AS 9 Revenue Recognition Revised Summary Notes PDF. In the previous articles, we have given AS 6 (Depreciation) and AS 10 (Fixed Assets). Today we are providing complete details of accounting standard – 9 revenue recognition. In this article, you can get the definition of revenue, the objective of AS 9, the effect of uncertainties on revenue recognition and cases. You can also download AS 9 revenue recognition notes by ICAI at the end of this article. This notes is useful for IPCC students.
AS 9 Revenue Recognition Revised Summary Notes PDF
It 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 includes: – Proceeds from sale of goods
- Proceeds from rendering of services
- Interest, royalty and dividends.
Sale of goods
Revenue from sales should be recognized when
- All significant risks and rewards of ownership have been transferred to the buyer from the seller.
- Ultimate realisability of receipt is reasonably certain.
The above accounting standard is not applicable for:
- Revenue arising from construction contracts
- Revenue arising from hire purchase, lease agreements
- Revenue arising from Government grants and subsidies
- Revenue of Insurance companies arising from insurance contracts
- Profit or loss on sale of fixed assets
- Realised or unrealized gains resulting from changes in foreign exchange rates
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.
Rendering of Services
Revenue from service transactions is usually recognized as the service is performed, either by proportionate completion method or by the completed service contract method.
1) Proportionate Completion method – This is a method of accounting, which recognises revenue in the statement of profit and loss proportionately with degree of completion of services under a contract.
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.
2) Completed service contract method – This 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.
Revenue under this method is recognised on completion or substantial completion of the job.
Revenue from Interest : Recognised on time proportion basis
Revenue from Royalties: Recognised on accrual basis in accordance with the terms of the relevant agreement.
Revenue from Dividends: Recognised when right to receive is established
Subsequent uncertainty in collection: When the uncertainty relating to collectability arises subsequent to the time of 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.
Effect of Uncertainties on Revenue Recognition
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.
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.
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.
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.
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.
Cases in Revenue Recognition:
1. On sale, buyer takes title and accepts billing but delivery is delayed at buyer’s request
- Revenue should be recognised notwithstanding that physical delivery has not been completed.
2. Delivery subject to installations and inspections
- Revenue should not be recognised until the customer accepts delivery and installation and inspection are complete. However, when installation process is very simple, revenue should be recognised. For example. Television sale subject to installation.
3. Sale on approval
- Revenue should not be recognised until the goods have been formally accepted or time for rejection has elapsed or where no time has been fixed, a reasonable time has elapsed.
4. Sales with the condition of ‘money back if not completely satisfied
- It may be appropriate to recognize the sale but to make suitable provision for returns based on previous experience.
5. Consignment sales
- Revenue should not be recognised until the goods are sold to a third party.
6. Installment sales
- Revenue of sale price excluding interest should be recognised on the date of sale.
7. Special order and shipments
- Revenue from such sales should be recognized when the goods are identified and ready for delivery.
8. Where seller concurrently agrees to repurchase the same goods at a later date
- The sale should not be recognised, as this is a financial arrangement.
9. Subscriptions received 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.
10. Advertisement commission received
- It is recognised when the advertisement appears before public.
11. Tuition fees received
- Should be recognised over the period of instruction.
12. Entrance and membership fees
- Entrance fee is generally capitalized
- If the membership fee permits only membership and all other services or products are paid for separately, 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.
13. Sale of show tickets
- Revenue should be recognised when the event takes place.
14. Guaranteed sales of agricultural crops
- When sale is assured under forward contract or government guarantee, the crops can be recognised at net realizable value although it does not satisfy the criteria of revenue recognition.
Click Here to download AS – 9 revenue recognition notes by ICAI.
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