Accounting Standard (AS) 9

Revenue Recognition

Contents

INTRODUCTION Paragraphs 1-4

Definitions 4

EXPLANATION 5-9

Sale of Goods 6

Rendering of Services 7

The Use by Others of Enterprise Resources

Yielding Interest, Royalties and Dividends 8

Effect of Uncertainties on Revenue Recognition 9

MAIN PRINCIPLES 10-14

Disclosure 14

ILLUSTRATIONS

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 Accounting Standard (AS) 9#
1
Revenue Recognition

(This Accounting Standard includes paragraphs set in bold italic type and plain
type, which have equal authority. Paragraphs in bold italic type indicate the main
principles. This Accounting Standard should be read in the context of the General
Instructions contained in part A of the Annexure to the Notification.)
Introduction
1. This Standard deals with the bases for recognition of revenue in the statement of
profit and loss of an enterprise. The Standard is concerned with the recognition of
revenue arising in the course of the ordinary activities of the enterprise from
- the sale of goods,
- the rendering of services, and
- the use by others of enterprise resources yielding interest, royalties and dividends.
2. This Standard does not deal with the following aspects of revenue recognition to
which special considerations apply:
(i) Revenue arising from construction contracts;2
(ii) Revenue arising from hire-purchase, lease agreements;
(iii) Revenue arising from government grants and other similar subsidies;
(iv) Revenue of insurance companies arising from insurance contracts.
3. Examples of items not included within the definition of “revenue” for the purpose of
this Standard are:

(i) Realised gains resulting from the disposal of, and unrealised gains resulting from
the holding of, non-current assets e.g. appreciation in the value of fixed assets;
(ii) Unrealised holding gains resulting from the change in value of current assets,
and the natural increases in herds and agricultural and forest products;
(iii) Realised or unrealised gains resulting from changes in foreign exchange rates and
adjustments arising on the translation of foreign currency financial statements;
(iv) Realised gains resulting from the discharge of an obligation at less than its
carrying amount;
(v) Unrealised gains resulting from the restatement of the carrying amount of an
obligation.

Definitions
4. The following terms are used in this Standard with the meanings specified:

#
This AS was notified vide Notification G.S.R. 739(E) dated 7th December, 2006.
1
It is reiterated that this Accounting Standard (as is the case of other accounting standards) assumes that the
three fundamental accounting assumptions i.e., going concern, consistency and accrual have been followed in
the preparation and presentation of financial statements.
2
Refer to AS 7 on ‘Construction Contracts’.
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4.1 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, from the rendering
of services, and from the use by others of enterprise resources yielding interest, royalties
and dividends. Revenue is measured by the charges made to customers or clients for goods
supplied and services rendered to them and by the charges and rewards arising from the use
of resources by them. In an agency relationship, the revenue is the amount of commission
and not the gross inflow of cash, receivables or other consideration.
4.2 Completed service contract method is a method of accounting which recognises
revenue in the statement of profit and loss only when the rendering of services under a
contract is completed or substantially completed.
4.3 Proportionate completion method is a method of accounting which recognises
revenue in the statement of profit and loss proportionately with the degree of
completion of services under a contract.
Explanation

5. Revenue recognition is mainly concerned with the timing of recognition of revenue

in the statement of profit and loss of an enterprise. The amount of revenue arising on a
transaction is usually determined by agreement between the parties involved in the
transaction. When uncertainties exist regarding the determination of the amount, or its
associated costs, these uncertainties may influence the timing of revenue recognition.

6. Sale of Goods
6.1 A key criterion for determining when to recognise revenue from a transaction involving
the sale of goods is that the seller has transferred the property in the goods to the buyer for a
consideration. The transfer of property in goods, in most cases, results in or coincides with the
transfer of significant risks and rewards of ownership to the buyer. However, there may be
situations where transfer of property in goods does not coincide with the transfer of significant
risks and rewards of ownership. Revenue in such situations is recognised at the time of
transfer of significant risks and rewards of ownership to the buyer. Such cases may arise
where delivery has been delayed through the fault of either the buyer or the seller and the
goods are at the risk of the party at fault as regards any loss which might not have occurred
but for such fault. Further, sometimes the parties may agree that the risk will pass at a time
different from the time when ownership passes.
6.2 At certain stages in specific industries, such as when agricultural crops have been
harvested or mineral ores have been extracted, performance may be substantially
complete prior to the execution of the transaction generating revenue. In such cases when
sale is assured under a forward contract or a government guarantee or where market
exists and there is a negligible risk of failure to sell, the goods involved are often valued
at net realisable value. Such amounts, while not revenue as defined in this Standard, are
sometimes recognised in the statement of profit and loss and appropriately described.
7. Rendering of Services
7.1 Revenue from service transactions is usually recognised as the service is performed, either
by the proportionate completion method or by the completed service contract method.

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 (i) Proportionate completion method. — Performance consists of the execution of
more than one act. Revenue is recognised proportionately by reference to the
performance of each act. The revenue recognised under this method would be
determined on the basis of contract value, associated costs, number of acts or
other suitable basis. For practical purposes, when services are provided by an
indeterminate number of acts over a specific period of time, revenue is
recognised on a straight line basis over the specific period unless there is
evidence that some other method better represents the pattern of performance.

(ii) Completed service contract method.— Performance consists of the execution of a

single act. Alternatively, services are performed in more than a single act, and the
services yet to be performed are so significant in relation to the transaction taken as
a whole that performance cannot be deemed to have been completed until the
execution of those acts. The completed service contract method is relevant to these
patterns of performance and accordingly revenue is recognised when the sole or
final act takes place and the service becomes chargeable.

8. The Use by Others of Enterprise Resources Yielding Interest, Royalties and

Dividends

8.1 The use by others of such enterprise resources gives rise to:
(i) interest—charges for the use of cash resources or amounts due to the enterprise;
(ii) royalties—charges for the use of such assets as know-how, patents,
trademarks and copyrights;
(iii) dividends—rewards from the holding of investments in shares.

8.2 Interest accrues, in most circumstances, on the time basis determined by the amount
outstanding and the rate applicable. Usually, discount or premium on debt securities held
is treated as though it were accruing over the period to maturity.
8.3 Royalties accrue in accordance with the terms of the relevant agreement and are
usually recognised on that basis unless, having regard to the substance of the
transactions, it is more appropriate to recognise revenue on some other systematic and
rational basis.
8.4 Dividends from investments in shares are not recognised in the statement of profit
and loss until a right to receive payment is established.
8.5 When interest, royalties and dividends from foreign countries require exchange
permission and uncertainty in remittance is anticipated, revenue recognition may need to
be postponed.
9. Effect of Uncertainties on Revenue Recognition
9.1 Recognition of revenue requires that revenue is measurable and that at the time of sale or
the rendering of the service it would not be unreasonable to expect ultimate collection.
9.2 Where the ability to assess the ultimate collection with reasonable certainty is
lacking at the time of raising any claim, e.g., for escalation of price, export incentives,
interest etc., revenue recognition is postponed to the extent of uncertainty involved. In
such cases, it may be appropriate to recognise revenue only when it is reasonably certain
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that the ultimate collection will be made. Where there is no uncertainty as to ultimate
collection, revenue is recognised at the time of sale or rendering of service even though
payments are made by instalments.
9.3 When the uncertainty relating to collectability arises subsequent to the time of sale
or the rendering of the service, it is more appropriate to make a separate provision to
reflect the uncertainty rather than to adjust the amount of revenue originally recorded.
9.4 An essential criterion for the recognition of revenue is that the consideration
receivable for the sale of goods, the rendering of services or from the use by others of
enterprise resources is reasonably determinable. When such consideration is not
determinable within reasonable limits, the recognition of revenue is postponed.
9.5 When recognition of revenue is postponed due to the effect of uncertainties, it is
considered as revenue of the period in which it is properly recognised.

Main Principles

Explanation:

10. Revenue from sales or service transactions should be recognised when the
requirements as to performance set out in paragraphs 11 and 12 are satisfied, provided
that at the time of performance it is not unreasonable to expect ultimate collection. If
at the time of raising of any claim it is unreasonable to expect ultimate collection,
revenue recognition should be postponed.

Explanation:

The amount of revenue from sales transactions (turnover) should be disclosed in the
following manner on the face of the statement of profit or loss:

Turnover (Gross) XX
Less: Excise Duty XX
Turnover (Net) XX

The amount of excise duty to be deducted from the turnover should be the total excise
duty for the year except the excise duty related to the difference between the closing
start and opening stock. The excise duty related to the difference between the closing
stock and opening stock should be recognised separately in the statement of profit or
loss, with an explanatory note in the notes to accounts to explain the nature of the two
amounts of excise duty.

11. In a transaction involving the sale of goods, performance should be regarded as

being achieved when the following conditions have been fulfilled:
(i) the seller of goods has transferred to the buyer the property in the goods for
a price or all significant risks and rewards of ownership have been
transferred to the buyer and the seller retains no effective control of the
goods transferred to a degree usually associated with ownership; and
(ii) no significant uncertainty exists regarding the amount of the consideration
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 that will be derived from the sale of the goods.
12. In a transaction involving the rendering of services, performance should be measured
either under the completed service contract method or under the proportionate completion
method, whichever relates the revenue to the work accomplished. Such performance should
be regarded as being achieved when no significant uncertainty exists regarding the amount
of the consideration that will be derived from rendering the service.
13. Revenue arising from the use by others of enterprise resources yielding interest,
royalties and dividends should only be recognised when no significant uncertainty as to
measurability or collectability exists. These revenues are recognised on the following bases:
(i) Interest : on a time proportion basis taking into account the amount
outstanding and the rate applicable.
: on an accrual basis in accordance with the terms of the
(ii) Royalties
relevant agreement.
: when the owner’s right to receive payment is established.
(iii) Dividends
from investments
in shares
Disclosure
14. In addition to the disclosures required by Accounting Standard 1 on ‘Disclosure of
Accounting Policies’ (AS 1), an enterprise should also disclose the circumstances in which
revenue recognition has been postponed pending the resolution of significant uncertainties.

Illustrations
These illustrations do not form part of the Accounting Standard. Their purpose is to
illustrate the application of the Standard to a number of commercial situations in an
endeavour to assist in clarifying application of the Standard.

A. Sale of Goods
1. Delivery is delayed at buyer’s request and buyer takes title and accepts billing
Revenue should be recognised notwithstanding that physical delivery has not been
completed so long as there is every expectation that delivery will be made. However, the
item must be on hand, identified and ready for delivery to the buyer at the time the sale is
recognised rather than there being simply an intention to acquire or manufacture the
goods in time for delivery.
2. Delivered subject to conditions
(a) installation and inspection i.e. goods are sold subject to installation, inspection etc.
Revenue should normally not be recognised until the customer accepts delivery and
installation and inspection are complete. In some cases, however, the installation process may
be so simple in nature that it may be appropriate to recognise the sale notwithstanding that
installation is not yet completed (e.g. installation of a factory-tested television receiver
normally only requires unpacking and connecting of power and antennae).

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(b) on approval
Revenue should not be recognised until the goods have been formally accepted by the
buyer or the buyer has done an act adopting the transaction or the time period for
rejection has elapsed or where no time has been fixed, a reasonable time has elapsed.
(c) guaranteed sales i.e. delivery is made giving the buyer an unlimited right of return
Recognition of revenue in such circumstances will depend on the substance of the
agreement. In the case of retail sales offering a guarantee of “money back if not
completely satisfied” it may be appropriate to recognise the sale but to make a suitable
provision for returns based on previous experience. In other cases, the substance of the
agreement may amount to a sale on consignment, in which case it should be treated as
indicated below.
(d) consignment sales i.e. a delivery is made whereby the recipient undertakes to sell the
goods on behalf of the consignor
Revenue should not be recognised until the goods are sold to a third party.
(e) cash on delivery sales
Revenue should not be recognised until cash is received by the seller or his agent.
3. Sales where the purchaser makes a series of instalment payments to the seller, and the
seller delivers the goods only when the final payment is received
Revenue from such sales should not be recognised until goods are delivered. However,
when experience indicates that most such sales have been consummated, revenue may be
recognised when a significant deposit is received.

4. Special order and shipments i.e. where payment (or partial payment) is received for
goods not presently held in stock e.g. the stock is still to be manufactured or is to be
delivered directly to the customer from a third party

Revenue from such sales should not be recognised until goods are manufactured,
identified and ready for delivery to the buyer by the third party.
5. Sale/repurchase agreements i.e. where seller concurrently agrees to repurchase the
same goods at a later date
For such transactions that are in substance a financing agreement, the resulting cash
inflow is not revenue as defined and should not be recognised as revenue.
6. Sales to intermediate parties i.e. where goods are sold to distributors, dealers or
others for resale
Revenue from such sales can generally be recognised if significant risks of ownership
have passed; however in some situations the buyer may in substance be an agent and in
such cases the sale should be treated as a consignment sale.
7. Subscriptions for publications
Revenue received or billed should be deferred and recognised either on a straight line
basis over time or, where the items delivered vary in value from period to period,
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revenue should be based on the sales value of the item delivered in relation to the total
sales value of all items covered by the subscription.
8. Instalment sales
When the consideration is receivable in instalments, revenue attributable to the sales
price exclusive of interest should be recognised at the date of sale. The interest element
should be recognised as revenue, proportionately to the unpaid balance due to the seller.
9. Trade discounts and volume rebates
Trade discounts and volume rebates received are not encompassed within the definition
of revenue, since they represent a reduction of cost. Trade discounts and volume rebates
given should be deducted in determining revenue.
B. Rendering of Services
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. Financial service commissions
A financial service may be rendered as a single act or may be provided over a period of time.
Similarly, charges for such services may be made as a single amount or in stages over the
period of the service or the life of the transaction to which it relates. Such charges may be
settled in full when made or added to a loan or other account and settled in stages. The
recognition of such revenue should therefore have regard to:
(a) whether the service has been provided “once and for all” or is on a “continuing” basis;
(b) the incidence of the costs relating to the service;
(c) when the payment for the service will be received. In general, commissions charged
for arranging or granting loan or other facilities should be recognised when a binding
obligation has been entered into. Commitment, facility or loan management fees which
relate to continuing obligations or services should normally be recognised over the life of
the loan or facility having regard to the amount of the obligation outstanding, the nature
of the services provided and the timing of the costs relating thereto.
4. 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.

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5. Tuition fees
Revenue should be recognised over the period of instruction.
6. 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 provided.