Ind As Ppts PDF

Presentation on Impact of Ind
AS on Construction and Real

Estate sector
12 May 2018
CA Amit Kumar Agarwal

Agenda
 Key accounting challenges in Construction and Real Estate Sector
 Ind AS 115: The five-step model
 Measure of progress
 Claims and variations
 Variable consideration
 Loss-making contracts
 Discounting of retention money & Mobilization Advance
 Accounting for Service concession arrangement
 Transition adjustments
 Introduction of RERA Act and impact of Ind AS 115

Key accounting challenges in
Construction and Real Estate Sector
 Idenfication of appropriate accounting policy for revenue recognition which reflects the entities operating performances.
 Estimation of contract budgets to compute percentage of completion method.
 Maintenance of voluminous records at site to identify stage of completion.
 Significant judgment is accounting of claims, variation and incentives.
 Segmentation and combination of identical contracts.
 Recognition of expected losses (more complex in entities following survey method).
 Accounting of contract loaded at site but not installed
 Accounting of contracts under Joint venture (assessment of joint relationship between Operations and Ventures).
Indian Accounting Standard (Ind
AS) 115 : Revenue from
Contracts with Customers
Ind AS 115 ‘Revenue from contracts with customers’ replaces Ind AS 18 “Revenue” and Ind AS 11 “Construction
contracts” and related interpretations.
Revenue is recognised when a customer obtains control of goods or services, i.e. when the customer has the ability to
direct the use of and obtain the benefits from the goods or services.
Step 1: Identify the contract(s) with the customer
Step 2: Identify the performance obligations in the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance obligations
Step 5: Recognize revenue when (or as) each performance obligation is satisfied
Ind AS 115: Measure of progress
For each performance obligation that is satisfied over time, an  Under IAS 11, no specific method is mandated for assessing the stage of
entity selects a single measure of progress. The objective is to completion, but an entity is required to use a method that measures the work
depict the transfer of control of the good or service to the performed reliably.
customer.
 The methods described under IAS 11 are broadly consistent with those
outlined in the Ind AS 115.
 However, Ind AS 115 provides additional guidance, which notes that if an

Input method entity’s chosen measure of progress results in the recognition of a material
 Costs incurred amount of work in progress, then that measure of progress is inappropriate.
 Labour hours
 Typically, it is expected work in progress for an over-time performance
Output method obligation to be expensed as incurred because control of the property passes
 Surveys to the customer as work progresses.
 Milestones reached
 For example, an entity that currently uses a milestone method under IAS 11
Select a method that depicts the entity’s performance should consider whether that method depicts progress towards satisfaction of
the performance obligation appropriately, especially if the milestones are
widely spread.
There may be more than one method that depicts
performance. However, the selection of the method is not a
free choice.
The new standard also provides specific guidance on the treatment of uninstalled materials, which requires revenue
recognition at a zero margin when control of those materials passes to the customer.
Under IAS 11, materials that have not yet been installed are excluded from contract costs when determining the stage
of completion of a contract and recognised as an asset until installed.
Therefore, recognising revenue on uninstalled materials at a zero margin under the new standard may result in
changes to a construction company’s revenue profile – and also its profit profile.
The adjustment to the cost-to-cost measure of progress for uninstalled materials is generally intended to apply to a
subset of goods in a construction-type contract – i.e. only to those goods that have a significant cost relative to the
contract and only if the entity is essentially providing a simple procurement service to the customer.
Judgment is required in determining whether a customer is obtaining control of a good ‘significantly’ before receiving
services related to the good.
- Example
Contractor P entered into a contract with Customer Q to refurbish a building, including the installation of new
elevators, for total consideration of 6,000. The consideration is payable at two milestones – on installation of the
elevators and on completion of works. The following facts are relevant:
- The consideration is payable at two milestones – on installation of the elevators and on completion of works.
- The refurbishment service, including the installation of elevators, is a single performance obligation that is
satisfied over time.
- Q obtains control of the elevators when they are delivered at site, however, these elevators are not expected to be
installed until June 2018.
- P also delivers similar materials to the site in anticipation of future activity.
At 31-Mar-18, the estimated total cost of the project is 4,500.

Upto 31-Mar-18 Project costs of 3,000 were incurred comprising: Elevators 1,500, Construction costs 1,000, Materials
not yet used in construction 500.
– Solution
As part of applying the cost-to-cost method, P analyses the costs incurred during the period to determine if any of the costs
should be excluded from the measure of progress. P concludes that:
–– including the cost of the elevators in the measure of progress on the contract would overstate the extent of its performance.
Consequently, it adjusts its measure of progress to exclude these costs from the costs incurred and makes a corresponding
adjustment to the transaction price. However, as control of elevators has transferred to the customer, P recognises revenue for
the transfer of elevators at a zero margin.
–– the materials not yet used in construction should be excluded from the measure of progress on the contract because they are
homogeneous in nature and could be deployed in another construction project. Control has therefore not yet transferred to Q. P
recognises the construction materials as inventory.
–– the construction costs of 1,000 depict the entity’s performance and are therefore included in the measure of progress.
At 31 March 2018 P determines that its performance is 33% complete (1,000 ÷ 3,000) and recognises revenue of 3,000 (33% x
4,500 + 1,500) and costs of 2,500 (3,000 – 500).
Ind AS 115: Claims and
variations
A contract modification is a change in the scope or price of a contract, or both. It may be described as a
change order, a variation, or an amendment. The flow chart below provides an overview of the
requirements.
 Under the new standard, a contract’s
modifications need to give rise to enforceable
rights and obligations before they can be
accounted for.
 This may be a higher threshold than was

previously applied by some entities when
accounting for claims and variations.
 Determining whether a modification is

enforceable requires an entity to consider all
related facts and circumstances, including the
terms of the contract and relevant laws and
regulations.
Ind AS 115: Variable
consideration
Items such as price concessions, incentives, performance bonuses, completion bonuses, price adjustment clauses,
penalties, discounts, refunds, rights of return, credits, or similar items may result in variable consideration.
Expected value The entity considers the sum of probability-weighted amounts for a
range of possible consideration amounts. This may be an appropriate
estimate of the amount of variable consideration if an entity has a
large number of contracts with similar characteristics.
More likely amount The entity considers the single most likely amount from a range of
possible consideration amounts. This may be an appropriate estimate
of the amount of variable consideration if the contract has only two
(or perhaps a few) possible outcomes.
The method used by the entity to estimate variable consideration is not an accounting policy choice. The entity
should select the method that best predicts the amount of consideration the entity expects to receive.
Ind AS 115: Loss-making
contracts
The new standard does not include specific guidance on the accounting for onerous revenue contracts or other contract
losses. Instead, an entity applies the guidance in Ind AS 37.
Current Ind AS deals with loss-making revenue contracts in two standards:

Under IAS 37 a provision for loss is recognized when the unavoidable costs of meeting the obligations under a contract exceed the
economic benefits. Ind AS 37 includes a specific prohibition on recognising provisions for future operating losses. Ind AS 115
withdraws Ind AS 11 so that accounting for all loss-making contracts now falls under a single standard – Ind AS 37.
It is not clear how the prohibition on recognising provisions will affect current practice under Ind AS 11 where an expected contract
loss is recognised immediately.
Under Ind AS 11, expected contract losses are generally taken to be the full costs of fulfilling the contract – e.g. including attributable
overheads. Under Ind AS 37, an entity considers the ‘unavoidable costs’ of fulfilling an obligation when identifying onerous contracts
and measuring any required provision. Ind AS 37 does not explain what is meant by ‘unavoidable costs’, except for noting that they
reflect ‘the least net cost of exiting from the contract’ – i.e. the lower of the cost of fulfilling it and any compensation or penalties
arising from failure to fulfil it.
Ind AS 115: Discounting of
retention money (EAC Opinion)
Retentions are amounts of progress billings that are not paid until the satisfaction of conditions specified in the contract for the payment of such
amounts or until defects have been rectified.
As per para 9 of Ind AS 18 and para 12 of Ind AS 11 “revenue is measured at the fair value of the consideration received or receivable”. In this
regard, para 11 of Ind AS 18 states as below:
when the inflow of cash or cash equivalents is deferred, the fair value of the consideration may be less than the nominal amount of cash received
or receivable. When the arrangement effectively constitutes a financing transaction, the fair value of the consideration is determined by
discounting all future receipts using an imputed rate of interest.
One has to evaluate whether the retention money is for the purpose of meeting performance obligation (as per paragraph 2 above) or whether it
constitutes a financing transaction.
Where the retention money represents the cost of expected rectification work, should not be discounted (and should not be recognised as revenue
unless such performance obligation is satisfied).
While concluding on the query, the Committee opined that where the effect of the time value of the money is material, deferred debtors due to
retention money should be discounted in order to arrive at the fair value of the consideration received or receivable.
Further, whether the effect of the time value of money is material or not should be determined on an overall consideration of total cash flows
including advance payments, etc.
Ind AS 115: Discounting of
Mobilisation Advance (ITFG 14)
Ind AS 18, Revenue requires entities to measure revenue ‘at the fair value of the consideration received or receivable’. When the inflow of
cash is deferred, the fair value of the consideration may be less than the nominal amount of cash received or receivable (eg: interest-free
credit to the buyer). In such case, the fair value of the consideration is determined by discounting all future receipts using an imputed
rate of interest.
An analogy must be drawn from the above paragraph and accordingly, when the entity has received advance payments from the customer
for providing promised goods or services, then it must evaluate whether the payment terms provide it with a significant benefit of
financing.
While making such an evaluation judgement is to be exercised and consideration be given to factors such as whether:
 the arrangement has been entered in the normal course of business;
 the advance payment is per typical payment terms within industry;
 having a primary purpose other than financing; and
 it is a security for a future supply of limited goods or services or other relevant factors depending on facts and circumstances of each
case.
If it is concluded that the arrangement does effectively constitute a significant financing component, i.e., a loan provided by the customer
to the supplier for providing the promised goods, then the entity should adjust the consideration (including advance payments) for the
effect of time value of money.
Ind AS 115: Transition
adjustments
Retrospective method (with An entity can choose to apply the new standard either from the start of the earliest comparative period presented (retrospective
optional practical approach) or from the start of the current period (cumulative effect approach).
expedients)
If an entity applies the new standard from 1 January 2018 and presents one year of comparative information, under the
retrospective approach it would present revenue for both 2017 and 2018 in accordance with the new standard and adjust retained
earnings at 1 January 2017. Under the cumulative effect approach, the entity would present only the current year, 2018, in
accordance with the new standard and adjust retained earnings at 1 January 2018.
It is also important to note that the transition approach and practical expedients are applied at the entity level – i.e. they cannot
be used on a contract by contract basi
Cumulative effect method Under either approach, an entity can choose to apply the standard only to those contracts that are not complete at the transition
date. The new standard defines a completed contract as a contract for which the entity has transferred to the customer all the
goods or services identified under Ind AS 11, Ind AS 18 and related interpretations. This means that construction contracts are
generally considered complete when the entity has finished construction of the asset and the customer has accepted it.
If an entity has a small population of multi-year projects, then the choice of transition approach and use of the completed
contracts practical expedient may result in little difference on transition, because there may be limited differences in the contracts
considered in the scope of the new standard.
Accounting for Service
concession arrangement
SCA are typically arrangements between a private sector entity (the operator) and a public sector entity (the grantor) where the operator
constructs the infrastructure used to provide public services or, alternatively upgrades, operates and maintains the existing infrastructure for a
specified period of time
Key highlights:
1. Significant judgment on fair value of the service rendered and expected dates of cash flows
2. Asset classified as PPE earlier seen as assets owned by the Company will be classified as intangible asset in the financial statements
3. SCA may also result in recognition of financial assets which are recognized on discounted cash flow basis.
4. Company will be able to show better turnover : pertaining to construction activity
5. Margins are not eliminated in the consolidated financial statements
6. Would result in lower PAT due to higher deprecation charge in the consolidated financial statements
7. Recognition of revenue during construction phase needs to be evaluated
8. In case of Annuity model, borrowing cost will not be eligible to be capitalized.
9. Provision for contractual obligation to restore the infrastructure facility to a specified level of serviceability.
Under Indian GAAP, the ICAI had issued an exposure draft on accounting for Services Concession Arrangement. Fully guidance on
accounting of SCA has been included Appendix C of Ind AS 11
Accounting for Service
concession arrangement
SCA are typically arrangements between a private sector entity (the operator) and a public sector entity (the grantor) where the operator
constructs the infrastructure used to provide public services or, alternatively upgrades, operates and maintains the existing infrastructure for a
specified period of time
Key highlights:
1. Significant judgment on fair value of the service rendered and expected dates of cash flows
2. Asset classified as PPE earlier seen as assets owned by the Company will be classified as intangible asset in the financial statements
3. SCA may also result in recognition of financial assets which are recognized on discounted cash flow basis.
4. Company will be able to show better turnover : pertaining to construction activity
5. Margins are not eliminated in the consolidated financial statements
6. Would result in lower PAT due to higher deprecation charge in the consolidated financial statements
7. Recognition of revenue during construction phase needs to be evaluated
8. In case of Annuity model, borrowing cost will not be eligible to be capitalized.
9. Provision for contractual obligation to restore the infrastructure facility to a specified level of serviceability.
Under Indian GAAP, the ICAI had issued an exposure draft on accounting for Services Concession Arrangement. Fully guidance on
accounting of SCA has been included Appendix C of Ind AS 11
Introduction of RERA Act and
impact of Ind AS 115
Salient features of RERA: Obligations of the developer
• Prior registration with Real Estate
Regulatory Authority (RERA) Legal title to land along with legally valid documents if land is
owned by another person
• Covers both Residential and
Commercial real estate
Promoter to advertise for sale only after mandatory registration
• Applies to Ongoing and Incomplete
and Future projects Adherence to approved plans and project specifications
• Ongoing projects are projects for
which a Completion Certificate has Completion of project within prescribed timelines
not been issued as on date of
notification 70% of amounts realized to be deposited in a separate account
• Phased development of a Real Withdrawal of amounts permitted only after certification by an
estate project – Each phase to be Engineer/ Architect/ CA
considered as a stand-alone real
estate project Promoter to get accounts audited after every 6 months
• Act provides for establishment of
Central Advisory Council to advise Cannot accept >10% as advance payment from customer without
on implementation of Act, policy ‘Agreement for Sale’.
questions, protection of consumer
interest and growth and Sale on the basis of ‘Carpet Area’ vis-à-vis ‘Super built-up Area’
development of the sector
Accounting of revenue for Real Estate Sector would undergo a significant change under Ind AS 115 and
due to implication of RERA.
Thank You
The new revenue recognition
standard
Ind AS 115 Revenue from Contracts with
Customers
Agenda
► Overview and scope

► Five step model
► Step 1: Identify the contract
► Step 2: Identify performance obligations
► Step 3: Determine the transaction price
► Step 4: Allocate the transaction price
► Step 5: Recognise revenue when (or as) performance obligations are satisfied
► Other matters for considerations
► Transitional provisions
► Presentation and Disclosure
Page 2 The new revenue recognition standard

Overview and scope

Overview
► Noting several concerns with existing revenue requirements for both

IFRS and US GAAP, the Boards decided to develop a joint revenue
standard that is intended to:
► Remove inconsistencies and weaknesses in current revenue
requirements
► Provide a more robust framework for addressing revenue issues
► Improve comparability of revenue recognition practices across
companies, industries, jurisdictions and capital markets
► Simplify the preparation of financial statements by reducing the
number of requirements to which an entity must refer
► Provide more useful information to users of financial statements
through improved disclosure requirements
New framework
Transfer of control
Scope and exceptions
What is in scope or affected by the standard

► Contracts with customers
► Sale of some non-financial assets that are not an output of
the entity’s ordinary activities (e.g., property, plant and
equipment, investment property, intangibles)
What is not in scope

► Leasing contracts
► Insurance contracts
► Financial instruments contracts and certain other contracts
► Certain non-monetary exchanges
► Certain put options on sale and repurchase agreements

Summary of the model
► Core principle: Recognise revenue to depict the transfer of

promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services
Step 1: Identify the contract(s) with the customer
Step 2: Identify the performance obligations in the contract
Step 4: Allocate the transaction price to the performance obligations
Step 5: Recognise revenue when (or as) each performance obligation is

satisfied

Step 1: Identify the contract

… collection of consideration is probable
A contract … rights to goods or services and payment terms

can be identified
exists if …
… it is approved and the parties are committed
to their obligations
… it has commercial substance
► A contract is defined as an agreement between two or more parties

that creates enforceable rights and obligations
► Can be written, oral or implied, but must meet specific criteria
► Does not exist if both parties can cancel without penalty

Combining contracts
► Contracts entered into at or near the same time with the same
customer must be combined if one or more of the following conditions
are met:
► They were negotiated as a package with a single commercial objective
► Consideration to be paid in one contract depends on the price or
performance of the other contract
► Some or all of the goods or services promised in the contracts are a single
performance obligation
► Contracts may be combined in a portfolio with similar characteristics if
the entity reasonably expects the effects on the financial statements
would not materially differ

Step 2: Identify performance obligations

► A performance obligation is a promise (explicit or implicit) to transfer a

distinct good or service to a customer
► Performance obligations are identified at contract inception and
determined based on:
► Contractual terms
► Customary business practices
► Incidental obligations or marketing incentives may be performance
obligations (e.g., ‘free’ maintenance provided by automotive
manufacturers, loyalty points provided by a hotel)
► Does not include activities to satisfy an obligation (e.g., set-up
activities) unless a good or service is transferred
► A series of goods or services that are substantially the same and
have the same pattern of transfer is a single performance obligation if
criteria are met

(cont.)
Two-step model to identify which goods or services are distinct
Step 1 - Focus on whether Step 2 - Focus on whether

the good or service is the good or service is
capable of being distinct distinct in the context of
the contract
Customer can benefit from ► Evaluate whether multiple promised

the individual good or service goods or services work together to
on its own deliver a combined output(s)
► Assess whether the good or service
OR is integrated with, highly
Customer can use good or interdependent on, highly
service with other readily interrelated with, or significantly
modifying or customising, other
available resources
promised goods or services in the
contract

Example : Identify performance obligations
Multiple performance obligations in a contract
► Entity enters into a contract to manufacture and install customised

equipment and provide maintenance services for a five-year period
► Installation services include the integration of multiple pieces of
equipment at the customer’s facility in order for the equipment to
operate as a single unit
► Equipment cannot operate without installation
► Entity sells equipment and installation services together; does not sell
installation separately
► Other vendors can provide the installation services
► The maintenance services are sold separately

(cont.)
Step 1 – Capable of being Step 2 – Distinct in the context

distinct of the contract
Good cannot be used without Equipment and installation are highly
installation, but customer can obtain interrelated. Significant customisation is
Equipment installation from another source. Good is required during installation. Good isn’t
distinct. Move to Step 2. distinct on its own because it must be
combined with installation.
Installation can be provided by multiple See discussion above. Equipment and

Installation vendors, so service is distinct. Move to installation are not distinct from one
Step 2. another.
Services have a distinct function Services are not highly interrelated. No

because they are sold separately. Move integration, modification or customisation
Maintenance to Step 2. required. Services are individually
distinct.
► In this example, there are two performance obligations: (1) the equipment and the installation
because they are distinct within the context of the contract; (2) maintenance services because they
are distinct services.

► Contractor enters into a contract to design and build a house for a

new homeowner.
► Contractor is responsible for the overall management of the project
and identifies various goods and services that are provided, including
architectural design, site preparation, construction of the home,
plumbing and electrical services, and finish carpentry.
► Contractor regularly sells these goods and services individually to
customers.
How many performance obligations are there in the contract?

Solution: Identify performance obligations
► The promised goods and services are capable of being distinct

because the homeowner could benefit from the goods or services
either on their own or together with other readily available resources.
► This is because Contractor regularly sells the goods or services
separately to other homeowners and the homeowner could generate
economic benefit from the individual goods and services by using,
consuming, or selling them.
► However, the goods and services are not distinct within the context of
the contract because they are not separately identifiable from other
promises in the contract.
► Contractor provides a significant service of integrating the various
goods and services into the home that the homeowner has contracted
to purchase.

Customer options to acquire additional
goods and services – Material rights
► Revenue is recognised when future goods and services are transferred

or when the option expires
► The transaction price is allocated to performance obligations (including
the option) based on relative stand-alone selling prices
► Estimate of stand-alone selling price of option reflects:
► The discount a customer receives when exercising the option, adjusted for the
discount a customer receives without exercising the option and the likelihood
the option will be exercised
► As an alternative to estimating the stand-alone selling price of the option,
an entity could evaluate the transaction assuming the option will be
exercised
► Transaction price will be determined by including any consideration estimated
to be received from the optional goods and services (variable consideration)
► Transaction price would be allocated to all goods and services (including
those under option)
► Typically applied when original and additional goods are similar

Customer options for additional goods or services
► An entity enters into a contract with a customer A to sell garden

supplies, and the arrangement includes a 40% discount voucher on
future purchases
► Simultaneous seasonal promotion gives all customers a 10%
discount, therefore, customer A receives an incremental discount of
30% (40% discount in the contract less the 10% discount available to
all customers)
► Entity determines there is an 80% likelihood of redemption and estimates
that customers will purchase (on average) INR50 of additional goods
Solution
► Entity estimates the stand-alone selling price of voucher as:
► Average purchases x incremental discount x likelihood
► INR50 x (40% – 10%) x 80% = INR12


► Transaction price is defined as the amount of consideration to

which an entity expects to be entitled in exchange for
transferring promised goods or services to a customer
► Transaction price reflects the effects of the following:
► Variable consideration (including application of the constraint)
► Significant financing component
► Consideration paid to a customer
► Non-cash consideration

Variable consideration
► Transaction price may vary because of variable consideration
Common types and events that cause consideration to be variable

Performance Incentive payments Penalties
Bonuses
Refunds Market-based fees Discounts
Returns Money-back guarantees Price concessions
Volume rebates Service level agreements Liquidating damages
Change orders Claims Success fees

Variable consideration (cont.)
► The transaction price is estimated using the approach that better

predicts the amount to which the company is entitled based on its
facts and circumstances (i.e., not a ‘free choice’)
► The approach should be applied consistently throughout the contract
and for similar types of contracts
Expected value Most likely amount
► Sum of the probability-weighted ► The single most likely amount in a
amounts in a range of possible range of possible outcomes
outcomes ► May be appropriate when the
► Most predictive when the transaction transaction will produce only two
has a large number of possible outcomes
outcomes
► Can be based on a limited number of
discrete outcomes and probabilities

Constraint on variable consideration
► Entities are required to evaluate whether to ‘constrain’ amounts of

variable consideration included in transaction price
► Objective of the constraint – include variable consideration in the
transaction price only to the extent it is ‘highly probable’ that a
significant revenue reversal will not occur when uncertainty is
subsequently resolved
► ‘Significant’ is relative to cumulative revenue recognised

Example : Determine the transaction price
► Contractor M enters into a contract to construct a corporate

headquarters for Company B for $25 million
► Contractor M will also receive a bonus or pay a penalty of
$25,000 for each day that project is completed before or after
30 June 2018, respectively
► Contractor M uses the expected value approach with the
following possible outcomes:
Possible outcomes Probability Calculated amount

Ten days early - $250,000 50% $125,000
On schedule - $0 25% $0
Five days late – ($125,000) 25% ($31,250)
Probability-weighted estimate $93,750

► Assume the same facts from previous example. Contractor M
will also receive a bonus of $200,000 if the building achieves a
green building certification level specified in the contract
► Contractor M uses the most likely amount approach to determine
whether the bonus should be included in the transaction price
because there are only two possible outcomes
► Based on its history of completing projects that achieve the
certification specified in the contract, Contractor M determines
the bonus should be included in the transaction price
► At contract inception, the total transaction price is:
Base contract price $25,000,000
Completion bonus $93,750
Green certification bonus $200,000
Transaction price $25,293,750

► Entity enters into a contract and will receive a performance bonus up

to INR100,000 if it meets specified performance targets. It estimates
the likelihood of achieving the targets as:
Possible outcomes Probability Calculated amount
INR100,000 10% INR10,000
INR80,000 30% INR24,000
INR60,000 35% INR21,000
INR40,000 10% INR4,000
- 15% -
INR59,000
► ‘Expected value’ approach is determined to be the best method, Entity

calculates INR59,000 using this method
► However, Entity must consider whether any of the INR59,000 needs
to be constrained
Variable consideration - rights of return
► Rights of return are a form of variable consideration

► Revenue recognition is limited to amounts for which it is ‘highly
probable’ a significant reversal will not occur (i.e., it is highly probable
the goods will not be returned)
► A refund liability is established for the expected amount of refunds
and credits to be issued to customers
► Corresponding asset and adjustment to cost of sales is recorded for
items expected to be returned, based on carrying amount of the asset
transferred less costs to recover
► Return assets must be recorded separately from inventory
► Return assets are subject to impairment testing

Rights of return
► Game Co sells 1,000 video games to Distributor for INR50 each.

Distributor has the right to return the video games for a full refund
for any reason within 180 days of purchase.
► The cost of each game is INR10.
► Game Co estimates, based on the expected value method, that
6% of sales of the video games will be returned and it is highly
probable that returns will not be higher than 6%.
► Game Co has no further obligations after transferring control of the
video games.
How should Game Co record this transaction?

Solution: Determine the transaction price
Rights of return
Entry Dr. Cr.

Bank (1,000x50) 50,000
Revenue (940x50) 47,000
Liability (60x50) 3,000
Cost of Sales (940x10) 9,400

Other assets (60x10) 600
Inventory (1,000x10) 10,000
► The return asset will be presented and assessed for impairment

separately from the refund liability.
► Game Co will need to assess the return asset for impairment, and
adjust the value of the asset if it becomes impaired.

Significant financing component
► Reflected as an adjustment to the transaction price when significant

and the primary purpose of the payment terms is to provide financing
to one party in the contract
► Evaluation is not required if customer is expected to pay within one year of
when control of the good or service is transferred
► If the financing component is not significant to the individual contract, the
entity is not required to adjust the transaction price
► Entity would use a financing rate that reflects the borrower’s credit risk
and expected term of the financing set at inception
► Effect of financing to be reflected separately from revenue

Advance payment
► An entity enters into a contract with a customer to sell an asset.

► Control of the asset will transfer to the customer in 2 years (ie the
performance obligation will be satisfied at a point in time).
► The contract includes two alternative payment options:
► Payment of Rs.5,000 at the end of 2nd year when the customer
obtains control of the asset; or
► Payment of Rs.4,000 when the contract is signed.
► The entity’s incremental borrowing rate is 6%
How should the financing component of the arrangement be accounted

for under Ind AS 115?

Solution: Determine the transaction price Advance
payment
► In case the customers opt to pay advance payment upon signing, it

seems that the contract contains a significant financing component
because:
► The difference between the amount of consideration under the two
options is significant (5,000 minus 4,000 i.e. 1,000)
► The expected length of time between payment of advance and
transfer of goods is significant (2 years)
► The interest rate implicit in the payment options (11.8%) is
significantly higher than the entity’s incremental borrowing rate
(6%)

Solution: Determine the transaction price Advance
payment (contd.)
► The following journal entries illustrate the accounting under Ind AS 115
Entry Dr(Rs.) Cr(Rs.)

Upon receipt of the advance on signing of the agreement:
Cash 4,000
Contract liability 4,000
Over the 2 year period until the asset is sold:
Interest expense (4,000@ 6% for 2 years) 494
Contract liability 494
Recognize revenue for transfer of assets:
Contract liability 4,494
Revenue 4,494

Consideration payable to a customer
► Entity determines whether amounts paid or payable to the

customer (e.g., cash, credit) are:
► A reduction of the transaction price and revenue
► A payment for distinct goods and services
► A combination of the two
► For an entity to treat the consideration payable to a customer
as something other than a reduction of revenue, the goods and
services from the customer must be ‘distinct’
► Reductions to the transaction price occur at the later of when:
► The entity recognises revenue for the transfer of control of the
goods or services to the customer
► The entity pays or promises to pay the consideration

► Entity enters into a contract with a customer for the exclusive

supply of paint for a three-year period
► Entity makes a CU50,000 upfront payment, which the customer
will use to customise its paint sprayers for the entity’s product
► Entity determines the upfront payment is not in respect of or for
a distinct good or service
► CU50,000 is accounted for as a reduction of the transaction price
► Entity estimates CU1,000,000 in sales with the customer over the
three-year period
► The upfront payment is deferred and recognised as a reduction
of revenue (in proportion to estimated sales) over the contract
term

► Mobile-Co sells 1,000 phones to Retailer for Rs.10,00,000. The

contract includes an advertising arrangement that requires Mobile-Co
to pay Rs.100,000 toward a specific advertising promotion that
Retailer will provide.
► Retailer will provide the advertising on strategically located billboards
and in local advertisements.
► Mobile-Co could have elected to engage a third party to provide
similar advertising services at a cost of Rs.100,000.
How should Mobile-Co account for the payment to Retailer for

advertising?

Solution: Determine the transaction price
► Mobile-Co should account for the payment to Retailer consistent with

other purchases of advertising services.
► The payment from Mobile-Co to Retailer is consideration for a distinct
service provided by Retailer and reflects fair value.
► The advertising is distinct because Mobile-Co could have engaged a
third party who is not its customer to perform similar services.
► The transaction price for the sale of the phones is Rs.10,00,000 and
is not affected by the payment made by Retailer.

Non-refundable upfront fees
► Entities may receive payments from customers before goods

or services are provided
► In many cases, upfront payments are non-refundable
► Entities must evaluate whether non-refundable upfront fees relate to
the transfer of a (future) good or service
► Fees charged for set-up activities – do not depict the transfer of services
to a customer and should be ignored when measuring progress of an
entity’s performance
► The existence of a non-refundable upfront fee may indicate
the arrangement includes an option for additional goods or services
(e.g., renewal option for future goods or services at
a reduced price)

Upfront fee
► Fit-Co operates health clubs. Fit-Co enters into contracts with customers
for 1 year access to any of its health clubs. The entity charges an annual
membership fee of Rs.6,000 as well as a Rs.1,500 non-refundable joining
fee.
► The joining fee is to compensate, in part, for the initial activities of
registering the customer.
► Customers can renew the contract each year and are charged the annual
membership fee of Rs.6,000 without paying the joining fee again.
► If customers allow their membership to lapse, they are required to pay a
new joining fee.
How should Fit-Co account for the non-refundable joining fees?

Step 4: Allocate the transaction price

Allocate based on relative stand-alone selling prices

Performance obligation 1 Performance obligation 2 Performance obligation 3
Determine stand-alone selling prices
Is observable price available?

YES NO
Use observable price Estimate price
Exceptions to the
allocation requirement: Adjusted market Expected cost plus a
► Discount
assessment approach margin
► Variable consideration Residual approach

Example : Allocate the transaction price to
performance obligations
► Entity enters into an agreement to sell hardware, professional

services and maintenance services for INR200,000
► Entity determines that each of the promised goods or services
represents a separate performance obligation
► Because the entity frequently sells professional services and
maintenance on a stand-alone basis, it uses those transactions to
determine stand-alone selling prices of INR25,000 and INR15,000,
respectively
► The entity rarely sells the hardware on a stand-alone basis, so it
estimates the stand-alone selling price at INR185,000 based on the
hardware’s underlying cost, the entity’s targeted cost and the amount
of margin the entity believes the market will bear (i.e., the expected
cost plus a margin approach)

performance obligations (cont.)
Estimated
Performance stand-alone % of relative Allocated Allocation of
obligation selling price selling price discount transaction price
Hardware INR185,000 82.2 INR(20,600) INR 164,400
Professional
services 25,000 11.1 (2,800) 22,200
Maintenance
services 15,000 6.7 (1,600) 13,400
Total INR225,000 100.0 INR(25,000) INR 200,000

► Assume the same facts as Example 1, except the arrangement

also includes software for a total fee of INR250,000
► The entity determines the software deliverable is also a
separate performance obligation
► The entity never sells the software on a stand-alone basis
► The entity has bundled the software into a number of different
arrangements, with the pricing for that element ranging from
INR15,000 to INR125,000

performance obligations (cont.)
Calculation of the stand-alone selling price of the software

using the residual approach:
Total arrangement consideration INR250,000

Less estimated stand-alone selling prices:
Hardware (185,000)
Professional services (25,000)
Maintenance services (15,000)
Stand-alone selling price of software INR 25,000

Exceptions for variable consideration
► Variable consideration is required to be allocated to one or

more (but not all) performance obligations, if both of the
following criteria are met:
► The contingent payment relates specifically to the entity’s efforts to
satisfy that performance obligation
► The amount allocated entirely to that performance obligation is
consistent with the overall principle for allocating consideration
► This exception can be applied to a single performance
obligation or a combination of performance obligations
► Subsequent changes in variable consideration should be
allocated in a consistent manner

Example : Allocate the transaction price
Exceptions for variable consideration
► Assume the same facts as in Example 2, except that the

contract price will include a INR10,000 premium if professional
services are provided within seven days of the delivery date of
the hardware and software
► The customer’s business is highly seasonal, and this
arrangement coincides with its busiest time of year
► The professional services are more valuable to the customer if
they are rendered as soon as possible
► The variable consideration relates specifically to the entity’s
efforts to satisfy the professional services performance
obligation
► The amount of the premium allocated to professional services is
consistent with the overall principle for allocating consideration

Solution: Allocate the transaction price
Exceptions for variable consideration (cont.)
Allocated fixed Total

Performance obligation transaction price Variable revenue transaction price
Hardware INR185,000 INR - INR185,000
Software 25,000 - 25,000
Professional services 25,000 10,000 35,000
Maintenance services 15,000 - 15,000
INR250,000 INR 10,000 INR260,000
Note: This example does not consider the application of the constraint on variable
consideration (a requirement under Step 3 of the model).

Exceptions for allocation of a discount
► An entity is required to allocate a discount entirely to one or

more (but not all) performance obligation(s), if all of the
following criteria are met:
► The entity regularly sells each distinct good or service (or each
bundle of goods or services) in the contract on a stand-alone basis
► The entity also regularly sells on a stand-alone basis a bundle (or
bundles) of some of those distinct goods or services at a discount
► The discount (when comparing stand-alone sales of a bundle to
stand-alone sales of the distinct goods or services) is substantially
the same as the discount in the contract and provides evidence
that the entire discount belongs to one (or some) distinct
performance obligation(s)

Step 5: Recognise revenue when (or as)
performance obligations are satisfied

Step 5: Recognise revenue when (or as)
performance obligations are satisfied
► Revenue is recognised when (or as) an entity satisfies a

performance obligation by transferring a promised good or
service to a customer
► A good or service is considered to be transferred when the
customer obtains control
► Performance obligations are either satisfied over time or at a
point in time
► To help make this determination, the standard includes criteria
for determining when control transfers over time
► If none of the criteria are met, control transfers at a point in time

Step 5: Recognise revenue as performance
obligations are satisfied over time
Control of goods and services is transferred over time
if one of the following three criteria is met:
The entity’s performance

The customer is receiving
The entity creates or does not create an asset
and consuming the
enhances an asset that with alternative use and
benefits of the entity’s
the customer controls as the entity has a right to
performance as the entity
it is created or enhanced payment for performance
performs
completed to date
Building an asset on Real Estate (if specific Routine/ recurring services

customer’s site criteria are met) eg cleaning services
If none of the criteria are met,

control transfers at a point in time

Step 5: Recognise revenue as performance
obligations are satisfied over time
► Revenue is recognised over time by measuring progress

toward completion of performance obligations
► The objective is to most faithfully depict the entity’s performance
► Select a single method for each performance obligation based on
facts and circumstances
► Output methods
► Input methods
► Apply method consistently for all similar arrangements
► If unable to reasonably estimate progress, revenue is not
recognised until progress can be estimated
► However, if entity can determine that no loss will be incurred, it
recognises revenue up to costs incurred

Step 5: Recognise revenue when (or as) performance
obligations are satisfied at a point in time
► If none of the three criteria for recognising revenue over time are met,
then the entity recognises revenue at the point in time at which it
transfers control of the good/service to the customer
Indicators that control has passed include a customer having….
… a present … physical … legal title … risks and … accepted

obligation possession rewards of the asset
to pay ownership
► None of the indicators are individually determinative and other

factors could be relevant

Step 5: Recognise revenue
Bill-and-hold arrangements
► Criteria for qualifying for revenue recognition on bill-and-hold

arrangements
► The reason must be substantive
► The product must be identified separately
► The product currently must be ready for physical transfer
► The entity cannot have the ability to use the product or to direct it
to another customer
► Entities that record revenue on bill-and-hold arrangements
should monitor developments in this area

Example : Recognise revenue
Real estate contracts
► An entity is developing a multi-unit residential complex.A customer enters into

a binding sale contract with the entity for a specified unit under construction.
► Each unit has a similar floor plan and is of a similar size, but other attributes
of the units are different (e.g., the location of the unit within the complex).
► The customer pays a non-refundable deposit upon entering into the contract
and will make progress payments during construction of the unit. The contract
has substantive terms that preclude the entity from being able to direct the
unit to another customer.
► In addition, the customer does not have the right to terminate the contract
unless the entity fails to perform as promised. If the customer defaults on its
obligations by failing to make the promised progress payments as and when
they are due, the entity would have a right to all of the consideration promised
in the contract if it completes the construction of the unit. The courts have
previously upheld similar rights that entitle developers to require the customer
to perform, subject to the entity meeting its obligations under the contract.

Other matters for consideration

Licences
► A license establishes a customer’s rights to intellectual property

(IP) of the entity
► Entity must first determine whether the license is a distinct
performance obligation in the arrangement
► For a distinct license, assess the nature of the promise
► For a license providing a right to access the IP, revenue is
recognised over time if specific criteria are met (see next slide)
► For a license providing a right to use the IP as it exists when
granted, revenue is recognised at a point in time
► Exclude the effects of other performance obligations
► Sales or usage-based royalties on licenses of IP
► Royalties cannot be recognised as revenue until the later of when
the sale/usage occurs or the performance obligation is satisfied

Determining the nature of a distinct licence
A distinct licence could represent either:
Access to the IP (over time) Right to use the IP (at a point in time)
► The entity is required (by the contract) or ► If all three criteria for access (over time)
reasonably expected (by the customer) are not met, the nature of the entity’s
to undertake activities that significantly promise is to provide a right to use the
affect the licensed IP IP as the IP exists at the point in time
► The license exposes the customer to any the license is granted to the customer
effects of the entity’s activities ► Effectively, this means the customer is
► The entity’s activities are not a able to direct the use of and obtain all
performance obligation under the remaining benefits from the licensed IP
contract when granted (i.e., the IP is static)
All criteria must be met

Example : Recognise revenue - Licences
► Pogo has created a popular television show called “Chhota Bheem”

► Pogo grants a three-year license to toy Manufacturer for use of the
character “Chhota Bheem” on its toys
► As per the contract,
► Pogo will continue to
► produce the show,
► popularize the character,
► carry out marketing activities
► Toy Manufacturer produces and sells “Chhota Bheem” toys.

Solution: Recognise revenue - Licences
► The license provides access to Pogo’s IP

► Pogo will undertake activities that significantly affect the IP by
► production and marketing of the show,
► development of the characters,
► Toy Manufacturer is directly exposed to any positive or negative
effects
► by Pogo’s activities
► how the show is received by kids and their parents
► These activities are not separate performance obligations as they do
not transfer a good or service to Toy Manufacturer separate from the
license
► Pogo will recognize revenue overtime.

Contract modifications
► A contract modification is any change in the scope and/or price

of a contract
► Accounting treatment depends on what was modified
Separate contract Part of original contract

► Scope of the contract changes ► All other modifications
due to added goods or
services that are distinct
And
► Price of the contract increases
by the stand-alone selling
price of the added goods or
services

Contract modifications
Is the contract modification for additional

goods and services that are distinct AND
at their standalone selling price?
Yes
No The new goods and services should be

treated as separate contract.
Update the transaction price and measure of progress for

No the single performance obligation (recognize change as a
Are the remaining goods
cumulative catch-up to revenue)
and services distinct from
those already provided?
Blend of two
Both yes and no
Yes
Allocate the remaining transaction price to the remaining goods and services
(transaction price for performance obligations already satisfied is not adjusted).

Example : Contract modifications
► Seller enters into contract with a customer to sell 1000 goods for
Rs10,000 (Rs10 per good). The goods are distinct and are transferred
to the customer after a three month period. The parties modify the
contract at the end of one month to sell an additional 100 goods for
Rs 9 each to be delivered after four months. The market price at the
date of modification is Rs 9.
Response
► The modification to sell an additional 100 goods is accounted for as a
separate contract because the additional goods are distinct and the
price reflects their standalone market price. The existing contract
would not be affected by the modification.

► Accprompt provides accounting services. It enters into a 2year

service contract with Customer for Rs 600,000 (Rs300,000 per year);
the standalone selling price for the service at inception. After the end
of the 1st year, Accprompt and Customer agree that the fees should
be Rs 350,000 per year for both the years because the volumes were
much larger than expected.
Response
► Accprompt will recognize an additional revenue of Rs 50,000 as a
cumulative catch up adjustment, as soon as the modification is
approved by the Customer.

► Accprompt enters into a 3 year contract to provide accounting

services for Rs 600,000 (Rs200,000 per year); the standalone selling
price at inception. At the end of the 2nd year, the contract is modified
as follows: (1) the fee for the 3rd year is reduced by Rs 90,000; and
(2) the contract is extended for another 3 years for Rs 750,000
(Rs250,000 per year); when the standalone selling price is
Rs230,000.
Response
► The modification is accounted for prospectively; as if the existing
arrangement is terminated and a new contract is entered into.
Accprompt should reallocate the remaining consideration to all of the
remaining services to be provided. Accprompt will recognize a total of
Rs 860,000 (750,000 + 110,000) over the remaining four-year service
period (one year remaining under the original contract plus three
additional years), or Rs 215,000 per year.
Principal versus agent consideration
► When more than one party is involved in providing goods or services to a

customer, the entity shall determine the nature of its promise to the customer
Principal Agent
 Provides the specified good or  Arranges for the good or service
service to the customer to be provided by another party
 Controls good or service before
transferring it to customer

Control of specified good or service prior to transfer
Principal versus Agent Consideration - Indicators
Indicators that an entity controls specified goods / services before it is transferred to

customers –
Entity is primarily responsible for fulfilling the promise

Net Indicators:
Entity has the inventory risk
Entity has the discretion in establishing prices
Entity has the credit risk

► TravelCo negotiates with major airlines to obtain access to airline tickets at reduced
rates and sells the tickets to its customers through its website. TravelCo contracts with
the airlines to buy a specific number of tickets at agreed-upon rates and must pay for
those tickets regardless of whether it is able to resell them. Customers visiting
TravelCo’s website search TravelCo’s available tickets. TravelCo has discretion in
establishing the prices for the tickets it sells to its customers.
► TravelCo is responsible for delivering the ticket to the customer. TravelCo will also
assist the customer in resolving complaints with the service provided by the airlines. The
airline is responsible for fulfilling all other obligations associated with the ticket, including
the air travel and related services (that is, the flight), and remedies for service
dissatisfaction.
► Is TravelCo the principal or agent for the sale of airline tickets to customers?

Accounting for warranties
Assessing the nature of the warranty
Does the customer have an option to YES Account for as a separate

purchase warranty separately? performance obligation
NO
Does the warranty provide a service YES Account for as a separate

in addition to assurance? performance obligation
NO
Account for as a cost

accrual

Example : Other matters for consideration
Product warranties
Warranty – example of separate performance obligation

► Entity sells 100 ultra-life batteries for INR20 each and provides the
customer with a five-year guarantee that the batteries will withstand
the elements and continue to perform to specifications
► The entity, which normally provides a one-year guarantee to customer
purchasing ultra-life batteries, determines that years two through five
represent a separate performance obligation
► The entity determines that INR1,700 of the INR2,000 transaction price
should be allocated to the batteries and INR300 to the service
warranty (based on estimated stand-alone selling prices and a relative
selling price allocation)
► The entity’s normal one-year warranty cost is INR1 per battery

Solution: Other matters for consideration
Product warranties (cont.)
► Upon delivery of the batteries, the entity records the following entry:
Dr. Cash/Receivables 2,000
Cr. Revenue 1,700
Cr. Contract liability (service warranty) 300
Dr. Warranty expense 100

Cr. Accrued warranty costs (assurance warranty) 100
► The contract liability is recognised as revenue over the service
warranty period (years two through five). The costs of providing the
service warranty are recognised as incurred
► The assurance warranty obligation is used/derecognised as defective
units are replaced/repaired during the initial year of the warranty
► Upon expiration of the assurance warranty period, any remaining
assurance warranty obligation is reversed

Contract costs
► Contract costs deferred and amortized over the contract period

► If incurred incrementally as a result of obtaining a contract, e.g. variable sales
commissions, and expected to be recovered
► Option to expense as incurred, if contract period is less than one year
► Contract fulfilment costs, not covered by other standards (inventory/ PPE)
deferred if certain criteria are met
Direct costs eligible for deferral Costs to be expensed as incurred
Direct labour e.g. wages General administrative costs
Direct materials e.g. supplies Costs relating to satisfied performance

obligations
Allocation of costs that relate directly to the Costs of wasted materials, labour, or other
contract e.g. depreciation contract costs
Costs explicitly recoverable from customer Costs that do not clearly relate to unsatisfied
Costs incurred only because the entity entered
into the contract e.g. subcontractor costs

Contract costs
► Salesperson for Product Co earns a 5% commission on a

contract that was signed in January.
► Product Co will deliver the purchased products throughout the
year. The contract is not expected to be renewed the following
year.
► Product Co expects to recover this cost.
How should Product Co account for the commission?

Contract costs
► Construction Co incurs costs in connection with winning a successful

bid on a contract to build a bridge.
► The costs were incurred during the proposal and contract
negotiations.
How should Construction Co account for the costs?

Transitional provisions

Transition methods
► Retrospective adoption required

► Two approaches permitted:
► Full retrospective adoption, with optional reliefs available
► Modified retrospective application, with optional reliefs available
► Factors to consider include:
► The number of comparative periods presented
► The number of contracts to be restated
► The length of contracts: long-term vs short-term
► The ability to obtain historical information

Full vs. modified retrospective adoption
PY* CY
(2017-18) (2018-19) Disclosures
Cumulative catch-
Full retrospective Contracts under Ind AS 115 and
(with optional new standard
up
Ind AS 8
practical Contracts disclosures apply
expedients) restated
Cumulative catch-
Existing and new
Modified Existing**
contracts
retrospective and new
Contracts not compared using
up
(Cumulative contracts
restated current Ind AS
effect at date of under new
(e.g., Ind AS 18)
application) standard
in CY
**Entities may elect either to apply Ind AS 115 only to contracts that are not completed, or
to all contracts, including completed contracts, at the date of initial application.
Page 78
Pre Adoption Disclosure

Pre-adoption disclosure requirements
► Paragraph 30 of Ind AS 8 requires an entity to consider disclosing all

of the following information:
► The title of the new standard
► The nature of the impending change
► The date by which application of the standard is required
► The date as at which it plans to apply the standard initially
► A discussion of the impact that initial application of the standard is
expected to have on the entity's financial statements, or, if that impact is
not known or reasonably estimable, a statement to that effect

Presentation and Disclosure in Financial
Statements

Key principle
► Key principle – to help financial statement users understand the

nature, amount, timing and uncertainty of revenue and cash
flows arising from contracts with customers
► Entity must present qualitative and quantitative information
about:
► Contracts with customers
► Significant judgments and changes in judgments made when
applying the standard to those contracts
► Assets recognised from costs to obtain or fulfil a contract
► Entity must disclose its use of any practical expedients

Disclosure about contracts with customers
for annual periods
An entity is required to disclose:
► Disaggregation of reported revenue
► Information about balances of contract assets and liabilities
► Opening and closing balances
► Revenue recognised in the reporting period included in contract liability at
the beginning of the period
► Revenue recognised in the reporting period from performance obligations
satisfied (or partially satisfied) in previous periods
► Relationship between timing of satisfaction of performance obligation and
typical timing of payment and effect on the balances
► Significant changes in contract balances during the reporting period

Disclosure about contracts with customers
for annual periods (cont.)
An entity is required to disclose:
► Information about performance obligations, including:
► Typical timing of satisfaction of performance obligations (e.g., upon
shipment, upon delivery, as services are rendered)
► Significant payment terms
► Nature of the goods or services promised
► Obligations for returns and refunds
► Types of warranties and related obligations
► For contracts of more than one year, the amount of transaction price
allocated to remaining performance obligations and an explanation of
when such amounts are expected to be recognised as revenue

Thank You
Challenges in
Ind AS
conversion
Workshop on Ind AS
Organised by:
Hyderabad Branch of SIRC of ICAI
Presented by:
CA Manish C. Iyer, Technical Director, GAAP
Advisors
CA Manish C. Iyer, Technical Director, GAAP Advisors manish.iyer@gaapadvisors.com 1

Interest free loans
Preference shares
Financial Embedded Derivatives
Instruments
Financial Guarantees
Debt instrument at FVOCI
CA Manish C. Iyer, Technical Director, GAAP Advisors
manish.iyer@gaapadvisors.com 2
Interest free loans
• A company has taken interest free loans of ₹ 100 crores from
directors on 1 April 2013, before application of Ind AS. The loan is
repayable on 31 March 2020.
• Same as previous, except that the loan is repayable in 10 equal annual
instalments.
• If the loan is repayable at the discretion of the company, what will be
the treatment

3
manish.iyer@gaapadvisors.com
Calculation of Fair Value of Interest free
Unsecured Loans Amortised cost of Unsecured Loans
Cash flows Discount Present

Opening Closing
Year in ₹crores Rate @16% Value
Balance Interest Cash Flows Balance
31-Mar-14 0.00 0.86 0.00
35.38 5.66 0.00 41.04
31-Mar-15 0.00 0.74 0.00
41.04 6.57 0.00 47.61
31-Mar-16 0.00 0.64 0.00
31-Mar-17 0.00 0.55 0.00 47.61 7.62 0.00 55.23
31-Mar-18 0.00 0.48 0.00 55.23 8.84 0.00 64.07
31-Mar-19 0.00 0.41 0.00 64.07 10.25 0.00 74.32
31-Mar-20 100.00 0.35 35.38 74.32 11.89 0.00 86.21
Fair value of Unsecured Loan 35.38 86.21 13.79 100.00 0.00
Calculation of Fair Value of Interest free

Unsecured Loans Amortised cost of Unsecured Loans
Cash flows Discount Present

Opening Closing
Year in ₹crores Rate @16% Value
Balance Interest Cash Flows Balance
31-Mar-14 10.00 0.86 8.62
48.33 7.73 10.00 46.07
31-Mar-15 10.00 0.74 7.43
46.07 7.37 10.00 43.44
31-Mar-16 10.00 0.64 6.41
43.44 6.95 10.00 40.39
31-Mar-17 10.00 0.55 5.52
31-Mar-18 10.00 0.48 4.76 40.39 6.46 10.00 36.85
31-Mar-19 10.00 0.41 4.10 36.85 5.90 10.00 32.74
31-Mar-20 10.00 0.35 3.54 32.74 5.24 10.00 27.98
31-Mar-21 10.00 0.31 3.05 27.98 4.48 10.00 22.46
31-Mar-22 10.00 0.26 2.63 22.46 3.59 10.00 16.05
31-Mar-23 10.00 0.23 2.27 16.05 2.57 10.00 8.62
Fair value of Unsecured Loan 48.33 8.62 1.38 10.00 0.00

4
Cumulative Redeemable
Preference Shares
Non-Cumulative Redeemable
Preference Preference Shares
Shares Cumulative convertible
preference shares
Non-Cumulative Convertible
Preference Shares
White Ltd. issues 2000 preference shares as on 01/04/08
having a 10 yr. term, face value of ₹1000/- per share &
dividend @6% p.a. on non-cumulative basis. Each
preference share is redeemable at a premium of ₹200 per
preference share. When the preference shares are issued,
the prevailing market dividend rate for cumulative
redeemable preference shares is 17%. How should the
entity recognise the instrument?
Preference
Shares White Ltd. issues 2000 cumulative convertible preference
shares as on 01/04/08 having a 10 yr. term, face value of ₹
1000/- per share & dividend @6% p.a on cumulative basis.
Each preference share is convertible at any time up to
maturity into 250 ordinary shares. When the preference
shares are issued, the prevailing market interest rate for
similar preference shares without conversion option is
17%. How should the entity recognise the instrument.
Dividend distribution tax is assumed to be 15%?

Bifurcation of Liability and Equity
Component
Discount Amortised cost of Unsecured Loans
Rate @ Present
Year Cash Flows 17% Value
1 0.00 0.85 0 Opening Closing
2 0.00 0.73 0 Balance Interest Cash Flows Balance
3 0.00 0.62 0 499290 84879 0 584169
4 0.00 0.53 0
5 0.00 0.46 0 584169 99309 0 683478
6 0.00 0.39 0 683478 116191 0 799669
7 0.00 0.33 0
799669 135944 0 935613
8 0.00 0.28 0
9 0.00 0.24 0 935613 159054 0 1094667
10 2400000.00 0.21 499290 1094667 186093 0 1280760
Fair Value of
Preference 1280760 217729 0 1498489
Shares 499289.7 1498489 254743 0 1753233
Equity Component being the non-
cumulative dividend 1500710
1753233 298050 0 2051282
Consideration 2000000 2051282 348718 2400000 0

7
Bifurcation of Liability and Equity
Amortised cost of Unsecured Loans
Component
Discount Present
Year Cash Flows Rate @ 17% Value Opening Closing
1 138000.00 0.85 117949 Balance Interest Cash Flows Balance
2 138000.00 0.73 100811
3 138000.00 0.62 86163 642887 109291 138000 614178
4 138000.00 0.53 73644 614178 104410 138000 580588
5 138000.00 0.46 62943
6 138000.00 0.39 53798 580588 98700 138000 541288
7 138000.00 0.33 45981 541288 92019 138000 495307
8 138000.00 0.28 39300
495307 84202 138000 441510
9 138000.00 0.24 33590
10 138000.00 0.21 28709 441510 75057 138000 378566
Fair Value of
378566 64356 138000 304923
Preference
Shares 642887.3 304923 51837 138000 218760
Equity Component being the non-
218760 37189 138000 117949
cumulative dividend 1357113
Consideration 2000000 117949 20051 138000 0

8
Embedded Derivative
• There are consortium advances by third parties in real estate developers
books. ( in years under ind as conversion). there are Letter of interest on
records. they are repaid once flats are sold to final customers by retain
certain % (10 to 25) depending on what stage of development ..parties
invested. they never purchase flats. According to me, it is embedded
derivative related to real estate price. as it us difficult to compute, entire
advances should be fair valued, depending on stage of completion. Client
real estate developer says.. fair value is difficult to determine They will
create letter of allotments and cancellations theses allotment letters.
However they have not produced such documentation. Secondly,
Accounting finance cost is issue (difference in fair value) What would be
correct and as far as possible.. practical approach? Kindly advise.

9
A Ltd. provides a guarantee to B Bank for a loan
of ₹1000 crore having a term of 10 years given
by B Bank to C Ltd. C Ltd. is a subsidiary of A Ltd.
Same as above, except that A Ltd. charges

commission of ₹2 crore per annum
Financial
Guarantees Same as above, except that A Ltd. charges
commission of ₹20 on issuance of the guarantee.
Same as above, except that the loan is now

classified as NPA

Commission of ₹2 crore per
annum Amortisation of Financial Guarantees
Unamortis
Discount Amortised ed
Cash Rate @ Present Guarantee Guarantee
Year Flows 8% Value Opening Cash Closing Commissi Commissi
1 2.00 0.93 2 Balance Interest Flows Balance on on
2 2.00 0.86 2 13 1 2 12 1 12
3 2.00 0.79 2 12 1 2 11 1 11
4 2.00 0.74 1 11 1 2 10 1 10
5 2.00 0.68 1 10 1 2 9 1 9
6 2.00 0.63 1 9 1 2 8 1 8
7 2.00 0.58 1 8 1 2 7 1 7
8 2.00 0.54 1 7 1 2 5 1 5
9 2.00 0.50 1 5 0 2 4 2 4
10 2.00 0.46 1 4 0 2 2 2 2
Fair Value of Guarantee 13 2 0 2 0 2 0

11
Measurement of Bond at FVOCI
• White Ltd. Purchased a fixed rate bond at a discount with the

following terms:
• Bond Terms
• Purchase Price - Rs.98 lacs
• Purchase Date - 1 April 2015
• Notional - Rs.100 lacs
• Maturity - 3 years
• Coupon - 10% annually, 30/360basis
• FV on 31 March 2016 - Rs.97 lacs
• FV on 31 March 2017 - Rs.101 lacs

12
Fixed Capital and Current Capital
• The Phase 2 Ind AS Construction Company, it has control over
Partnership firms, hence to be consolidated as Subsidiaries. The
Company and other Partners have fixed capital as well as current
capital. Fixed capital is very small amount. Current capital fluctuates
i.e. contribution and withdrawals as per business needs. In case of
one firm, interest on capital allowed and excess withdrawals, Partner
has to pay interest. Fixed and Current capital are on par at the time of
liquidation (if any) and Partners will be paid back their capital (current
and fixed) and shares of agreed profits (added to Current capital)...
After paying off all debts and honouring obligations.

14
Pro rata share of entity’s net assets
Subordinate to all other classes of instruments
All such subordinate Financial Instrument have identical features Puttable

instruments
Does not have any obligation other than to redeem or repurchase the
instrument classified as
equity
Cash Flows based substantially on profit or loss or change in fair value instruments
of recognised & unrecognised net assets
No other instrument that has Cash Flows based substantially on profit or loss
or change in fair value of recognised & unrecognised net assets

15
Other Challenges
• Business Combinations accounting
• Accounting on acquiring significant influence / joint control
• Line by line consolidation not possible
• Contract manufacturing
• Control in absence of equity holding
• Lease of land
• Service concession arrangements
• Government grants
• Deferred Tax
16
Thank You
• CA Manish C. Iyer
• Technical Director
• GAAP Advisors – Your Financial
Reporting Advisory Hub
• manish.iyer@gaapadvisors.com
• https://gaapadvisors.com
• +919999058563
17

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Presentation on Impact of Ind

AS on Construction and Real

CA Amit Kumar Agarwal

 Ind AS 115: The five-step model

 Claims and variations

 Discounting of retention money & Mobilization Advance

 Accounting for Service concession arrangement

 Introduction of RERA Act and impact of Ind AS 115

 Estimation of contract budgets to compute percentage of completion method.

 Maintenance of voluminous records at site to identify stage of completion.

 Significant judgment is accounting of claims, variation and incentives.

 Segmentation and combination of identical contracts.

 Recognition of expected losses (more complex in entities following survey method).

 Accounting of contract loaded at site but not installed

Step 1: Identify the contract(s) with the customer

Step 2: Identify the performance obligations in the contract

Step 3: Determine the transaction price

Step 4: Allocate the transaction price to the performance obligations

 However, Ind AS 115 provides additional guidance, which notes that if an

- P also delivers similar materials to the site in anticipation of future activity.

At 31-Mar-18, the estimated total cost of the project is 4,500.

 This may be a higher threshold than was

 Determining whether a modification is

Current Ind AS deals with loss-making revenue contracts in two standards:

► Overview and scope

Page 2 The new revenue recognition standard

Page 3 The new revenue recognition standard

► Noting several concerns with existing revenue requirements for both

What is in scope or affected by the standard

What is not in scope

Page 5 The new revenue recognition standard

► Core principle: Recognise revenue to depict the transfer of

Step 2: Identify the performance obligations in the contract

Step 3: Determine the transaction price

Step 4: Allocate the transaction price to the performance obligations

Step 5: Recognise revenue when (or as) each performance obligation is

Page 6 The new revenue recognition standard

Page 7 The new revenue recognition standard

… collection of consideration is probable

A contract … rights to goods or services and payment terms

► A contract is defined as an agreement between two or more parties

Page 8 The new revenue recognition standard

Page 9 The new revenue recognition standard

Page 10 The new revenue recognition standard

► A performance obligation is a promise (explicit or implicit) to transfer a

Page 11 The new revenue recognition standard

Two-step model to identify which goods or services are distinct

Step 1 - Focus on whether Step 2 - Focus on whether

Customer can benefit from ► Evaluate whether multiple promised

Page 12 The new revenue recognition standard

► Entity enters into a contract to manufacture and install customised

Page 13 The new revenue recognition standard

Step 1 – Capable of being Step 2 – Distinct in the context

Installation can be provided by multiple See discussion above. Equipment and

Services have a distinct function Services are not highly interrelated. No

Page 14 The new revenue recognition standard

► Contractor enters into a contract to design and build a house for a

How many performance obligations are there in the contract?

Page 15 The new revenue recognition standard

► The promised goods and services are capable of being distinct

Page 16 The new revenue recognition standard

► Revenue is recognised when future goods and services are transferred

Page 17 The new revenue recognition standard