Revenue recognition

The rule that decides when a sale counts as revenue. Under the current standard, revenue is recognised when control of the goods or service passes to the customer, which can be at a moment or spread across time.

A software firm signs a ₹24,00,000 annual contract on 1 April and collects the whole amount upfront. It cannot book ₹24,00,000 of April revenue. Control passes month by month, so ₹2,00,000 becomes revenue each month and the rest sits as deferred revenue, a liability, until it is earned.

Contrast that with a furniture maker delivering a container of chairs. Control passes on delivery, so the whole invoice is revenue that day.

Where the policy gets genuinely hard is in long contracts and in arrangements with several parts. A construction company recognises revenue as the work progresses rather than at handover, which means it books profit on an estimate of how complete the project is and how much it will finally cost. Both estimates are management's, both are revised as the project runs, and a revision can move a year's reported profit substantially. That is not a defect in the standard so much as an unavoidable consequence of measuring a three-year project in one-year slices.

The policy sits in the notes to the accounts, and it is worth reading before any growth number is believed. Two companies with identical cash collections can report very different revenue if their recognition points differ.