Revenue Recognition (as-9)

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11/29/2014 REVENUE RECOGNITION (AS-9) BY TWINKLE DIXIT

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REVENUE RECOGNITION (AS-9) BY TWINKLE DIXITWhite Paper - White Paper

Submitted by Twinkle Dixit

REVENUE RECOGNITION (AS-9)Objective:-

The Standard explains as to when the revenue should be recognized in profit and loss account and alsostates the circumstances in which revenue recognition can be postponed. Revenue means gross inflowof cash, receivable of an enterprise such as:-

The Sales of Goods.

Rendering of Services.

Use of the enterprise resources by others yielding interest, dividend and royalties.

In other words, revenue is a charge made to customers/ clients for goods supplied and servicesrendered.

Timing of Revenue Recognition:-Revenue from sale of rendering services should be recognized at the time of the sale or rendering of services. H owever, if at the time o f renderin g opf services or sale there is significant uncertainty inultimate collection of the revenue, then the revenue recognition is postponed and in such cases revenueshould be recognized only when it becomes reasonably certain that ultimate collection will be made. Italso applies to the revenue arising out of escalation of price, export incentive, interest, etc.

Applicability:-This Accounting Standard is not applicable to following revenue or gain-

Revenue arising from construction contracts.

Revenue arising from hire purchase, lease agreements.

Revenue arising from Govt. grants and subsidies.

Revenue of insurance companies arising from insurance contracts.

Gain- realized or unrealized gain . Example :- Profit on sale of fixed assets.

1. Revenue from sale of goods:-I. It is recognized when all the following conditions are fulfilled:-

Seller has transferred the ownership of goods to buyer for a price.Or

All significant risks and reward of ownership have been transferred to buyer.

There is no significant uncertainty in collection of the amount of consideration (i.e.cash, receivable, etc.)

II. Revenue Recognition when the delivery of goods is delayed at buyers request:- Delivery isdelayed at buyers request and buyer takes title and accepts billing. Revenue shold berecognized immediately bt goods must be in the hand of seller, identified and ready for delivery at the time of recognition of revenue.

III. Revenue Recognition when delivery of goods sold is subject to conditions:-

Installation and inspection:- Revenue should be recognized when

Goods are installed at the buyers place to his satisfaction

Goods are inspected and accepted by the buyer.

Sale on Approval:- Revenue should be recognized when the buyer confirms hisdesire to buy such goods by communication.

Guaranteed Sales:- Revenue should be recognized as per the substance of theagreement of sale or after the reasonable period has expired.

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Warranty Sales:- Sales should be recognized immediately but the provisionshould be made to cover unexpired warranty.

Consignment Sales:- Revenue should be recognized only when the goods aresold to a third party.

Special order and shipments:- Revenue from such sales should be recognizedwhen the goods are identified and are ready for delivery.

Items delivered vary in the value from period to period.

Revenue should be recognized on the basis of sales value of items delivered.

Items delivered do not vary in value from period to period

Revenue should be recognized on straight-line basis over time.Installment sales:- Revenue of sale price excluding interest should be recognized

on the date of sale. Interest should be recognized proportionately to the unpaidbalance.

2. Revenue from rendering of the services:-Revenue from service is generally recognized as the service is performed. The performance of service ismeasured by two methods as under:-

Completed service contract method- Revenue is recognized when service isabout to be completed and no significant uncertainties exist about the collectionof amount of service charges.

Proportionate Completion Method- Revenue is recognized by reference to theperformance of each act. The revenue recognized under this method would bedetermined on the basis of contract value, associated costs, number of acts or

other suitable basis. Further, no significant uncertainty exists about the collectionof amount of service charges of performed acts.

Revenue Recognition Norms: - Revenue Recognition norms for rendering of servicesunder special conditions are as follows:-

Installation Fees

Advertising and Insurance agency commission-

Advertising commission is recognized when the advertisement appears beforepublic

Insurance commission is recognized on the effective commencement/ renewaldate of the policies.

Financial service commission

Admission fee

Tuition fees

Entrance and Membership Fees

3. Revenue from Interest:-Revenue from interest should be recognized on time proportion basis.

4. Revenue from Royalties:-On accrual basis as per the terms of the agreement.

5. Revenue from Dividend:-When the declaring company declares dividend.

6. Subsequent uncertainty in collection:-When uncertainty of revenue arises subsequently after the revenue recognition, it is better to make

provision for the uncertainty in collection rather than adjustment in already recognized revenue.Disclosure:-When revenue recognition is postponed, the disclosure of the circumstances necessitating thepostponement should be made.

Disclosure of Revenue from Sales Transactions

Turnover (Gross) - XXX

Less- Excise Duty - XXX----------

Turnover (Net) - XXX

Revenue Recognition of real Estate sale Issue:-The term Real Estate refers to land as well as building. The issue is when should the revenue berecognized in case of Real Estate by the enterprises engaged in such activities (commonly referred to asReal estate developers,builders or property developers)

Consensus- Revenue in case of Real estate sales should be recognized when all the followingconditions are satisfied:-

(i) The seller has transferred to the buyer all significant risks and rewards of ownership and theseller retains to effective control of the real estate transferred to a degree usuallyassociated with ownership.

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(ii) At the time of transfer of all significant risks and rewards of ownership is not unreasonable toexpect ultimate collection.

(iii) No significant uncertainty exists regarding the amount of the consideration that will be derived.

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Revenue Recognition (as-9)