| Statements of Accounting Standards
(AS 9)
Revenue Recognition
The following is the text of the Accounting
Standard (AS) 9 issued by the Institute of Chartered Accountants
of India on 'Revenue Recognition'.
In the initial years, this accounting
standard will be recommendatory in character. During this period,
this standard is recommended for use by companies listed on a recognised
stock exchange and other large commercial, industrial and business
enterprises in the public and private sectors.
Introduction
1. This Statement deals with the bases
for recognition of revenue in the statement of profit and loss of
an enterprise. The Statement 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 Statement does not deal with
the following aspects of revenue recognition to which special considerations
apply:
(i) Revenue arising from construction
contracts;
(ii) Revenue arising from hire-purchase,
lease agreements;
(iii) Revenue arising from government
grants and other similar subsidies;
(iv) Revenue of insurance companies
arising from insurance contracts.
3. Examples of items not included within
the definition of "revenue" for the purpose of this Statement are:
(i) Realised gains resulting from the
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
from the 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 from the
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
Statement 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 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 recognition.
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 Statement,
are sometimes recognised in the statement of profit and loss and
appropriately described.
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.
(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
Interest, Royalties and Dividends
8.1 The use by others of such enterprise
resources gives rise to:
(i) interest—charges for the use of
cash resources or amounts due to the enterprise;
(ii) royalties—charges for the use of
such assets as know-how, patents, trade marks and copyrights;
(iii) dividends—rewards from the holding
of investments in shares.
8.2 Interest accrues, in most circumstances,
on the time basis determined by the amount outstanding and the rate
applicable. Usually, discount or premium on debt securities held
is treated as though it were accruing over the period to maturity.
8.3 Royalties accrue in accordance with
the terms of the relevant agreement and are usually recognised on
that basis unless, having regard to the substance of the transactions,
it is more appropriate to recognise revenue on some other systematic
and rational basis.
8.4 Dividends from investments in shares
are not recognised in the statement of profit and loss until a right
to receive payment is established.
8.5 When interest, royalties and dividends
from foreign countries require exchange permission and uncertainty
in remittance is anticipated, revenue recognition may need to be
postponed.
9. Effect of Uncertainties on Revenue Recognition
9.1 Recognition of revenue requires
that revenue is measurable and that at the time of sale or the rendering
of the service it would not be unreasonable to expect ultimate collection.
9.2 Where the ability to assess the
ultimate collection with reasonable certainty is lacking at the
time of raising any claim, e.g., for escalation of price, export
incentives, interest etc., revenue recognition is postponed to the
extent of uncertainty involved. In such cases, it may be appropriate
to recognise revenue only when it is reasonably certain that the
ultimate collection will be made. Where there is no uncertainty
as to ultimate collection, revenue is recognised at the time of
sale or rendering of service even though payments are made by instalments.
9.3 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.
9.4 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.
9.5 When recognition of revenue is postponed
due to the effect of uncertainties, it is considered as revenue
of the period in which it is properly recognised.
ACCOUNTING STANDARD
(Accounting Standard comprises paragraphs
10–14 of this Statement. The Standard should be read in the context
of paragraphs 1–9 of this Statement and of the 'Preface to the Statements
of Accounting Standards'.)
10. Revenue from sales or service
transactions should be recognised when the requirements as to performance
set out in paragraphs 11 and 12 are satisfied, provided that at
the time of performance it is not unreasonable to expect ultimate
collection. If at the time of raising of any claim it is unreasonable
to expect ultimate collection, revenue recognition should be postponed.
11. In a transaction involving
the sale of goods, performance should be regarded as being achieved
when the following conditions have been fulfilled:
(i) 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
(ii) no significant uncertainty
exists regarding the amount of the consideration that will be derived
from the sale of the goods.
12. In a transaction involving
the rendering of services, performance should be measured either
under the completed service contract method or under the proportionate
completion method, whichever relates the revenue to the work accomplished.
Such performance should be regarded as being achieved when no significant
uncertainty exists regarding the amount of the consideration that
will be derived from rendering the service.
13. Revenue arising from the use
by others of enterprise resources yielding interest, royalties and
dividends should only be recognised when no significant uncertainty
as to measurability or collectability exists. These revenues are
recognised on the following bases:
| (i) Interest
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:
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on
a time proportion basis taking into account the amount outstanding
and the rate applicable. |
| (ii) Royalties
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:
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on
an accrual basis in accordance with the terms of the relevant
agreement. |
| (iii) Dividends
from investments in shares |
:
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when
the owner's right to receive payment is established.
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Disclosure
14. In addition to the disclosures
required by Accounting Standard 1 on 'Disclosure of Accounting Policies'
(AS 1), an enterprise should also disclose the circumstances in
which revenue recognition has been postponed pending the resolution
of significant uncertainties.
APPENDIX
This appendix is illustrative only and
does not form part of the accounting standard set forth in this
Statement. The purpose of the appendix is to illustrate the application
of the Standard to a number of commercial situations in an endeavour
to assist in clarifying application of the Standard.
A. Sale of Goods
1. Delivery is delayed at buyer's request
and buyer takes title and accepts billing
Revenue should be recognised notwithstanding
that physical delivery has not been completed so long as there is
every expectation that delivery will be made. However, the item
must be on hand, identified and ready for delivery to the buyer
at the time the sale is recognised rather than there being simply
an intention to acquire or manufacture the goods in time for delivery.
2. Delivered subject to conditions
(a) installation and inspection i.e.
goods are sold subject to installation, inspection etc.
Revenue should normally not be recognised
until the customer accepts delivery and installation and inspection
are complete. In some cases, however, the installation process may
be so simple in nature that it may be appropriate to recognise the
sale notwithstanding that installation is not yet completed (e.g.
installation of a factory-tested television receiver normally only
requires unpacking and connecting of power and antennae).
(b) on approval
Revenue should not be recognised until
the goods have been formally accepted by the buyer or the buyer
has done an act adopting the transaction or the time period for
rejection has elapsed or where no time has been fixed, a reasonable
time has elapsed.
(c) guaranteed sales i.e. delivery is
made giving the buyer an unlimited right of return
Recognition of revenue in such circumstances
will depend on the substance of the agreement. In the case of retail
sales offering a guarantee of "money back if not completely satisfied"
it may be appropriate to recognise the sale but to make a suitable
provision for returns based on previous experience. In other cases,
the substance of the agreement may amount to a sale on consignment,
in which case it should be treated as indicated below.
(d) consignment sales i.e. a delivery
is made whereby the recipient undertakes to sell the goods on behalf
of the consignor
Revenue should not be recognised until
the goods are sold to a third party.
(e) cash on delivery sales
Revenue should not be recognised until
cash is received by the seller or his agent.
3. Sales where the purchaser makes a
series of instalment payments to the seller, and the seller delivers
the goods only when the final payment is received
Revenue from such sales should not be
recognised until goods are delivered. However, when experience indicates
that most such sales have been consummated, revenue may be recognised
when a significant deposit is received.
4. Special order and shipments i.e.
where payment (or partial payment) is received for goods not presently
held in stock e.g. the stock is still to be manufactured or is to
be delivered directly to the customer from a third party
Revenue from such sales should not be
recognised until goods are manufactured, identified and ready for
delivery to the buyer by the third party.
5. Sale/repurchase agreements i.e. where
seller concurrently agrees to repurchase the same goods at a later
date
For such transactions that are in substance
a financing agreement, the resulting cash inflow is not revenue
as defined and should not be recognised as revenue.
6. Sales to intermediate parties i.e.
where goods are sold to distributors, dealers or others for resale
Revenue from such sales can generally
be recognised if significant risks of ownership have passed; however
in some situations the buyer may in substance be an agent and in
such cases the sale should be treated as a consignment sale.
7. Subscriptions for publications
Revenue received or billed should be
deferred and recognised either on a straight line basis over time
or, where the items delivered vary in value from period to period,
revenue should be based on the sales value of the item delivered
in relation to the total sales value of all items covered by the
subscription.
8. Instalment sales
When the consideration is receivable
in instalments, revenue attributable to the sales price exclusive
of interest should be recognised at the date of sale. The interest
element should be recognised as revenue, proportionately to the
unpaid balance due to the seller.
9. Trade discounts and volume rebates
Trade discounts and volume rebates received
are not encompassed within the definition of revenue, since they
represent a reduction of cost. Trade discounts and volume rebates
given should be deducted in determining revenue.
B. Rendering of Services
1. Installation Fees
In cases where installation fees are
other than incidental to the sale of a product, they should be recognised
as revenue only when the equipment is installed and accepted by
the customer.
2. Advertising and insurance agency
commissions
Revenue should be recognised when the
service is completed. For advertising agencies, media commissions
will normally be recognised when the related advertisement or commercial
appears before the public and the necessary intimation is received
by the agency, as opposed to production commission, which will be
recognised when the project is completed. Insurance agency commissions
should be recognised on the effective commencement or renewal dates
of the related policies.
3. Financial service commissions
A financial service may be rendered
as a single act or may be provided over a period of time. Similarly,
charges for such services may be made as a single amount or in stages
over the period of the service or the life of the transaction to
which it relates. Such charges may be settled in full when made
or added to a loan or other account and settled in stages. The recognition
of such revenue should therefore have regard to:
(a) whether the service has been provided
"once and for all" or is on a "continuing" basis;
(b) the incidence of the costs relating
to the service;
(c) when the payment for the service
will be received. In general, commissions charged for arranging
or granting loan or other facilities should be recognised when a
binding obligation has been entered into. Commitment, facility or
loan management fees which relate to continuing obligations or services
should normally be recognised over the life of the loan or facility
having regard to the amount of the obligation outstanding, the nature
of the services provided and the timing of the costs relating thereto.
4. Admission fees
Revenue from artistic performances,
banquets and other special events should be recognised when the
event takes place. When a subscription to a number of events is
sold, the fee should be allocated to each event on a systematic
and rational basis.
5. Tuition fees
Revenue should be recognised over the
period of instruction.
6. Entrance and membership fees
Revenue recognition from these
sources will depend on the nature of the services being provided.
Entrance fee received is generally capitalised. If the membership
fee permits only membership and all other services or products are
paid for separately, or if there is a separate annual subscription,
the fee should be recognised when received. If the membership fee
entitles the member to services or publications to be provided during
the year, it should be recognised on a systematic and rational basis
having regard to the timing and nature of all services provided.
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