Ind AS 115 - Revenue from Contracts with Customers
Summary of Ind AS 115 - Revenue from Contracts with Customers, covering the 5-step model and special topics.
Ind AS 115
Revenue from Contracts with Customers
1. Objective
To report useful information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
2. Scope & Exclusions
Applies to all contracts with customers, EXCEPT:
- Lease contracts (Ind AS 116)
- Insurance contracts
- Financial instruments
- Non-monetary exchanges between entities in the same line of business
3. Meaning of Customer
A party that contracts with an entity to obtain goods/services that are outputs of the entity’s ordinary activities in exchange for consideration.
The 5-Step Revenue Recognition Model
Conditions (All must be met)
- Approved by both parties
- Each party’s rights identified
- Payment terms identified
- Commercial substance exists
- Collection of consideration is probable
Even if the criteria are not met, revenue may be recognised if:
- Entity has transferred goods/services AND
- No remaining obligations AND
- Consideration is non-refundable
A PO is a promise to transfer a distinct good/service OR a series of distinct goods/services.
Criteria for DISTINCT
- Customer can benefit from the good/service on its own (or with available resources).
- Promise to transfer is separately identifiable from other promises.
NOT Distinct If:
- Significant integration service provided.
- One good significantly modifies another.
- Highly interdependent.
📌 Series Guidance: Similar services transferred over time (e.g., technical support for 3 years) = Single PO.
Specific Situations in Step 2
Customer Options
Material Right = Separate PO
(e.g., Discount vouchers, loyalty points)
Accounting: Allocate price to option. Recognise when exercised or expired.
Consignment Arrangements
Revenue NOT recognised on delivery to dealer if:
- Entity controls product
- Dealer has right to return
- Entity can redirect product
Upfront Fees
Non-Refundable:
- Relates to future services → Advance Payment
- Relates to transferred service → Revenue
(e.g., Gym membership, Activation fee)
Principal vs Agent
| Principal | Agent |
|---|---|
| Controls good/service before transfer | Facilitates transfer |
| Recognise Gross Revenue | Recognise Net Commission |
| Indicators: Primary responsibility, Inventory risk, Pricing discretion | Indicators: No inventory risk, fixed fee |
The amount the entity expects to be entitled to.
1. Variable Consideration
(Bonuses, discounts, penalties, refunds)
Methods:
- Expected Value: For many outcomes.
- Most Likely Amount: For two outcomes.
Include only if highly probable that significant reversal will not occur.
2. Significant Financing Component
Exists if significant benefit of financing due to time gap.
Accounting: Interest recognised using EIR.
Exclude if:
- Advance at customer discretion.
- Gap < 1 year (Practical expedient).
3. Non-Cash Consideration
Measured at Fair Value.
If FV unreliable → Use Standalone Selling Price (SSP).
FV change due to form = Ignore.
FV change due to other reasons = Variable consideration rules.
4. Payable to Customer
(Coupons, Rebates, Slotting fees)
Treatment: Reduce Transaction Price.
Exception: Unless payment is for a distinct service received from customer.
Sales with Right of Return
Recognise:
- Revenue (excluding expected returns)
- Refund Liability (Amount returned to customer)
- Asset for right to recover goods (Cost - recovery cost)
*Restocking fees reduce the refund liability.
Warranties
Assurance Warranty
Quality assurance.
Treatment: Provision as per Ind AS 37.
Service Warranty
Additional service.
Treatment: Separate PO (Allocate transaction price).
Allocation based on relative Standalone Selling Prices (SSP).
Change in Price: Allocate on same basis as original. Bonus changes → Re-allocate.
When Control Transfers
Indicators of Control
- Right to payment
- Legal title
- Physical possession
- Significant risks & rewards
- Customer acceptance
Recognise OVER TIME
If ANY ONE is met:
- Customer simultaneously receives & consumes benefits.
- Asset created has no alternative use AND enforceable right to payment.
- Customer controls asset as it is created.
Methods: Input Method or Output Method.
Special Topics
Bill-and-Hold Arrangements
Revenue recognised only if all met:
- Substantive reason for bill-and-hold
- Product identified separately
- Ready for physical transfer
- Entity cannot use or redirect
Repurchase Agreements
| Type | Accounting Treatment |
|---|---|
| Forward / Call Option (Entity obligation/right to repurchase) |
|
| Put Option (Customer right to return) |
|
Contract Costs
1. Acquisition Cost
Incremental costs (e.g., Commission).
Treatment: Capitalise & Amortise.
2. Fulfilment Cost
Directly related, enhances resources, recoverable.
Treatment: Capitalise assets.
Service Concession (SCA)
Infrastructure not recognised as PPE by operator.
Financial Asset Model:
Operator has right to receive cash (Guaranteed).
Intangible Asset Model:
Operator has right to charge users (Demand risk).
Licensing of Intellectual Property (IP)
1. Right to Access (Dynamic IP)
IP changes throughout the period.
Entity activities significantly affect IP.
Revenue: Over Time
2. Right to Use (Static IP)
IP exists at a point in time.
Entity has no remaining obligation to change IP.
Revenue: Point in Time
Contract Modification
Separate Contract if:
- Adds distinct goods/services AND
- Price reflects Standalone Selling Price (SSP).
Otherwise:
- Prospective Adjustment: Remaining goods are distinct.
- Cumulative Catch-up: Remaining goods are NOT distinct.
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