Revenue Recognition under AS-9 | How is it done?

Revenue recognition under Accounting Standard (AS)-9 refers to the principles and conditions for recognising revenue arising from the sale of goods, rendering of services, and the use of enterprise resources by others that yield interest, royalties, or dividends. The standard provides guidance on when and how revenue should be recorded in the financial statements to ensure that it reflects the amount earned during a particular accounting period.

Table of Contents

1. Objective
2. Timing of Revenue Recognition
3. Applicability
4. Revenue from Sale of Goods
5. Revenue from Rendering of the Services
6. Revenue from Interest
7. Revenue from Royalties
8. Revenue from Dividend
9. Effect of Uncertainties on Revenue Recognition
10. Disclosure
11. Treatment of Inter-Divisional Transfers

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1. Objective

The Standard explains when the revenue should be recognised in profit and loss account and also states the circumstances in which revenue recognition can be postponed. Revenue means gross inflow of cash, receivable or other consideration arising in the course of ordinary activities of an enterprise such as:

• The sale of goods
• Rendering the services
• Use of the enterprises resources by others yielding interest, dividend and royalties.

In other words, revenue is charge made to customers/clients for goods supplied and services rendered.

1.1 What is Revenue?

As per AS-9, 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.

2. Timing of Revenue Recognition

Revenue from sale or rendering services should be recognised at the time of the sale or rendering of services. However, if at the time of rendering of services or sale there is significant uncertainty in ultimate collection of the revenue, then the revenue recognition is postponed and in such cases revenue should be recognised only when it becomes reasonably certain that ultimate collection will be made. It also applies to the revenue arising out of escalation of price; export incentive, interest, etc.

3. Applicability

This Accounting Standard is not applicable to following revenue or gain:

• Revenue arising from construction contracts
• Revenue arising from hire purchase, lease agreements
• Revenue arising from Govt. grants and subsidies
• Revenue of Insurance companies arising from insurance contracts
• Gain realised or unrealised gain. Example – Profit on sale of fixed asset.

4. Revenue from Sale of Goods

It is recognised when all the following conditions are fulfilled:

• Seller has transferred the ownership of goods to buyer for a price.

Or

All significant risks and rewards of ownership have been transferred to buyer

• Seller does not retain any effective control of ownership of the transferred goods
• There is no significant uncertainty in collection of the amount of consideration (i.e. cash, receivables etc.).

4.1 Revenue Recognition When the Delivery of Goods is Delayed at Buyers Request

Delivery is delayed at buyer’s request and buyer takes title and accepts billing. Revenue should be recognised immediately but goods must be in hand of seller, identified and ready for delivery at the time of recognition of Revenue.

4.2 Revenue Recognition When Delivery of Goods Sold Subject to Conditions

• Installation and Inspection – Revenue should be recognised when:

1. 1. Goods are installed at the buyer’s place to his satisfaction
   2. Goods are inspected and accepted by the buyer.

• Sale on Approval – Revenue should be recognised when buyer confirms his desire to buy such goods by communication.
• Guaranteed Sales – Revenue should be recognised as per the substance of the agreement of sale or after the reasonable period has expired.
• Warranty Sales – Sales should be recognised immediately but the provision should be made to cover unexpired warranty.
• Consignment Sales – Revenue should be recognised only when the goods are sold to third party.
• Special Order and Shipments – Revenue from such sales should be recognised when the goods are identified and ready for delivery.
• Subscriptions for Publication:

1. 1. Items delivered vary in value from period to period. Revenue should be recognised on the basis of sales value of items delivered.
   2. Items delivered do not vary in value from period to period. Revenue should be recognised on straight-line basis over time.

• Instalment Sales – Revenue of sale price excluding interest should be recognised on the date of sale. Interest should be recognised proportionately to the unpaid balance.

5. Revenue from Rendering of the Services

Revenue from service is generally recognised as the service is performed. The performance of service is measured by two methods as under:

5.1 Completed Service Contract Method

Revenue is recognised when service is about to be completed and no significant uncertainties exist about the collection of amount of service charges.

5.2 Proportionate Completion Method

Revenue is recognised 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. Further, no significant uncertainty exists about the collection of amount of service charges of performed Acts.

5.3 Revenue Recognition Norms

Revenue Recognition norms for rendering of service under special condition are as follows:

• Installation Fees – It is recognised when the installation has been completed and accepted by the clients.
• Advertising and Insurance Agency Commission:

1. 1. Advertising commission is recognised when the advertisement appears before public
   2. Insurance commission is recognised on the effective commencement/renewal date of the policies.

• Financial Service Commission – Recognition of revenue depends upon:

1. 1. Whether the service has been provided “once and for all” or is on a continuing basis
   2. The incidence of costs relating to the service
   3. When the payment for the service will be received.

Generally, commission charged for arranging or granting a loan and other facilities should be recognised when a loan is sanctioned and accepted by the borrower. Commitment facility or loan management fees which relate to continuing obligations or services should normally be recognised over the life of the loan.

• Admission Fee – Revenue from artistic performance, banquets and other special events should be recognised when event takes place.
• Tuition fees – Revenue should be recognised over the period of instruction.
• Entrance and Membership Fees – Recognition depends upon the nature of service being provided against entrance and membership fees, however entrance fees are generally capitalised and membership fees should be recognised on systematic and rational basis having regard to timing and nature of service provided.

6. Revenue from Interest

Revenue from interest should be recognised on time proportion basis.

7. Revenue from Royalties

On accrual basis as per terms of agreement.

8. Revenue from Dividend

When the declaring company declares dividend.

9. Effect of Uncertainties on Revenue Recognition

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.

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 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.

9.1 Subsequent Uncertainty in Collection

When uncertainty of collection of revenue arises subsequently after the revenue recognition, it is better to make provision for the uncertainty in collection rather than adjustment in already recognised revenue.

10. Disclosure

When revenue recognition is postponed, the disclosure of the circumstances necessitating the postponement should be made.

11. Treatment of Inter-Divisional Transfers

ICAI has announced that inter-divisional transfers/sales are not the revenue as per AS-9 “Revenue Recognition”.

Since in case of inter-divisional transfers, risks and rewards remain within the enterprise and also there is no consideration from the point of view of the enterprise as a whole, the recogni­tion criteria for revenue recognition are also not fulfilled in respect of inter-divisional transfers.