AS9 (Accounting Standard 9) Simplified Short notes- Revenue Recognition

AS9 for Revenue recognition is mainly concerned with timing of recognition of revenue in the profit and loss account, amount of revenue arising on a transaction and influence of uncertainties existing regarding the determination of the amount, or its cost on timing of revenue recognition. Expenses belonging to that particular period should be charged against the revenue earned during that period. Proper recognition of revenue is important for implementation of both matching and accrual principles of accounting.

Non Applicability

Transactions covered under other AS, such as

1. Construction Contracts ( AS-7)
2. Hire Purchase, Lease agreement (AS-19)
3. Government Grants and other Subsidies (AS-12)

Revenue of insurance companies arising from the insurance contracts

Examples of other transaction not included in Revenue Recognition Standard

1. Realised gains resulting from disposal of, or unrealised gain resulting from holding of, non-current asset i.e. sale or appreciation in value of fixed asset
2. Unrealised gains from restatement of the carrying amount of an obligation
3. Realised gains resulting from the discharge of obligation at less than its carrying amount
4. Realised or unrealised gain resulting from changes in foreign exchange rate during the translation of foreign currency financial statements
5. Unrealised gains from change in value of current asset and increase in value of herds, agricultural or forest product

Meaning

Revenue is gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of an enterprise

• From sale of goods,
• From rendering of services, and
• From the use by others of enterprise resources yielding interest, royalties and dividends

Recognition under AS9

From Sale of Goods

Basic Conditions

• Property in goods is transferred from seller to buyer
• Significant risk and reward of ownership have been transferred to buyer
• No significant uncertainties exist regarding amount of sale

Additional Guidelines

• Revenue should be recognised when delivery is delayed at buyer’s request and ownership has been transferred to the buyer
• Unless the installation process is very simple, revenue should not be recognised until customer accepts the delivery and installation and inspection is complete
• In case of sale on approvable basis, no revenue shall be recognised until

1. Goods are formally accepted by the buyer, or
2. Done any act of adopting the goods, or
3. Time period of rejection has elapsed, otherwise reasonable time has elapsed

• Consignment sale is not recognised until goods are sold to a third party
• Until cash is received by the seller or his agent, cash on delivery sales should not be recognised
• Sale/repurchase agreement i.e. where the seller agrees to repurchase the goods at the later date is a financing agreement. Net cash flow shall be treated as interest
• In case of subscriptions and publications, revenue shall be deferred and recognised on straight line basis or sale value of item delivered in relation to total sales value of items covered by subscription

From Rendering Services

Basic Conditions

• Measured either through Completed Service contract method or proportionate completion method
• No significant uncertainties regarding collection of amount of consideration at the time of performance of service

Additional Guidelines

• Tuition fee should be recognised over the period of instruction
• Admission fees to any event should be recognised when event takes place, in case of multiple events allocated to each event on rational basis
• Revenue from advertisement or commercial is recognised when it appears before public
• Commissions of insurance companies should be recognised on commencement of renewal date of related policy
• Financial service can be provided in a single act or over a period of time and should be recognised accordingly
• If membership fees only permits membership and for other services members are charged separately then it should be recognised on receipt basis, if fee charged is for the services to be provided during the year then it should be recognised on some systematic or rational basis

Use of Enterprise resources by others under AS9

Interest

• Charges for the use of cash resources or amount due
• Interest accrues mostly on time basis
• Determined by the amount outstanding and the rate applicable
• Discount or premium on debt securities are treated as they are accruing over the period to maturity

Royalties

• Charges for the use of intangible assets such as know-how, patents, copyrights or trademarks
• Accrued in accordance with the relevant terms of agreement unless on some other systematic and rational basis, having regards to substance of transaction

Dividends

• Rewards from holding shares as investments
• Not recognised until the right to receive payment is not established

 Effect of uncertainties on Revenue Recognition under AS9

1. When the uncertainty to collectability arises at the time of raising claim, it may be appropriate to recognise revenue only when it is reasonably certain that the ultimate collection will be made. Examples escalation of price, export incentives, interest etc.
2. When the uncertainty to collectability arises subsequent to the time of sale or rendering services, it may be appropriate to make a separate provision to reflect uncertainty instead of making adjustment in originally recorded amount.
3. When consideration is not determinable within reasonable time limit, the recognition should be delayed.

Disclosure Requirements under AS9

1. Circumstances under which Revenue Recognition has been postponed due to significant uncertainties
2. Disclosure of Excise Duty