As-9

AS-9 Revenue Recognition Revenue means the inflow of cash, receivables or any other consideration arising in the normal course of the business. This standard states that when the revenue should be recognized in the profit and loss accounts. It also states that when revenue recognition should be postponed. Revenues may be either from1) Sale of goods 2) Rendering of services 3) Use of business resources which yields interest, dividend, royalties etc. Revenues in all these case should be recognized when the sale is made, services are rendered, or interest, royalties etc. are accrued. But if at the time of sale of goods or rendering of services there is uncertainties exist about the collection of the revenue then it should be recognized when collection of revenues becomes certain. 1) Revenue recognition on sale of goods I) II)

Conditions Delivery is delayed at the buyer’s request III) Revenue recognition at the conditions relating to delivery I) Conditons Revenues should be recognized when all the following conditions are satisfied: • Seller has transferred the ownership of the goods sold to the buyer for price. • All the risks and rewards are transferred to the buyer and there is no more control of the seller on the goods sold to the buyer. • Too there will not be any uncertainties about the collection of revenues.

II) Delivery is delayed at the buyer’s request When the goods are sold to the buyer and ownership is transferred to him, at the same time revenue should be recognized, no matter if the goods are still lying in the hands of the seller because of the request by the buyer. But if the seller is delayed in delivery of the goods, revenue should be recognized only when it is delivered to the buyer. III)

Revenue recognition at the conditions relating to delivery •

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2)

Installations and inspections: Revenue should be recognized only when the goods are installed at the buyer’s place and inspected by the buyer. Sales on approval: Revenue should be recognized only when the buyer confirms his desire to buy the goods to the seller. Guaranteed sales: Revenue should be recognized as per the agreement or when the guaranteed period has expired. Warranty sales: Sales should be recognized immediately, but the provision should be made for the unexpired period. Consignment sales: Revenue should be recognized only when the goods are sold to the third party. Installment sales: Revenue of sale price excluding of interest should be recognized at the time of sale. Interest should be recognized at proportionately to the unpaid balance.

Rendering of Services: Revenue should be recognized when the services are performed. There are two methods of measuring services performed: •

Complete service contract method: Revenues should be recognized when the services are about to be completed and there is no uncertainties about the collection of the charges for the services rendered

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Proportionate completion service contract method: Revenue is recognized after completion of proportionate service and the charges for the proportionate service depends upon the contract cost, associated cost, total number of acts or any other suitable basis. Too there will not be any uncertainties about the collection of the charges of the services rendered.

Revenue recognition under certain conditions: • •

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Installation Fees: Revenue is recognized only when the installation has been completed and accepted by the clients. Advertising commission: Revenue should be recognized only when the advertisement of the respective product appears before the public. Arrangement of loan commission: Revenue should be recognized only when the loan is sanctioned. Tuition Fees: Revenue should be recognized throughout the period of instruction.

3) Use of business resources which yields interest, dividends or royalties • • •

Interest: Revenue should be recognized on the proportionate basis. Dividends: Revenue should be recognized when the company declares it Royalties: Revenue should be recognized as per the terms of agreement.

Notes: Subsequent uncertainty in collection of revenue: If after the services are rendered or sales are made there is any uncertainty about the collection of revenue, then without making any adjustment in already recognized revenue, provision for the uncertainty in collection of revenue should be made. • Treatment of inter divisional transfer: ICAI has notified that the inter divisional transfers are not the revenue under AS-9 “Revenue Recognition”. Since risks and ownership remains with the enterprise while transfer. • AS-9 is not applicable in revenues or gains arising from: i) Construction contracts ii) Hire purchase, lease agreements iii) Government grants and subsidies iv) Insurance companies from insurance contracts v) Realized or unrealized gain, such as profit from sale of fixed assets. •

-Mayank Kothari