41

C H A P T E R

REVENUE FROM CONTRACTS WITH

CUSTOMERS (IND AS-115)*
41.1 Introduction
The IFRS 15, the new Standard creates a single model for revenue recog-
nition from the contracts with customers. India has issued a corresponding
converged standard Ind AS-115 ‘Revenue from Contracts with Customers’.
This Standard will supersede Ind AS-11 ‘Construction Contracts’ and Ind
AS-18 ‘Revenue’ and related appendixes to these two Standards except
Service Concession Arrangement which has been made an integral part
of the Ind AS-115 as Appendix ‘C’.
Revenue is defined as income arising in the course of an entity’s ordinary
activities. The Conceptual Framework introduced ‘income’ as increases in
economic benefits (i.e., inflows or enhancement of assets or decreases of
liabilities) that result in increases in equity other than those that relate to
contributions from equity participants.
All entities (public, private) that either enters into contracts with custom-
ers to transfer goods, services, or non-financial assets (unless governed by
other Standards) are subject to the revenue recognition standard. Certain
contracts, such as those covering leases, insurance, non-warranty guaran-
tee, and other financial instructions are covered under other Standards.

41.2 Principles of revenue recognition

The core principle of Ind AS-115 is that revenue should be recognized from
the transfer of goods or services to a customer in an amount that reflects
the consideration that the entity expects to be entitled to in exchange for
the goods or services.

*Applicable from May 2019 Exam onwards.

905
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Ind AS-115 ‘Revenue from Contracts with Customers’ defined revenue

recognition process:
Step 1: Identify the contracts with the customer
Step 2: Identify the separate performance obligations
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance obligations
Step 5: Recognise revenue when (or as) a performance obligation is
satisfied

41.2-1 Identify contracts with customers

Contract: An agreement between two or more parties that creates enforce-
able rights and obligations. Contracts can be written, verbal or implied
based on an entity’s customary business practices.
Customer: A Party that has contracted with an entity to obtain goods or
services that are an output of the entity’s ordinary activities in exchange
for consideration.
The revenue recognition principles of Ind AS-115 apply only when a con-
tract meets all of the following criteria:
u The parties to the contract have approved the contract;
u Each party’ regarding the goods or services in the contract can be
identified;
u The payment terms can be identified
u The contract has commercial substance (i.e., the risk, timing or amount
of future cash flows is expected to change as a result of the contract);
and
u It is probable that the entity will collect the consideration due under
the contract.
Consideration may not be the same as the transaction price due to dis-
counts and bonuses.
The criteria are assessed at the beginning of the contract and, if the contract
meets them, they are not reassessed unless there is a significant change in
circumstances that make the contract rights and obligations unenforce-
able. A contract that does not initially meet the criteria can be reassessed
at a later date.
Example 1: Company X is in the business of buying and selling commercial property.
It sells a property to Purchaser Y, this transaction is in the scope of the new standard
because Purchaser Y has entered into a contract to purchase an output of Company
X’s ordinary activities and is therefore considered a customer of Company Y.

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Conversely, if Company X was a manufacturing entity selling its corporate headquarters

to Purchaser Y, then the transaction would not be a contract with a customer because
selling real estate is not an ordinary activity of Company X.
Example 2: Shoe Manufacture A holds products available to ship to customers before
the end of its current fiscal year. Shoe Store B places an order for the product, and
Shoe Manufacture A delivers the product before the end of its current fiscal year.
Shoe Manufacturer A generally enters into written sales agreements with this class
of customer that requires the signatures of the authorized representatives of both
parties. Shoe Manufacturer A prepares a written sales agreement, and its authorized
representative sign the agreement before the end of the year. Shoe Store B does not
sign the agreement before end of Shoe Manufacturer A’s fiscal year. However, Shoe
Store B’s purchasing department has orally agreed to the purchase and started that it
is highly likely that the contract will be signed in the first week of Shoe Manufacturer
A’s next fiscal year.
After consulting its legal counsel and obtaining a legal opinion, Shoe Manufacturer A
determines that based on local laws and legal precedent in Shoe Store B’s jurisdiction,
Shoe Store B is legally obliged to pay for the products shipped to it under the agreement,
even though Shoe Store B has not yet signed the agreement.
Therefore, Shoe Manufacturer A concludes that a contract exists and applies the general
requirements of the new standard to sales made under the agreements up to the year-end.
Combination of Contracts: When two or more contracts are entered into
with the same customer or with related parties of the customer at or near
the same time, the contracts should be combined and accounted for as a
single contract if:
(a) either the contracts are negotiated as a package with a single com-
mercial objective;
(b) consideration for one contract is tied to the performance or price of
another contract, or
(c) the goods/services promised represent a single performance obligation.
Contract Modification: A contract modification represents a change in
the price or scope (or both) of a contract approved by both parties. When
a modification occurs, it is either treated as a new contract or as a mod-
ification of the existing contract. The modification is treated as a new if
both the scope increases due to the addition of distinct goods or services
and the price increase appropriately reflect the stand-alone selling prices
of the additional goods/services. If not accounted for as a new contract,
the modification is treated as part of the existing contract (not non-distinct
goods and services) with an adjustment to revenue to reflect the change
in the transaction price.

41.2-2 Identify separate performance obligations

Performance obligation- a promise to transfer to a customer:
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u A goods or services (or bundle of goods or services) that is distinct; or

u A series of goods or services that are substantially the same and are
transferred in the same way.
u If a promise to transfer a goods or services not distinct from other
goods and services in a contract, then the goods or services are com-
bined into a single performance obligation.
A goods or services is distinct if both the following criteria are met:
1. The customer can benefit from the goods or services on its own or
when combined with the customer’s available resources; and
2. The promise to transfer the goods or services is separately identifiable
from other goods or services in the contract.
A transfer of a goods or services is separately identifiable if the goods or
services :
u is not integrated with other goods or services in the contract;
u does not modify or customize another goods or services in the contract;
or
u does not depend on or relate to other goods or services promised in
the contract.
Example 3: TDC is building a multi-unit residential complex. It enters into a contract
with a customer for a specific unit that is under construction. The goods and services
to be provided in the contract include procurement, construction, piping, wiring, in-
stallation of equipment and finishing.
Although the goods and services provided by the contractor are distinguishable, they
are not distinct in this contract because the goods and services cannot be separately
identified from the promise to construct the unit. TDC will integrate the goods and
services into the unit, so all the goods and services are accounted for as a single per-
formance obligation.
Example 4: A software developer, Jai, enters into a contract with a customer to transfer
a software license, perform installation and provide software updates and technical
support for five years. Jai sells the license, installation, updates and technical support
separately. Jai determines that each goods or services is separately identifiable because
the installation does not modify the software and the software is functional without
the updates and technical support.
The software is delivered before the installation, updates and technical support and is
functional without the updates and technical support, so the customer can benefit from
each goods or services on its own. Jai has also determined that the software license,
installation, updates and technical support are separately identifiable. On this basis,
there are four performance obligations in this contract:
u Software license
u Installation service

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u Software updates
u Technical support
Transfer of control - An entity should recognise revenue when the entity
satisfies a performance obligation by transferring the goods or services
to the customer, who thereby obtains control of the asset. Control implies
the ability to obtain the benefits from and direct the usage of the asset
while also preventing other entities from obtaining benefits and directing
usage. Performance obligations may be satisfied either over time or at a
point in time.
Satisfied over time- Revenue is recognized over time if any one of the
criteria below is met
u The entity’s performance creates or enhances an asset that the cus-
tomer controls.
u The customer receives and consumes the benefits of the entity’s per-
formance as the entity performs it (e.g., service contracts, such as a
cleaning service or a monthly payroll processing service).
u The entity’s performance does not create an asset with alternative use
to the entity (assessed at inception) and the entity has an enforceable
right to receive payment for performance completed to date.
In order to recognise revenue, the entity must be able to reasonably mea-
sure progress towards completion. Progress can be measured using output
and input methods.
Output methods - By using output method, revenue is recognized based
on the value to the customer of the goods or services transferred to date
relative to the remaining goods or services promised. Examples of output
methods include: units produced or delivered, time elapsed, milestones
achieved survey of performance completed to date, and appraisals of results
achieved. These methods should only be used when the output selected
represents the entity’s performance toward complete satisfaction of the
performance obligation. When the outputs used to measure progress are
not available or directly observable, an input may be necessary.
Input Method - By using input methods, revenue is recognised based on
the entity’s efforts or inputs to the satisfaction of the performance obliga-
tion relative to the total expected inputs. Examples of the input methods
include: Costs incurred relative to total expected costs, resources con-
sumed, labour-hours expended, and time elapsed. A disadvantage of input
methods is that there may not be a direct relationship between an entity’s
inputs and the transfer of control of goods and services to a customer. If
inputs are used evenly throughout the performance period, revenue can
be recognized on a straight-line-basis.
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