I
At what point is revenue recognized for "Interest" and "Dividends"?
Interest: On a time basis
Dividends: When the right to receive is established
A consumer electronics store sells a Home Theater system for ₹1,20,000 on a 12-month EMI.
The "Cash Sale Price" is actually ₹1,00,000, and the rest is interest.
On day one, how much does the store credit to the Revenue from Operations account?
₹1,00,000.
AS 9 requires that the interest portion (₹20,000) be separated and recognized on a time proportion basis over the 12 months, not as part of the initial sale revenue.
You subscribe to Netflix for an annual plan of ₹6,000. Netflix provides you access to thousands of movies instantly. How should Netflix recognize this revenue?
On a Straight-line basis (₹500 per month). the service is the "availability of content" over the 12-month period.
On Amazon, you see a product "Sold by Cloudtail" but "Fulfilled by Amazon."
Who is the Principal for the sale value?
Cloudtail.
Amazon is acting as a Proxy/Service Provider (earning storage and delivery fees), while Cloudtail is the Principal because they bear the risk of the goods not selling
The Ind AS 115 model requires identifying "distinct" promises. What is the technical term for these promises?
Performance Obligations (POs).
A company has three types of "other" income. Match them to their textbook recognition bases:
(A) Interest
(B) Royalties
(C) Dividends
A. Interest: Time proportion basis.
B. Royalties: Accrual basis (per agreement terms).
C. Dividends: When the owner's right to receive payment is established
In the context of the "Sale of Goods," AS 9 states that revenue is recognized when the seller has transferred two specific things to the buyer.
What are they?
The property in the goods (legal ownership)
and the significant risks and rewards of ownership.
An advertising agency creates a brilliant 30-second commercial in February. The ad is scheduled to air on TV during the IPL in April.
When does the agency recognize the "Creative Fee" vs. the "Media Commission"?
Split Recognition. The Creative Fee is recognized when the ad is completed and approved.
The Media Commission is only recognized when the ad actually airs on television.
Swiggy charges a restaurant a 20% commission on a ₹1,000 order. Swiggy collects the full ₹1,000 from the customer. Does Swiggy record ₹1,000 or ₹200 as its revenue?
₹200.
In an agency relationship, revenue is only the commission, not the gross inflow.
A company ships ₹1 Crore worth of machinery to a client. While the ship is in the middle of the ocean, the destination country imposes a total import ban on those goods. The ship is forced to turn back. Can the company recognize the revenue since the goods were "shipped"?
No.
Under AS 9, revenue is recognized only when there is no significant uncertainty regarding delivery and collection.
According to AS 9, revenue is the gross inflow of cash, receivables, or other consideration arising in the course of the ordinary activities of an enterprise from three specific sources.
Name them.
1. Sale of goods
2. Rendering of services
3. Use by others of enterprise resources yielding interest, royalties, and dividends.
A product is sold with a "30-day return policy." When should they recognize the revenue?
When the return period expires or when the buyer confirms acceptance.
A lawyer is hired for a 3-stage case. Stage 1 (Filing) and Stage 2 (Arguments) are done. Before Stage 3 (Judgement), the lawyer is fired. The lawyer has a "No Refund" policy.
Can they book the full 100% fee as revenue?
No.
Only the portion relating to the stages completed (Proportionate Completion) can be booked as revenue.
If at the time of a sale, the company has significant uncertainty regarding the ultimate collection of the money, what does AS 9 require the company to do?
Revenue recognition must be postponed until the uncertainty is removed.
(If the uncertainty arises after the sale, you create a provision instead of reversing the revenue).
A company sells a machine for ₹10 Lakhs on a 2-year interest-free EMI plan. The market price for cash is actually ₹9 Lakhs. Can the company record ₹10 Lakhs as "Sale of Goods" revenue on Day 1?
NO.
Under AS 9, you can only recognize the Cash Price (₹9 Lakhs) as Sales Revenue today. The remaining ₹1 Lakh is technically Interest Income and must be spread over the 2-year credit period.
Before you can book revenue, you must have "Reasonable Certainty" about two things. One is Measurement (the amount).
What is the second one?
Collectability.
A company sells a complex industrial HVAC system. The goods are delivered to the buyer’s site on March 28th, but the technical installation (which is a significant part of the contract) isn't completed until April 5th.
Can the seller recognize revenue in the year ending March 31st?
No.
If the installation is a significant condition of the contract, revenue is only recognized when the installation is complete. Delivering the boxes isn't enough to
AS 9 allows two methods for recognizing revenue from services.
Differentiate and give an example of the Proportionate Completion Method and the Completed Service Contract Method?
Difference -
Proportionate recognizes revenue stage-by-stage as work progresses.
Completed Contract recognizes revenue only when the service is nearly or fully finished
An online electronics store,croma ,buys 1,000 iPhones from Apple. If the iPhones don’t sell, Croma loses the money. When they sell a phone for ₹80,000, do they record the full ₹80,000 as revenue?
Yes
Because they took the Inventory Risk (bought the stock) and have the power to set the price, they act as the Principal.
A publisher signs a famous chef for a cookbook and pays a "Minimum Guaranteed Royalty" of ₹5 Lakhs upfront in March. The book hasn't been written yet. Can the publisher (as the expense-side) or the Chef (as the revenue-side) record this as a completed transaction in March?
NO.
This is an Advance. For the Chef, it is "Unearned Revenue" (a liability). For the publisher, it is a "Prepaid Expense." Revenue is only recognized as the books are actually sold and the royalty is "earned.
A manufacturing company sells "Industrial Scrap" generated during production. Should this be recognized as Revenue under AS 9?
Yes.
If the sale of scrap is a regular feature of the manufacturing process, it is considered an ordinary activity and recognized as revenue.
Under Ind AS 115, when a customer pays for a product 2 years after delivery (creating a significant delay between transfer of goods and payment), the "interest" component that is separated from the transaction price is called as?
Significant Financing Component.
A wedding planner is 90% done with a project. A sudden lockdown is imposed, and the wedding is postponed indefinitely. The planner has already spent the entire budget.
Can they recognize 90% revenue based on work done?
Only if the amount is "recoverable."
AS 9 says service revenue is recognized only when no significant uncertainty exists regarding collection.
If the client is unlikely to pay for a wedding that never happened, the planner may have to recognize zero revenue and treat the costs as a loss.
A retailer receives goods on consignment (Agent). However, the contract states that any goods not sold within 60 days must be paid for by the retailer and cannot be returned. At what point does the retailer transition from Proxy to Principal?
On the 61st day.
Once the "Right of Return" expires, the Inventory Risk shifts to the retailer. From that moment, they are the Principal for that stock.
A company owns shares in an MNC. On March 30th, the MNC’s Board of Directors recommends a dividend of ₹5 Lakhs. The Annual General Meeting (AGM) to approve it is in May. Can the company record this income on March 31st?
No.
For Dividends, revenue is recognized only when the Right to Receive is established. In India, that right is only established when the dividend is declared at the AGM, not when it's recommended by the Board.