AS 9 REVENUE RECOGNITION

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OBJECTIVES

To recognize revenue in the statement of profit and loss account arising in the ordinary course of business i.e. from

A. The Sale of GoodsB. The Rendering of Services ; and C. The use by Others of enterprise resources

yielding interest, royalties and dividends.

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APPLICABILITY

This standard does not apply to

1. Revenue arising from Construction Contracts.2. Revenue arising from Hire Purchase or Lease

Agreements.3. Revenue arising from Government Grants or

other similar subsidies.4. Revenue of Insurance Companies arising from

insurance business.

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DEFINITIONREVENUE

Revenue is the gross inflow of cash, receivables or other consideration arising in the course of ordinary activities of an enterprise

- from the sale of goods, - from the rendering of services and - from the use of enterprise’s resources by

others yielding interest, royalty and dividend. 4

Revenue Producing Activities/earning process/operating cycle

Revenue arise from those activities that are designated business operations like :

1. Acquisition of resources2. Receipt of customer orders3. Production4. Delivery of goods or performance of services5. Collection of cash

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Revenue Recognition Criteria : Revenue Recognition Criteria are based on the desire

for both relevant and reliable accounting information. AS-9 ‘Revenue Recognition’ contains the following

criteria for revenue recognition :1. Revenue recognised at the point of sale2. Revenue Recognition in Sale of Services3. Revenue Recognition in Construction Work4. Revenue Recognition in Instalment Credit Sales5. Revenue Recognition using Production Method6. Revenue Recognition when a firm receives interest,

royalties and dividends7. Money received or Amounts paid in advance

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1. Revenue recognised at the point of sale

• The enterprise’s earning process should be substantially complete before revenue is recorded.

• Revenue should be realised before it is recorded in the books of accounts. Realised means :

- goods/services exchanged for cash/claims to cashTwo conditions : 1. revenue earned 2. revenue realised When to recognise ? - seller has transferred the property in goods to the buyer

for a price

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2. Revenue Recognition in sale of Services

• In transactions involving sale or rendering of services, revenues are usually recognised as the services are performed.

Examples : 1. Repair of automobiles 2. rental hotel rooms 3. real estate broker

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3. Revenue Recognition in Construction Work

Some projects/works take longer than usual and may extend over several years.

Examples : dams, bridges, aircrafts, ships, buildings etc.• The long-term contract has provisions for pre-

determined amounts the customer may pay at different points and stages of work

OR Suggest a formula that will determine customer

payments within the actual project costs plus a reasonable profit.

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Revenue recognition : Construction Projects(i) Percentage Completion Method (approach is reverse to Matching concept) It allocates the estimated total gross profit on contract

among the several accounting periods involved in proportion to the estimated percentage of the contract completed each period .

If the income earned by the work done in the period can be reliably estimated, then revenue is appropriately recognised in each such period.

It is called so because the amount of revenue is related to the percentage of the total project work that was

performed in the period.

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(ii) Completed Contract Method Recognises revenue : - when the final act takes place and the

service is chargeable - when final approval for the project is given

by the customer. Use : - when projects completed each year - when reasonable estimates of future costs

can’t be done.

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4. Revenue Recognition in Instalment Credit Sales

• In Instalment, sales revenue is not recognised at the point of sale.

WHY ??• Revenue is recognised when the instalment payments are

received.• Two methods : - Instalment Method (instalment payment is ‘revenue’ and

proportionate part of the cost of sales becomes costs in the same period)

- Cost Recovery Method (all cash collections are recovered as returns to cost and additional cash receive d is income)

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5. Revenue Recognition using Production Method

In some cases, the amount of income that can be earned can be reliably measured as soon as the production is over.

e. g: revenue can also be recognised at the time of harvest.

It happens in cases where : - market risk is negligible - market exists - government guarantee

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6. Revenue Recognition when a firm receives interest, royalties and dividends

A firm may allow others to use its resources and thereby can receive :

- Interests (on time basis) - Royalties and; (depends upon agreement) - Dividends (when right to receive payment

is established)

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7. Money received or Amounts paid in advance

Sometimes money is received or amounts are billed in advance e. g rents

• Some items are rightly not treated as revenue of the period in which they are received but as revenue of the future period or periods in which they are earned.

So, they become ‘unearned revenue’ (liabilities)

When earning process is complete , it results in recording a decrease in liability.

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Measurement of Revenue Recognised :

Revenue = value of goods and services ie. Amount customers pay.

In practice, to determine the amount likely to be paid by

customers (revenue), some adjustments shall be made in the gross sales value of the goods and services sold.

Those adjustments are : 1. Discounts 2. Sales Returns and Allowances 3. Bad Debts 4. Revenue Measurement in Non-Cash Transactions

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1. Discounts - Trade discount (used in determining invoice price). Thus, sales

revenue will be recorded at not more than the sale value of actual transaction.

- Cash discounts (To encourage prompt payments, early payments firms designate a discount period shorter than credit period)

Cash Discount is recorded in two ways : 1. Payment at the time of sale (deduct cash discount from the

gross sales) 2. Payment during the discount period not at the time of sale

(cash discount – expense ; sales revenue – gross sales w/o deduction)

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2. Sales returns and Allowances - If sales are returned, the amount of cash

finally to be received can be less. - Sales Return are deducted from the gross

sales and remaining is revenue. (practically, sales return in a period may be

different from the period of actual sales)

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3. Bad Debts - Bad Debt expense is classified as a selling expense on the

profit & loss account, some treat is as administration expense

Two methods : 1. Direct Write-off method are shown when they are discovered and vary from the sales

for which they happened. The result is sales and corresponding bad debts may appear in income statements of different periods

2. Allowance Method (based on matching concept) debt expense is shown as an estimate in advance that will

result from a period’s sales in order to show the bad debt expense in the same period

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4. Revenue Measurement in Non-Cash transactions

• Amount to be recorded will be the cash equivalent of the goods received or given up

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expenses

Expenses are monetary amount of resources used up or expended by an entity

during a period of time to earn revenues

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Expenses and unexpired costs

Expenses are incurred costs associated with the revenue of the

period ,often directly but frequently indirectly through association with

the periodCost to be associated with future

revenue is unexpired costs

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Categories of expenses

• Costs of assets used to produce revenue• Expenses from non reciprocal transfers and

casualities• Costs of assets other than products• Costs incurred in unsuccessful efforts

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Expenses recognition

• Matching process• Systematic and rational allocation• Immediate recognition

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Gains and losses

• Gains are defined as increase in net assets other than from revenue or from changes in capital

• Gains are increase in equity from incidental transactions of an entity

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Features of gains and losses

• Gains and losses result from enterprises incidental transactions

• Gains and losses may also be described as operating or non-operating depending upon their relation to an enterprise`s earning process

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Recognition of gains and losses

• Realization principle is followed in recognition of gains and losses

• However, an increase in the market value of securities may under some circumstances ,be sufficient evidence to recognise gain

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Recognising unrealised holding gains and losses

• Gains are generally not recognised until sale or exchange has taken place

• However, there are proposals which are concerned with changes in values of individual assets rather than changes in purchasing power of money which is reflected in general price level

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Edward and bell concept of business income

• Edward and bell developed the concept of business income

• It is based on replacement cost valuation and recognises only the gains accruing during the period

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How it is calculatedIt comprises of following:

• 1 current operating profit(current value of output sold and current value of input)-X

• 2 the realised and accrued holding gains of the period-Y

• 3 the unrealised holding gains of the period –W

• Bi= X+Y+W

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