Accounting Standard 9 - Commerce PDF Download

Revenue Recognition under AS 9

• Definition of Revenue: Revenue is defined as the total inflow of cash, receivables, or other forms of consideration that a business receives from its ordinary activities, including the sale of goods and services, as well as from sources like interest, royalties, and dividends.
• Measurement of Revenue: Revenue should be measured based on the amount billed to customers for goods and services sold. However, in cases of agency relationships, revenue is determined by the commission earned rather than the total inflow of cash or receivables.
• Exceptions to Revenue Recognition: There are specific exceptions to revenue recognition in cases such as revenue from construction contracts, hire-purchase or lease agreements, government grants, subsidies, and revenue from insurance contracts of insurance companies.

Exceptions to Revenue Recognition:

• Revenue from Construction Contracts: Revenue recognition principles differ for revenue generated from construction contracts.
• Revenue from Hire-Purchase or Lease Agreements: Revenue recognition criteria vary for revenue from hire-purchase or lease agreements.
• Revenue from Government Grants and Subsidies: Special conditions apply to revenue sourced from government grants and similar subsidies.
• Revenue from Insurance Contracts: Revenue recognition for insurance companies involves unique considerations related to insurance contracts.

Applicability of AS 9 Revenue Recognition

• AS 9 Revenue Recognition was introduced by the Institute of Chartered Accountants of India (ICAI) in 1985.
• Initially, it was recommended for Level I enterprises only.
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  • Level I enterprises are those whose turnover in the previous accounting year exceeded 50 crores.
  • Turnover for this purpose excludes other income and is relevant for both holding and subsidiary companies.
• From April 1, 1993, AS 9 became mandatory for all enterprises, as per ICAI regulations.
• According to ICAI's definition, an 'Enterprise' refers to a company defined in section 3 of the Companies Act, 1956.

Explanation

• Recognizing revenue is crucial for businesses as it focuses on when revenue should be accounted for in the financial records.
• The amount of revenue from a transaction is typically determined through an agreement between the parties involved.
• Uncertainties in determining revenue amounts or associated costs can affect when revenue is recognized.

Sale of Goods

In sales transactions, revenue recognition hinges on transferring goods' ownership to the buyer for an agreed-upon price. Usually, transferring ownership also transfers significant risks and rewards of ownership.

• Example: Goods sent on approval may lead to revenue recognition when significant risks and rewards are transferred, even if goods are not physically transferred yet.
• In specific cases like government-guaranteed sales or forward contracts, revenue might be recognized based on net realizable value.
• For instance, revenue may be recognized in unique situations like agricultural crop harvesting or mineral extraction.

Rendering of Services

Recognizing revenue for services depends on when the service is performed and can be categorized into two methods:

• Proportionate Completion Method: Revenue is recognized in proportion to the completion of each service act.
• Completed Service Contract Method: Revenue is recognized only when services under a contract are completed or substantially completed.

Interest, Royalties & Dividends

Revenue from interests, royalties, and dividends relies on the use of enterprise resources by others:

• Interest: Revenue is recognized over time based on outstanding amounts and applicable rates.
• Royalties: Revenue is recognized as per relevant agreements, such as the number of copies sold for royalties on books.
• Dividends: Revenue is acknowledged when the company declares dividends, ensuring the shareholders' right to payment.

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