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 from-

1) 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) Conditions
II) 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

• 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.

2) 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
 • 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:

• 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