AS – 9 = REVENUE RECOGNITION
2010-MAY
According to Accounting Standard-9, when revenue from sales should be recognised?
Answer:
According to AS 9 'Revenue Recognition', revenue from sales should be recognised only when requirements as to performance are satisfied provided that at the time of performance it is not unreasonable to expect ultimate collection. These requirements can be given as follows:
(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.
2008-NOV
Answer the following:
Y Ltd. used certain resources of X Ltd. In return X Ltd. receives Rs 10 lakhs and Rs 15 lakhs as interest and royalties respectively, from Y Ltd. during the year 2007-08. State on what basis X Ltd. should recognize their revenue, as per AS 9.
Answer:
According to AS-9 on 'Revenue Recognition', interest of Rs 10 lakhs received in the year 2007-08 should be recognized on the time proportion basis taking into account the amount outstanding and the rate applicable; whereas royalty of Rs 15 lakhs received in the same year should be recognized on accrual basis as per the terms of relevant agreement.
2011-NOV.
Answer the following:
M/s. SEA Ltd. recognized Rs 5.00 lakhs on accrual basis income from dividend during the year 2010-11, on shares of the face value of Rs 25.00 lakhs held by it in Rock Ltd. as at 31st March, 2011. Rock Ltd. proposed dividend @ 20% on 10th April, 2011. However, dividend was declared on 30th June, 2011. Please state with reference to relevant Accounting Standard, whether the treatment accorded by SEA Ltd. is in order.
Answer:
Provision:
According to para 8.4 of AS-9 "Revenue Recognition", dividends from investments in shares are not recognized in the statement of Profit and Loss until the right to receive dividends is established.
Analysis and Conclusion:
In the given situation the dividend is proposed on 10th April, 2011, while it was declared on 30th June, 2011. Hence, the right to receive dividend is established on 30th June, 2011 only. Therefore, on applying the provisions stated in the standard, income from dividend on shares should be recognized by Sea Ltd. in the financial year 2011-2012 only.
Therefore, the recognition of income from dividend of Rs 5 lakhs, on accrual basis, in the financial year 2010- 11 is not in accordance with AS-9.
2013-MAY
Answer the following:
(d) M/s. Moon Ltd. sold goods worth Rs 6,50,000 to Mr. Star. Mr. Star asked for a trade discount amounting to Rs 53,000 and same was agreed to by M/s. Moon Ltd. The sales was effected and goods were dispatched. On receipt of goods, Mr. Star has found that goods worth Rs 67,000 are defective. Mr. Star returned defective goods to M/s. Moon Ltd. and made payment due amounting to Rs 5,30,000. The accountant of M/s. Moon Ltd. booked the sale for Rs 5,30,000. Discuss the contention of the accountant with reference to Accounting Standard (AS) 9.
Answer:
Provisions
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. Analysis and Conclusion:
In the given case, if trade discounts allowed by M/s. Moon Ltd. are given in the ordinary course of business, M/s. Moon Ltd. should record the sales at Rs 5,97,000 (i.e. Rs 6,50,000- Rs 53,000) and goods returned worth Rs 67,000 are to be recorded in the form of sales return.
However, when trade discount allowed by M/s. Moon Ltd. is not in the ordinary course of business, M/s. Moon Ltd. should record the sales at gross value of Rs 6,50,000. Discount of Rs 53,000 in price and return of goods worth Rs 67,000 are to be adjusted by suitable provisions.
M/s Moon Ltd. might have sent the credit note of Rs 1,20,000 to Mr. Star to account for these adjustments. In both the cases, the contention of the accountant to book the sales for Rs 5,30,000 is not correct.
2013-NOV
A Ltd. entered into a contract with B Ltd. to despatch goods valuing Rs 25,000 every month for 4 months upon receipt of entire payment. B Ltd. accordingly made the payment of Rs 1,00,000 and A Ltd. started despatching the goods. In third month, due to a natural calamity, B Ltd. requested A Ltd. not to despatch goods until further notice though A Ltd.
is holding the remaining goods worth Rs 50,000 ready for despatch. A Ltd. accounted Rs 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.
Answer:
Analysis:
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 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.
Conclusion:
In the given problem 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. A Ltd, should recognize the entire sale of Rs 1,00,000 ( 25,000 x 4) and no part of the same is to be treated as Advance Receipt against Sales.
2014-NOV
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 2014 issue was made in February 2014. The magazine was published on
its scheduled date. It received Rs 2,40,000 on 10.3.2014 and Rs 60,000 on 10.4.2014 for the March 2014 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 31.3.2014. What will be the treatment if the publication is delayed till 2.4.2014?
Answer:
According to 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 as the service is performed, whichever relates the revenue to the work accomplished.
In this 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 révenue is recognized on that date, so in this case, it is 15.03.2014, the date of publication of the magazine.
Therefore, Rs 3,00,000 (2,40,000+60,000) is recognized as income in March, 2014. The terms of payment are not relevant for considering the date on which revenue is to be recognized. Rs 60,000 is treated as amount due from advertisers as on 31.03.2014 and Rs 2,40,000 will be treated as payment received against the sale. Whereas, if the publication is delayed till 02.04.2014 revenue recognition will also be delayed till the advertisements get published in the magazine. In such case revenue of Rs 3,00,000 will be recognized for the year ended 31.03.2015 after the magazine is published on 02.04.2014. The amount received from sale of advertising space on 10.03.2014 of Rs 2,40,000 will be considered as an advance from advertisers as on 31.03.2014.
2015-MAY
Answer the following:
Given the following information of M/s. Paper Products Ltd.
(i) Goods of Rs 60,000 were sold on 20-3-2015 but at the request of the buyer these were delivered on 10-4- 2015.
(ii) On 15-1-2015 goods of Rs 1,50,000 were sent on consignment basis of which 20% of the goods unsold are lying with the consignee as on 31-3-2015.
(iii) Rs 1,20,000 worth of goods were sold on approval basis on 1-12- 2014. The period of approval was 3 months after which they were considered sold. Buyer sent approval for 75% goods up to 31-1-2015 and no approval or disapproval received for the remaining goods till 31-3-2015.
(iv) Apart from the above, the company has made cash sales of Rs 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 31-3-2015.
Answer:
(i) 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:
(a) the seller of goods has transferred to the buyer the property in the goods for a price or all singnificant risks and rewards of ownership have been tranfered to the buyer and the seller retains no effective control of the goods tranfered 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 goods.
In this transaction, the buyer sold goods of 60,000 on 20-3-2015 but at the request of the buyer these were delivered on 10-4-2015.
As per AS-9, goods sold by company the right becomes to revenue recognised whether, the actual physical delivery of goods taken place or not. So here Rs 60,000 of revenue is to be recognised as Sales in Trading A/c. (ii) As per AS-9, if the goods are sent on consignment basis and if the agent sells them to third party then only the revenue is recognised by consignor.
So here, goods of Rs 1,50,000 sent on consignment and only 80% goods were sold. Thus, sales recorded will be only Rs 1,20,000 in Trading A/c as per AS-9.
(iii) As per AS-9, revenue should be recognised on sale on approval basis as follows:
Revenue shall be recognised if the buyer formally accepted the goods.
Revenue shall also be recognised if the period of rejection has elapsed or where no time has been fixed or a
reasonable time has elapsed.
● Here, total goods worth Rs 1,20,000 are sold to customers on 1-12- 2014, on approval period of 3 months. Buyer sent approval for 75% goods up to 31-1-2015 and no approval or disapproval received for the remaining goods till 31-3-2015. As the approval time is elapsed on 31-3-2015, so all the goods sold on' 1-12-2014 is to be considered as sales.
● So, Rs 1,20,000 to be shown in Trading P&L A/c as sales as on 31-3-2015.
(iv) Apart, from above the company has made cash sales of Rs 7,80,000 (gross). Trade discount of 5% allowed on cash sales, so sale is to be recorded as 7,80,000-39,000 = Rs 7,41,000.
Calculation for total revenue to be recognised for the year ending 31-3-2015
Particulars
(i) Sale as on 20-3-2015
(ii) Sale on consignment basis on 15-2-2015 (iii) Sale on approval basis on 1-12-2014 (iv) Sale (Cash) after discount
Total revenue recognized
2015-NOV
amount (Rs) 60,000
1,20,000 1,20,000
7,41,000 10,41,000
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, 2015 interest due from agent (because of delay in payment)
amounts to Rs 1,72,000. The accountant of M/s Umang Ltd. booked Rs 1,72,000 as interest income in the year ended 31st March, 2015. Discuss the contention of the accountant with reference to Accounting Standard-9. Answer:
As per AS-9 "Revenue Recognition", where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of rising any claim, the revenue recognition is postponed to the extent of uncertainty.
In such cases, the revenue is recognised only when it is reasonably certain that the ultimate collection will be made.
So in this case M/s Umang Ltd. never realised interest for the delayed payments made by the agents. Hence, it has to recognize the interest only if the ultimate collection is certain. The interest income of Rs 1,72,000 is not be recognised in the year ended 31 March, 2015.
So the contention of the accountant is wrong. It should not recognize it as interest income in the books of account for year ended 31" March, 2015.
2016-NOV
A manufacturing company has the following stages of production and sale in manufacturing Fine paper rolls:
Date Activity Costs to Net Realizable Date (Rs ) Value (Rs )
15.1.16 20.1.16 27.1.16 15.2.16 20.2.16 15.3.16 02.4.16
Raw material
Pulp (WIP 1)
Rough & thick paper (WIP 2)
Fine Paper Rolls
Ready for sale
Sale agreed and invoice raised
Delivered and paid for
1,00,000 1,20,000 1,50,000 1,80,000 1,80,000 2,00,000 2,00,000
80,000 1,20,000 1,80,000 3,50,000 3,50,000 3,50,000 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 31-3-16 on this product according to AS-9.
Answer:
Provision:
As per AS-9 'Revenue Recognition' revenue in terms of sales could be recognised only when ownership has been passed by the seller to the buyer and there is no uncertainty regarding collection of consideration (sale proceeds) and it is reasonable to expect ultimate collection at the time of performance. 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.
Analysis:
In the given situation, company has sold goods and raised invoice on 15.3.16 and goods are ready for delivery. In that case company is entitled to recognise sale for the year ended 31.3.2016, provided delay in delivery is due to buyer's request.
Calculation of NP is as under:
Sale price
Less: Cost
Gross profit Less: Expenses Thus, Net profit
2017-MAY
Rs 3,50,000 Rs (1,80,000) Rs 1,70,000 Rs (20,000)
Rs 1,50,000
Raj Ltd. entered into an agreement with Heena Ltd. to dispatch goods valuing Rs 5,00,000 every month for next 6 months on receipt of entire payment. Heena Ltd. accordingly made the entire payment of Rs 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 untill further notice. Due to this, Raj Ltd. is holding the remaining goods worth Rs 15,00,000 ready for dispatch. Raj Ltd. accounted Rs 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.
Answer:
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:
1. The seller of goods has transferred to the buyer the property in the goods for 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
2. 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 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 Rs 30,00,000 (Rs 5,00,000 x 6) and
no part of the same is to be treated as Advance Receipt against Sales.
2017-NOV
Fashion Limited is engaged in manufacturing of readymade garments. They provide you the following information on 31st March, 2017:
(i) On 15th January, 2017 garments worth Rs 4,00,000 were sent to Anand on consignment basis of which 25% garments unsold were lying with Anand as on 31st March, 2017.
(ii) Garments worth Rs 1,95,000 were sold to Shine boutique on 25th March, 2017 but at the request of Shine Boutique, these were delivered on 15th April, 2017.
(iii) On 1st November, 2016 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, 2016 and no approval or disapproval received for the remaining goods till 31st March, 2017.
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.
Answer:
(i) 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.
Situation: Consignment Sales.
Amount to be recognised as Revenue: Rs 4,00,000 x 75% = Rs 3,00,000
Reason: Revenue on Consignment Sales is recognised only when goods are sold by the agent to a third party. Since 25% is unsold, 75% would have been sold.
Note: Cost of Inventory 25% should also be accounted for.
(ii) Situation: Delay in delivery at Buyer's request.
Amount to be recognised as Revenue: Rs 1,95,000
Reason: Revenue should be recognised notwithstanding that physically delivery has not been completed so long as there is expectation that delivery will be made.
(iii) Situation: Sales on approval basis.
Amount to be recognised as Revenue: Rs 2,50,000
Reason:
For 75% approved: Revenue should be recognised since the buyer has formally accepted the goods.
For 25%: Revenue should be recognised as time period for rejection has elapsed.
2019-MAY
Given below are the following informations of M/s B.S. Ltd.
(i) Goods of Rs 50,000 were sold on 18-03-2018 but at the request of the buyer these were delivered on 15-04- 2018.
(ii) On 13-01-2018 goods of Rs 1,25,000 were sent on consignment basis of which 20% of the goods unsold are lying with the consignee as on 31-03-2018.
(iii) Rs 1,00,000 worth of goods were sold on approval basis 01-12-2017. The period of approval was 3 months after which they were considered sold. Buyer sent approval for 75% goods up to 31-01-2018 and no approval or disapproval received for the remaining goods till 31-03-2018.
You are required to advise the accountant of M/s B.S. Ltd., with valid reasons, the amount to be recognized as revenue for the year ended 31stMarch, 2018 in above cases in the context of AS-9.
ANSWER
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, 2018.
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, 2018 in the books of B.S. Ltd.
2019-dec
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.
ANS
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.
2021-DEC
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.
ANS.
(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 and 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.
RTP QUESTIONS
MAY 2021
Tonk Tanners is engaged in manufacturing of leather shoes. They provide you the following information for the year ended 31st March,2020:
1. 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.
2. On 10th January, 2020, Tonk Tanner supplied shoes worth ` 4,50,000 to Shani Shoes and concurrently agrees to re-purchase the same goods on 11th April. 2020.
3. 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 12th April, 2020.
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.
ANS
(i)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.
(II) 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.
(III) 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.
NOV 2021
(a) How will you recognize revenue in the following cases:
1. Installation Fees;
2. Advertising and insurance agency commissions;
3. Subscriptions for publications.
(b) Shipra Ltd., has been successful jewellers 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.
ANS
(a) Installation Fees: In cases where installation fees are other than incidental to the sale of a product, they should be recognized as revenue only when the equipment is installed and accepted by the customer. Advertising and insurance agency commissions: 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. Insurance agency commissions should be recognized on the effective commencement or renewal dates of the related policies. Subscription for publications: Revenue received or billed should be deferred and recognized 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.
(b) 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 the amount, or its associated costs, these uncertainties may influence the timing of revenue recognition.
Effect of Uncertainty- In the case of the jewellery 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 Jewellery and Apparels business.
MAY 2022
(a) An 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 Financial Officer of the company wants to account/recognize license fee as income for 12 months during current year and 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.
(B) 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.
ANS
(A) 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.
(b) (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 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.
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.
ANS.
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 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.