ACCOUNTING STANDARD – 9
ACCOUNTING STANDARD – 9
11
REVENUE RECOGNITION
Quote:
Be miserable. Or motivate yourself. Whatever has to be done, it’s always your choice.
1. WHAT IS REVENUE?
Revenue is Gross inflow of cash, receivables or other consideration arising in the course of the ordinary
activities of an enterprise from:
● The Sale of Goods,
● The Rendering of services, and
● The Use by others of enterprise resources yielding Interest, Royalties and Dividends.
Examples on Revenue Nature Transactions
Revenue Nature Non-Revenue Nature
Example 1 Example 2
ST Ltd is a real-estate developer and builder. It Entity XY sells a machine being used at its
is into the business of buying and selling factory at a price of ₹ 2 lakh. The carrying value
properties. In 20X1, ST Ltd purchased a unit of of the machine is ₹ 1.80 lakh. The sale of the
land for ₹ 150 crore. It sold off that land after machine does not increase the revenue of XY but
few months at a price of ₹ 240 crore. is an example of a capital receipt since
In the above case, the sale of land is a transaction does not take place in the normal
transaction that happens in the ordinary course course of business. Such gain on sale of ₹ 20,000
of business (as he is a real estate developer and (₹ 2 lakhs – ₹ 1.80 lakhs) is recognised as a part
builder – properties will be an item of inventory of profit & loss statement under Gain/(Loss) on
in the financial statements) for ST Ltd. Hence, disposal of asset.
it should recognise a revenue of ₹ 240 crore
when the land is sold.
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ACCOUNTING STANDARD – 9
Example 3 Example 4
Trip Deal is a website that allows people to DL Ltd, a pharma company, has been conducting
book airlines tickets. As a part of the business, research on new medicine for the last 2 years to
it agrees to buys 100 tickets from an airline on increase the immunity levels of the people
a particular date and resells those tickets to consuming it without any side effects. During the
customers. However, Trip Deal bears the loss current year, it decides to sell the outcome of
for any unsold tickets. the research undertaken so far to another
In the above example, the risks and rewards competitor, GH Ltd for ₹ 50 crore. DL has
relating to tickets are borne by Trip Deal. already incurred ₹ 30 crore on the ongoing
Hence, sales made for the tickets will be fully research.
recognized as part of its revenue. Any unsold In the above example, the sale of the research
tickets will be charged as loss by the entity. findings does not represent an increase in
revenue. This is because DL Ltd’s business is not
to sell these research findings in the ordinary
course of business. The amount of ₹ 50 crore will
be a part of Other Income in the profit & loss
statement.
2. MEASUREMENT OF REVENUE:
Revenue is recognised at the nominal amount of Consideration Receivable (i.e., Agreed Price).
(a) Any trade discounts or rebates shall be deducted and revenue is measured net of these
items.
(b) With regard to exchanges of goods or services (barter transactions):
● When goods or services are of a similar nature, then the exchange is not regarded as a
revenue generating transaction and the revenue cannot be recognized.
● When goods or services are of a dissimilar nature, then the exchange is regarded as a
revenue generating transaction and the revenue is recognized in amount of fair value of
goods/services received (adjusted by the amount of any cash transferred).
3. RECOGNITION OF REVENUE
AS 9 specifies revenue recognition criteria for 3 basic revenue generating scenarios:
● Sale of goods
● Rendering of services
● Interest, Royalties and Dividends
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ACCOUNTING STANDARD – 9
4. REVENUE FROM SALE OF GOODS
Revenue from sale of goods is recognized when all of the following conditions are satisfied:
1) The entity has transferred to the buyer the significant Risks & Rewards of ownership of the goods.
2) The entity retains neither continuing managerial involvement to the degree usually associated with
ownership nor effective control over the goods sold
3) The amount of revenue can be measured reliably
4) It is probable that the economic benefits associated with the transaction will flow to the entity
5) The costs incurred or to be incurred in respect of the transaction can be measured reliably.
AS 9 sets the practical guidance on recognition of revenue from various situations when selling goods.
The summarized list is as follows:
Transaction Revenue Recognition
Bill and Hold Sales When the buyer takes title (i.e., Ownership)
Goods Shipped Subject to Conditions
When the buyer accepts delivery and installation &
– installation & inspection inspection is completed.
– on approval When the buyer formally accepts the shipment
When the goods were delivered and time for
– with limited right of return return lapsed.
After the consignee sells goods to the final
– consignment sales customer.
– cash on delivery sales (e.g., When delivery is made and cash is received by the
Amazon/Flipkart) seller.
Lay Away Sales (a system of paying a
deposit to secure an article for later
purchase. When the delivery is made.
In line with the period over which the items are
Subscriptions to Publications dispatched.
Case 1: Seller is sure that he will repurchase
No sale should be recognised, it is considered as
loan transaction.
Case 2: Seller is sure that he will not repurchase
Sale of Goods with right to repurchase by Sale should be recognised
seller
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ACCOUNTING STANDARD – 9
Example 5
XY Ltd sells goods worth ₹ 50 lakh on 20 February 20X1 to AB Ltd. AB Ltd is facing storage capacity
constraints at their warehouse. AB Ltd instructs XY Ltd to hold the goods at XY Ltd’s warehouse and
arrange for delivery on 15 March 20X1. However, all the risks and rewards associated with the sold
goods are deemed transferred to AB Ltd.
In the current scenario, delivery of goods sold is delayed at the request of buyer. XY Ltd can
recognize revenue for sale of goods to AB Ltd on 20 February 20X1 provided that the goods sold to
AB Ltd are held in XY Ltd’s warehouse separately and are not clubbed with other inventory.
Example 6
M/s XY sells goods worth ₹ 5 lakh on 30th of March 20X1 to M/s FT under Sale on approval basis.
Under the arrangement, FT can return the goods back to XY within next 3 months. XY cannot
reasonably determine whether FT will give the acceptance of goods before the expiry of 3 months.
Under these circumstances, XY cannot recognize revenue until the goods are accepted by FT or on
completion of 3 months, whichever is earlier.
Example 7
On 1st January 20X1, M/s KJ sells goods at invoice value of ₹ 5 lakhs to M/s TH. At the time of sale,
M/s KJ has agreed to repurchase these goods back from M/s TH on 31st March at a price of ₹ 6 Lac.
You are required to do the accounting for above transactions in the books of M/s KJ.
Solution
This is a Sale and Repurchase agreement. In these kinds of transactions, Revenue is not recognized
since ultimate control over goods is not transferred. It is treated as a Finance Arrangement.
1st Jan 20X1:
Bank A/c Dr. ₹ 5 lakhs
To Loan from M/s TH A/c ₹ 5 lakhs
(Being borrowing made under the Sale & Repurchase
arrangement)
31st March 20X1
Interest expense A/c Dr. ₹ 1 lakhs
To Loan from M/s TH A/c ₹ 1 lakhs
(Being interest cost recognised on the borrowing)
31st March 20X1:
Loan from M/s TH A/c Dr. ₹ 6 lakhs
To Bank A/c ₹ 6 lakhs
(Being repayment of loan taken from TH)
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ACCOUNTING STANDARD – 9
5. REVENUE FROM RENDERING OF SERVICES
Here, can the outcome of the transaction be estimated reliably?
● If yes, then the revenue can be recognized by the reference to the stage of completion of the
transaction at the end of the reporting period.
● If not, then the revenue can be recognized only to the extent of the expenses recognized that
are recoverable.
When can the outcome of the transaction be estimated reliably? It is when all the following conditions
are satisfied:
● The amount of revenue can be measured reliably
● It is probable that the economic benefits associated with the transaction will flow to the entity
(Certainty of Collection)
● The stage of completion of the transaction at the end of the reporting period can be measured
reliably and
● The costs incurred for the transaction and the costs to complete the transaction can be measured
reliably.
STANDARD ALSO PERMITS RECOGNITION AS PER COMPLETED SERVICE
CONTRACT METHOD.
AS 9 sets the practical guidance on recognition of revenue from various situations when rendering
services:
Transaction Revenue Recognition
Installation Fees With reference to the stage of completion.
If subsequent services are included, then defer the
Servicing Fees revenue for the subsequent services.
Advertising Commissions
When the related advertisement appears before the
– Media Commissions public.
– Production Commissions With reference to the stage of completion.
Insurance Agency Commissions
Defer over the period during which the policy is in
– Agent Renders Further Services force.
– Agent Does Not Render Further
Services At the date of policy commencement or renewal.
Financial Services/Banking Services
– Earned As Services Are Provided When related service is provided.
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ACCOUNTING STANDARD – 9
– Earned On Execution of Significant
Act When related significant act has been completed.
When the event takes place or allocate proportionally
Admission Fees to individual events.
Tuition Fees Over the period of instruction.
Entrance and Membership Fees
– No additional services provided Immediately when membership starts.
Defer over the membership period on some reasonable
– Additional services provided basis.
On the basis reflecting the purpose for which the fees
Franchise Fees are charged.
Fees from Development of Customized With reference to the stage of completion, including
Software the post-delivery service support stage.
6. REVENUE FROM INTEREST, ROYALTIES AND DIVIDENDS
Revenue arising from the use by others of entity assets yielding interest, royalties and dividends shall
be recognized when:
● It is probable that the economic benefits associated with the transaction will flow to the entity&
● The amount of the revenue can be measured reliably.
Revenue shall be recognized on the following bases:
1. INTEREST: The recognition of revenue from interest on TIME PROPORTION BASIS.
2. ROYALTIES: shall be recognized on an ACCRUAL BASIS in accordance with the substance of the
relevant agreement.
3. DIVIDENDS: shall be recognized when the SHAREHOLDER’S RIGHT TO RECEIVE payment is
established (i.e. When Dividend is declared by Paying Co.)
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ACCOUNTING STANDARD – 9
7. POSTPONEMENT OF REVENUE RECOGNITION
Revenue recognition shall be postponed when:
● The Consideration is not determinable or
● The amount of consideration is not certain to be collected
● When uncertainties gets over, Revenue should be recognized.
● If uncertainty about the ultimate collectability of revenue arise after the initial recognition,
then enterprises should not reverse the revenue already recognized, it should create a proper
Provision.
Case 1 – At the date of Transaction, there is no probability of collection – Do not recognise the
revenue.
Case 2 – Initially Revenue was recognised because conditions of recognition satisfied. After some
time, probability of collection reduced, Do Not Reverse Revenue, Create Provision for bad debts.
8. PRESENTATION OF TURNOVER:
Turnover should be presented in the following manner:
Turnover Gross
Less: GST
Turnover (Net)
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9. IMPORTANT KEY POINTS
1. What is Gross Inflow?
Gross Inflow is depends on following:
a) If there is transaction of Principal & Agent
● Gross Inflow for Principal would be amount charged from customers without deducting
Commission
● Gross inflow for agent will be Commission receivable from principal
b) If there is transaction of Principal to Principal
● Gross Inflow for P1 will be amount charged from P2
● Gross Inflow for P2 will be charged from Customer
2. Interest income can be treated as “Revenue” if an Entity’s Main Operating business is Financing
Activity. E.g. Banks, NBFC
3. Revenue can be Royalty received by transferring “technical know how or patents” to other party if
such transfer is a part of Ordinary Business.
4. Dividend can be Revenue if entity is an Investment entity (Mutual Fund Companies)
5. Exchange Transaction
(a) Exchange of Similar G/S to Facilitate sales with similar business entities - It’s not a revenue
transaction
(b) Exchange of dissimilar G/S - Revenue will be equal to Fair value of Consideration receivable.
e.g.: A ltd. provided consultancy service for Infrastructure & Interior to a builder & in
Consideration A Ltd. will get 1 5BHk flat with garden facing. Revenue for A Ltd. would be Fv/MP of
5 BHK Flat.
6. Rendering of Service - Is the outcome of Service Probable?
(a) YES - Revenue is recognised on the basis of %(PCM) or Completed Service Method
(b) NO - Revenue = Cost incurred till date of which recovery is probable
7. How to identify that outcome is probable?
All 4 Conditions must be satisfied:
(a) Revenue amount is measured reliably. Price is mutually agreed between seller/buyer.
(b) Certainty of collection of revenue
(c) Percentage of Completion can be measured reliably.
(d) Cost should be measured reliably.
8. If at the time sale, No Revenue is recognized because of Uncertainty of collection then Inventory
with costumer is the Inventory of Seller only.
9. When seller arrange any transit Insurance while delivering the goods at customer’s place.
In Case of any damage or loss of goods before they reached customer’s Locations, it means seller
doesn’t transfer significant risk & rewards of ownership of goods.
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ACCOUNTING STANDARD – 9
Seller shall recognise revenue only when goods will reach customer’s Place.
10. In case of “ Principal – Agent” transaction, Principal shall recognize revenue only when Agent will
sale the goods to ultimate customer.
11. Goods sold to customer subject to approval
Goods sold to
customer subject to
approval
Customer not yet
Customer approved
Period of approval approved & perod of
the goods before
Lapsed approval not yet
expiry
lapsed
Do not recognise
Recognise Revenue Revenue
Recognise Revenue
after Such period Show Inventory with
customer as an Asset
12. If seller is charging Interest on delay Payments from Customer, then such Interest will from part
of Revenue.
13. Installation
Case 1:- Installation is very simple, customer can also do the same: Recognise the Revenue
immediately. Do not wait for actual Installation.
Case 2:- Installation is Complicated & Requires Significant assistance of Seller: Recognise Revenue
only when Installation is completed
14. Subscription Income: Recongnise the revenue over the period of contract as under:
SLM basis if services or products are delivered in If variable delivery of services or products then
same quantity every month/year. deferred in proportion of the value of delivery every
month/year.
15. Advertisement commission:
Recognise the revenue on accrual Basis when advertisement is published. Any amount collected
from customer for which advertisement is not yet published will be treated as liability.
16. In case of Retrospective Price revision, if Seller has right to recover the additional amount from
customer then Revenue shall be recognised only when there is certainty of ultimate collection of
such amount.
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10. MCQ’s from ICAI Material
1. Which of the conditions mentioned below must be met to recognize revenue from the sale of
goods?
(i) the entity selling does not retain any continuing influence or control over the goods;
(ii) when the goods are dispatched to the buyer;
(iii) revenue can be measured reliably;
(iv) the supplier is paid for the goods;
(v) it is reasonably certain that the buyer will pay for the goods;
(vi) the buyer has paid for the goods.
(a) (i), (ii) and (v)
(b) (ii), (iii) and (iv)
(c) (i), (iii) and (v)
(d) (i), (iv) and (v)
2. Consignment inventory is an arrangement whereby inventory is held by one party but owned by
another party. Which of the following indicates that the inventory in question is a consignment
inventory?
(a) Manufacturer cannot require the dealer to return the inventory
(b) Dealer has the right to return the inventory
(c) Manufacture is responsible for the pricing of goods and any changes in the pricing can only
be approved by the manufacturer.
(d) Manufacture is responsible for the holding the goods and any changes in the pricing can only
be approved by the dealer
3. Which of the following transactions qualify as revenue for M/s AB Enterprises?
(a) Sales of ₹ 20 lakhs made under consignment sales.
(b) Sale of an old machine amounting ₹ 5 lakhs
(c) Services provided to the customer in the normal course of business. Sales recorded is ₹
50,000.
(d) Sales of ₹ 25 lakhs made under consignment sales
4. The Accounting Club has 100 members who are required to pay an annual membership fee of ₹
5,000 each. During the current year, all members have paid the fee. However, 5 members have
paid an amount of ₹ 10,000 each. Of these, 3 members paid the current year’s fee and also the
previous year’s dues. Remaining 2 members have paid next years’ fee of ₹ 5,000 in advance.
Revenue from membership fee for the current year to be recognised will be:
(a) ₹ 5,25,000
(b) ₹ 5,10,000
(c) ₹ 5,00,000
(d) ₹ 5,15,000
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5. Flix Net International offers a subscription fee model to allow the paid subscribers an annual
viewing of movies, sports events and other content. It allows users to register for free and have
access to limited content for one month without any charges. The customer has a right to cancel
the subscription within a month’s time but is required to pay for 1 year subscription fee after the
free period.
XY has subscribed for free viewing on 1st March 20X1. After 1 month, he has agreed to pay the
annual membership and has paid ₹ 1,200 on 31st March 20X1 for the subscription that is valid up
to 31st of March 20X2.
Revenue that can be recognized by FlixNet for the year ended 31st March 20X2 is
(b) ₹ 100
(c) ₹ 1,200
(d) Nil
(e) ₹ 1,100
ANSWERS 1 2 3 4 5
c c c c b
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Student Notes:-
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