AS 9 Revenue Recognition

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”.

Introduction of AS 9 Revenue Recognition

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. There are few exceptions to the above-mentioned statement where the special consideration applies: –

• Revenue arising from Construction Contracts
• Revenue arising from hire-purchase, lease agreements
• Revenue arising from government grants and other similar subsidies
• 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.

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

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.

Rendering of Services

Revenue recognition of services depends as the service is performed. This is further divided into two ways: 

• 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.
• 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.

Interest, royalties & dividends

The use by others of such enterprise resources gives rise to: 

• 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.
• 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.
• 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.  

Difference between IND AS -18 & AS -9