IND AS 115 aims at providing the following details related to contractual revenue and cash flows to the users of financial statements:
- The uncertainty of the revenue from customer contracts
This standard specifies accounting treatment for an individual or portfolio of contracts.
An entity should apply this standard all customer contracts except:
- Lease contract – IND AS 17
- Insurance contracts – IND AS 104
- Financial Instruments and other contractual rights or obligations – IND AS 109 & 110 etc
- Non-monetary exchanges between entities doing similar business to facilitate sales to customers
Recognition of revenue is explained as below:
a) Identifying the Contract
Following criteria should be met for accounting a contract under this standard:
- Parties to the contract have approved the contract
- Parties are committed to performing their respective obligations
- Each party’s rights and payment for the contract is identified
- A contract has commercial substance
- Probable collection of the consideration by the entity
On receipt of consideration from a customer without meeting the above conditions, an entity can recognise revenue only when either:
- The contract has been terminated and the consideration received is non-refundable or
- The entity has no remaining obligation to transfer the goods or services and the customer has paid a substantial part of consideration which is non-refundable
b) Combination of Contract
Contracts entered at or near the same time and with the same customer can be accounted as a single contract if one or more of the following criteria are met:
c) Contract Modifications
A contract modification is a change in the scope or price that is approved by the contract parties (Eg. Change order, variation or an amendment). Contract modification can be accounted as a separate contract if both the following conditions are met:
- The scope of the contract increases because of the addition of promised goods or services that are distinct
- Price of the contract increases by an amount of consideration that reflects the entity’s stand-alone selling price of the additional goods or services & any other adjustments
Contract modification can be accounted for termination of existing contract and creation of a new contract if the remaining goods or services are distinct from the goods or services transferred on or before the date of contract modification.
d) Identifying Performance Obligation
An entity should assess the goods or services promised in a contract and identify as a performance obligation each promise to transfer either:
- Good or service or
- A series of distinct goods or service that are similar and have the same pattern of transfer
Contract with the customer can include promises that are implied by an entity’s business practice apart from those explicitly stated in the contract. Performance obligation does not include activities undertaken an entity to execute the contract which does not result in a transfer of goods or services.
Distinct Goods or Services
Goods or services that are promised to a customer are distinct if both the conditions are met:
Distinct goods or services include the following:
Sale of goods produced by an entity
- Resale of goods produced by an entity
- Performing a contractually agreed-upon task
- Resale of rights to goods or services purchased by an entity
- Constructing, manufacturing or developing an asset on behalf of a customer etc
Goods or services (not distinct) can be combined with other goods or services and in some cases, an entity might account for all the goods or services in a contract as a single performance obligation.
e) Satisfaction of Performance Obligation
Revenue should be recognised when (or as) the entity satisfies a performance obligation by transferring a promised goods or services to a customer (customer obtains control). For each performance obligation, an entity should determine the following:
Goods and services are assets even when they are received and used momentarily. Control over an asset is the ability to direct the use of and obtain substantially all of the remaining benefits from the asset. To evaluate whether the customer has the control over an asset, the entity should consider any agreement or repurchase the asset.
f) Measuring progress of satisfaction – Revenue Recognition
Each per performance obligation satisfied over time, revenue should be recognised by measuring the progress of complete satisfaction at the end of every reporting period. An entity should use the single method consistently for such measurement.
Two types of methods used are input method and output method which an entity should consider based on the nature of the goods or services. Following points to be noted:
- When applying method, excluding goods or services for which control is not transferred
- Update the measure of progress to reflect any changes in the performance obligation outcome
- Recognise revenue only if the entity can reasonably measure its progress, if not recognise only the cost incurred
An entity shall recognise the amount of allocated transaction price as revenue once a performance obligation is satisfied. Transaction price which can be fixed or variable amount is determined based on the terms of contract and entity’s customary practice.
a) Variable Consideration
If the consideration includes a variable amount, an entity should estimate the amount of consideration to which it will be entitled in exchange for transferring the promised goods or services to a customer. Estimation can be done using any of the two methods being:
- The expected Value – the sum of probability-weighted amounts in a range of possible consideration
- The Most Likely Amount – single most likely outcome of the contract
b) Constraining estimates of Variable Consideration
In assessing the uncertainty related to variable consideration, an entity should consider both the likelihood and the magnitude of revenue reversal. Following are the factors that indicate the high probability of revenue reversal related to the amount of consideration:
- High susceptibility to factors outside entity’s control
- Uncertainty exists and it’s expected to resolve for a long time
- Entity’s experience has limited predictive value
- Has a large range of possible consideration amounts etc.
c) The existence of a significant financing component
In determining the transaction price, an entity should adjust the promised amount of consideration for the time value of money if significant financing components exist.
In assessing if a contract contains a significant financing component; an entity should consider the relevant facts including both of the following:
- Difference between the amount of promised consideration and the cash selling price of the goods or services.
- The combined effect of the prevailing interest rate in the market and expected length of time between when the transfer of goods or services and the time when the customer makes the payment.
d) Non-Cash Consideration
When customer promises to pay consideration other than in cash form, an entity should measure it at fair value. If fair value cannot be reasonably measured, then entity should measure the consideration indirectly by reference to the stand-alone selling price of the goods or service in exchange for consideration.
e) Consideration payable to Customer
Consideration payable to the customer includes cash amounts, credits or other items (voucher or coupon) and entity account it as a reduction of transaction price (revenue). An entity should recognise the reduction of revenue when (or as) either of the following events occurs:
- Recognises revenue for the transfer of related goods or service to the customer
- Pays or promises to pay the consideration
Allocation of Transaction Price to Performance Obligation
Entity should allocate the transaction price to each performance obligation identified in a contract on a relative stand-alone selling price basis (It is the price at which an entity would sell a promised good or service separately to a customer). If this price is directly not available, it should be estimated using methods such as:
- The adjusted market assessment approach
- Expected cost plus margin approach
- Residual approach
5. Contract Cost
Incremental cost of obtaining a contract with a customer – Entity should recognise as an asset if the entity expects to recover those costs. These are expenses which an entity would not have incurred if the contract had not been obtained (eg. sales commission)
Cost to fulfil a contract – Entity should recognise an asset from the cost incurred to fulfil a contract if those costs:
- Relate directly to a contract that an entity can specifically identify
- Generate or enhance resources of the entity used in satisfying the performance obligation in future.
- Is expected to recover
“When either party to a contract has performed, en entity shall present the contract in the balance sheet as a contract asset or a contract liability, depending on the relationship between the entity’s performance and the customer’s payment. An entity shall present any unconditional rights to consideration separately as a receivable.”
|1||Customer pays (or due to pay) consideration an entity has an unconditional right to the consideration before the transfer of goods or service||
Entity should present the contract as a contract liability
Entity transfers the goods or services before the customer pay (or due to pay)
Entity should present the contract as a contract asset, exclude any amount presented as receivable
An entity should disclose qualitative and quantitative information about all of the below: