AS 9 - Revenue Recognition

AS 9 Revenue Recognition
As per the AS 9 Revenue

Recognition issued by ICAI
“Revenue is the gross inflow of
cash, receivables or other
consideration arising in the
course of the ordinary activities
of an enterprise from the sale of
goods, rendering of services &
from various other sources like
interest, royalties & dividends”.
Introduction of AS 9 Revenue
Recognition
Revenue has to be measured by
the amount charged to the
clients for the sale of goods and
services.
However, in the case of the
agency relationship, the revenue
has to be measured by the
amount charged for commission
and not on the gross inflow of
the cash, receivables or other
consideration.
There are few exceptions to the
above-mentioned statement
where the special consideration
applies: –
1) Revenue arising from
Construction Contracts
2) Revenue arising from hire-
purchase, lease agreements
3) Revenue arising from
government grants and other
similar subsidies
4) Revenue of Insurance
companies arising from
insurance contracts
Explanation
Revenue recognition emphasizes
on the timing of recognition of
revenue in the statement of
profit and loss of an enterprise
The amount of revenue arising
from a transaction is usually
determined by an agreement
between the parties involved in
the transaction
When uncertainties arise
regarding the determination of
the amount or its associated
costs, these uncertainties may
influence the timing of the
revenue
A. Sale of Goods
One key element for determining
the recognition of revenue of a
transaction involving the sale of
goods is that the seller has
transferred the property in the
goods to the buyer for a
consideration. In most cases,
the transfer of property in the
goods results in the transfer of
the significant risks and rewards
in ownership of the goods.
However, there are situations
where the transfer of significant
risks doesn’t coincide with the
transfer of goods to the buyer,
in such cases revenue has to be
recognized at the time of
transfer of significant risks and
rewards to the buyer. Example:
Goods sent to the consignee on
approval basis.
There are certain cases in the
specific industry where the
performance may be
substantially complete prior to
the execution of the transaction
generating revenue.
In such cases, when the sale is
assured under government
guarantee or a forward contract
or where the market exists and
there is a negligible risk of
failure to sell, the goods
involved are often valued at the
net realizable value (NRV).
Such amounts are not defined in
the definition of the revenue but
are still sometimes recognized in
the statement of profit and loss.
Example: Harvesting of
Agricultural Crops or extraction
of mineral ores.
B. Rendering of Services
Revenue recognition of services
depends as the service is
performed. This is further
divided into two ways:
(a) Proportionate Completion
Method: This method of
accounting recognizes revenue
in the statement of profit & loss
proportionately with the degree
of completion of each service.
Here the service completion
consists of the execution of
more than one act. Revenue is
recognized with the completion
of each such act.
(b) Completed Service Contract
Method: This method of
accounting recognizes revenue
in the statement of profit & loss
only when the rendering of
services under a contract is
completed or substantially
completed.
C. Interest, royalties & dividends
The use by others of such
enterprise resources gives rise
to:
(i) Interest: Revenue is
recognized on the time
proportion basis after taking into
account the amount outstanding
and the rate applicable.
For Example: If the interest on
FD is due on 30th June and 31st
Dec. On 31st March when the
books will be closed, though the
interest for the period of Jan-
March will be received in June,
still we have to recognize the
revenue in March itself.
(ii) Royalties: Royalty includes
the charge for the use of
patents, know-how, trademarks,
and copyrights. Revenue has to
be recognized on the basis of
accrual basis and in accordance
with the relevant agreement.
For Example: If the royalty is
payable based on the number of
copies of the book, then it has to
be recognized on that basis only.
(iii) Dividends: Revenue has to
be recognized when the owner’s
right to receive payment is
established. It is only certain
when the company declares the
dividends on the shares and the
directors actually decide to pay
the dividends to their
shareholders.
Illustrations
1. Installation Fees In cases
where installation fees are other
than incidental to the sale of a
product, they should be
recognised as revenue only
when the equipment is installed
and accepted by the customer.
2. Advertising and insurance
agency commissions Revenue
should be recognised when the
service is completed. For
advertising agencies, media
commissions will normally be
recognised when the related
advertisement or commercial
appears before the public and
the necessary intimation is
received by the agency, as
opposed to production
commission, which will be
recognised when the project is
completed. Insurance agency
commissions should be
recognised on the effective
commencement or renewal
dates of the related policies.
3. Admission fees Revenue from
artistic performances, banquets
and other special events should
be recognised when the event
takes place. When a subscription
to a number of events is sold,
the fee should be allocated to
each event on a systematic and
rational basis.
4. Tuition fees Revenue should
be recognised over the period of
instruction.
5. Entrance and membership
fees Revenue recognition from
these sources will depend on the
nature of the services being
provided. Entrance fee received
is generally capitalised. If the
membership fee permits only
membership and all other
services or products are paid for
separately, or if there is a
separate annual subscription,
the fee should be recognised
when received. If the
membership fee entitles the
member to services or
publications to be provided
during the year, it should be
recognised on a systematic and
rational basis having regard to
the timing and nature of all
services

AS 9 - Revenue Recognition

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AS 9 Revenue Recognition

As per the AS 9 Revenue

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