As 9 Accountancy

7/28/2019 As 9 Accountancy

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Accounting Standard (AS) 9

Revenue Recognition

Introduction

Issued in 1985 Mandatory for all enterprises after 1.4.1991. Deals with the bases for recognition of

revenue in the statement of profit and loss ofan enterprise.


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SCOPE

Revenue recognition is mainly concerned withthe timing of recognition of revenue in thestatement of profit and loss of an enterprise.

The amount of revenue arising on atransaction is usually determined byagreement between the parties involved inthe transaction.

When uncertainties exist regarding thedetermination of the amount, or itsassociated costs, these uncertainties mayinfluence the timing of revenue recognition.


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This Standard does not deal with the

following aspects of revenue recognition towhich special considerations apply:

(i) Revenue arising from constructioncontracts.AS-7

(ii) Revenue arising from hire-purchase, leaseagreements.AS-19

(iii) Revenue arising from government grants

and other similar subsidies.AS-12(iv) Revenue of insurance companies arising

from insurance contracts


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Items not included within the definitionof "revenue"

(i) non-current assets(ii) current assets,and the natural increases

in herds and agricultural and forest

products;(iii) changes in foreign exchange rates(iv) discharge of an obligation at less than its

carrying amount;(v) restatement of the carrying amount of an

obligation.


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DEFINITIONS

Revenue is the gross inflow of cash,receivables or other considerationarising in the course of the ordinaryactivities of an enterprise from the saleof goods, from the rendering ofservices, and from the use by others of

enterprise resources yielding interest,royalties and dividends.


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Revenue is measured by the charges made

to customers or clients for goods suppliedand services rendered to them and by thecharges and rewards arising from the useof resources by them.

In an agency relationship, the revenue isthe amount of commission and not thegross inflow of cash, receivables or other

consideration.


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Completed service contract method is amethod of accounting which recognises

revenue in the statement of profit and lossonly when the rendering of services undera contract is completed or substantiallycompleted.

Proportionate completion method is amethod of accounting which recognisesrevenue in the statement of profit and lossproportionately with the degree ofcompletion of services under a contract.


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Sale of Goods

In a transaction involving the sale of goods,

performance should be regarded as being achievedwhen the following conditions have been fulfilled: The seller has transferred the property in goods

for a priceOR

All significant risks & rewards of ownership havebeen transferred to buyer and the seller retains noeffective control of the goods transferred to adegree usually associated with ownership

AND No significant uncertainity exists regarding theamt of consideration from such sale.


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Rendering of Services

Revenue from service transactions is usuallyrecognised as the service is performed,either by the proportionate completion

method or by the completed servicecontract method.(i) Proportionate completion method.

Performance consists of the execution of

more than one act. Revenue is recognisedproportionately by reference to theperformance of each act.


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(ii) Completed service contract method.

Performance consists of the execution of a singleact. The completed service contract method isrelevant to these patterns of performance andaccordingly revenue is recognised when the soleor final act takes place and the service becomes

chargeable.


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The Use by Others of EnterpriseResources

(i) interest--charges for the use of cashresources or amounts due to theenterprise

(ii) royalties--charges for the use of suchassets as know-how, patents, trademarks and copyrights

(iii) dividends--rewards from the holdingof investments in shares*Basis for recognition*


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Such revenue should only be recognised

when no significant uncertainity as tomeasurability or collecability exists.

When interest, royalties and dividendsfrom foreign countries requireexchange permission and uncertainty inremittance is anticipated, revenuerecognition may need to be postponed.


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Effect of Uncertainties on Revenue

Recognition

Recognition of revenue requires thatrevenue is measurable and that at thetime of sale or the rendering of the

service it would not be unreasonable toexpect ultimate collection. In such cases, it may be appropriate to

recognize revenue only when it isreasonably certain that the ultimatecollection will be made.


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When the uncertainly relating to

collectability arises subsequent to the timeof sale or the rendering of the service, itis more appropriate to make a separateprovision to reflect the uncertainty ratherthan to adjust the amount of revenue

originally recorded. When recognition of revenue is postponed

due to the effect of uncertainties, it isconsidered as revenue of the period in

which it is properly repognised.


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Disclosure

In addition to the disclosures requiredby Accounting Standard 1 on 'Disclosureof Accounting Policies' (AS 1), anenterprise should also disclose thecircumstances in which revenuerecognition has been postponed pending

the resolution of significantuncertainties.


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SALE OF GOODS RENDERINGOFSERVICES

USE OFRESOURCES

PERFORMANCEBEINGACHIEVED

PROPERTY INGOODS OR RISKISTRANSFERREDAND

SERVICE ISRENDERED

INT: ACCRUES ONTIME BASISROYALTY:ACCRUES ONBASIS OFAGREEMENTDIVIDEND: RIGHTTO RECEIVEPAYMENT IS ESTD.

MEASURE-ABILITY

NOUNCERTAINITY

i.e. EXACT AMTRECIEVABLE ISMEASURABLE

--same-- --same--

ULTIMATECOLLECTION

REASONABLECERTAINITY OFCOLLECTION

--same-- --same--


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Application: Sale of Goods

Delivery is delayed at buyer's requestand buyer takes title and accepts billing

Delivery subject to conditions:

(a)goods are sold subject to installation,inspection etc.

(b)Goods sent on approval(c)guaranteed sales

(d)cash on delivery sales


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(e)consignment sales i.e. a delivery is

made whereby the recipient undertakesto sell the goods on behalf of theconsignor

Revenue should not be recognised untilthe goods are sold to a third party.


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(f)Sales where the purchaser makes aseries of instalment payments to the

seller, and the seller delivers the goodsonly 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 berecognised when a significant deposit isreceived if goods are ready for delivery.


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(g)Special order and shipments i.e. wherepayment (or partial payment) is received

for goods not presently held in stocke.g. the stock is still to bemanufactured or is to be delivereddirectly to the customer from a thirdparty:

Revenue from such sales should not berecognised until goods are

manufactured, identified and ready fordelivery to the buyer by the thirdparty.


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(h)Sale/repurchase agreements i.e. whereseller concurrently agrees to

repurchase the same goods at a laterdate

For such transactions that are in

substance a financing agreement, theresulting cash inflow is not revenue asdefined and should not be recognised as

revenue.


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(i) 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 ofownership have passed;

however in some situations the buyermay in substance be an agent and insuch cases the sale should be treated asa consignment sale.


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(j) Subscriptions for publications

Revenue received or billed should bedeferred and recognised either on astraight line basis over time or,

where the items delivered vary in valuefrom period to period, revenue shouldbe based on the sales value of the itemdelivered in relation to the total sales

value of all items covered by thesubscription.


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(k) Instalment sales

When the consideration is receivable ininstalments, revenue attributable to thesales 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.


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(l)Trade discounts and volume rebates

Trade discounts and volume rebatesreceived are not encompassed withinthe definition of revenue, since theyrepresent a reduction of cost.

Trade discounts and volume rebatesgiven should be deducted in determiningrevenue.


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Application: Rendering of Services Installation Fees

Tuition fees Entrance and membership fees Insurance agency commissions Advertising

For advertising agencies, mediacommissions will normally be recognisedwhen the related advertisement orcommercial appears before the public and

the necessary intimation is received by theagency, as opposed to productioncommission, which will be recognised whenthe project is completed.


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THANK YOU

MADE BY:

NEHA AGARWAL40024TH YEAR MBA

K S SCHOOL OF BUSINESSMANAGEMENT

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As 9 Accountancy