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CA Intermediate · Advanced Accounting · AS 9 Revenue Recognition

Zenith Software Ltd licenses software to a client for a royalty of 5% of the client's sales under a three-year agreement dated 1 April 2024. The client's sales for 2024-25 were ₹80,00,000, and the client's statement was received on 15 April 2025, before Zenith approved its accounts. How should Zenith account for the royalty in 2024-25?

Zenith should recognise ₹4,00,000 as royalty revenue in 2024-25. AS 9 requires royalties to be recognised on an accrual basis according to the substance of the agreement. At 5% of the client's sales of ₹80,00,000, the royalty has accrued for that year irrespective of when cash or the statement is received.

  1. ARecognise ₹4,00,000 as revenue in 2024-25, as royalties accrue in accordance with the agreementCorrect
  2. BRecognise nothing until cash is received
  3. CRecognise ₹12,00,000 by spreading expected three-year royalty equally
  4. DRecognise ₹4,00,000 only in 2025-26 when the statement was received

Explanation

AS 9 requires royalties to be recognised on an accrual basis in accordance with the terms of the relevant agreement. Royalty = 5% × 80,00,000 = ₹4,00,000 for 2024-25, and the statement received before approval of accounts confirms the amount. Option 4 wrongly uses the date of the statement; option 3 uses unsupported estimates.

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