Revenue recognition
This query is : Resolved
09 September 2011
when export incentives should be recognised as per AS.
12 September 2011
Accounting Standard (AS) 9
Revenue Recognition1
Introduction
1. This Standard 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, and
— the use by others of enterprise resources yielding interest, royalties
and dividends.
2. This Standard does not deal with the following aspects of revenue
recognition to which special considerations apply:
(i) Revenue arising from construction contracts;2
(ii) Revenue arising from hire-purchase, lease agreements;
(iii) Revenue arising fromgovernment grants and other similar subsidies;
(iv) Revenue of insurance companies arising from insurance contracts.
1 It is reiterated that this Accounting Standard (as is the case of other accounting
standards) assumes that the three fundamental accounting assumptions i.e., going
concern, consistency and accrual have been followed in the preparation and
presentation of financial statements.
2 Refer to AS 7 on ‘Construction Contracts’.AS 9
3. Examples of items not included within the definition of “revenue” for
the purpose of this Standard are:
(i) Realised gains resulting fromthe disposal of, and unrealised gains
resulting from the holding of, non-current assets e.g. appreciation
in the value of fixed assets;
(ii) Unrealised holding gains resulting fromthe change in value of current
assets, and the natural increases in herds and agricultural and forest
products;
(iii) Realised or unrealised gains resulting from changes in foreign
exchange rates and adjustments arising on the translation of foreign
currency financial statements;
(iv) Realised gains resulting fromthe discharge of an obligation at less
than its carrying amount;
(v) Unrealised gains resulting from the restatement of the carrying
amount of an obligation.
Definitions
4. The following terms are used in this Standard with the meanings
specified:
4.1 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, from the rendering of services, and
from the use by others of enterprise resources yielding interest, royalties
and dividends. Revenue is measured by the charges made to customers
or clients for goods supplied and services rendered to them and by the
charges and rewards arising from the use of resources by them. In an
agency relationship, the revenue is the amount of commission and not
the gross inflow of cash, receivables or other consideration.
4.2 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.
4.3 Proportionate completion method is a method of accounting which
Revenue Recognition 87
recognises revenue in the statement of profit and loss proportionately
with the degree of completion of services under a contract.
Explanation
5. Revenue recognition is mainly concerned with the timing of recognition
of revenue in the statement of profit and loss of an enterprise. The amount
of revenue arising on a transaction is usually determined by
agreement between the parties involved in the transaction. When
uncertainties exist regarding the determination of the amount, or its
associated costs, these uncertainties may influence the timing of revenue
6. Sale of Goods
6.1 A key criterion for determining when to recognise revenue from a
transaction involving the sale of goods is that the seller has transferred the
property in the goods to the buyer for a consideration. The transfer of property
in goods, in most cases, results in or coincides with the transfer of significant
risks and rewards of ownership to the buyer. However, there may be situations
where transfer of property in goods does not coincide with the transfer of
significant risks and rewards of ownership. Revenue in such situations is
recognised at the time of transfer of significant risks and rewards of
ownership to the buyer. Such cases may arise where delivery has been
delayed through the fault of either the buyer or the seller and the goods are
at the risk of the party at fault as regards any loss which might not have
occurred but for such fault. Further, sometimes the parties may agree that
the risk will pass at a time different from the time when ownership passes.
6.2 At certain stages in specific industries, such as when agricultural crops
have been harvested or mineral ores have been extracted, performance may
be substantially complete prior to the execution of the transaction generating
revenue. In such cases when sale is assured under a forward contract or a
government guarantee or where market exists and there is a negligible risk
of failure to sell, the goods involved are often valued at net realisable value.
Such amounts, while not revenue as defined in this Standard, are
sometimes recognised in the statement of profit and loss and appropriately
7. Rendering of Services
7.1 Revenue from service transactions is usually recognised as the service
is performed, either by the proportionate completion method or by the
completed service contract method.
88 AS 9
(i) Proportionate completion method—Performance consists of the
execution of more than one act. Revenue is recognised proportionately
by reference to the performance of each act. The revenue
recognised under this method would be determined on the basis of
contract value, associated costs, number of acts or other suitable
basis. For practical purposes, when services are provided by an
indeterminate number of acts over a specific period of time, revenue
is recognised on a straight line basis over the specific period unless
there is evidence that some other method better represents the
pattern of performance.
(ii) Completed service contract method—Performance consists of
the execution of a single act. Alternatively, services are performed
in more than a single act, and the services yet to be performed are
so significant in relation to the transaction taken as a whole that
performance cannot be deemed to have been completed until the
execution of those acts. The completed service contract method is
relevant to these patterns of performance and accordingly revenue
is recognised when the sole or final act takes place and the service
becomes chargeable.
8. The Use by Others of Enterprise Resources Yielding
Revenue Recognition1
Introduction
1. This Standard 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, and
— the use by others of enterprise resources yielding interest, royalties
and dividends.
2. This Standard does not deal with the following aspects of revenue
recognition to which special considerations apply:
(i) Revenue arising from construction contracts;2
(ii) Revenue arising from hire-purchase, lease agreements;
(iii) Revenue arising fromgovernment grants and other similar subsidies;
(iv) Revenue of insurance companies arising from insurance contracts.
1 It is reiterated that this Accounting Standard (as is the case of other accounting
standards) assumes that the three fundamental accounting assumptions i.e., going
concern, consistency and accrual have been followed in the preparation and
presentation of financial statements.
2 Refer to AS 7 on ‘Construction Contracts’.AS 9
3. Examples of items not included within the definition of “revenue” for
the purpose of this Standard are:
(i) Realised gains resulting fromthe disposal of, and unrealised gains
resulting from the holding of, non-current assets e.g. appreciation
in the value of fixed assets;
(ii) Unrealised holding gains resulting fromthe change in value of current
assets, and the natural increases in herds and agricultural and forest
products;
(iii) Realised or unrealised gains resulting from changes in foreign
exchange rates and adjustments arising on the translation of foreign
currency financial statements;
(iv) Realised gains resulting fromthe discharge of an obligation at less
than its carrying amount;
(v) Unrealised gains resulting from the restatement of the carrying
amount of an obligation.
Definitions
4. The following terms are used in this Standard with the meanings
specified:
4.1 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, from the rendering of services, and
from the use by others of enterprise resources yielding interest, royalties
and dividends. Revenue is measured by the charges made to customers
or clients for goods supplied and services rendered to them and by the
charges and rewards arising from the use of resources by them. In an
agency relationship, the revenue is the amount of commission and not
the gross inflow of cash, receivables or other consideration.
4.2 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.
4.3 Proportionate completion method is a method of accounting which
Revenue Recognition 87
recognises revenue in the statement of profit and loss proportionately
with the degree of completion of services under a contract.
Explanation
5. Revenue recognition is mainly concerned with the timing of recognition
of revenue in the statement of profit and loss of an enterprise. The amount
of revenue arising on a transaction is usually determined by
agreement between the parties involved in the transaction. When
uncertainties exist regarding the determination of the amount, or its
associated costs, these uncertainties may influence the timing of revenue
6. Sale of Goods
6.1 A key criterion for determining when to recognise revenue from a
transaction involving the sale of goods is that the seller has transferred the
property in the goods to the buyer for a consideration. The transfer of property
in goods, in most cases, results in or coincides with the transfer of significant
risks and rewards of ownership to the buyer. However, there may be situations
where transfer of property in goods does not coincide with the transfer of
significant risks and rewards of ownership. Revenue in such situations is
recognised at the time of transfer of significant risks and rewards of
ownership to the buyer. Such cases may arise where delivery has been
delayed through the fault of either the buyer or the seller and the goods are
at the risk of the party at fault as regards any loss which might not have
occurred but for such fault. Further, sometimes the parties may agree that
the risk will pass at a time different from the time when ownership passes.
6.2 At certain stages in specific industries, such as when agricultural crops
have been harvested or mineral ores have been extracted, performance may
be substantially complete prior to the execution of the transaction generating
revenue. In such cases when sale is assured under a forward contract or a
government guarantee or where market exists and there is a negligible risk
of failure to sell, the goods involved are often valued at net realisable value.
Such amounts, while not revenue as defined in this Standard, are
sometimes recognised in the statement of profit and loss and appropriately
7. Rendering of Services
7.1 Revenue from service transactions is usually recognised as the service
is performed, either by the proportionate completion method or by the
completed service contract method.
88 AS 9
(i) Proportionate completion method—Performance consists of the
execution of more than one act. Revenue is recognised proportionately
by reference to the performance of each act. The revenue
recognised under this method would be determined on the basis of
contract value, associated costs, number of acts or other suitable
basis. For practical purposes, when services are provided by an
indeterminate number of acts over a specific period of time, revenue
is recognised on a straight line basis over the specific period unless
there is evidence that some other method better represents the
pattern of performance.
(ii) Completed service contract method—Performance consists of
the execution of a single act. Alternatively, services are performed
in more than a single act, and the services yet to be performed are
so significant in relation to the transaction taken as a whole that
performance cannot be deemed to have been completed until the
execution of those acts. The completed service contract method is
relevant to these patterns of performance and accordingly revenue
is recognised when the sole or final act takes place and the service
becomes chargeable.
8. The Use by Others of Enterprise Resources Yielding
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