Accounting Standard (AS) 9, Revenue Recognition
AS 9 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
- the use by others of enterprise resources yielding interest, royalties and dividends
AS 9 does not deal with the following aspects of revenue recognition to which special considerations apply:
- 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.
Sale of Goods
In a transaction involving the sale of goods, performance should be regarded as being achieved when the following conditions have been fulfilled:
- 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
- no significant uncertainty exists regarding the amount of the consideration that will be derived from the sale of the goods.
Rendering of Services
There are two methods of recognition of revenue from service transaction, viz
Proportionate Completion Method is a method of accounting which recognises revenue in the statement of profit and loss proportionately with the degree of completion of services under a contract. Here performance consists of the execution of more than one act. Revenue is recognised proportionately by reference to the performance of each act.
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.
Use by Others of Enterprise Resources Yielding Interest, Royalties and Dividends
Interest: Revenue is recognised on a time proportion basis taking into account the amount outstanding and the rate applicable.
Royalties: Revenue is recognised on an accrual basis in accordance with the terms of the relevant agreement.
Dividends: Revenue is recognised when the owner’s right to receive payment is established.
Effect of Uncertainties on Revenue Recognition
Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, revenue recognition is postponed to the extent of uncertainty involved. In such cases:
- 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.
- 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.
An enterprise should disclose the circumstances in which revenue recognition has been postponed pending the resolution of significant uncertainties.