ICAI Notes- Unit 2: Revenue Based Accounting Standards | Advanced Accounting for CA Intermediate PDF Download

 Page 1


 
8.34 
 
ADVANCED ACCOUNTING 
a
8.34 
 
LEARNING OUTCOMES 
UNIT 2: ACCOUNTING STANDARD 9  
REVENUE RECOGNITION 
 
 
After studying this unit, you will be able to comprehend the provisions 
of AS 9 related with– 
? Recognition of revenue in case of: 
? Sale of Goods  
? Rendering of Services  
? The Use by Others of Enterprise Resources Yielding Interest, 
Royalties and Dividends  
? Effect of Uncertainties on Revenue Recognition 
? Required Disclosures.
 2.1 INTRODUCTION  
Revenue(also called as Top Line),  or Sales is the backbone for any business. A 
higher revenue would normally reflect an increase in market share, higher 
prospects, and eventually an increased value of the business. You would notice 
that many start-up entities are more focused to increase their market penetration 
and revenue without initially focusing on the profitability. 
As a result, it is critical to have a standard that addresses how entities must 
recognised the revenue, with respect to the amount and timing in a particular 
accounting period.  
AS 9 deals with the bases for recognition of revenue in the statement of profit 
and loss of an enterprise. AS 9 is mandatory for all enterprises.  The Standard is 
© The Institute of Chartered Accountants of India
Page 2


 
8.34 
 
ADVANCED ACCOUNTING 
a
8.34 
 
LEARNING OUTCOMES 
UNIT 2: ACCOUNTING STANDARD 9  
REVENUE RECOGNITION 
 
 
After studying this unit, you will be able to comprehend the provisions 
of AS 9 related with– 
? Recognition of revenue in case of: 
? Sale of Goods  
? Rendering of Services  
? The Use by Others of Enterprise Resources Yielding Interest, 
Royalties and Dividends  
? Effect of Uncertainties on Revenue Recognition 
? Required Disclosures.
 2.1 INTRODUCTION  
Revenue(also called as Top Line),  or Sales is the backbone for any business. A 
higher revenue would normally reflect an increase in market share, higher 
prospects, and eventually an increased value of the business. You would notice 
that many start-up entities are more focused to increase their market penetration 
and revenue without initially focusing on the profitability. 
As a result, it is critical to have a standard that addresses how entities must 
recognised the revenue, with respect to the amount and timing in a particular 
accounting period.  
AS 9 deals with the bases for recognition of revenue in the statement of profit 
and loss of an enterprise. AS 9 is mandatory for all enterprises.  The Standard is 
© The Institute of Chartered Accountants of India
 
REVENUE BASED ACCOUNTING STANDARDS 
 
a
8.35 
 
concerned with the recognition of revenue arising in the course of the ordinary 
activities of the enterprise from
• the sale of goods 
• the rendering of services 
• the use by others of enterprise resources yielding interest, royalties and 
dividends 
AS 9 does not deal with the following aspects of revenue recognition to which 
special considerations apply:  
i. Revenue arising from construction contracts; 
ii. Revenue arising from hire-purchase, lease agreements; 
iii. Revenue arising from government grants and other similar subsidies; 
iv. Revenue of insurance companies arising from insurance contracts. 
Examples of items not included within the definition of “revenue” for the purpose 
of AS 9 are:  
i. Realized gains resulting from the disposal of, and unrealized gains resulting 
from the holding of, non-current assets, e.g., appreciation in the value of 
fixed assets; 
ii. Unrealized holding gains resulting from the change in value of current 
assets, and the natural increases in herds and agricultural and forest 
products; 
iii. Realized or unrealized gains resulting from changes in foreign exchange 
rates and adjustments arising on the translation of foreign currency financial 
statements; 
iv. Realized gains resulting from the discharge of an obligation at less than its 
carrying amount; 
v Unrealized gains resulting from the restatement of the carrying amount of 
an obligation. 
© The Institute of Chartered Accountants of India
Page 3


 
8.34 
 
ADVANCED ACCOUNTING 
a
8.34 
 
LEARNING OUTCOMES 
UNIT 2: ACCOUNTING STANDARD 9  
REVENUE RECOGNITION 
 
 
After studying this unit, you will be able to comprehend the provisions 
of AS 9 related with– 
? Recognition of revenue in case of: 
? Sale of Goods  
? Rendering of Services  
? The Use by Others of Enterprise Resources Yielding Interest, 
Royalties and Dividends  
? Effect of Uncertainties on Revenue Recognition 
? Required Disclosures.
 2.1 INTRODUCTION  
Revenue(also called as Top Line),  or Sales is the backbone for any business. A 
higher revenue would normally reflect an increase in market share, higher 
prospects, and eventually an increased value of the business. You would notice 
that many start-up entities are more focused to increase their market penetration 
and revenue without initially focusing on the profitability. 
As a result, it is critical to have a standard that addresses how entities must 
recognised the revenue, with respect to the amount and timing in a particular 
accounting period.  
AS 9 deals with the bases for recognition of revenue in the statement of profit 
and loss of an enterprise. AS 9 is mandatory for all enterprises.  The Standard is 
© The Institute of Chartered Accountants of India
 
REVENUE BASED ACCOUNTING STANDARDS 
 
a
8.35 
 
concerned with the recognition of revenue arising in the course of the ordinary 
activities of the enterprise from
• the sale of goods 
• the rendering of services 
• the use by others of enterprise resources yielding interest, royalties and 
dividends 
AS 9 does not deal with the following aspects of revenue recognition to which 
special considerations apply:  
i. Revenue arising from construction contracts; 
ii. Revenue arising from hire-purchase, lease agreements; 
iii. Revenue arising from government grants and other similar subsidies; 
iv. Revenue of insurance companies arising from insurance contracts. 
Examples of items not included within the definition of “revenue” for the purpose 
of AS 9 are:  
i. Realized gains resulting from the disposal of, and unrealized gains resulting 
from the holding of, non-current assets, e.g., appreciation in the value of 
fixed assets; 
ii. Unrealized holding gains resulting from the change in value of current 
assets, and the natural increases in herds and agricultural and forest 
products; 
iii. Realized or unrealized gains resulting from changes in foreign exchange 
rates and adjustments arising on the translation of foreign currency financial 
statements; 
iv. Realized gains resulting from the discharge of an obligation at less than its 
carrying amount; 
v Unrealized gains resulting from the restatement of the carrying amount of 
an obligation. 
© The Institute of Chartered Accountants of India
 
8.36 
 
ADVANCED ACCOUNTING 
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 2.2 DEFINITION OF REVENUE 
Revenue is the gross inflow of cash, receivables or other consideration arising in 
the course of the ordinary activities of an enterprise from the sale of goods, from 
the rendering of services, and from the use by others of enterprise resources 
yielding interest, royalties and dividends.  
 
Example 1 
Entity XY sells a machine being used at its factory at a price of ` 2 lakh. The 
carrying value of the machine is ` 1.80 lakh. The sale of the machine does not 
increase the revenue of XY but is an example of a capital receipt since transaction 
does not take place in the normal course of business. Such gain on sale of  
` 20,000 (` 2 lakhs – ` 1.80 lakhs) is recognised as a part of profit & loss statement 
under Gain/(Loss) on disposal of asset. 
Example 2 
ST Ltd is a real-estate developer and builder. It is into the business of buying and 
selling properties. In 20X1, ST Ltd purchased a unit of land for ? 150 crore. It sold 
off that land after few months at a price of ?  240 crore. 
In the above case, the sale of land is a transaction that happens in the ordinary 
course of business (as he is a real estate developer and builder – properties will be 
an item of inventory in the financial statements) for ST Ltd. Hence, it should 
recognise a revenue of ? 240 crore when the land is sold. 
Revenue is the gross inflow of cash, receivables or other 
consideration arising from
Sale of goods Rendering of services
Use by others of 
enterprise resources 
yielding Interest, 
royalties and dividends
© The Institute of Chartered Accountants of India
Page 4


 
8.34 
 
ADVANCED ACCOUNTING 
a
8.34 
 
LEARNING OUTCOMES 
UNIT 2: ACCOUNTING STANDARD 9  
REVENUE RECOGNITION 
 
 
After studying this unit, you will be able to comprehend the provisions 
of AS 9 related with– 
? Recognition of revenue in case of: 
? Sale of Goods  
? Rendering of Services  
? The Use by Others of Enterprise Resources Yielding Interest, 
Royalties and Dividends  
? Effect of Uncertainties on Revenue Recognition 
? Required Disclosures.
 2.1 INTRODUCTION  
Revenue(also called as Top Line),  or Sales is the backbone for any business. A 
higher revenue would normally reflect an increase in market share, higher 
prospects, and eventually an increased value of the business. You would notice 
that many start-up entities are more focused to increase their market penetration 
and revenue without initially focusing on the profitability. 
As a result, it is critical to have a standard that addresses how entities must 
recognised the revenue, with respect to the amount and timing in a particular 
accounting period.  
AS 9 deals with the bases for recognition of revenue in the statement of profit 
and loss of an enterprise. AS 9 is mandatory for all enterprises.  The Standard is 
© The Institute of Chartered Accountants of India
 
REVENUE BASED ACCOUNTING STANDARDS 
 
a
8.35 
 
concerned with the recognition of revenue arising in the course of the ordinary 
activities of the enterprise from
• the sale of goods 
• the rendering of services 
• the use by others of enterprise resources yielding interest, royalties and 
dividends 
AS 9 does not deal with the following aspects of revenue recognition to which 
special considerations apply:  
i. Revenue arising from construction contracts; 
ii. Revenue arising from hire-purchase, lease agreements; 
iii. Revenue arising from government grants and other similar subsidies; 
iv. Revenue of insurance companies arising from insurance contracts. 
Examples of items not included within the definition of “revenue” for the purpose 
of AS 9 are:  
i. Realized gains resulting from the disposal of, and unrealized gains resulting 
from the holding of, non-current assets, e.g., appreciation in the value of 
fixed assets; 
ii. Unrealized holding gains resulting from the change in value of current 
assets, and the natural increases in herds and agricultural and forest 
products; 
iii. Realized or unrealized gains resulting from changes in foreign exchange 
rates and adjustments arising on the translation of foreign currency financial 
statements; 
iv. Realized gains resulting from the discharge of an obligation at less than its 
carrying amount; 
v Unrealized gains resulting from the restatement of the carrying amount of 
an obligation. 
© The Institute of Chartered Accountants of India
 
8.36 
 
ADVANCED ACCOUNTING 
a
8.36 
 
 2.2 DEFINITION OF REVENUE 
Revenue is the gross inflow of cash, receivables or other consideration arising in 
the course of the ordinary activities of an enterprise from the sale of goods, from 
the rendering of services, and from the use by others of enterprise resources 
yielding interest, royalties and dividends.  
 
Example 1 
Entity XY sells a machine being used at its factory at a price of ` 2 lakh. The 
carrying value of the machine is ` 1.80 lakh. The sale of the machine does not 
increase the revenue of XY but is an example of a capital receipt since transaction 
does not take place in the normal course of business. Such gain on sale of  
` 20,000 (` 2 lakhs – ` 1.80 lakhs) is recognised as a part of profit & loss statement 
under Gain/(Loss) on disposal of asset. 
Example 2 
ST Ltd is a real-estate developer and builder. It is into the business of buying and 
selling properties. In 20X1, ST Ltd purchased a unit of land for ? 150 crore. It sold 
off that land after few months at a price of ?  240 crore. 
In the above case, the sale of land is a transaction that happens in the ordinary 
course of business (as he is a real estate developer and builder – properties will be 
an item of inventory in the financial statements) for ST Ltd. Hence, it should 
recognise a revenue of ? 240 crore when the land is sold. 
Revenue is the gross inflow of cash, receivables or other 
consideration arising from
Sale of goods Rendering of services
Use by others of 
enterprise resources 
yielding Interest, 
royalties and dividends
© The Institute of Chartered Accountants of India
 
REVENUE BASED ACCOUNTING STANDARDS 
 
a
8.37 
 
Example 3 
DL Ltd, a pharma company, has been conducting research on new medicine since 
last 2 years to increase the immunity levels of the people consuming it without any 
side effects. During the current year, it decides to sell the outcome of the research 
undertaken so far to another competitor, GH Ltd for ` 50 crore. DL has already 
incurred ` 30 crore on the ongoing research. 
In the above example, the sale of the research findings does not represent an 
increase in revenue. This is because DL Ltd’s business is not t o sell these research 
findings in the ordinary course of business. The amount of ? 50 crore will be a part 
of Other Income in the profit & loss statement. 
 2.3 AGENCY RELATIONSHIP 
In an agency relationship, the revenue is the amount of commission and not the 
gross inflow of cash, receivables or other consideration. 
The criteria of principal-agency relationship is significant to understand how 
much revenue can be recognised by an entity for a sale transaction. The key 
principle is whether the sale transaction is made by an entity on its own, or on 
behalf of someone else. Whether the risks and rewards pertaining to the goods or 
services are with the entity or with someone else, would determine the seller’s 
capacity as principal or agency (agent). 
When another party is involved in providing goods or services to a customer, the 
entity shall determine whether it has an obligation to sell or provide the specified 
goods or services itself (i.e., the entity is a principal) or to arrange for those goods 
or services to be sold or provided by the other party (i.e., the entity is an agent). 
Illustration 1 
Zigato runs a food-delivery business. As per the arrangement, Zigato allows 
customers to order food from local restaurants and is responsible the delivery of the 
food within stipulated time. During a particular year, it collects the money on 
orders made online as under: 
© The Institute of Chartered Accountants of India
Page 5


 
8.34 
 
ADVANCED ACCOUNTING 
a
8.34 
 
LEARNING OUTCOMES 
UNIT 2: ACCOUNTING STANDARD 9  
REVENUE RECOGNITION 
 
 
After studying this unit, you will be able to comprehend the provisions 
of AS 9 related with– 
? Recognition of revenue in case of: 
? Sale of Goods  
? Rendering of Services  
? The Use by Others of Enterprise Resources Yielding Interest, 
Royalties and Dividends  
? Effect of Uncertainties on Revenue Recognition 
? Required Disclosures.
 2.1 INTRODUCTION  
Revenue(also called as Top Line),  or Sales is the backbone for any business. A 
higher revenue would normally reflect an increase in market share, higher 
prospects, and eventually an increased value of the business. You would notice 
that many start-up entities are more focused to increase their market penetration 
and revenue without initially focusing on the profitability. 
As a result, it is critical to have a standard that addresses how entities must 
recognised the revenue, with respect to the amount and timing in a particular 
accounting period.  
AS 9 deals with the bases for recognition of revenue in the statement of profit 
and loss of an enterprise. AS 9 is mandatory for all enterprises.  The Standard is 
© The Institute of Chartered Accountants of India
 
REVENUE BASED ACCOUNTING STANDARDS 
 
a
8.35 
 
concerned with the recognition of revenue arising in the course of the ordinary 
activities of the enterprise from
• the sale of goods 
• the rendering of services 
• the use by others of enterprise resources yielding interest, royalties and 
dividends 
AS 9 does not deal with the following aspects of revenue recognition to which 
special considerations apply:  
i. Revenue arising from construction contracts; 
ii. Revenue arising from hire-purchase, lease agreements; 
iii. Revenue arising from government grants and other similar subsidies; 
iv. Revenue of insurance companies arising from insurance contracts. 
Examples of items not included within the definition of “revenue” for the purpose 
of AS 9 are:  
i. Realized gains resulting from the disposal of, and unrealized gains resulting 
from the holding of, non-current assets, e.g., appreciation in the value of 
fixed assets; 
ii. Unrealized holding gains resulting from the change in value of current 
assets, and the natural increases in herds and agricultural and forest 
products; 
iii. Realized or unrealized gains resulting from changes in foreign exchange 
rates and adjustments arising on the translation of foreign currency financial 
statements; 
iv. Realized gains resulting from the discharge of an obligation at less than its 
carrying amount; 
v Unrealized gains resulting from the restatement of the carrying amount of 
an obligation. 
© The Institute of Chartered Accountants of India
 
8.36 
 
ADVANCED ACCOUNTING 
a
8.36 
 
 2.2 DEFINITION OF REVENUE 
Revenue is the gross inflow of cash, receivables or other consideration arising in 
the course of the ordinary activities of an enterprise from the sale of goods, from 
the rendering of services, and from the use by others of enterprise resources 
yielding interest, royalties and dividends.  
 
Example 1 
Entity XY sells a machine being used at its factory at a price of ` 2 lakh. The 
carrying value of the machine is ` 1.80 lakh. The sale of the machine does not 
increase the revenue of XY but is an example of a capital receipt since transaction 
does not take place in the normal course of business. Such gain on sale of  
` 20,000 (` 2 lakhs – ` 1.80 lakhs) is recognised as a part of profit & loss statement 
under Gain/(Loss) on disposal of asset. 
Example 2 
ST Ltd is a real-estate developer and builder. It is into the business of buying and 
selling properties. In 20X1, ST Ltd purchased a unit of land for ? 150 crore. It sold 
off that land after few months at a price of ?  240 crore. 
In the above case, the sale of land is a transaction that happens in the ordinary 
course of business (as he is a real estate developer and builder – properties will be 
an item of inventory in the financial statements) for ST Ltd. Hence, it should 
recognise a revenue of ? 240 crore when the land is sold. 
Revenue is the gross inflow of cash, receivables or other 
consideration arising from
Sale of goods Rendering of services
Use by others of 
enterprise resources 
yielding Interest, 
royalties and dividends
© The Institute of Chartered Accountants of India
 
REVENUE BASED ACCOUNTING STANDARDS 
 
a
8.37 
 
Example 3 
DL Ltd, a pharma company, has been conducting research on new medicine since 
last 2 years to increase the immunity levels of the people consuming it without any 
side effects. During the current year, it decides to sell the outcome of the research 
undertaken so far to another competitor, GH Ltd for ` 50 crore. DL has already 
incurred ` 30 crore on the ongoing research. 
In the above example, the sale of the research findings does not represent an 
increase in revenue. This is because DL Ltd’s business is not t o sell these research 
findings in the ordinary course of business. The amount of ? 50 crore will be a part 
of Other Income in the profit & loss statement. 
 2.3 AGENCY RELATIONSHIP 
In an agency relationship, the revenue is the amount of commission and not the 
gross inflow of cash, receivables or other consideration. 
The criteria of principal-agency relationship is significant to understand how 
much revenue can be recognised by an entity for a sale transaction. The key 
principle is whether the sale transaction is made by an entity on its own, or on 
behalf of someone else. Whether the risks and rewards pertaining to the goods or 
services are with the entity or with someone else, would determine the seller’s 
capacity as principal or agency (agent). 
When another party is involved in providing goods or services to a customer, the 
entity shall determine whether it has an obligation to sell or provide the specified 
goods or services itself (i.e., the entity is a principal) or to arrange for those goods 
or services to be sold or provided by the other party (i.e., the entity is an agent). 
Illustration 1 
Zigato runs a food-delivery business. As per the arrangement, Zigato allows 
customers to order food from local restaurants and is responsible the delivery of the 
food within stipulated time. During a particular year, it collects the money on 
orders made online as under: 
© The Institute of Chartered Accountants of India
 
8.38 
 
ADVANCED ACCOUNTING 
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8.38 
 
Total price for the food item     -  ` 200 lakhs 
Delivery charges       -  ` 60 lakhs 
GST         -  ` 40 lakhs 
Total         -  ` 300 lakhs 
Zigato has received ` 300 lakhs for the above orders from customers and the orders 
were delivered to the customer in stipulated time.  
How much revenue should be recognised by restaurants and how much revenue 
should be recognised by Zigato for the year? 
Solution 
The risks and rewards associated with the food item are not with Zigato. When a 
customer has ordered a food item, whether the item will be prepared or not is the 
responsibility of the restaurant and not Zigato. Similarly, the responsibility to 
deliver the food item is with Zigato and the restaurant does not undertake 
responsibility for the same.  
Therefore, the restaurant undertakes the principal’s responsibility to prepare the 
food and ensure its quality. Zigato, on the other hand, is only responsible to 
deliver the food. Thus, Zigato is acting as an agent. Hence, it can only recognize 
revenue relating to that activity (which it does in the ordinary course of business). 
The revenue for Zigato, therefore, is ` 60 lakhs, whereas, the revenue for 
restaurants will be ` 200 lakhs. 
It may be noted that the GST of ` 40 lakhs is a liability payable to the Government 
(third party), hence it does not form part of revenue. 
Example 4 
Trip Deal is a website that allows people to book airlines tickets. As a part of the 
business, it agrees to buys 100 tickets from an airline on a particular date and 
resells those tickets to customers. However, Trip Deal bears the loss for any unsold 
tickets. 
In the above example, the risks and rewards relating to tickets are borne by Trip 
Deal. Hence, sales made for the tickets will be fully recognized as part of its 
revenue. Any unsold tickets will be charged as loss by the entity. 
© The Institute of Chartered Accountants of India