|Deals with bases for recognition of revenue arising in the course of the ordinary activities of a person from:
· The sale of goods;
· The rendering of services;
· The use by others of the person’s resources yielding interest, royalties or dividends.
· Is the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of a person from the sale of goods, from the rendering of services, or from the use by others of the person’s resources yielding interest, royalties or dividends.
· In an agency relationship, the revenue is the amount of commission and not gross inflow of cash.
Criteria for recognition of revenue
| ¨ Sale of goods:
(i) Seller of the goods has to transfer “property” in the goods and significant “risks and rewards” of ownership and the seller retains no effective control of the goods transferred to a degree usually associated with ownership.
(ii) Revenue to be recognised when there is reasonable certainty about ultimate collection.
(iii) Postpone the recognition of revenue in following situations:
(a) When transfer of property does not coincide with transfer of significant risk and rewards of ownership, recognise revenue when risks and rewards are transferred.
(b) When the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim for escalation of price and export incentives, revenue recognition should be postponed to the extent of uncertainty involved.
| ¨ Rendering of Services:
(i) Shall be recognised by the percentage completion method. Revenue from service transactions is matched with the service transaction costs incurred in reaching the stage of completion resulting in the determination of revenue, expenses and profit which can be attributed to the proportion of work completed.
(ii) The requirements of ICDS III will mutatis mutandis apply to the recognition of revenue and the associated expenses for a service transaction.
| ¨ Interest:
Recognise on time proportion basis. Discount or premium on debt securities held is treated as though it were accruing over the period to maturity
| ¨ Royalties
Shall accrue in terms of the relevant agreement and shall be recognised on the basis unless, having regard to the substance of the transaction, it is more appropriate to recognise revenue on some other systematic and rational basis.
| ¨ Dividends
Are recognised in accordance with the provisions of the Act.
| ¨ In a transaction involving sale of goods, total amount not recognised as revenue during the previous year due to lack of reasonably certainty of its ultimate collection along with the nature of uncertainty;
¨ The amount of revenue from service transactions recognised as revenue during the previous year;
¨ The method used to determine the stage of completion of service transactions in progress; and
¨ For a service transactions in progress at the end of previous years:
(a) Amount of costs incurred and recognised profits (less recognised losses) upto the end of previous years;
(b) The amount of advances received; and
(c) The amount of retentions.
Key differences from AS 9
| ¨ AS 9 recognises completed contrct method for certain services, whereas ICDS requires that every service transaction revenue to be recognised only under the percentage of completion method.
¨ AS 9 provides for deferment of revenue recognition of any claim whose ultimate collection is not certain. In ICDS IV it merely states that claims in respect of price escalation and export incentives, which are uncertain of its ultimate collection, can be deferred.
¨ AS 9 recognises dividend income when right to receive is established. ICDS does not provide for any recognition principles as it is dealt in the IT act