a 8.

34
8.34 ADVANCED ACCOUNTING

UNIT 2: ACCOUNTING STANDARD 9

REVENUE RECOGNITION

LEARNING OUTCOMES

After studying this unit, you will be able to comprehend the provisions
of AS 9 related with–
 Recognition of revenue in case of:

▪ Sale of Goods

▪ Rendering of Services

▪ The Use by Others of Enterprise Resources Yielding Interest,

Royalties and Dividends

 Effect of Uncertainties on Revenue Recognition

 Required Disclosures.

2.1 INTRODUCTION
Revenue(also called as Top Line), or Sales is the backbone for any business. A
higher revenue would normally reflect an increase in market share, higher
prospects, and eventually an increased value of the business. You would notice
that many start-up entities are more focused to increase their market penetration
and revenue without initially focusing on the profitability.
As a result, it is critical to have a standard that addresses how entities must
recognised the revenue, with respect to the amount and timing in a particular
accounting period.

AS 9 deals with the bases for recognition of revenue in the statement of profit
and loss of an enterprise. AS 9 is mandatory for all enterprises. The Standard is

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 REVENUE BASED ACCOUNTING STANDARDS 8.35 a

concerned with the recognition of revenue arising in the course of the ordinary
activities of the enterprise from
• the sale of goods
• the rendering of services

• the use by others of enterprise resources yielding interest, royalties and

dividends
AS 9 does not deal with the following aspects of revenue recognition to which
special considerations apply:
i. Revenue arising from construction contracts;
ii. Revenue arising from hire-purchase, lease agreements;
iii. Revenue arising from government grants and other similar subsidies;
iv. Revenue of insurance companies arising from insurance contracts.
Examples of items not included within the definition of “revenue” for the purpose
of AS 9 are:
i. Realized gains resulting from the disposal of, and unrealized gains resulting
from the holding of, non-current assets, e.g., appreciation in the value of
fixed assets;
ii. Unrealized holding gains resulting from the change in value of current
assets, and the natural increases in herds and agricultural and forest
products;
iii. Realized or unrealized gains resulting from changes in foreign exchange
rates and adjustments arising on the translation of foreign currency financial
statements;
iv. Realized gains resulting from the discharge of an obligation at less than its
carrying amount;
v Unrealized gains resulting from the restatement of the carrying amount of
an obligation.

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8.36 ADVANCED ACCOUNTING

2.2 DEFINITION OF REVENUE

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

consideration arising from

Use by others of
enterprise resources
Sale of goods Rendering of services
yielding Interest,
royalties and dividends

Example 1
Entity XY sells a machine being used at its factory at a price of ` 2 lakh. The
carrying value of the machine is ` 1.80 lakh. The sale of the machine does not
increase the revenue of XY but is an example of a capital receipt since transaction
does not take place in the normal course of business. Such gain on sale of
` 20,000 (` 2 lakhs – ` 1.80 lakhs) is recognised as a part of profit & loss statement
under Gain/(Loss) on disposal of asset.
Example 2
ST Ltd is a real-estate developer and builder. It is into the business of buying and
selling properties. In 20X1, ST Ltd purchased a unit of land for ₹ 150 crore. It sold
off that land after few months at a price of ₹ 240 crore.
In the above case, the sale of land is a transaction that happens in the ordinary
course of business (as he is a real estate developer and builder – properties will be
an item of inventory in the financial statements) for ST Ltd. Hence, it should
recognise a revenue of ₹ 240 crore when the land is sold.

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Example 3
DL Ltd, a pharma company, has been conducting research on new medicine since
last 2 years to increase the immunity levels of the people consuming it without any
side effects. During the current year, it decides to sell the outcome of the research
undertaken so far to another competitor, GH Ltd for ` 50 crore. DL has already
incurred ` 30 crore on the ongoing research.
In the above example, the sale of the research 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.

2.3 AGENCY RELATIONSHIP

In an agency relationship, the revenue is the amount of commission and not the
gross inflow of cash, receivables or other consideration.

The criteria of principal-agency relationship is significant to understand how

much revenue can be recognised by an entity for a sale transaction. The key
principle is whether the sale transaction is made by an entity on its own, or on
behalf of someone else. Whether the risks and rewards pertaining to the goods or
services are with the entity or with someone else, would determine the seller’s
capacity as principal or agency (agent).

When another party is involved in providing goods or services to a customer, the

entity shall determine whether it has an obligation to sell or provide the specified
goods or services itself (i.e., the entity is a principal) or to arrange for those goods
or services to be sold or provided by the other party (i.e., the entity is an agent).
Illustration 1
Zigato runs a food-delivery business. As per the arrangement, Zigato allows
customers to order food from local restaurants and is responsible the delivery of the
food within stipulated time. During a particular year, it collects the money on
orders made online as under:

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8.38 ADVANCED ACCOUNTING

Total price for the food item - ` 200 lakhs

Delivery charges - ` 60 lakhs
GST - ` 40 lakhs
Total - ` 300 lakhs
Zigato has received ` 300 lakhs for the above orders from customers and the orders
were delivered to the customer in stipulated time.
How much revenue should be recognised by restaurants and how much revenue
should be recognised by Zigato for the year?
Solution
The risks and rewards associated with the food item are not with Zigato. When a
customer has ordered a food item, whether the item will be prepared or not is the
responsibility of the restaurant and not Zigato. Similarly, the responsibility to
deliver the food item is with Zigato and the restaurant does not undertake
responsibility for the same.
Therefore, the restaurant undertakes the principal’s responsibility to prepare the
food and ensure its quality. Zigato, on the other hand, is only responsible to
deliver the food. Thus, Zigato is acting as an agent. Hence, it can only recognize
revenue relating to that activity (which it does in the ordinary course of business).
The revenue for Zigato, therefore, is ` 60 lakhs, whereas, the revenue for
restaurants will be ` 200 lakhs.
It may be noted that the GST of ` 40 lakhs is a liability payable to the Government
(third party), hence it does not form part of revenue.
Example 4
Trip Deal is a website that allows people to book airlines tickets. As a part of the
business, it agrees to buys 100 tickets from an airline on a particular date and
resells those tickets to customers. However, Trip Deal bears the loss for any unsold
tickets.
In the above example, the risks and rewards relating to tickets are borne by Trip
Deal. Hence, sales made for the tickets will be fully recognized as part of its
revenue. Any unsold tickets will be charged as loss by the entity.

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2.4 SALE OF GOODS

Revenue from sales transactions should be recognised when the requirements as
to performance set out in below in para 2.5 ‘Timing of Recognition of Revenue
from Sale of Goods’ 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.
Illustration 2
AB sells goods to CD on 1 st March 20X1. CD is having significant cash flows issues
since last few months. However, it is trying to raise funding through bank loan to be
able to run its operations in future. On 5th of May 20X1, CD is able to seek the
funding and is expected to be able to pay for the goods in future.
At the time of sale, it is difficult for AB to ascertain whether it will be able to collect
the amount from CD due to poor financial conditions.
Explain how the recognition of revenue be done by AB?
Solution
In the above case, AB should not recognise any revenue on 1st of March and until
that uncertainty of recovery is clear. Hence, the revenue can only be recognised
by AB on 5th of May 20X1. The inventory transferred to CD until that date is
required to be shown as its own inventory [inventory lying with customers].

2.5 TIMING OF RECOGNITION OF REVENUE

FROM SALE OF GOODS
In a transaction involving the sale of goods, performance should be regarded as
being achieved when the following conditions have been fulfilled:
(i) the seller of goods has transferred to the buyer the property in the goods
for a price or
(ii) all significant risks and rewards of ownership have been transferred to the
buyer and the seller retains no effective control of the goods transferred to
a degree usually associated with ownership; and

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(iii) no significant uncertainty exists regarding the amount of the consideration

that will be derived from the sale of the goods.
Note:
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

Illustration 3
AB sells goods to CD on 1 st January 20X1 for ` 2 lakhs. After the sale was made, CD
is having significant cash flows issues. It is trying to raise funding through bank
loan to be able to run its operations in future. However, it is unable to do so and
has gone under liquidation on 15 th of March 20 X1.
At the time of sale, there was no reason for AB to believe that it will not be able to
collect the amount from CD in future.
Explain how the recognition of revenue be done by AB for the year ended 31 st
March 20X1?
Solution
In the above case, at the time of sale, it was not unreasonable for AB to expect
ultimate collection from CD. Therefore, AB should recognise the revenue of ` 2
lakhs on 1 st of January 20X1 and recognise a receivable for the same amount.
Later, since CD went into liquidation, AB should write off the receivables and book
a loss in his books.
Accounting in the books of AB
1st January 20X1

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 REVENUE BASED ACCOUNTING STANDARDS 8.41 a

CD A/c (Receivables) Dr. ` 2 lakhs

To Revenue A/c ` 2 lakhs
(Being goods sold to CD Ltd)

15th March 20X1

Bad Debts A/c Dr. ` 2 lakhs

To CD A/c (Receivables)A/c ` 2 lakhs
(Being receivables from CD written off due
to its liquidation)

2.6 RENDERING OF SERVICES

Revenue from service transactions is usually recognised as the service is
performed. There are two methods of recognition of revenue from service
transaction, viz,

Methods of recognition of revenue

Proportionate completion Completed service contract

method method

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. Here performance consists of the
execution of more than one act. Revenue is recognised proportionately by
reference to the performance of each act.

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. In this method
performance consists of the execution of a single act e.g., installation of a
machine, or repair service,

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8.42 ADVANCED ACCOUNTING

Alternatively, services are performed in more than a single act, and the services
yet to be performed are so significant in relation to the transaction taken that
performance cannot be deemed to have been completed until the execution of
those acts.
The completed service contract method is relevant to these patterns of
performance and accordingly revenue is recognised when the sole or final act
takes place and the service becomes chargeable.
Revenue from sales or service transactions should be recognised when the service
is performed 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.

2.7 INCOME FROM OTHER SOURCES - INTEREST,

ROYALTIES AND DIVIDENDS
Use by others of such enterprise resources gives rise to:

i. Interest: charges for the use of cash resources or amounts due to the
enterprise. Revenue is recognized on a time proportion basis taking into
account the amount outstanding and the rate applicable.

ii. Royalties: charges for the use of such assets as know-how, patents, trade
marks and copyrights. Revenue is recognized on an accrual basis in
accordance with the terms of the relevant agreement.

iii. Dividends: rewards from the holding of investments in shares. Revenue is

recognized when the owner’s right to receive payment is established.

Revenue arising from the use by others of enterprise resources yielding interest,
royalties and dividends should only be recognized when no significant uncertainty
as to measurability or collectability exists.

Illustration 4
During the year ended 31 st March 20X1, ZX Enterprises has recognized ` 100 lakhs
on accrual basis income from dividend on units of mutual funds held by it. The

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 REVENUE BASED ACCOUNTING STANDARDS 8.43 a

dividends on mutual funds were declared on 15th June, 20X1. The dividend was
proposed on 10th April, 20X1.

Whether the above treatment is as per the relevant Accounting Standard?

Solution

Dividends from investments in shares are not recognized in the statement of

profit and loss until a right to receive payment is established. In the given
situation, the dividend is proposed on 10th April, 20X1, while it is declared on
15th June, 20X1. Thus, the right to receive the payment of dividend gets
established on 15th June, 20X1.

The recognition of ` 100 lakhs on accrual basis in the financial year 20X0-20X1 is
not correct as per AS 9 'Revenue Recognition'.

Illustration 5

Y Ltd., used certain resources of X Ltd. In return X Ltd. received ₹ 10 lakhs and ₹ 15
lakhs as interest and royalties respective from Y Ltd. during the year 20 X1-X2. You
are required to state whether and on what basis these revenues can be recognized
by X Ltd.

Solution

As per AS 9 on Revenue Recognition, revenue arising from the use by others of

enterprise resources yielding interest and royalties should only be recognized
when no significant uncertainty as to measurability or collectability exists. These
revenues are recognized on the following bases:

(i) Interest: on a time proportion basis taking into account the amount
outstanding and the rate applicable. Therefore X Ltd. should recognize
interest revenue of ₹ 10 Lakhs

(ii) Royalties: on an accrual basis in accordance with the terms of the relevant
agreement. X Ltd. therefore should recognize royalty revenue of ₹ 15 Lakhs.

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8.44 ADVANCED ACCOUNTING

2.8 CONDITIONS FOR SALE OF GOODS

1. Delivery is delayed at buyer’s request and buyer takes title and
accepts billing

Sometimes, the buyer may purchase goods and requests the seller to hold the
goods on his behalf for some reason, for example, due to lack of storage or
transportation delays. In such cases, the risks and rewards associated with the
ownership seem to have been transferred to the buyer and the sale should be
considered as complete. This is true even if the physical possession of the goods
is with the seller. The conditions to be met to account for the sale are:

- the goods must be specifically identified, and cannot be transferred to

another customer;

- the delivery is delayed at buyer’s request; and

- the goods are ready to be delivered to the buyer

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.

2. Sale on approval basis

Revenue should not be recognized until the goods have been formally accepted
by the buyer or the buyer has done an act adopting the transaction or the time
period for rejection has elapsed or where no time has been fixed, a reasonable
time has elapsed.

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 REVENUE BASED ACCOUNTING STANDARDS 8.45 a

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.
3. Goods sold subject to inspection / installation
In case the installation is complex and is significant to be able to use the goods in
the intended manner, revenue should not be recognized until the installation is
satisfactorily completed. However, in case the installation is simple (for example, a
refrigerator needs to be plugged to a power connection after delivery to
customer’s place), revenue is recognized when the customer has agreed to
purchase the goods.

4. Sale and repurchase arrangement

Such arrangements are considered to be financing arrangement, and no sale can
be recognized. Instead, a borrowing should be recognized in the books of the
seller.
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
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)

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8.46 ADVANCED ACCOUNTING

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)

5. 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.
6. Cash discounts
Definition of revenue under AS 9 represents the gross inflow of cash from sale of
goods or provision of services. Any cash discount given should not be deducted
in determining the revenue. Revenue is therefore recognized at gross amount and
cash discount is recorded as an expense as an when the seller receives the
payment net of discount.
7. Consignment Sale
Consignment sales is a sale where a delivery is made whereby the recipient
undertakes to sell the goods on behalf of the consignor.
In such case revenue should not be recognized until the goods are sold to a third
party
Example 8
In the year 20X1-X2, XYZ supplied goods on Consignment basis to ABC – a retail
outlet worth ` 10,00,000. As per the terms, ABC will only pay XYZ for the goods
which are sold by them to the third party. Rest of the goods can be returned back to
XYZ and ABC will not have any further liability for these goods.

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 REVENUE BASED ACCOUNTING STANDARDS 8.47 a

During the year 20X1-X2, ABC has sold goods worth ` 5,50,000 only and rest of the
goods are still lying in its store which may get sold by next year. Advise XYZ, how
much revenue it can recognize in its books for period 20X1-X2.

Solution
As per AS 9, consignment risk and rewards are not transferred to the customer on
just delivery of the goods and no revenue should be recognized until the goods are
sold to a third party. Therefore, XYZ can recognize revenue of ` 5,50,000 only.

2.9 EFFECT OF UNCERTAINTIES ON REVENUE

RECOGNITION
Where the ability to assess the ultimate collection with reasonable certainty is
lacking at the time of raising any claim, revenue recognition is postponed to the
extent of uncertainty involved.

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.

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.

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8.48 ADVANCED ACCOUNTING

Revenue Recognition

*Sale of *Rendering *Use by others of

Goods of Services Enterprise Resources

when seller proportionate Complete Dividends

Interest Royalties
has completion d service
transferred method method
the property Revenue is
Revenue is
to the buyer Revenue is recognised
performance recognised
generally recognised on when right to
consists of the time
performance the basis of receive the
for execution of basis
consists of the terms of payment is
consideration more than one
execution of a agreement established
act
single act
transfer of
significant practically
revenue is revenue is
risk &
recognised recognised when
rewards to
the buyer on SLM basis the final act is
completed &
services are
chargeable

* Provided there exists no significant uncertainty regarding the ultimate collection

of consideration
(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 and there exists no significant uncertainty
regarding the ultimate collection of consideration).

2.10 DISCLOSURE
In addition to the disclosures required by AS 1 on ‘Disclosure of Accounting
Policies’, an enterprise should disclose the circumstances in which revenue
recognition has been postponed pending the resolution of significant
uncertainties.
Illustration 6
The Board of Directors decided on 31.3.20X2 to increase the sale price of certain
items retrospectively from 1st January, 20X2. In view of this price revision with
effect from 1st January 20X2, the company has to receive ` 15 lakhs from its
customers in respect of sales made from 1st January, 20X2 to 31st March, 20X2.

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Accountant cannot make up his mind whether to include ` 15 lakhs in the sales for
[Link].
Solution
Price revision was effected during the current accounting period 20X1-20X2. As a
result, the company stands to receive ` 15 lakhs from its customers in respect of
sales made from 1st January, 20X2 to 31st March, 20X2. If the company is able to
assess the ultimate collection with reasonable certainty, only then additional
revenue arising out of the said price revision may be recognized in 20X1-20X2.
If the company is not reasonably certain on ultimate collection ` 15 lakhs from its
customers in respect of sales made from 1st January, 20X2 to 31st March, 20X2, it
shall postpone recognition of revenue and disclose it in financial statements for
year 20X1-20X2 as per AS 1
Illustration 7
A claim lodged with the Railways in March, 20X1 for loss of goods of ` 2,00,000 had
been passed for payment in March, 20X3 for ` 1,50,000. No entry was passed in the
books of the Company, when the claim was lodged. Advise P Co. Ltd. about the
treatment of the following in the Final Statement of Accounts for the year ended
31st March, 20X3.
Solution
AS 9 on ‘Revenue Recognition’ states that where the ability to assess the ultimate
collection with reasonable certainty is lacking at the time of raising any claim,
revenue recognition is postponed to the extent of uncertainty involved. When
recognition of revenue is postponed due to the effect of uncertainties, it is
considered as revenue of the period in which it is certain to be collected. In this
case it may be assumed that collectability of claim was not certain in the earlier
periods. This is supposed from the fact that only ` 1,50,000 were collected against
a claim of ` 2,00,000. So this transaction can not be taken as a Prior Period Item.
Hence receipt of ` 1,50,000 shall be recognized as revenue in year ended 31st
March, 20X3
In the light of AS 5, it will not be treated as extraordinary item. However, AS 5
states that when items of income and expense within profit or loss from ordinary
activities are of such size, nature, or incidence that their disclosure is relevant to
explain the performance of the enterprise for the period, the nature and amount
of such items should be disclosed separately. Accordingly, the nature and amount
of this item should be disclosed separately.

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TEST YOUR KNOWLEDGE

MCQs
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

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 REVENUE BASED ACCOUNTING STANDARDS 8.51 a

(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

5. FlixNet 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 1 st 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 31 st of March 20X2.
Revenue that can be recognized by FlixNet for the year ended 31 st March
20X2 is

(a) ` 100
(b) ` 1,200
(c) Nil

(d) ` 1,100

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Practical Questions
6. GH manufactures and sells televisions. The televisions are shipped to the
customer by sea. In order to transfer risk related to the shipment of the
televisions, GH also gets an insurance coverage for the goods while they are
in transit from the factory to customer’s location.
The insurance policy will reimburse GH for the value of the goods in the event
of loss or damage arising anytime up to these goods reaching customer’s
location. The legal title passes when the goods arrive at the customer’s
premises one month later.
When should Entity GH recognize revenue in its books?

7. The following information of Meghna Ltd. is provided:

(i) Goods of ` 60,000 were sold on 20-3-20X2 but at the request of the
buyer these were delivered on 10-4-20X2.

(ii) On 15-1-20X2 goods of ` 1,50,000 were sent on consignment basis of

which 20% of the goods unsold are lying with the consignee as on
31-3-20X2.

(iii) ` 1,20,000 worth of goods were sold on approval basis on 1-12-20X1.

The period of approval was 3 months after which they were considered
sold. Buyer sent approval for 75% goods up to 31-1-20X2 and no
approval or disapproval received for the remaining goods till 31-3-
20X2.

(iv) Apart from the above, the company has made cash sales of ` 7,80,000
(gross). Trade discount of 5% was allowed on the cash sales.

You are required to advise the accountant of Meghna Ltd., with valid reasons,
the amount to be recognized as revenue in above cases in the context of AS 9.

8. For the year ended 31 st March 20X1, KY Enterprises has entered into the
following transactions.

On 31 March 20X1, KY supplied two machines to its customer ST. Both

machines were accepted by ST on 31 March 20X1. Machine 1 was a machine

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 REVENUE BASED ACCOUNTING STANDARDS 8.53 a

that was routinely supplied by KY to many customers and the installation

process was very simple.

Machine 1 was installed on 2 April 20X1 by ST’s employees.

Machine 2 being more specialised in nature requires an installation process

which is more complicated, requiring significant assistance from KY. Machine
2 was installed between 2 and 5 April 20X1. Details of costs and sales prices
are as follows:
Machine 1 Machine 2
Sale Price 3,20,000 3,00,000
Cost of production 1,60,000 1,50,000
Installation fee nil 10,000
How should above transactions be recognized by KY Enterprises for the
year ended 31 st March 20X1?

ANSWERS/SOLUTIONS
MCQ

1. (a) 2. (c) 3. (c) 4. (c) 5. (b)

Practical Questions
6. GH should recognize revenue for the sale when the goods arrive at the
customer’s premises. GH has not transferred the televisions’ significant risks
and rewards of ownership to the customer when the goods depart from the
factory. This is evidenced by the fact that any insurance proceeds received
from the goods’ damage or destruction will be repaid to GH. Further, the
legal title does not pass until the goods arrive at the customer’s premises.
7. As per AS 9 “Revenue Recognition”, in a transaction involving the sale of
goods, performance should be regarded as being achieved when the
following conditions are fulfilled:
(i) the seller of goods has transferred to the buyer the property in the
goods for a price or all significant risks and rewards of ownership have
been transferred to the buyer and the seller retains no effective

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 a 8.54
8.54 ADVANCED ACCOUNTING

control of the goods transferred to a degree usually associated with

ownership; and
(ii) no significant uncertainty exists regarding the amount of the
consideration that will be derived from the sale of the goods.
Case (i) The sale is complete but delivery has been postponed at buyer’s
request. The entity should recognize the entire sale of ` 60,000 for the year
ended 31st March, 20X2.
Case (ii) 20% goods lying unsold with consignee should be treated as
closing inventory and sales should be recognized for ` 1,20,000 (80% of
` 1,50,000). In case of consignment sale revenue should not be recognized
until the goods are sold to a third party.
Case (iii) In case of goods sold on approval basis, revenue should not be
recognized until the goods have been formally accepted by the buyer or the
buyer has done an act adopting the transaction or the time period for
rejection has elapsed or where no time has been fixed, a reasonable time
has elapsed. Therefore, revenue should be recognized for the ` 90,000 upon
receipt of approval on 31-02-20X1 and for the balance ` 30,000 on 01-03-
20X1 as the time period for rejecting the goods had expired.
Case (iv) Trade discounts given should be deducted in determining revenue.
Thus ` 39,000 should be deducted from the amount of turnover of ₹
7,80,000 for the purpose of recognition of revenue.

Thus, revenue should be ` 7,41,000.

8. Machine 1: As the installation process is simple, revenue from Machine 1
will be recognized on 31 March 20X1.
Revenue (Machine 1) ` 3,20,000
Cost of Goods Sold ` 1,60,000
Profit during the period ` 1,60,000

Since the question specifies that the machine is already accepted by ST on

31 March 20X1, the revenue arising from sale of the machine needs to be
recognized for the year ending 31 March 20X1. This is because acceptance

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 REVENUE BASED ACCOUNTING STANDARDS 8.55 a

of the machine indicates that the risks and rewards pursuant to the
ownership are transferred to ST.

Machine 2: Installation process for Machine 2 is more complicated,

requiring significant assistance from KY Ltd. However, question specifies
that the machine is already accepted by ST on 31 March 20X1. Assuming
that there is no further approval/acceptance required from the buyer for the
Machine sold, revenue from sale of Machine 2 can be recognized for the
year ending 31 March 20X1.
Revenue (Machine 2) ` 3,00,000
Cost of Goods Sold ` 1,50,000
Profit during the period ` 1,50,000

However, installation fee which is for rendering installation services cannot

be recognized until the installation is complete. Since the machine is
pending installation, the revenue in respect of installation charges `10,000
needs to be recognized on 5 April 20X1 once the installation process gets
completed.

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© The Institute of Chartered Accountants of India