Contents
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INTRODUCTION
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Paragraphs 1-4
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Definitions
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4
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EXPLANATION
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5-9
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Sale
of Goods
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6
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Rendering
of Services
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7
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The
Use by Others of Enterprise Resources Yielding Interest,
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Royalties
and Dividends
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8
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Effect
of Uncertainties on Revenue Recognition
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9
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MAIN
PRINCIPLES
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10-14
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Disclosure
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14
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ILLUSTRATIONS
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122 AS 9 (issued 1985)
Accounting
Standard (AS) 9
Revenue
Recognition1
(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.
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’.
86
AS 9
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) Realise d 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:
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
Revenue Recognition 87
reco gnises 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
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
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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AS 9
(i) Proportionate completion method—Performance consists of the execution of more than one
act. Revenue is recognised propor-tionately 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, trade marks 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.
Revenue Recognition 89
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 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
10. Revenue from
sales or service transactions should be recognised when the requirements as to
performance set out in paragraphs 11 and
90 AS 9
12 are satisfied , provided that at the time of perf ormance 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 and
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 stock 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 and 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 amoun t 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
Revenue Recognition 91
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:
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(i)
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Interest
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on
a time proportion basis taking into
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account
the amount outstanding and the
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rate
applicable.
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(ii)
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Royalties
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:
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on
an accrual basis in accordance with
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the
terms of the relevant agreement.
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(iii)
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Dividends
from
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when
the owner’s right to receive pay-
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investments
in
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ment
is established.
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shares
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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.
92 AS 9
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).
(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
Revenue Recognition 93
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 p
ayments 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 s eller 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.
94 AS 9
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, 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
Revenue Recognition 95
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.
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
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