Revenue recognition AS9 Financial Reporting

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”.

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.

Objective of AS-9

This Accounting Standard explains how to recognise income or revenue in the profit & loss account. It also gives circumstances when recognition of revenue can be postponed. Revenue or income includes any cash or consideration received by the business enterprise in the normal course of its business operation and from the other source. It also can be said that it is chage made on customer/client for providing services or supplying goods. These ordinary activities of business includes following revenue of enterprise.

Any revenue generated from sale of goods in which company is dealing.

Any services provided or to be provided by enterprise and in respect of such service any income is arise.

Income from use of resources of business that are dividend, interest, compensation & royalties.

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

Applicability of AS 9 Revenue Recognition

This standard was issued by ICAI in the year 1985 and in the initial years, it was re-commendatory for only Level I enterprises and but was made mandatory for all other enterprises from April 01, 1993.

As per ICAI, “Enterprise means a company as defined in section 3 of the Companies Act, 1956”.

Level I enterprises are those enterprises whose turnover for the immediately preceding accounting year exceeds 50 crores. The turnover here does not include other income and is applicable for holding as well as subsidiary companies.

This Accounting Standard is not applicable to following concern or situations. It is also important to know that whenever ICAI has issued separate Accounting Standard for special transaction or organisation, common Accounting Standard will not be applicable.

Income or revenue from hire purchase transaction & lease agreement (because there is separate AS-19 Accounting for Leases).

Income or revenue from construction contract (because there is separate AS-7 Construction Contract).

Income or revenue from Government grant and subsidies (because there is separate AS-12 Accounting for Government Grants).

Income or revenue of Insurance Company arising from insurance contract.

Realised or unrealised profit on sale of fixed assets (because there is separate AS-10 Accounting of Fixed Assets).

Explanation

1. Revenue recognition emphasizes on the timing of recognition of revenue in the statement of profit and loss of an enterprise
2. The amount of revenue arising from a transaction is usually determined by an agreement between the parties involved in the transaction
3. 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 declare the dividends on the shares and the directors actually decide to pay the dividends to their shareholders.  

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.


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 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.


(ii) Royalties : on an accrual basis in accordance with the terms of the relevant agreement.

(iii) Dividends from : when the owner’s right to receive payment investments in is established.
shares

Practical problem

The XYZ Ltd. Has recognised Rs.100000 on accrual bases income from dividend on securities and shares face value of Rs.1000000 held by it at the end of the year 31st March, 2012. The company has declared dividend on such securities on the date of 1st August, 2012 at 20%. Whether treatment given by XYZ Ltd is correct or not?

Solution

No, Treatment given by XYZ Ltd. is not correct according to Accounting Standard-9. As per AS-9 dividend income should be recognised in the books of investor when company declares dividend on securities. So that if XYZ Ltd recognised dividend income as per accrual bases it will be recorded in the year 2011-12 rather it should be recorded in the year 2012-13.

Difference between IND AS -18 & AS -9

AS 9 Revenue Recognition	IND AS 18
It is recognized at nominal value	It is recognized at fair value
This aspect is not covered in AS-9	IND AS – 18 also includes the exchange of goods and services with goods and services of similar and dissimilar nature (Barter Transactions are included in Ind AS-18)
Interest Income is recognized on time proportion basis	Interest Income is recognized using effective interest rate method
It recognizes revenue as per completed service method or percentage completion method	It only recognizes revenue as per percentage of completion method