IND AS - 115

REVENUE FROM CONTRACTS WITH

CUSTOMERS

1. SCOPE
 This Standard applies to all contracts with customers, EXCEPT the following:
a. Lease contracts within the scope of Ind AS 116;
b. Insurance contracts (Ind AS 104)
c. Financial instruments and other contractual rights or obligations within the scope
of Ind AS 109, Ind AS 110, Ind AS 111, Ind AS 27 & Ind AS 28; and
d. Non-monetary exchanges between entities in the same line of business to facilitate
sales to customers or potential customers.
(For example, this Standard would not apply to a contract between two oil
companies that agree to an exchange of oil to fulfil demand from their customers
in different specified locations on a timely basis.)

 This standard is applicable ONLY to contracts with CUSTOMER.

 CUSTOMER
A customer is a party that has contracted to obtain goods or services that are an
output of entity’s ordinary activities in exchange for consideration.
A counterparty would not be a customer if it has contracted with the entity to
participate in an activity or process in which the parties to the contract share in the
risks and benefits rather than to obtain the output of the entity’s ordinary activities.
(For Example, Developing an asset in a collaboration arrangement)

CA AAKASH KANDOI AT ACADEMY 26.1

 2. CORE PRINCIPLE OF IND AS 115

In a manner that depict the transfer of goods or

services to customer
RECOGNISE
REVENUE
At an amount that reflects the consideration the
entity expects to be entitled in exchange for
those goods or services

3. FIVE STEP MODEL FOR REVENUE RECOGNITION

 To achieve the core principle, an entity should apply the following 5 step model:

Step 1: Identify the contract 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 in the contract

Step 5: Recognize revenue as and when the entity satisfies its performance obligations

4. STEP 1: IDENTIFYING THE CONTRACT

4.1 CONTRACT
 A contract is an agreement between two or more parties that creates enforceable
rights and obligations. Contracts can be written, oral, or implied.

4.2 CRITERIA FOR RECOGNIZING A CONTRACT

 An accounting contract exists only when an arrangement with a customer meets ALL
of the following five criteria:

CA AAKASH KANDOI AT ACADEMY 26.2

 a) Parties have approved the contract and are committed to perform their
contractual obligations;

b) The entity can identify each party’s rights regarding the goods or services
to be transferred;

c) The entity can identify the payment terms for the goods or services to
be transferred;

d) The contract has commercial substance;

e) It is probable that the entity will collect substantially all of the consideration
to which it expects to be entitled.

 A contract may NOT pass all the 5 conditions of Step 1, but entity may still transfer
goods or services to the customer and receive non-refundable consideration in exchange
for those goods or services. In that circumstance, the entity cannot recognise revenue
for the non-refundable consideration received i.e. the entity will recognise consideration
received as a liability until either:
 Step 1 criteria are subsequently met, OR
 One of the events outlined below has occurred:
a) The entity has no remaining obligations to transfer goods or services, and
substantially all consideration received from customer is non-refundable, OR
b) The contract has been terminated, and consideration received from the customer
is non-refundable.

 When a contract passes Step 1, entity should NOT reassess contract existence unless
there is an indication of a significant change in facts & circumstances.

4.3 CONTRACT TERM

 Some contracts may have no fixed duration and can be terminated or modified by
either party at any time. Other contracts may automatically renew on a periodic basis

CA AAKASH KANDOI AT ACADEMY 26.3

 that is specified in the contract.
 An entity shall apply this Standard to the duration of the contract (i.e. the contractual
period) in which the parties have enforceable rights and obligations.

 TERMINATION PROVISIONS
 Some contracts can be terminated by either party or it may only be terminated by
one party. An accounting contract DOES NOT exist if each party to a contract has
the unilateral enforceable right to terminate a wholly unperformed contract without
paying a termination penalty.
 In some situations, only the customer has the ability to terminate the contract without
penalty. In those situations, the contract term for accounting purposes may be shorter
than the stated contract term.

4.4 COMBINING CONTRACTS

 Two or more contracts may need to be accounted for as a single contract if they are
entered at or near same time, with the same customer and if ANY ONE of the
following conditions exists:

a) The contracts are
negotiated as a single
package; OR
b) The amount of
c) The goods or services
consideration paid in one
promised in the contract
contract depends on price
are a single performance
or performance of other
obligation.
contract; OR

4.5 CONTRACT MODIFICATIONS

A. IDENTIFYING A MODIFICATION
 A contract modification exists if three conditions are met:
i) There is a change in the scope, price, or both in a contract.
ii) That change is approved by both the entity and the customer.

CA AAKASH KANDOI AT ACADEMY 26.4

 iii) The change is enforceable.

B. ACCOUNTING FOR THE MODIFICATION

ACCOUNTING FOR
MODIFICATION

MODIFICATIONS THAT CONSTITUTE MODIFICATIONS THAT DO NOT CONSTITUTE

SEPARATE CONTRACTS SEPARATE CONTRACTS

If New Goods or Service

It is treated as a separate contract are distinct from Goods
if BOTH the conditions are or service in Original All Other Cases
satisfied: Contract BUT Price is
a) Increases the scope by adding NOT Standalone S.P
new goods or services that are
distinct;

AND Account for the

Account for
Modification Prospectively
b) Increase in the contract price modification on a
reflects the stand-alone selling price (i.e. Termination of the cumulative catch-
of the additional goods or services. old contract and the up basis (i.e.
creation of a new Retrospectively)
contract)

CA AAKASH KANDOI AT ACADEMY 26.5

 5. STEP 2: IDENTIFYING PERFORMANCE OBLIGATIONS
 Performance obligation is a promise to transfer to the customer either:
a) A good or service (or a bundle of goods or services) that is distinct; OR
b) A series of distinct goods or services that are substantially the same and that
have the same pattern of transfer.

 At contract inception, an entity shall assess

a) The goods or services promised in a contract AND
b) Shall identify performance obligation under each promise.

 Promises under the contract can be explicit (mentioned in the contract) or implicit
(implied by customary business practice).

 DISTINCT PERFORMANCE OBLIGATIONS

 A good or service that is promised to a customer is distinct if BOTH of the following
criteria are met:

b) Entity's promise to transfer good or service to the

a) Customer can benefit from the
good or service either on its own
or together with other resources
that are readily available to the
customer; AND
customer is separately identifiable from other promises
in the contract;
(i.e. the good or service is NOT integrated /
interrelated / interdependent or DOES NOT
siginificantly modify or customise other promises in the
contract)

NOTE: Whether Goods or Services are distinct or not is to be checked in the context
of the contract

CA AAKASH KANDOI AT ACADEMY 26.6

 Mutiple Performance
Are there Multiple Promise of Goods & YES
Obligation
Services which are Distinct (which are
not substantially same and that do not
Single Performance
have same pattern of transfer) NO
Obligation

 LONG TERM ARRANGEMENTS

 Should a three-year maintenance agreement be considered a single performance obligation
representing the entire contractual period, or should it be broken into smaller periods
(daily, monthly or yearly)?
 It may be appropriate to treat a three-year services contract as three separate one-
year performance obligations, if the contract can be renewed or cancelled by either
party at discrete points in time (that is, at the end of each service year).
 In long-term service agreements when the consideration is fixed, the accounting generally
will not change regardless of whether a single performance obligation or multiple
performance obligations are identified.

6. STEP 3: DETERMINING THE TRANSACTION PRICE

 Transaction Price is the amount of consideration which an entity expects to be entitled
in exchange for transferring promised goods or services to a customer, excluding amounts
collected on behalf of third parties (for example, GST).
 The consideration promised may be FIXED or VARIABLE or both.

TRANSACTION
PRICE

B. Constraining C. Significant E. Consideration

A. Variable D. Non-Cash
Estimates of Financing Payable to a
Consideration Consideration
Variable Component Customer
Consideration

CA AAKASH KANDOI AT ACADEMY 26.7

A. VARIABLE CONSIDERATION
 An amount of consideration would be variable if either a product was sold with a right
of return or a fixed amount is promised as a performance bonus on achievement of a
specified milestone.
 Variable consideration may be fixed in amount, but the entity’s right to receive that
consideration is contingent on a future outcome.
 The variability relating to the consideration promised by a customer may be explicitly
stated in the contract or it may be implicit.

 Penalties
Where the penalty is inherent in determination of transaction price, it shall form part
of variable consideration.
EXAMPLE
An entity agrees to transfer control of a good or service at the end of 30 days for ₹
100,000 and if it exceeds 30 days, then entity is entitled to receive only ₹ 95,000.
Reduction of ₹ 5,000 shall be regarded as variable consideration. In other cases, the
transaction price shall be considered as fixed.

 ESTIMATING THE AMOUNT OF VARIABLE CONSIDERATION

An entity shall estimate an amount of variable consideration by using either of the
following methods:

1. THE EXPECTED VALUE 2. THE MOST LIKELY AMOUNT

• The expected value is the sum of
probability-weighted amounts in a
range of possible consideration
amounts. This method may be
appropriate if the contract has
multiple outcomes possible.
• It is the single most likely amount in
a range of possible consideration
amounts (i.e. the single most likely
outcome). This method may be
appropriate if the contract has only
two possible outcomes (Example, an
entity either achieves a performance
bonus or does not).

CA AAKASH KANDOI AT ACADEMY 26.8

 NOTE:
 An entity shall apply one method consistently throughout the contract.
 The entity considers the requirements on constraining estimates of variable
consideration (discussed below) to determine whether it should include some or
all of its estimate of variable consideration in the transaction price.

B. CONSTRAINING ESTIMATES OF VARIABLE CONSIDERATION

 Variable Consideration shall be included in the transaction price only when it is highly
probable that significant reversal will NOT occur.
 Factors that increase the likelihood or the magnitude of a revenue reversal include any
of the following:
a) Amount of consideration is highly susceptible to factors outside entity’s influence.
b) Uncertainty about the amount of consideration is not expected to be resolved for
a long period of time.
c) Entity’s experience or other evidence with similar types of contracts is limited,
or has limited predictive value.
d) Entity has a practice of either offering a broad range of price concessions or
changing payment terms & conditions of similar contracts in similar circumstances.
e) Contract has a large number and broad range of possible consideration amounts.

 REASSESSMENT OF VARIABLE CONSIDERATION

 At the end of each reporting period, an entity shall update the estimated transaction
price (including updating its assessment of whether an estimate of variable consideration
is constrained) to represent faithfully the circumstances present at the end of the
reporting period and the changes in circumstances during the reporting period.

C. SIGNIFICANT FINANCING COMPONENT

 An entity shall adjust the Transaction Price for the effects of the time value of money
if the timing of payments agreed (either explicitly or implicitly) provides the customer
or the entity with a significant benefit of financing.

CA AAKASH KANDOI AT ACADEMY 26.9

 Either party may benefit from financing i.e.,
 Customer may pay before the entity performs its obligation (a customer loan
to the entity) OR
 Customer may pay after the entity performs its obligation (a loan by the entity
to the customer).
 The objective is that an entity should recognise revenue at the price that a customer
would have paid for those goods or services as and when they were transferred to the
customer (i.e. the cash selling price).
 Significant Financing component in a contract can be evidenced by checking BOTH of
the following:
a) Difference between the Promised consideration and Cash Selling Price; AND
b) Combined effect of both of the following:
 Length of time between when entity transfers goods or services and when the
customer pays; and
 Prevailing interest rates in the relevant market.
 Discount rate is the rate at which entity could have taken finance. If that rate is NOT
available then the entity can compute IRR (i.e. EIR) which equates the promised
consideration and the cash selling price.
 The discount rate should be computed at contract inception and after contract
inception, an entity shall not update the discount rate for changes in interest rates
or other circumstances.

 A CONTRACT WOULD NOT HAVE A SIGNIFICANT FINANCING COMPONENT IF ANY

OF THE FOLLOWING FACTORS EXIST:
a) Customer paid for the goods or services in advance and the timing of the transfer of
those goods or services is at the discretion of the customer.
(Example, consider a prepaid card for mobile phone services, wherein the customer has
the discretion to avail mobile services within a certain band of time)
b) A substantial amount of consideration is variable based on future event that is not
within the control of the customer or the entity.
(Example, if the consideration is a sales-based royalty)
c) Difference between promised consideration and cash selling price arises for reasons other

CA AAKASH KANDOI AT ACADEMY 26.10

 than the provision of finance.
(Example, the payment terms might provide the entity or the customer with
protection from the other party failing to adequately complete its obligations under
the contract)

D. NON-CASH CONSIDERATION
 Sometimes a customer promises to pay for a good or service in a form other than cash
such as shares, advertising, or equipment.
 To determine the transaction price in such cases:

1st Preference 2nd Preference

• Fair Value of Non-Cash Consideration • Standalone Selling Price of goods or

Received services given

 After Contract Inception, if the fair value of the non-cash consideration varies due to
its form (Eg: Shares), entity does not adjust the transaction price for any such
changes. But, if it varies for reasons other than only the form of the consideration
(for example, the fair value could vary because of the entity’s performance), the entity
is required to apply the guidance on variable consideration.

 CUSTOMER-PROVIDED GOODS OR SERVICES

 If a customer contributes goods or services (for example, materials, equipment or
labour) to facilitate an entity’s fulfilment of the contract, the entity shall assess
whether it obtains control of those contributed goods or services.

If entity obtains Control If entity DOES NOT obtain Control

• Fair Value of Goods or Services • Fair Value of Goods or Services

supplied by customer will be added to supplied by customer will NOT be
Transaction Price. added to Transaction Price.

CA AAKASH KANDOI AT ACADEMY 26.11

 E. CONSIDERATION PAYABLE TO A CUSTOMER
 Consideration payable to a customer includes cash amounts, coupons, vouchers that an
entity expects to pay or that can be applied against amounts owed to the entity.

CONSIDERATION PAYABLE TO A CUSTOMER

It relates to distinct good or service received DOES NOT relate to

from the customer (Also refer note below) distinct Goods or Services

Consideration DOES NOT

Consideration Exceeds the Account for the
Exceed the fair value of
fair value of distinct Goods consideration as a reduction
distinct Goods or Service
or Services Received of the transaction price
Received

Accounted Separately i.e.

Account for the EXCESS
in the same way the
as a reduction of the
entity accounts for other
transaction price.
purchases from suppliers

NOTE:
If the entity cannot reasonably estimate the fair value of the good or service received
from the customer, it shall account for all of the consideration payable to the customer
as a reduction of the transaction price

7. STEP 4: ALLOCATING THE TRANSACTION PRICE TO PERFORMANCE OBLIGATIONS

 Allocate the transaction price to each performance obligation (or distinct good or
service) on a relative stand-alone selling price basis EXCEPT for allocating discounts and
for Variable consideration.
 There are two exceptions to the above principle of allocation transaction price based
on standalone selling price:

CA AAKASH KANDOI AT ACADEMY 26.12

  Allocating discounts (Refer Point B below), and
 Allocating variable consideration (Refer Point C below)

A. DETERMINING STANDALONE SELLING PRICE

 Standalone selling price is the price at which an entity would sell a promised good or
service separately to a similar customer under similar circumstances.
 If a stand-alone selling price is not directly observable, an entity shall estimate the
stand-alone selling price after considering all information (including market conditions,
entity-specific factors and information about the customer or class of customer) that
is reasonably available to the entity.
 In doing so, an entity shall maximise the use of observable inputs and apply estimation
methods (discussed below) consistently in similar circumstances. A combination of below
methods may also be used:

ADJUSTED MARKET EXPECTED COST PLUS

RESIDUAL APPROACH
ASSESSMENT APPROACH MARGIN APPROACH

• Price of competitors • Forecast its expected costs • Total Transaction Price

similar goods or services
and adjusting those prices
to reflect the entity’s
costs and margins.
for each performance LESS sum of observable
obligation and then add an standalone selling prices of
appropriate margin for other goods or services in
that good or service the contract (after
allocating discount)
• Also refer Note Below

 NOTE: RELATES TO RESIDUAL APPROACH

 An entity may use a residual approach to estimate the standalone selling price only if:
 Entity sells the same good or service to different customers for a broad range of
amounts; OR
 Such good or service has not previously been sold on a stand-alone basis and its
prices is not yet decided.
 An entity shall allocate the discount before using the residual approach to estimate
the stand-alone selling price of a good or service where the discount is allocated entirely
to one or more performance obligations in the contract.

CA AAKASH KANDOI AT ACADEMY 26.13

B. ALLOCATION OF A DISCOUNT
 The entity shall allocate discount proportionately to all performance obligations on the
basis of standalone selling prices of distinct goods or services EXCEPT when entity has
evidence that entire discount relates to only one or more, but not all, performance
obligations.
 When to allocate discount to ‘less than all’ performance obligations?
 The entity also regularly sells a smaller bundle of some of those distinct goods or
services at a discount; AND
 Discount attributable to the smaller bundle of goods or services is substantially
the same as the discount in the contract and an analysis provides evidence of
performance obligations to which entire discount belongs.

C. ALLOCATION OF VARIABLE CONSIDERATION

 Variable consideration may be attributable to (i) the entire contract or (ii) a specific
part of the contract.
EXAMPLE
A contract may include two performance obligations: Construction of a building and
provision of services related to ongoing maintenance of the property after construction.
But a bonus for early completion may relate entirely to the construction of the
building;
 If variable consideration relates to a part of contract, then entity should allocate
Variable Consideration (and subsequent changes to that amount) only to that part.
But if variable consideration relates to the entire contract, then it should allocate the
variable consideration to all Performance Obligations in that contract in the ratio of
standalone prices.

 CHANGES IN TRANSACTION PRICE

 After contract inception, the transaction price can change for various reasons. The
following principles should be noted:
 An entity shall allocate to the performance obligations any subsequent changes in
the transaction price on the same basis as at contract inception. Consequently,

CA AAKASH KANDOI AT ACADEMY 26.14

 an entity shall not reallocate the transaction price to reflect changes in stand-
alone selling prices after contract inception.
 Amounts allocated to a satisfied performance obligation shall be recognised as
revenue, or as a reduction of revenue, in the period in which the transaction price
changes (i.e. prospective effect).
 If the change in transaction price is the result of a contract modification, the entity
should follow the contract modification guidance.

8. STEP 5: RECOGNIZE REVENUE AS AND WHEN ENTITY SATISFIES ITS

PERFORMANCE OBLIGATIONS
 An entity shall recognise revenue as & when the entity satisfies a performance obligation
by transferring a promised good or service (i.e. an asset) to a customer. An asset is
transferred when the customer obtains control of that asset.

A. CONTROL
 Control of an asset refers to ability to direct the use & obtain substantially all the
benefits from the asset OR ability to prevent others from directing the use of the
asset.
 In addition, an entity shall consider indicators of the transfer of control, which include
the following:
 The entity has a present right to payment for the asset;
 The customer has legal title to the asset;
 The entity has transferred physical possession of the asset;
 The customer has the significant risks and rewards of ownership of the asset;
 The customer has accepted the asset.

B. CONTROL MAY BE TRANSFERRED CONTROL OVER A PERIOD OF TIME OR AT A

POINT IN TIME.

CA AAKASH KANDOI AT ACADEMY 26.15

 TRANSFER OF
CONTROL

OVER A PERIOD OF TIME AT A POINT IN TIME

If none of the
An entity transfers control of a good or service
criteria of over a
over time and satisfies a performance obligation &
period of time is
recognises revenue over time, if ANY of the
met, then revenue is
following criteria is met
recognised at a point
in time

Customer
Entity's performance does
simultaneously Entity's performance
not create an asset with
receives and creates or enhances
an alternative use to the
consumes the an asset that the
entity and entity has an
benefits provided by customer controls as
enforceable right to
the entity's the asset is created
payment for performance
performance as the or enhanced; OR
completed to date
entity performs; OR

Also Refer Note 1 Also Refer Note 2 Also Refer Note 3

NOTE 1:
It is ordinarily applied in situations where benefits of seller’s performance are
immediately consumed by the customer. Hence, in such situations, entity’s performance
is said to be performed over a period of time.

NOTE 2:
In such cases, the customer ordinarily obtains control of the asset whose work is in
progress and therefore, the entity carrying out the work can recognise revenue over a
period of time

CA AAKASH KANDOI AT ACADEMY 26.16

 Example: Construction contracts, where contractor engages to construct a specific asset
for the customer on customer’s land
NOTE 3:
This criterion is met if two factors exist:
1. Asset created does not have an
alternate use to the seller
• CONTRACTUAL RESTRICTIONS - A
legal clause which restricts the seller
from redirecting the asset for another
use or selling the asset to another
customer; OR
• PRACTICAL LIMITATIONS - It exist
when considering the nature of the
asset, seller entity would require
incurring significant economic losses to
direct the asset for another use.
C. METHODS OF MEASURING PROGRESS IF CONTROL IS TRANSFERRED OVER A
PERIOD OF TIME
CA AAKASH KANDOI
2. Legally enforceable right to receive
payment for performance completed to
date
• An entity has a right to payment
that at least compensates for
performance completed to date when
customer terminates the contract for
reasons other than entity's failure.
• Compensation should include costs
incurred for work completed PLUS a
reasonable profit margin.
• A small compensation / flat penalty
on termination does not tantamount
to legally enforceable right for work
completed
AT ACADEMY 26.17
 METHODS OF MEASURING
PROGRESS

OUTPUT BASED METHOD INPUT BASED METHOD

Recognise revenue on the basis of Recognise Revenue based on entity's effort or

Fair Value of goods or services
transferred to date relative to
remaining goods or services.
Example: Surveys of performance
completed to date, appraisals of
results achieved etc.
inputs or cost incurred to satisfy the
performance obligation
Example: Resources consumed labour hours
expended, costs incurred, time elapsed or
machine hours used
ALSO REFER NOTE BELOW

NOTE:
 Exclude abnormal losses and wastages from the cost incurred calculation as they
do not contribute to satisfying performance obligation.
 In case of unused material, we would adjust the input method & calculate stage
of completion based on used material only. The unused material should be
recognised only to the extent of cost incurred.
 If the inputs/costs are incurred evenly, we can use the straight-line method

D. TRANSFER OF CONTROL AT A POINT IN TIME

 If none of the criteria of over a period of time is met, then performance obligation is
considered to be discharged at a point in time. In such case, revenue is recognised at
a point in time.
 The point of time at which control of goods has been passed to the customer can be
determined based after considering various indicators such as: point when customers
gets the legal title, physical possession, when he assumes the risks & rewards, when
the entity has a right to demand payment etc.

CA AAKASH KANDOI AT ACADEMY 26.18

 9. SPECIAL CASES

I. PRINCIPAL VS AGENT

Entity is acting as a:

PRINCIPAL AGENT

Recognise Revenue on Net Basis

Recognise revenue on
(i.e. Only Commission or Fees to
Gross Basis
which it is entitled)

 INDICATORS THAT AN ENTITY IS A PRINCIPAL:

a) The entity is primarily responsible for fulfilling the contract;
b) The entity has inventory risk before goods or service has been transferred to a customer.
c) The entity has discretion in establishing prices for goods or services.
In some contracts in which the entity is the agent, control of the goods or services
promised by the agent might transfer before the customer receives the goods or services
from the principal.

II. NON-REFUNDABLE UPFRONT FEES

NON-REFUNDABLE UPFRONT FEES

Relates to Goods or Services which entity DOES NOT Relate to Goods or Services
has to provide at the inception and it is to be provided at the inception or is
a separate Performance Obligation NOT a separate Performance Obligation

Recognise Revenue (Upfront Fees) Recognise Revenue over the period

immediately at inception when Perfomrance Obligation is satisfied

CA AAKASH KANDOI AT ACADEMY 26.19

III. CUSTOMER OPTIONS FOR ADDITIONAL GOODS OR SERVICES
 In case an entity gives customers option to purchase additional goods or services by
way of coupons, gift cards and customer award credits like loyalty or reward programs
etc, then such option is treated as a separate performance obligation ONLY IF it
provides a material right to the customer.
 The right is material if it results in a discount that the customer would not receive
without entering into the contract (e.g., a discount that exceeds the range of discounts
typically given for those goods or services to that class of customer in that geographical
area or market).
 If the option provides a material right to the customer, the customer in effect pays
the entity in advance for future goods or services and the entity recognises revenue
when those future goods or services are transferred or when the option expires.
 The entity has to allocate the transaction price to performance obligations on a relative
stand-alone selling price basis. If the stand-alone selling price for a customer’s option
to acquire additional goods or services is not directly observable, an entity shall estimate
it.
 That estimate shall reflect the discount that the customer would obtain when exercising
the option, adjusted for both of the following:
 any discount that the customer could receive without exercising the option; and
 the likelihood (Probability) that the option will be exercised.

IV. SALE WITH A RIGHT OF RETURN

 To account for the transfer of products with a right of return (and for some services
that are provided subject to a refund), an entity shall:
 Recognise Revenue for the transferred products only to the extent entity expects
to be entitled (therefore, revenue would not be recognised for the products
expected to be returned);
 Recognise a Refund Liability (For consideration received on goods expected to be
returned by customer); and
 Recognise an Asset (and corresponding adjustment to cost of sales i.e. P&L) for

CA AAKASH KANDOI AT ACADEMY 26.20

 its right to recover products from customers. (Asset will be recognised at: Carrying
amount of the product LESS any expected costs to recover those products LESS
potential decreases in the value of returned products)
 An entity shall present the asset separately from the refund liability.
 An entity shall update the measurement of the refund liability and asset recognised
for right to recover product at the end of each reporting period for changes in
expectations about the amount of refunds.
 Exchanges by customers of one product for another of the same type, quality, condition
and price (for example, one colour or size for another) are not considered returns for
the purposes of applying this Standard.

V. WARRANTIES

WARRANTIES

Customer has an option to purchase Customer DOES NOT have option to

warranty separately purchase warranty separately

(Eg: Service Type Warranties) (Eg: Assurance Type Warranties)

In this case, warranty should NOT be

In this case, warranty will be a
considered as a separate P.O. and entire
distinct service & should be accounted
revenue should be attributable to the
as a separate P.O. and a portion of
product.
transaction price should be allocated
to it However, provision for warranty should
be created as per IND AS 37

 In assessing whether a warranty is a separate P.O. or not, an entity shall consider

factors such as:
a) Whether the warranty is required by law - If required by law, it indicates that the
promised warranty is not a performance obligation.
b) Length of warranty coverage period - Longer the coverage period, the more likely it is

CA AAKASH KANDOI AT ACADEMY 26.21

 that the promised warranty is a separate performance obligation.

VI. CONSIGNMENT ARRANGEMENTS

 A consignment agreement is an agreement between a consignee and consignor for the
storage, transfer, sale or resale and use of the goods. Entities (Consignor) frequently
deliver inventory on a consignment basis to other parties like distributor, dealer
(Consignee).
 Indicators to evaluate whether the arrangement is a consignment arrangement:
a) the product is controlled by the entity (consignor) until a specified event occurs,
such as the sale of the product to a customer of the dealer or until a specified
period expires;
b) the entity (consignor) is able to require the return of the product or transfer
the product to a third party (such as another dealer); and
c) the dealer (consignee does not have an unconditional obligation to pay for the
product until the goods are sold to the ultimate or end customer (although it
might be required to pay a deposit).
 In case of consignment arrangements, revenue would NOT be recognised when the goods
are delivered to the consignee because control has not yet transferred. Revenue is
recognized when the entity has transferred control of the goods to the consignor or
the end consumer.
 A consignment sale differs from a sale with a right of return. The customer has control
of the goods in a sale with right of return and can decide whether to put the goods
back to the seller. In case of consignment sales, the consignee does not have the control
over the goods.

VII. SALE & REPURCHASE AGREEMENTS

 A repurchase agreement is a contract in which an entity sells goods and also promises
or has the option to repurchase the goods. Repurchase agreements generally come in
three forms:
 Forward: An entity’s obligation to repurchase the asset

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  Call Option: An entity’s right to repurchase the asset
 Put Option: An entity’s obligation to repurchase the asset at the customer’s
request
 In case of repurchase agreements, revenue should not be recognised as the customer
does not obtain control (ability to direct the use and obtain substantially all of the
remaining benefits from the asset) even though the customer may have physical
possession of the asset.
 Consequently, the entity shall account for the contract as either of the following:

REPURCHASE AGREEMENTS

(FORWARD / CALL / PUT)

Repurchase Price is more than or equal to Repuchase Price is less than Original
Original Selling Price Selling Price

(Eg: Original Selling Price is 10 lakhs and (Eg: Original Selling Price is 10 lakhs and
Repurchase Price is 11 lakhs) Repurchase Price is 9 lakhs)

Financing Arrangement (as per IND AS 109)

i.e. recognise the consideration received (10
lakhs) as financial liability
Also recognise difference between Original SP
(10 lakhs) & Repurchase Price (11 lakhs) as
Finance Cost over the term.
Lease Contract (as per IND AS 116) in
which difference between original selling
price (10 lakhs) & Repurchase Price (9
lakhs) shall be recognized as lease income
over the period of lease.

 NOTE:
 If the option lapses unexercised, an entity shall derecognise the liability and recognise
revenue.
 The above treatment would be done for options only if, the entity estimates at the
inception that there is a significant economic incentive for the option holder to exercise
the option. The economic incentive should be evaluated form the option holder
perspective by comparing the repurchase price with the expected market price.
 If the customer does not have a significant economic incentive to exercise its right,

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 the entity shall account for the agreement as sale of a product with a right of return.
EXAMPLE:
If the repurchase price is expected to exceed the expected market value of the asset,
this may indicate that the customer has a significant economic incentive to exercise
the put option.
If the repurchase price expected to be less than the expected market value of the
asset, this may indicate (along with other factors if any) that the customer does not
have a significant economic incentive to exercise its right (put option).

VIII. BILL AND HOLD

 A bill and hold arrangement is a contract under which an entity bills a customer for a
product but the entity retains physical possession of the product (at customers request
because of customer's lack of available space or because of delays in customer's production
schedules).
 In such arrangements, the entity shall recognise revenue at the point of time when
control is transferred to the customer.
In some cases, control is transferred either when the product is delivered to the
customer’s site, while in other cases, a customer may obtain control of a product even
though that product remains in an entity’s physical possession.
 For a customer to have obtained control of a product even though the product remains
in an entity’s physical possession (i.e. Bill and Hold Arrangement) ALL the following
criteria must be met:
a) The reason for the bill-and-hold arrangement must be substantive (for example,
the customer has requested the arrangement);
b) The product must be identified separately as belonging to the customer;
c) The product currently must be ready for physical transfer to the customer; and
d) The entity cannot have the ability to use the product or to direct it to another
customer.
 Where an entity recognises revenue on bill & hold basis, the entity checks for additional
performance obligations (for eg: custodial services for goods held) and allocate a portion
of transaction price to each performance obligation.

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 IX. CONTRACT COSTS

CONTRACT COSTS

Contract Acquisition Cost Contract Fulfilment Costs

Cost incurred Incremental costs Costs incurred in If cost incurred

whether or not to obtain a fulfilling a are not covered
contract is contract that contract are under any IND AS
obtained or not would not be covered under
incurred if another Standard
contract not (such as Ind AS 2 An entity recognises an
Recognised as obtained or Ind AS 16) asset for such costs,
Expense (Trf to provided ALL conditions
P&L) are met:
An entity
Recognise as Asset 1. Cost directly relate to
accounts for those
(Capitalise) if the a contract (such direct
costs in accordance
entity expects to material, direct labour,
with those
recover it other indirect cost of
Standards
production, etc)

2. Costs generate or
NOTE: If the enhance resources of
amortization entity that will be used
period of the to satisfy performance
asset is is one obligations in the future;
year or less, then AND
entity may 3. Entity expects to
expense out such recover the costs, for e.g.
incremental costs through the expected
margin.

 NOTE: The following contract fulfilment costs should be expensed as incurred:

 General & administrative costs that are not explicitly chargeable to the customer;
 Costs of wasted materials, labour, or other resources that were not reflected in
the contract price;

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  Costs that relate to satisfied performance obligations; etc.

 EXAMPLES OF CONTRACT ACQUISITION COSTS

COST CAPITALIZE REASON
OR
EXPENSE
Commission paid only upon Capitalize Assuming the entity expects to recover the cost, the
successful signing of a commission is incremental since it would not have been
contract paid if the parties decided not to enter into the
arrangement just before signing.
Travel expenses for sales Expense Because the costs are incurred regardless of whether
persons pitching a new the new contract is won or lost, the entity expenses
client contract the costs, unless they are expressly reimbursable.
Legal fees for drafting Expense If the parties walk away during negotiations, the costs
terms of arrangement for would still be incurred and therefore are not
parties to approve and sign incremental costs of obtaining the contract.

Salaries for sales people Expense The salaries are incurred regardless of whether
working exclusively on contracts are won or lost and therefore are not
obtaining new clients incremental costs to obtain the contract.
Bonus based on quarterly Capitalize Bonuses based solely on sales are
sales target incremental costs to obtain a contract.
Commission paid to sales Capitalize The commissions are incremental costs that would not
manager based on have been incurred had the entity not obtained the
contracts obtained by the contract. Ind AS 115 does not differentiate costs
sales manager’s local based on the function or title of the employee that
employees receives the commission.

 AMORTISATION & IMPAIRMENT OF CONTRACT COST RECOGNISED AS ASSET

 Amortize capitalised contract costs on a systematic basis consistent with pattern of
transferring goods or services. Any change in expected pattern, is accounted as a change
in estimate as per IND AS 8.
 Recognises an impairment loss in earnings if carrying amount of an asset exceeds
remaining amount of consideration LESS directly related contract costs yet to be
recognised.
 Before recognising an impairment loss under the revenue recognition guidance, an entity

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 recognises impairment losses associated with assets related to the contract that are
accounted in accordance with another Standard (for example, Ind AS 2, Ind AS 16 and
Ind AS 38).
 Reversal of impairment loss is permitted when impairment conditions no longer exist
or have improved. The increased carrying amount of the asset shall not exceed the
amount that would have been determined (net of amortisation) if no impairment loss
had been recognised previously (Same as IND AS 36).

X. SERVICE CONCESSION ARRANGEMENTS

ABOUT SERVICE CONCESSION

PARTIES
ARRANGEMENTS

Such types of arrangements involve the Grantor – It is a Public

construction of infrastructure used to
provide public services. It also involves
operating and maintaining that infrastructure
for a specified period of time.
It is also called the "Build-operate-transfer"
(B-O-T) or "Public-to-Private" service
concession arrangement.
It is of the public service nature because it
has some involvement of infrastructure which
is used by the general public. It can be
bridges, roads, national highways, etc.
Authority (Eg: Govt Body)
that grants the operator
contract to construct/upgrade
& operate that infrastructure
for a specified period of time.
Operator - An entity
constructing & operating the
infrastructure. The operator is
paid for its services over the
period of the arrangement.

A. ACCOUNTING PRINCIPLES
i) Treatment of the operator's rights over the infrastructure
 Infrastructure under this arrangement shall not be recognized as PPE by the operator.
It is because operator does not have right to control the use of public service
infrastructure. But yes, operator has access to operate infrastructure to provide public
service on behalf of grantor in accordance with terms specified in contract.

ii) Recognition and measurement

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 Operator (acting as a service provider) shall recognize revenue in accordance with Ind
AS 115.
 If the operator is performing more than one service (i.e. construction services and
operating services) under a single contract, the consideration received or receivable shall
be allocated based on the fair value of the services provided.

iii) Consideration given by the grantor to the operator

 The grantor can provide the operator with the consideration which shall be recognized
at fair value.

CONSIDERATION BY GRANTOR TO
OPERATOR

Right to charge users of public service.

Unconditional right to receive CASH or
A right to charge users is not an
another financial asset from grantor for
unconditional right to receive cash
constructing a public sector asset and
because amounts are contingent on the
then operating it for a specified period.
extent to which public uses the service.

Recognise a Right to Financial Asset Recognise a Right to an Intangible Asset

Account the FA under IND AS 109 (as

Apply IND AS 38 for measuring
per ACM, FVTOCI, FVTPL)
intangible assets acquired in exchange
AND
and amortizing such Intangible Asset
Also Recognise Finance Income (in case
of ACM & FVTOCI) based on E.I.R

 NOTE:
 If operator is paid for construction services partly by a financial asset & partly by an
intangible asset, it is necessary to account separately for each component of the
operator’s consideration.

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