CA NITIN GOEL AS 9 CH 10H

REVENUE RECOGNITION

Objective AS 9 deals with the basis for recognition of revenue in the Statement of
P&L. Recognition means timing of recording the revenue in the P&L A/c
of enterprise.

Scope of AS 9 ❖ Revenue from Sale of goods.

❖ Revenue from Rendering of services
❖ Revenue from Interest, Royalties and Dividend
Non ❖ Revenue arising from Construction contracts (AS 7)
Applicability ❖ Revenue arising from Hire purchase and lease agreements (AS 19)
❖ Revenue arising from Government grants and other similar subsidies
(AS 12)
❖ Revenue of Insurance company arising under insurance contracts
Other Revenue does not include the following:
examples of ❖ Realized gains on disposal of non-current assets.
scope Example: Gain on sale of fixed assets under AS 10.
exclusions ❖ Unrealized gains on holding of Non- current assets
Example: Appreciation in the value of fixed assets under AS 10.
❖ Unrealized holding gains resulting from change in value of current
assets.
❖ Realized/unrealized gains resulting from changes in foreign exchange
rates and adjustments arising on translation of foreign currency
financial statement (AS11)
Meaning of Revenue is the gross inflow of :
Revenue ➢ Cash
➢ Receivables or
➢ Other consideration
arising in the course of ordinary activities of an enterprise from the
• Sale of goods,
• Rendering of services and
• Use by others of enterprise resources yielding interest; royalties and
dividends.
Exception – In an agency relationship, revenue is the amount of
commission and not the gross inflow of cash, receivables or other
considerations.
Note: Trade Discounts & volume rebates to be deducted while determining
revenue

Examples 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.

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ST Ltd is a real-estate developer and builder. It is into the business of buying

and selling properties. In 2022, 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

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.

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.

CONDITIONS FOR RECOGNITION

Sale of goods ✓ The seller of goods has transferred to buyer the property in goods for
(PARA 11) a price or all significant risks and rewards of ownership have been
transferred to the buyer.
✓ The seller retains no effective control of the goods transferred to a
degree usually associated with ownership.
✓ No significant uncertainty regarding consideration

Rendering of ✓ Service is performed as per the terms of the contract i.e. either as per
services completed service contract method (For Eg: Installation of machinery or
(PARA 12) repair service) or proportionate completion method.
✓ No significant uncertainty regarding consideration

Use of Interest On a time proportion basis taking into account the amount
resource of the outstanding and the rate applicable
enterprise by
others Royalty On an accrual basis in accordance with the terms of relevant
(PARA 13) agreement i.e. when the conditions attached have been
complied with.

Dividend When the owners right to receive payment is established i.e.

• In case of Final Dividend, date when it is declared at an AGM
• In case of Interim Dividend, date it is declared in Board Meeting

Revenue should be recognised when no significant uncertainty as to

measurability or collectability exists.

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CA NITIN GOEL AS 9 CH 10H

SOME IMPORTANT POINTS

Delivery is When delivery is delayed at buyer’s request and buyer takes title and
delayed at accepts billing, revenue should be recognized when
buyer’s request ➢ There is every expectation that delivery will be made
➢ Item must be on hand, identified & ready for delivery at time sale is
recognized.

Delivery Revenue should normally not be recognised until the customer accepts
subject to delivery and installation and inspection are complete.
installation, However, in case the installation is simple (for example, a refrigerator needs to
inspection etc. be plugged to a power connection after delivery to customer’s place), revenue
is recognized when the customer has agreed to purchase the goods.

Goods on Revenue should not be recognized until

Approval basis ➢ The goods have been formally accepted by the buyer
➢ Buyer has done an act adopting the transaction
➢ Time period for rejection has lapsed

Guaranteed In the case of retail sales offering a guarantee of “money back if not
Sales completely satisfied” it may be appropriate to recognise the sale but to
make a suitable provision for returns based on previous experience.

Consignment Revenue is to be recognized when goods are sold by consignee to third

party

Cash on Revenue should not be recognised until cash is received by the seller or
delivery his agent

Sale to Revenue from such sales can generally be recognized if significant risks
distributors or of ownership have passed; however, in some situations the buyer may in
others for substance be an agent and in such cases the sale should be treated as a
resale consignment sale.

Subscriptions Revenue should be recognised either on straight line basis over time or,
for where items delivered vary in value, revenue should be based on sales
publications value of item delivered.

For Advertising Amount will be recognized when advertisement appears before the
agencies public.

Artistic Revenue from artistic performances, banquets and other special events
Performances, should be recognised when the event takes place
banquets, etc.
Tuition Fees Revenue should be recognised over the period of instruction
Insurance Revenue should be recognized on the effective commencement or
Agent Comm. renewal dates of the related policies.

Installation In cases where installation fees are other than incidental to the sale of a
Fees product, they should be recognised as revenue only when the equipment
is installed and accepted by the customer.

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CA NITIN GOEL AS 9 CH 10H

Membership ➢ If the membership fee permits only membership and all other services
Fees or products are paid for separately, or if there is a separate annual
subscription, the fee should be recognised when received.
➢ If the membership fee entitles the member to services or publications
to be provided during the year, it should be recognised on a systematic
and rational basis having regard to the timing and nature of all services
provided
➢
Price Income can be recognized when there is certainty of collection
revisions
Sale and For transactions, where seller concurrently agrees to repurchase the
Repurchase same goods at later date that are in substance a financing agreement, the
Agreement resulting cash inflow is not revenue as defined and should not be
recognized as revenue.

Example
On 1st January 2023, 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.

→ When the ability to assess the ultimate collection with reasonable certainty is lacking at
the time of raising any claim, the revenue recognition should be postponed to the extent
of uncertainty involved. (PARA 10)

→ When the uncertainty regarding collection arises subsequent to the sale or rendering of
services, then provision should be created instead of reducing the amount originally
recorded.

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 CA NITIN GOEL AS 9 CH 10H

ASSIGNMENT QUESTIONS
Question 1
The stages of production and sale of a producer are as follow:
Date Activity Cost to Date (₹) Net Realisable Value (₹)
20.1.20 Raw Materials 10,000 8,000
25.1.20 WIP 1 12,000 13,000
27.1.20 WIP 2 15,000 19,000
25.2.20 Finished Product 17,000 30,000
12.3.20 Ready for Sale 17,000 30,000
27.3.20 Sale Agreed and invoice raised 19,000 30,000
02.4.20 Delivered and paid for 19,000 30,000
Explain the stage on which you think revenue will be recognized and state how much would
be net profit on a unit of this product according to AS 9?

Solution
According to AS 9 “Revenue Recognition”, in a transaction involving the sale of goods,
performance should be regarded as being achieved when the following conditions have been
fulfilled:
a) 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 control of the goods transferred to a degree usually associated
with ownership; and
b) no significant uncertainty exists regarding the amount of the consideration that will be
derived from the sale of the goods.
Thus, sales will be recognized only when following two conditions are satisfied:
(i) The sale value is fixed and determinable.
(ii) Property of the goods is transferred to the customer.
Both these conditions are satisfied only on 27.3.2020 when sales are agreed upon at a price
and goods are allocated for delivery purpose. The amount of net profit ₹ 11,000 (30,000 –
19,000) would be recognized in the books for the year ending 31st March, 2020.

Question 2 (ICAI Study Material)

During the year ended 31st March 2023, ZX Enterprises has recognized ₹ 100 lakhs on accrual
basis income from dividend on units of mutual funds held by it. The dividends on mutual funds
were declared on 15th June, 2023. The dividend was proposed on 10th April, 2023. 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, 2023, while it is declared on 15th June, 2023. Thus, the right to receive the
payment of dividend gets established on 15th June, 2023.
The recognition of ₹ 100 lakhs on accrual basis in the financial year 2022-2023 is not correct
as per AS 9 'Revenue Recognition'.

Question 3
Arjun Ltd. sold farm equipments through its dealers. One of the conditions at the time of sale
is payment of consideration in 14 days and in the event of delay interest is chargeable @ 15%
per annum. The Company has not realized interest from the dealers in the past. However,

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 CA NITIN GOEL AS 9 CH 10H

for the year ended 31.3.2020, it wants to recognise interest due on the balances due from
dealers. The amount is ascertained at ₹ 9 lakhs. Decide, whether the income by way of
interest from dealers is eligible for recognition as per AS 9?

Solution
As per AS 9 “Revenue Recognition”, where the ability to assess the ultimate collection with
reasonable certainty is lacking at the time of raising any claim, the revenue recognition is
postponed to the extent of uncertainty inverted. In such cases, the revenue is recognized only
when it is reasonably certain that the ultimate collection will be made.
In this case, the company never realized interest for the delayed payments make by
the dealers. Hence, it has to recognize the interest only if the ultimate collection is certain.
The interest income hence is not to be recognized.

Question 4 (RTP May 2020) / (ICAI Study Material)

Given the following information of M/s. Paper Products Ltd:-
a) Goods of ₹ 60,000 were sold on 20-3-2020 but at the request of the buyer these were
delivered on 10-4-2020.
b) On 15-1-2020 goods of ₹ 1,50,000 were sent on consignment basis of which 20% of the goods
unsold are lying with the consignee as on 31-3-2020.
c) ₹ 1,20,000 worth of goods were sold on approval basis on 1-12-2019. The period of approval
was 3 months after which they were considered sold. Buyer sent approval for 75% goods
up to 31-1-2020 and no approval or disapproval received for the remaining goods till 31-3-
2020.
d) 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 M/s. Paper Products Ltd., with valid reasons, the
amount to be recognized as revenue in above cases in the context of AS-9 and also determine
the total revenue to be recognized for the year ending 31-3-2020.

Solution
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 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.
In case (a):
The sale is complete but delivery has been postponed at buyer’s request. M/s Paper Products
Ltd. should recognize the entire sale of ₹ 60,000 for the year ended 31st March, 2020.
In case (b):
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.
In case (c):
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, in case (c) revenue should be recognized for the total
sales amounting ₹ 1,20,000 as the time period for rejecting the goods had expired.

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In case (d):
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.
Thus total revenue amounting ₹ 10,41,000 (60,000 + 1,20,000+ 1,20,000+7,41,000) will be
recognized for the year ended 31st March, 2020 in the books of M/s Paper Products Ltd.

Question 5
Victory Ltd. purchased goods on credit from Lucky Ltd. for ₹ 250 crores for export. The export
order was cancelled. Victory Ltd. decided to sell the same goods in the local market with a
price discount. Lucky Ltd. was requested to offer a price discount of 15%. The Chief Accountant
of Lucky Ltd. wants to adjust the sales figure to the extent of the discount requested by Victory
Ltd. Discuss whether this treatment is justified.

Solution
Lucky Ltd. had sold goods to Victory Ltd on credit worth for ₹ 250 crores and the sale was
completed in all respects. Victory Ltd.’s decision to sell the same in the domestic market at a
discount does not affect the amount recorded as sales by Lucky Ltd. The price discount of 15%
offered by Lucky Ltd. after request of Victory Ltd. was not in the nature of a discount given
during the ordinary course of trade because otherwise the same would have been given at
the time of sale itself. It is the special discount which is being allowed at the request of the
buyer. Therefore, it would be appropriate to make a separate provision rather than to adjust
the amount of revenue originally recorded. Therefore, such discount should be written off to
the profit and loss account and not shown as deduction from the sales figure.

Question 6
X Limited sold goods worth ₹ 13 Lakhs to Mr. Y. Mr. Y asked for a Trade Discount amounting
to ₹ 1,06,000 and the same was agreed to by X Limited. Such discount was allowed in the
ordinary course of business. The sale was effected and goods were dispatched. On receipt of
goods, Mr. Y has found that goods worth ₹ 1,34,000 are defective. Mr. Y returned defective
goods to X Limited and made payment amount to ₹ 10,60,000. The Accountant of X Limited
booked the sale for ₹ 10,60,000. Discuss the contention of the Accountant with reference to
relevant Accounting Standard.

Solution
As per AS 9, "Revenue Recognition" is the inflow of cash, receivable or other consideration
arising in the course of ordinary activities of an enterprise from the sale of Goods. However,
the above is subject to trade discount and volume rebates received in the course of carrying
on business which shall be deducted in ascertaining revenue since they represent a reduction
of cost.
In the given case, trade discount is to be deducted from ₹ 13,00,000 and gross sale shall be
recognized at (₹ 13,00,000 - ₹ 1,06,000) = ₹ 11,94,000 and goods returned ₹ 1,34,000 are to be
recorded in the form of sales return. Thus, the contention of Accountant to book sale of ₹
10,60,000 is not correct.

Question 7 (RTP Nov 2019) / (ICAI Study Material)

The Board of Directors decided on 31.3.2020 to increase the sale price of certain items
retrospectively from 1st January, 2020. In view of this price revision with effect from 1st
January 2020, the company has to receive ₹ 15 lakhs from its customers in respect of sales
made from 1st January, 2020 to 31st March, 2020. Accountant cannot make up his mind
whether to include ₹ 15 lakhs in the sales for 2019-2020. Advise.

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 CA NITIN GOEL AS 9 CH 10H

Solution
As per para 10 of AS 9 ‘Revenue Recognition’, the additional revenue on account of increase
in sales price with retrospective effect, as decided by Board of Directors, of ₹ 15 lakhs to be
recognised as income for financial year 2019-20, only if the company is able to assess the
ultimate collection with reasonable certainty. If at the time of raising of any claim it is
unreasonable to expect ultimate collection, revenue recognition should be postponed.

Question 8
Sarita Publications publishes a monthly magazine on the 15th of every month. It sells
advertising space in the magazine to advertisers on the terms of 80% sale value payable in
advance and the balance within 30 days of the release of the publication. The sale of space
for the March 2020 issue was made in February 2020. The magazine was published on its
scheduled date. It received ₹ 2,40,000 on 10.3.2020 and ₹ 60,000 on 10.4.2020 for the March
2020 issue. Discuss in the context of AS 9 the amount of revenue to be recognized and the
treatment of the amount received from advertisers for the year ending 31.3.2020.
What will be the treatment if the publication is delayed till 2.4.2020?

Solution
As per para 12 of AS 9 ‘Revenue Recognition’, ‘In a transaction involving the rendering of
services, performance should be measured either under the completed service contract
method or under the proportionate completion method, whichever relates the revenue to the
work accomplished’.
In the given case, income accrues when the related advertisement appears before
public. The advertisement service would be considered as performed on the day the
advertisement is seen by public and hence revenue is recognized on that date. In this case, it
is 15.03.2020, the date of publication of the magazine.
Hence, ₹ 3,00,000 (₹ 2,40,000 + ₹ 60,000) is recognized as income in March, 2020. The terms
of payment are not relevant for considering the date on which revenue is to be recognized. ₹
60,000 is treated as amount due from advertisers as on 31.03.2020 and ₹ 2,40,000 will be
treated as payment received against the sale.
However, if the publication is delayed till 02.04.2020 revenue recognition will also be
delayed till the advertisements get published in the magazine. In that case revenue of ₹
3,00,000 will be recognized for the year ended 31.03.2021 after the magazine is published on
02.04.2020. The amount received from sale of advertising space on 10.03.2020 of ₹ 2,40,000
will be considered as an advance from advertisers for the year ended 31st March, 2020.

Question 9
A Ltd. entered into a contract with B Ltd. to dispatch goods valuing ₹ 25,000 every month for
4 months upon receipt of entire payment. B Ltd. accordingly made the payment of ₹ 1,00,000
and A Ltd. started dispatching the goods. In third month, due to a natural calamity, B Ltd.
requested A Ltd. not to dispatch goods until further notice though A Ltd. is holding the
remaining goods worth ₹ 50,000 ready for dispatch. A Ltd. accounted ₹ 50,000 as sales and
transferred the balance to Advance Received against Sales. Comment upon the treatment of
balance amount with reference to the provisions of Accounting Standard 9.

Solution
As per para 11 of AS 9 “Revenue Recognition”, in a transaction involving the sale of goods,
performance should be regarded as being achieved when following conditions are fulfilled:
a) the seller of goods has transferred to the buyer the property in the goods for a price or all
significant risks & rewards of ownership have been transferred to buyer & seller retains
no effective control of the goods transferred to a degree usually associated with ownership

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 CA NITIN GOEL AS 9 CH 10H

b) no significant uncertainty exists regarding the amount of the consideration that will be
derived from the sale of the goods.
In the given case, transfer of property in goods results in transfer of significant risks and
rewards of ownership to the buyer. Also, the sale price has been recovered by the seller.
Hence, the sale is complete but delivery has been postponed at buyer’s request. A Ltd. should
recognize the entire sale of ₹ 1,00,000 (₹ 25,000 x 4) and no part of the same is to be treated
as Advance Receipt against Sales.

Question 10 (ICAI Study Material)

A Ltd. has sold its building for ₹ 50 lakhs to B Ltd. and has also given the possession to B Ltd.
The book value of the building is ₹ 30 lakhs. As on 31st March, 2020, the documentation and
legal formalities are pending. The company has not recorded the sale and has shown the
amount received as advance. Do you agree with this treatment?

Solution
The economic reality and substance of the transaction is that the rights and beneficial interest
in the property has been transferred although legal title has not been transferred. In
accordance with AS 9, at the Balance Sheet date what was pending was merely a formality to
register the deed. It is clear that significant risk and rewards of ownership had passed before
the balance sheet date.
A Ltd. should record the sale and recognise the profit of ₹ 20 lakhs in its profit and loss
account. The building should be eliminated from the balance sheet.

Question 11 (ICAI Study Material)

A claim lodged with the Railways in March, 2018 for loss of goods of ₹ 2,00,000 had been
passed for payment in March, 2020 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, 2020.

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
properly recognised. 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 cannot be taken as a Prior Period
Item.
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.

Question 12 (RTP Nov 2021)

Shipra Ltd., has been successful jewelers for the past 100 years and sales are against cash
only (returns are negligible). The company also diversified into apparels. A young senior
executive was put in charge of Apparels business and sales increased 5 times. One of the
conditions for sales is that dealers can return the unsold stocks within one month of the end
of season. Sales return for the year was 25% of sales. Suggest a suitable Revenue Recognition
Policy, with reference to AS 9.

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 CA NITIN GOEL AS 9 CH 10H

Solution
As per AS 9 “Revenue recognition”, revenue recognition is mainly concerned with the timing
of recognition of revenue in statement of profit and loss of an enterprise. The amount of
revenue arising on a transaction is usually determined by the agreement between the parties
involved in the transaction. When uncertainties exist regarding the determination of amount,
or its associated costs, these uncertainties may influence the timing of revenue recognition.
Effect of Uncertainty- In the case of the jewelry business the company is selling for cash and
returns are negligible. Hence, revenue can be recognized on sales. On the other hand, in
Apparels Industry, the dealers have a right to return the unsold goods within one month of
the end of the season. In this case, the company is bearing the risk of sales return and
therefore, the company should not recognize the revenue to the extent of 25% of its sales.
The company may disclose suitable revenue recognition policy in its financial statements
separately for both Jewelry and Apparels business.

Question 13 (ICAI Study Material)

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:
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.

Question 14 (ICAI Study Material)

AB sells goods to CD on 1st March 2023. 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 2023, 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

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May 2023. The inventory transferred to CD until that date is required to be shown as its own
inventory [inventory lying with customers].

Question 15 (ICAI Study Material)

AB sells goods to CD on 1st January 2023 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 15th
of March 2023. 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 31st March 2023?

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 1st of January
2023 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

Question 16 (RTP May 2021)

Tonk Tanners is engaged in manufacturing of leather shoes. They provide you the following
information for the year 2019-20:
a) On 31st December, 2019 shoes worth ₹ 3,20,000 were sent to Mohan Shoes for sale on
consignment basis of which 25% shoes were unsold and lying with Mohan Shoes as on 31st
March, 2020.
b) On 10th January, 2020, Tonk Tanners supplied shoes worth ₹ 4,50,000 to Shani Shoes and
concurrently agrees to re-purchase the same goods on 11th April. 2020.
c) On 21st March, 2020 shoes worth ₹ 1,60,000 were sold to Shoe Shine but due to refurbishing
of their showroom being underway, on their request, shoes were delivered on 12 th April2020
You are required to advise the accountant of Tonk Tanners, when amount is to be recognised
as revenue in 2019 -20 in above cases in the context of AS 9

Solution
a) Shoes sent to Mohan Shoes (consignee) for consignment sale:
In case goods are sent for consignment sale, revenue is recognized when significant risks of
ownership have passed from seller to the buyer. In the given case, Mohan Shoes is the
consignee i.e. an agent of Tonk Tanners and not the buyer. Therefore, the risk and reward is
considered to vest with Tonk Tanners only till the time the sale is made to the third party by
Mohan Shoes; although the goods are held by Mohan Shoes. Hence, in the year 2019-2020,
the sale will be recognized for the amount of goods sold by Mohan Shoes to the third party
i.e. for ₹ 3,20,000 x 75% = ₹ 2,40,000.
b) Sale/repurchase agreements i.e. where seller concurrently agrees to repurchase the same
goods at a later date.
For such transactions that are in substance a financing agreement, the resulting cash inflow
is not revenue and should not be recognised as revenue in the year 2019-2020. Hence, sale
of ₹ 4,50,000 to Shani Shoes should not be recognized as revenue.

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c) Delivery is delayed at buyer’s request

On 21st March, 2020, if Shoe Shine takes title and accepts billing for the goods then it is implied
that the sale is complete and all the risk and rewards of ownership has been transferred to
the buyer. In case no significant uncertainty exists regarding the amount of consideration for
sale, revenue shall be recognized in the year 2019-2020 irrespective of the fact that the
delivery is delayed on the request of Shoe Shine.

Question 17 (RTP May 2022)

A infrastructure company has constructed a mall and entered into agreement with tenants
towards license fee (monthly rental) and variable license fee, a percentage on the turnover
of the tenant (on an annual basis). Chief Finance Officer wants to account/recognize license
fee as income for 12 months during current year & variable license fee as income during next
year, since invoice is raised in the subsequent year. Comment whether the treatment desired
by the CFO is correct or not.

Solution
AS 9 on Revenue Recognition, is mainly concerned with the timing of recognition of revenue
in the Statement of Profit and Loss of an enterprise. The amount of revenue arising on a
transaction is usually determined by agreement between the parties involved in the
transaction. However, when uncertainties exist regarding the determination of the amount,
or its associated costs, these uncertainties may influence the timing of revenue recognition.
Further, as per accrual concept, revenue should be recognized as and when it is accrued i.e.
recorded in the financial statements of the periods to which they relate.
In the present case, monthly rental towards license fee and variable license fee as a
percentage on the turnover of the tenant (though on annual basis) is the income related to
common financial year. Therefore, recognizing the fee as revenue cannot be deferred simply
because the invoice is raised in subsequent period. Hence it should be recognized in the
financial year of accrual. Therefore, the contention of the Chief Financial Officer is not in
accordance with AS 9.

Question 18 (ICAI Study Material)

For the year ended 31st March 2023, KY Enterprises has entered into following transactions.
On 31 March 2023, KY supplied two machines to its customer ST. Both machines were accepted
by ST on 31 March 2023. Machine 1 was a machine that was routinely supplied by KY to many
customers and the installation process was very simple.
Machine 1 was installed on 2 April 2023 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 2023. 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 31st
March 2023?
Solution
Machine 1: As the installation process is simple, revenue from Machine 1 will be recognized
on 31 March 2023.
Revenue (Machine 1) ₹ 3,20,000
Cost of Goods Sold ₹ 1,60,000
Profit during the period ₹ 1,60,000

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Since the question specifies that the machine is already accepted by ST on 31 March 2023, the
revenue arising from sale of the machine needs to be recognized for the year ending 31 March
2023. This is because acceptance 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 2023. 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 2023.
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 2023 once the
installation process gets completed.

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PRACTICE QUESTIONS
Question 1 (RTP May 2018)
A manufacturing company has following stages of production & sale in manufacturing Fine
paper rolls:
Date Activity Cost to Date (₹) Net Realisable Value (₹)
15.1.20 Raw Materials 1,00,000 80,000
20.1.20 Pulp (WIP 1) 1,20,000 1,20,000
27.1.20 Rough & Thick Paper (WIP 2) 1,50,000 1,80,000
15.2.20 Fine paper Rolls 1,80,000 3,50,000
20.2.20 Ready for Sale 1,80,000 3,50,000
15.3.20 Sale Agreed and invoice raised 2,00,000 3,50,000
02.4.20 Delivered and paid for 2,00,000 3,50,000
Explain the stage on which you think revenue will be generated and state how much would
be net profit for year ending 31.3.2020 on this product according to AS-9.

Solution
As per AS 9 “Revenue Recognition”, in a transaction involving sale of goods, performance
should be regarded as being achieved when following conditions have been fulfilled:
a) 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 control of the goods transferred to a degree usually associated
with ownership; and
b) no significant uncertainty exists regarding the amount of the consideration that will be
derived from the sale of the goods.
Thus, sales will be recognized only when following two conditions are satisfied:
(i) The sale value is fixed and determinable.
(ii) Property of the goods is transferred to the customer.
Both these conditions are satisfied only on 15.3.2020 when sales are agreed upon at a price &
goods are allocated for delivery purpose through invoice. The amount of net profit ₹ 150,000
(3,50,000 – 2,00,000) would be recognized in the books for the year ending 31st March, 2020.

Question 2 (ICAI Study Material)

Y Co. Ltd., used certain resources of X Co. Ltd. In return X Co. Ltd. received ₹ 10 lakhs and ₹
15 lakhs as interest and royalties respective from Y Co. Ltd. during the year 2019-20. You are
required to state whether and on what basis these revenues can be recognised by X Co. Ltd.

Solution
As per para 13 of AS 9 on Revenue Recognition, revenue arising from the use by others of
enterprise resources yielding interest and royalties should only be recognised when no
significant uncertainty as to measurability or collectability exists. These revenues are
recognised on the following bases:
a) Interest: on time proportion basis taking into account amount outstanding & rate applicable.
b) Royalties: on an accrual basis in accordance with the terms of the relevant agreement.

Question 3
M/s Umang Ltd. sold goods through its agent. As per terms of sales, consideration is payable
within one month. In the event of delay in payment, interest is chargeable @ 12% p.a. from the
agent. The company has not realized interest from the agent in the past. For the year ended
31st March, 2020 interest due from agent (because of delay in payment) amounts to ₹ 1,72,000.

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The accountant of M/s Umang Ltd. booked ₹ 1,72,000 as interest income in the year ended 31st
March, 2020. Discuss the contention of accountant with reference to Accounting Standard-9.

Solution
As per AS 9 “Revenue Recognition”, “Where the ability to assess the ultimate collection with
reasonable certainty is lacking at the time of raising any claim, the revenue recognition is
postponed to the extent of uncertainty involved. In such cases, the revenue is recognized only
when it is reasonably certain that the ultimate collection will be made”.
In this case, the company never realized interest for the delayed payments made by the agent.
Hence, based on the past experience, the realization of interest for the delayed payments by
the agent is very much uncertain. The interest should be recognized only if the ultimate
collection is certain. Therefore, the interest income of ₹ 1,72,000 should not be recognized in
the books for the year ended 31st March, 2020. Thus, the contention of accountant is incorrect

Question 4 (Inter May 2019) (5 Marks)

Given below are the following information of B.S. Ltd.
(i) Goods of ₹ 50,000 were sold on 18-03-2020 but at the request of the buyer these were
delivered on 15-04-2020.
(ii) On 13-01-2020 goods of ₹ 1,25,000 are sent on consignment basis of which 20% of the
goods unsold are lying with the consignee as on 31-03-2020.
(iii) ₹ 1,00,000 worth of goods were sold on approval basis on 01-12-2019. The period of
approval was 3 months after which they were considered sold. Buyer sent approval for
75% goods up to 31-01-2020 and no approval or disapproval received for the remaining
goods till 31-03-2020.
You are required to advise accountant of B.S. Ltd., with valid reasons, amount to be recognized
as revenue for the year ended 31st March, 2020 in above cases in the context of AS-9

Solution
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 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. B.S. Ltd. should
recognize the entire sale of ₹ 50,000 for the year ended 31st March, 2020.
Case (ii)
In case of consignment sale revenue should not be recognized until the goods are sold to a
third party. 20% goods lying unsold with consignee should be treated as closing inventory and
sales should be recognized for ₹ 1,00,000 (80% of ₹ 1,25,000).
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 total sales
amounting ₹ 1,00,000 as the time period for rejecting the goods had expired.
Thus total revenue amounting ₹ 2,50,000 (50,000 + 1,00,000+ 1,00,000) will be recognized for
the year ended 31st March, 2020 in the books of B.S. Ltd.

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 CA NITIN GOEL AS 9 CH 10H

Question 5 (RTP Nov 2018) / (RTP Nov 2020)

Fashion Limited is engaged in manufacturing of readymade garments. They provide you the
following information on 31st March, 2020:
a) On 15th January, 2020 garments worth ₹ 4,00,000 were sent to Anand on consignment
basis of which 25% garments unsold were lying with Anand as on 31st March, 2020.
b) Garments worth ₹ 1,95,000 were sold to Shine boutique on 25th March, 2020 but at the
request of Shine Boutique, these were delivered on 15th April, 2020.
c) On 1st November, 2019 garments worth ₹ 2,50,000 were sold on approval basis. The period
of approval was 4 months after which they were considered sold. Buyer sent approval for
75% goods up to 31st December, 2019 and no approval or disapproval received for the
remaining goods till 31st March, 2020.
You are required to advise the accountant of Fashion Limited, the amount to be recognised as
revenue in above cases in the context of AS 9.

Solution
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 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 (a):
25% goods lying unsold with consignee should be treated as closing inventory and sales
should be recognized for ₹ 3,00,000 (75% of ₹ 4,00,000) for the year ended on 31.3.20. In case
of consignment sale, revenue should not be recognized until the goods are sold to a third
party.
Case (b):
The sale is complete but delivery has been postponed at buyer’s request. Fashion Ltd. should
recognize the entire sale of ₹1,95,000 for the year ended 31st March, 2020.
Case (c):
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 accepting 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 total sales amounting ₹ 2,50,000 as the time
period for rejecting the goods had expired.
Thus total revenue amounting ₹ 7,45,000 (3,00,000+1,95,000+2,50,000) will be recognized for
the year ended 31st March, 2020 in the books of Fashion Ltd.

Question 6
In the year 2020-21, 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. During the year 2020-21, 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 2020-21

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 CA NITIN GOEL AS 9 CH 10H

Solution
As per AS 9, For 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.

Question 7
Goods worth ₹ 6,62,500 were sold on 31.10.2020 by X Ltd. to Y Ltd. Y Ltd. requested for a trade
discount of 8% which was agreed by X Ltd. The sale was effected and goods were dispatched,
However, on receipt of the goods, Y Ltd. found that goods worth ₹ 77,500 were damaged.
Consequently, Y Ltd. returned the damaged goods to X Ltd. and made the due payment
amounting to ₹ 5,32,000. The accountant of X Ltd. booked the sale for ₹ 5,32,000. Discuss the
above treatment by the accountant with reference to applicable Accounting Standard.

Solution
As per AS 9 ‘Revenue Recognition’, revenue is the gross inflow of cash, receivable or other
consideration arising in the course of the ordinary activities of an enterprise from the sale of
goods. However, trade discounts and volume rebates given in the ordinary course of business
should be deducted in determining revenue. Revenue from sales should be recognized at the
time of transfer of significant risks and rewards. If the delivery of the sales is not subject to
approval from customers, then the transfer of significant risks and rewards would take place
when the sale is affected and goods are dispatched.
In the given case, if trade discount allowed by X Ltd. is given in the ordinary course of
business, X Ltd. should record the sales at ₹ 6,09,500 (after deducting 8% trade discount from
6,62,500) and goods returned worth ₹ 77,500 are to be recorded in the form of sales return.
However, when trade discount allowed by X Ltd. is not in the ordinary course of
business, X Ltd. should record the sales at gross value of ₹ 6,62,500. Discount of ₹ 53,000 in
price and return of goods worth ₹ 77,500 are to be adjusted by suitable provisions. X Ltd.
might have sent the credit note of ₹ 1,30,500 to Y Ltd. to account for these adjustments.
In both the cases, the contention of the accountant to book the sales for ₹ 5,32,000 is
not correct.

Question 8 (RTP May 2019)

Raj Ltd. entered into an agreement with Heena Ltd. to dispatch goods valuing ₹ 5,00,000 every
month for next 6 months on receipt of entire payment. Heena Ltd. accordingly made the entire
payment of ₹ 30,00,000 and Raj Ltd. started dispatching the goods. In fourth month, due to
fire in premise of Heena Ltd., Heena Ltd. requested to Raj Ltd. not to dispatch goods worth ₹
15,00,000 ready for dispatch. Raj Ltd. accounted ₹ 15,00,000 as sales and transferred the
balance to Advance received against Sales account. Comment upon the above treatment by
Raj Ltd. with reference to the provision of AS-9.

Solution
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:
▪ 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 control of the goods transferred to a degree usually associated
with ownership; and
▪ no significant uncertainty exists regarding the amount of the consideration that will be
derived from the sale of the goods.

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 CA NITIN GOEL AS 9 CH 10H

In the given case, transfer of property in goods results in or coincides with the transfer of
significant risks and rewards of ownership to the buyer. Also, the sale price has been
recovered by the seller. Hence, the sale is complete but delivery has been postponed at
buyer’s request.
Raj Ltd. should recognize the entire sale of ₹ 30,00,000 (₹ 5,00,000 x 6) and no part of the
same is to be treated as Advance Received against Sales.

Question 9
Khetan Ltd. has received two lakh subscriptions during the current year under its new
scheme whereby customers are required to pay a sum of ₹ 4,500 for which they will be
entitled to receive a magazine for a period of 3 years. Khetan wants to treat the entire amount
as revenue for the current year. Comment

Solution
As per AS 9 'Revenue Recognition', revenue received or billed should be deferred and
recognised either on a straight line basis over time or, where the items delivered vary in value
from period to period, revenue should be based on the sales value of the item delivered in
relation to the total sales value of all items covered by the subscription.
Accordingly, in the given case the accounting treating adopted by Khetan Ltd. to treat
the entire amount as revenue for the current year is not in accordance with AS 9. The revenue
should be recognized on a straight line basis over the period of 3 years.

Question 10 (Inter Nov 2019) (5 Marks)/ (RTP May 2022)

Indicate in each case whether revenue can be recognized and when it will be recognized as
per AS-9.
(1) Trade discount and volume rebate received.
(2) Where goods are sold to distributors or others for resale.
(3) Where seller concurrently agrees to repurchase the same goods at a later date.
(4) Insurance agency commission for rendering services.
(5) On 11-03-2019 cloths worth ₹ 50,000 were sold to X mart, but due to refurbishing of their
showroom being underway, on their request, clothes were delivered on 12-04-2019.

Solution
(1) 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.
(2) When goods are sold to distributor or others, revenue from such sales can generally be
recognized if significant risks of ownership have passed; however, in some situations the
buyer may in substance be an agent and in such cases the sale should be treated as a
consignment sale.
(3) For transactions, where seller concurrently agrees to repurchase the same goods at a
later date that are in substance a financing agreement, the resulting cash inflow is not
revenue as defined and should not be recognized as revenue.
(4) Insurance agency commissions should be recognized on the effective commencement or
renewal dates of the related policies.
(5) On 11.03.2019, if X mart takes title and accepts billing for the goods then it is implied that
the sale is complete and all risk and reward on ownership has been transferred to the
buyers. Revenue should be recognized for year ended 31st March, 2019 notwithstanding
that physical delivery has not been completed so long as there is every expectation that
delivery will be made and items were ready for delivery to the buyer at the time.

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Question 11 (Inter Dec 2021) (5 Marks)

Given the following information of Rainbow Ltd.
(i) On 15th November, goods worth ₹ 5,00,000 were sold on approval basis. The period of
approval was 4 months after which they were considered sold. Buyer sent approval for
75% goods sold upto 31st January and no approval or disapproval received for the
remaining goods till 31st March.
(ii) On 31st March, goods worth ₹ 2,40,000 were sold to Bright Ltd. but due to refurnishing of
their show-room being underway, on their request, goods were delivered on 10th April.
(iii) Rainbow Ltd. supplied goods worth ₹ 6,00,000 to Shyam Ltd. and concurrently agrees to
re-purchase the same goods on 14th April.
(iv) Dew Ltd, used certain assets of Rainbow Ltd. Rainbow Ltd. received ₹ 7.5 lakhs and ₹ 12
as interest and royalties respectively from Dew Ltd. during the year 2020-21.
(v) On 25th December, goods of ₹ 4,00,000 were sent on consignment basis of which 40% of
the goods unsold are lying with the consignee at the year-end on 31st March.
In each of the above cases, you are required to advise, with valid reasons, the amount to be
recognized as revenue under the provisions of AS-9.

Solution
(i) As per AS 9 “Revenue Recognition”, 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 total sales amounting ₹ 5,00,000 as the time period
for rejecting the goods had expired.
(ii) The sale is complete but delivery has been postponed at buyer’s request. The entity should
recognize the entire sale of ₹ 2,40,000 for the year ended 31st March.
(iii) Sale/repurchase agreements i.e. where seller concurrently agrees to repurchase the
same goods at a later date, such transactions that are in substance a financing
agreement, the resulting cash inflow is not revenue as defined and should not be
recognized as revenue. Hence no revenue to be recognized in the given case.
(iv) Revenue arising from the use by others of enterprise resources yielding interest & royalty
should be recognized when no significant uncertainty as to measurability or collectability
exists. The interest should be recognized on time proportion basis taking into account the
amount outstanding and rate applicable. The royalty should be recognized on accrual
basis in accordance with the terms of relevant agreement.
(v) 40% goods lying unsold with consignee should be treated as closing inventory and sales
should be recognized for ₹ 2,40,000 (60% of ₹ 4,00,000). In case of consignment sale
revenue should not be recognized until the goods are sold to a third party.

Question 12 (RTP Nov 2022)

When revenue will be recognized in the following situation:
(1) Where the purchaser makes a series of installment payments to the seller and the seller
deliver the goods only when the final payment is received.
(2) Where seller concurrently agrees to repurchase the same goods at a later date.
(3) Where goods are sold to distributors, dealers or others for resale.
(4) Commissions on service rendered as agent on insurance business

Solution
(1) Revenue from sales where the purchaser makes a series of instalment payments to the
seller, and the seller delivers the goods only when the final payment is received, should

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 CA NITIN GOEL AS 9 CH 10H

not be recognised until goods are delivered. However, when experience indicates that
most such sales have been consummated, revenue may be recognised when a significant
deposit is received.
(2) For sale where seller concurrently agrees to repurchase the same goods at a later date,
such transactions are in substance a financing agreement. In such a situation, the
resulting cash inflow should not be recognised as revenue.
(3) Revenue from sales of goods to distributors, dealers or others for resale can generally
be recognised if significant risks of ownership have passed. However, in some situations
the buyer may in substance be an agent and in such cases the sale should be treated as
a consignment sale.
(4) Commissions on service rendered as agent on insurance business should be recognised
as revenue when the service is completed. Insurance agency commissions should be
recognised on the effective commencement or renewal dates of the related policies.

Question 13
XY Ltd sells goods worth ₹ 50 lakh on 20 February 2023 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 2023. However, all the risks and rewards
associated with the sold goods are deemed transferred to AB Ltd. When XY Ltd. can recognise
the revenue?

Solution
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 2023 provided that goods sold
to AB Ltd are held in XY Ltd’s warehouse separately and are not clubbed with other inventory.

Question 14 (ICAI Study Material)

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?

Solution
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.

Question 15 (Inter Nov 2022) (5 Marks)

Indicate in each case whether revenue can be recognized and when it will be recognized as
per AS-9.
a) Delivery is delayed at buyer's request but buyer takes title and accepts billing.
b) Instalment Sales.
c) Trade discounts and volume rebates.
d) Insurance agency commission for rendering services.
e) Advertising commission.

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Solution:
a) Delivery is delayed at buyer’s request and buyer takes title and accepts billing : Revenue
should be recognized notwithstanding that physical delivery has not been completed so
long as there is every expectation that delivery will be made. However, the item must be
on hand, identified and ready for delivery to the buyer at the time the sale is recognized
rather than there being simply an intention to acquire or manufacture the goods in time
for delivery.
b) Instalment sales: When the consideration is receivable in instalments, revenue
attributable to the sales price exclusive of interest should be recognized at the date of
sale. The interest element should be recognized as revenue, proportionately to the unpaid
balance due to the seller.
c) 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.
d) Insurance agency commissions for rendering services: Insurance agency commissions
should be recognized on the effective commencement or renewal dates of the related
policies.
e) Advertising commission: Revenue should be recognized when the service is completed.
For advertising agencies, media commissions will normally be recognized when the
related advertisement or commercial appears before the public and the necessary
intimation is received by the agency, as opposed to production commission, which will be
recognized when the project is completed.

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