Revenue Recognition

AS – 9
Scope
Deals with the bases for recognition of revenue in the
statement of profit and loss

revenue arising in the course of the ordinary activities

Sale of Goods
the rendering of services
interest, royalties and dividends.
Scope
Does not cover
• Revenue arising from construction contracts
• Revenue arising from hire-purchase, lease
agreements
• Revenue arising from government grants and other
similar subsidies
• Revenue of insurance companies arising from
insurance contracts
Definition
Revenue is the gross inflow of cash, receivables or
other consideration arising in the course of the
ordinary activities of an enterprise

• Revenue is measured by the charges made to

customers or clients for goods supplied and services
rendered to them
• Gains arising form disposal of fixed assets?
• You hold raw material of Rs 25,000. during the
current FY its valued is increased to Rs 40,000?

• Gains arising due to changes in foreign exchange

rates?

• Gains arising out of discharge of an obligation at

less than its carrying amount
Definition
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

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
Revenue Recognition
• concerned with the timing of recognition of revenue

• The amount of revenue is determined by agreement

between the parties
Sale of Goods
• transferred the property in the goods to the buyer
for a consideration
• transfer of significant risks and rewards of
ownership to the buyer
• parties may agree that the risk will pass at a time
different from the time when ownership passes

• sale is assured under a forward contract

• government guarantee sale
Use by others of enterprise resources
INTEREST—charges for the use of cash resources or
amounts due to the enterprise

• Interest accrues on the time basis determined by the

amount outstanding and the rate applicable

• discount or premium on debt securities ?

Use by others of enterprise resources
• ROYALTIES—charges for the use of such assets as know-
how, patents, trade marks and copyrights

• Royalties accrue in accordance with the terms of the

relevant agreement
Use by others of enterprise resources
DIVIDENDS—rewards from the holding of investments in
shares

• right to receive payment is established - recognised in

the statement of profit and loss

• When interest, royalties and dividends from foreign

countries require exchange permission and uncertainty
in remittance ?
Effect of uncertainties on revenue
recognition
• revenue should be measurable
• Unable to assess the collection with reasonable certainty
• escalation of price
• export incentives
• Interest

• uncertainty relating to collectability arises - make a

separate provision

• consideration receivable is to be reasonably determined

Illustration – Sale of Goods
1.Delivery is delayed at buyer’s request and buyer takes
title and accepts billing

2. Delivered subject to conditions

• installation and inspection
• on approval basis
• guaranteed sales (giving buyer an unlimited right of return)
• consignment sales
• cash on delivery sales
3. purchaser makes a series of instalment payments and
the seller delivers the goods only when the final payment
is received
Illustration
4. Special order - where payment is received for goods not
presently held in stock
should not be recognised until goods are manufactured, identified
and ready for delivery

5. Sale/repurchase agreements
Finance agreement not revenue
6. Instalment sales
sales price exclusive of interest should be recognised at the date
of sale. Interest on time basis.
7. Trade discounts and volume rebates
not encompassed within the definition of revenue, since they
represent a reduction of cost – to be deducted
Illustration – Rendering
service
Installation fees – (along with sale or others)
installation completed
Advertising agency
advt appearing before public
advt production commission – when completed
insurance agency commissions
Insurance commission – commencement of policy
Financial service commissions
“once and for all” or continuing service

Admission fees for events

when event takes place
Illustration – Rendering
service
Tuition fees –
over period of instruction

Entrance and membership fees

nature of service – capitalised / systematic and rational
basis
Illustration – Revenue from
interest
Revenue from interest –
Time Proportionate basis
Revenues from dividends –
when declared
Uncertainty of collections –
make provision
Disclosure
• If uncertainty in revenue and postponed – stated in disclosure
• AS1 – Accounting Policy
AS9 Ind AS 18
Based on Nominal Value Based on fair value
Not covered Barter Transactions are included in Ind
AS-18
Interest Income is recognized on time Interest Income is recognized using
proportion basis effective interest rate method
It recognizes revenue as per completed It only recognizes revenue as per
service method or percentage percentage of completion method
completion method
SMT Enterprise entered into a contract with ST Ltd to
dispatch goods valuing Rs. 4 lakh every month for six
months upon receipt of entire payment. ST Ltd.,
accordingly made the payments. In third month due to
pandemic, ST Ltd., requested SMT Enterprise not to
despatch until further notice. SMT Enterprise accounted Rs
12 lakhs as sales and transferred the balance to Advance
Receipt against sales.
Is treatment of SMT Enterprise correct?

(Delivery is delayed at buyer ’s request)

• LMW has placed an order for a special machine with XYZ ltd.
on Jan 2020.
• Advance of Rs. 3,00,000 was paid in Feb 2020 and the
balance to be paid is Rs. 200,000.

• As per the terms of sale agreement, it is an FOB Cochin (Free

on Board) contract. The goods boarded on 15th April 2020

• When should the revenue be recognized by XYZ ltd.?

Royaloak Furnitures accepted an order for customized furniture
of Rs 5,00,000 in Jan 2019. It received the full payment for the
same. Upon receiving the payment it started manufacturing it.
The furniture was delivered in May 2019.

• Can it be recognized as revenue in Jan 2019.

• A sale contract was made between Maruti and Pricol
industries in the year 2001.

• As per the sale contract both companies can decide upon the
price of the product on a retrospective basis.

• On 31st March 2005, it was agreed to increase the price by

10% on retrospective basis from 1st Feb 2005. The sale as per
the old price was Rs 10 Lakhs for this period.

• How much amount should be recognised as revenue for this

period?
• L & T Constructions entered an agreement with Tata steel for
construction of a factory. The total project cost was Rs 250
crores.
• In the year 2015-16 50% of the work was completed and an
amount of Rs 150 Crores was received from Tata Motors.
• How much amount should be recognised as revenue as per AS
9?
• Bharti Airtel Limited hold shares of Indus Towers ltd with a
face vale of Rs 50 lakhs (Rs 10 each)
• The Board of Directors proposed an interim dividend of Rs 2
per share on 20 Feb 2019. This was declared by passing a
resolution of board of directors on 15 April 2019.

• The accountant of Bharti Airtel treated as revenue in the

financial statement of 2018-19. Is this treatment correct?