What is Ind AS-115?”Revenue from Contracts with Customers”

On 28 March 2018, the MCA notified Ind AS 115, a new revenue recognition standard that replaces existing Ind AS 11 and Ind AS 18. The new standard also replaces guidance notes on real estate revenue recognition. Ind AS 115 is applicable from 1 April 2018, i.e., FY 2018–19.

Objectives of Ind AS-115

The objectives of Ind AS 115 is that revenue needs to be recognized when an entity transfers the control of goods and services to customers at an amount that the entity expects to be entitled to.

Applicability of Ind AS-115

An entity shall apply this Standard to all contracts with customers, except the following:-

  • Lease contracts (refer to IND AS 17)
  • Insurance contracts (refer to IND AS 104)
  • Financial instruments and other contractual rights or obligations (refer to IND AS 109, IND AS 110 / 111, IND AS 27, and IND AS 28)
  • Certain non-monetary exchanges.

Core Principle of Ind AS-115

Ind AS 115 is based on a five-step model shown below:-

Step 1 – Identify the contract with the customer.
Step 2 – Identify performance obligation in the contract.
Step 3 – Determine Transaction Price.
Step 4 – Allocate The transaction price to performance obligation.
Step 5 – Recognize revenue when the entity satisfies its performance obligations.

Step 1 – Identify the contract with the customer:-

Contract is an agreement between two or more parties that creates enforceable rights and obligations. This Standard defines a ‘contract’ and a ‘customer’ and specifies five mandatory criteria to be met for the identification of a contract.

  • (i) the parties to the contract have approved the contract (in writing, orally or in accordance with other customary business practices)and are committed to performing their respective obligations;
  • (ii) the entity can identify each party’s rights regarding the goods or services to be transferred;
  • (iii) the entity can identify the payment terms for the goods or services to be transferred;
  • (iv) the contract has commercial substance (i.e, the risk, timing or amount of the entity’s future cash flows is expected to change as a result of the contract); and
  • (v) It is probable that the entity will collect the consideration due under the contract.

Step 2 – Identify performance obligation in the contract:-

Performance obligation is a promise to transfer to a customer-

  • A good or service (or bundle of goods or services) that is distinct or
  • A series of goods or services that are substantially the same and are transferred in the same way

Note:-If a promise to transfer a good or service is not distinct from other goods & services in a contract, then the goods or services are combined into a single performance obligation.

Step 3 – Determine Transaction Price:-

The transaction price is the amount of consideration an entity expects to be entitled to in exchange for transferring the promised goods or services (not amounts collected on behalf of third parties, e.g. excise duty, GST, or other value-added taxes).

The transaction price may be affected by the nature, timing, and amount of consideration, and includes consideration of significant financing components, variable components, amounts payable to the customer (e.g. refunds and rebates), and non-cash amounts.

This Standard uses the transaction price approach instead of the fair value approach in Ind AS 18 while determining the amount of consideration.

Step 4 – Allocate The transaction price to performance obligation:-

The transaction price (determined in Step 3) is allocated to each performance obligation (determined in Step 2) based on the stand-alone selling price of each performance obligation.

The stand-alone selling price is the price at which an entity would sell a promised good or service separately to a customer.

If the stand-alone selling price(s) are not observable, they are estimated using:-

  • The adjusted market assessment approach
  • Expected cost plus margin approach
  • Residual approach

Step 5 – Recognize revenue when the entity satisfies its performance obligations.

The transaction price allocated to each performance obligation (determined in Step 4) is recognized as or when the performance obligation is satisfied, either
(i) Over time, or
(ii) At a point in time.

(i) Recognizing Revenue Overtime (Applies if any of the following three criteria are met);-

  • (a) Customer simultaneously receives and consumes all of the benefits (for e.g. many recurring service contracts such as cleaning services).
  • (b) The entity’s work creates or enhances an asset (for e.g. Work in progress) controlled by the customer
  • (c) The entity’s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date.

(ii) Recognizing Revenue at a Point of Time;-

Revenue is recognised at a point in time if the criteria for recognising revenue over time are not met.

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