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The Fundamentals of AS-9 Revenue Recognition

Accounting Standard (AS) 9 – Revenue recognition deals the basis on which, revenue is recognized in the statement of profit and loss of a business entity in the course of ordinary activities.

Generally this standard deals with income arise from ordinary activities as follows: 

  • Sale of goods, 

  • Rendering of services, 

  • Use of business entity resources by others giving interest, royalties and dividends in return. 


However, this standard does not deal with revenue derived from: 

  • Construction contracts, 

  • Hire purchase or lease agreements, 

  • Government grants and other such subsidies, 

  • Insurance contracts in case of insurance companies.  



Under this standard Revenue means the inflow of cash, receivables or other consideration resulting in the course of the above said ordinary activities of a business entity.Thus, business revenue can be measured in terms of amount charged for supply goods, providing services and granting them the facility to use entity’s resources. So this standard is considered with the time when should entity recognise its revenue in profit and loss statement. Sometimes recognition of revenue depends on the agreements made.


The revenue recognition of three ordinary activities is discussed separately below. 


1. Sale of Goods


Transfer of property by the seller to buyer provides base to timing of revenue recognition in case of sale of goods. When the transfer of property in goods is transferred along with associated risks and ownership rewards to the buyers, then the revenue is recognised at the time of sale of goods only as physical transfer and its risks and rewards also transferred at the same time. But when the property of goods and its risks and rewards are not transferred at same time, the revenue is recognised at the time of transfer of risks rewards only. 

In some cases some sales gets completed before the revenue is generated like farmers harvests crops before selling them in the market.


The sale of goods of this type is assured either: 

  • Under a forward contract or 

  • Government guarantee or 

  • Through an existing market for the goods where there is negligible risk of failure to sell. 

In such cases, the goods are valued at net realizable value. The revenue generated from such sales is not defined in this standard. However sometimes they are appropriately recognised in the statement of profit and loss.  

    

2.   Rendering of Services. 

For services rendered, revenue is recognised in 2(Two) ways as follows: 

Proportionate Completion Method 

There can be a situation when there are more than one act or indefinite acts are to be performed for providing a single service over specific period of time, then revenue will be recognised proportionately recognised based on the performance of each act. The amount of revenue to be recognised under this method will be based on the contract value of service, number of acts performed, associated costs or any other suitable basis. Sometimes revenue can be recognised on a straight line basis over a specific period. 

  

Completed Service Contract Method 

There can be cases where more than a single act is performed to provide a service. But the whole service is significant to recognise revenue for transaction when a single (important) or final act is performed. So performance includes completion of that single or final act. In such cases, this method is appropriate for revenue recognition. Here revenue is recognised when that important single act or final act takes place and where such services as a whole become chargeable. 

    

Interest, Royalties and Dividends


When others use entity’s resources it gives rise to: 

  • Interest  These are the charges for using entity’s cash resources which includes any amounts due to the enterprise. Such accumulated amounts of interests are determined on the basis of time period for which it becomes outstanding.   

  • Royalties  These are the charges for entity’s assets such as knowhow, patents, trademarks and copyrights. This accrues as per the terms of agreement between the parties. So Royalties are recognised on the basis of terms of an agreement.   


  • Dividends  These are the rewards given on account of holding of investments in entity’s shares. These are not recognised in profit and loss statement unless a right to receive such a payment is given.  


When Interest, royalties and dividend are to be received from a foreign country, sometimes permission is required. So, an uncertainty is expected in case of such remittance. Here, it needs to postpone revenue recognition.


Effect of Uncertainties in Revenue Recognition


While revenue recognition, two factors must be considered that is Revenue must be measurable and it is not irrational to expect revenue collection at the time of sale or rendering of service. 


But there are chances where it is not possible to assess revenue with certainty. In such cases recognition need to be postponed to an extent of the uncertainty involved. If there is no uncertainty recognition should be done at the time of sale or rendering of a service. In some cases uncertainty arises after recognition, then it is suggested to create a provision that reflects uncertainty. There is no need to adjust the amount of revenue with the amount of uncertainty. 

  

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