Standard 9: Revenue Recognition

Standard 9: Revenue Recognition · Complied AI

(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 4 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 Standard, 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.

(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.

Main Principles

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.

Explanation

Explanation:

The amount of revenue from sales transactions (turnover) should be disclosed in the following manner on

the face of the statement of profit or loss:

Turnover (Gross)

Less: Excise Duty

Turnover (Net):

The amount of excise duty to be deducted from the turnover should be the total excise duty for the year

except the excise duty related to the difference between the closing stock and opening stock. The excise duty

related to the difference between the closing stock and opening stock should be recognised separately in the

statement of profit or loss, with an explanatory note in the notes to accounts to explain the nature of the two

amounts of excise duty.

11 In a transaction involving the sale of goods, performance should be regarded as being achieved when

the following conditions have been fulfilled:

(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: