Revenue Reognition

7/29/2019 Revenue Reognition

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Introduction

Accounting standard 9 (AS 9) issued by the institute

of chartered accountants of India (ICAI) in 1985.

In the initial years this accounting standard will be

recommendatory in character. During this period, this

statement is recommended for use by companies

listed in recognized stock exchange and other largecommercial industrial and business enterprise in the

public and private sectors.


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Definition :

Revenue is the gross inflow of cash receivables or otherconsiderations in the course of the ordinary activities of anenterprise.

Revenue is measured by the charges made to customers orclients for goods supplied and services rendered to them andby the charges and rewards arising from the use of resourcesby them.

In an agency relationship, the revenue is the amount ofcommission and not the gross inflow of cash, receivable orother consideration.


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Completed service contract method :it is a method

of accounting which recognizes revenue in the statementof P&L only when the rendering of services under a

contract is completed or substantially completed.

Proportionate completion method :

it is a method ofaccounting which recognitions revenue in the statementof P&L proportionately with the degree of completion ofservices under a contract.


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Salient Features of AS-9

This statement deals with the bases for recognition ofrevenue in the statement of P&L of an organization. Thestatement is concerned with the recognition of revenuearising in the course of ordinary activities of the

enterprise.

The sale of goods

The rendering of services.

The use by others of enterprises resources yieldinginterest and

Royalties and dividends.

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This statement does not deal with the following aspects ofrevenue recognition to which special considerations

apply :

Revenue arising from construction contracts.

Revenue arising from hire purchase & lease agreements.

Revenue arising from government grants & other similarsubsidies.

Revenue of insurance companies arising from insurancecontracts.

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Examples of items not included within the definitionofRevenue for the purpose of the statement are asfollow :

i. Realized gains from the disposal of and unrealized gainsresulting from holding of non-current assets. E.g.appreciation in the value of fixed assets.

ii. Unrealized holding gains resulting from the changes in thevalue of current assets and the natural increases in herds andagricultural & forest product.

iii. Realized or unrealized gains resulting from change in foreignexchange rates adjustments arising on the translation of

foreign currency financial statements.iv. Realized gains resulting from the discharge of an obligation

at less than its carrying amount.

v. Unrealized gains resulting from the carrying amount of anobligation.


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Criteria to recognize revenue

Transfer Risk/ Reward of ownership to buyer.

Seller does not retain effective control over goods.

Revenue can be measurable.

Economic benefits are probable.

Transfer of ownership

Likely to get payment


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Explanation

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 usuallydetermined by agreement between the parties involved in

the transaction.

When uncertainties exist regarding the determination of

the amount or its associated costs these uncertainties mayinfluence the timing of revenue recognition.


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Sale of goods


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Rendering of services.

Revenue from services transaction is usually recognized

as the service is performed either by proportionate

completion service contract method or completed Service

contract method.

1. proportionate completion method

2. Completed service contract method
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The use by others enterprise resources yieldinginterest, royalties & dividends.

The use by others of such enterprise resources gives rise to.

Interest - charges for the use of cash resources or amounts due

to the enterprise.

Royalties charges for the use of such assets as know-how,

patents trademarks and copyright.

Dividends rewards from the holding of investment in shares.


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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 through were accruing over the period to maturity.

Royalties accrue in accordance with the term of relevant

agreement and are usually recognized on that basis unless,

having regard to the substance of the transaction, it is more

appropriate to recognize revenue on some other systematic and

rational basis.

Dividends from investment in shares are not recognized in the

statement of profit and loss until a right to receive payments is

established.

when interest, royalties and dividends from foreign countries

require exchange permission and uncertainty in remittance is

anticipated, revenue recognition may need to be postponed.


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Effects of uncertainties on revenue recognition

Recognition of revenue requires that revenue is measurable and that at the

time of sale of the assets or the rendering of the services, it would not be

unreasonable to expect ultimate collection.

Where the ability to assess the ultimate collection with reasonable certaintyis lacking at the time of raising any claim.& when there is no uncertainty

as to the ultimate collection, revenue is recognized at the time of sale or

rendering of services even though payments are made by installments.

When the uncertainty relating to collectability arises subsequent to the timeof sale or the rendering of services, it is more appropriate to make a

separate provision to reflect the uncertainty rather than to adjust the amount

of revenue originally recorded.

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An essential criterion for the recognition of revenue is that the

consideration receivable for the sale of goods, the rendering of services

from the use by other of enterprise resources is reasonably determinable

when such consideration is not determinable within reasonable limits andthe recognition of revenue is postponed

When recognition of revenue is postponed due to the effect to

uncertainties, it is considered as revenue of the period in which it is

properly recognized.


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Accounting Standard

1. Revenue sales or service transaction should be recognized when the

requirement 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.

2. In a transaction involving the sales of goods, performance should be

regarded as being achieved when the following conditions have been

fulfilled :

1) 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 retain no effective control of the

goods transferred to a degree usually associated with ownership ; and


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2) No significant uncertainty exists regarding the amount of theconsideration that will be derived form the sale of the goods.

3) In a transaction involving the rendering of service , performance

should be measured either under the completed service contractmethod or under the proportionate completion method ,whichever relates the revenue to the work accomplished. Suchperformance should be regarded as being achieved when nosignificant uncertainty exist regarding the amount of theconsideration that will be derived from rendering the service .

4) Revenue arising from the use by others of enterprise resourcesyielding interest , royalties and dividends should only be recognizedwhen no significant uncertainty as to measurability or collectabilityexists. These revenues are recognized on the following basis:

i. Interest : On a time proportionate basis taking into account the

amount outstanding and the rate applicable.ii. Royalties: On an accrual basis in accordance with the term of the

relevant agreement.

iii. Dividends from investment in shares: When the owners right toreceive payment is established.


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Appendix Sale of goods.

Delivery subject to condition

installation and inspection. Sale of approval.

Guaranteed sale.

Consignment sales.

Cash on delivery sales.

Sales on installment payments and delivery to be made after the receipt of

final installment.

Special order and shipments.

Sale/repurchase agreements.

Sale to intermediate parties.

Subscription for publication.

Trade discount and volume rebates.

Rendering of services.


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Revenue Reognition

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