Ind AS 115 - Revenue From Contracts With Customers

If you want to grow professionally, you first have to keep learning and learning. Ind As is the talk of the town since its applicability to make the IGAAP at par with the international practices. While studying the Ind AS 115 which deals with revenue recognition from contracts with customers, have made shot notes. Although, these notes does not cover full Ind AS 115 but can be helpful to understand the thing covered in the notes.

Ind AS 115 - Revenue from Contracts with Customers, prescribes single model for revenue recognition from contracts with customers. It is based on 5 step model which shall be applied on revenue earned from a contract from customer.

Scope – This standard shall be applied to all contracts with customers except the followings.

a.??????Ind AS 116 -?Leases

b.??????Ind AS 104 -?Insurance Contracts

c.??????Ind AS 109 – Contracts within scope of Financial Instruments

d.??????Ind AS 110, 111, 27, 28 – Contracts within scope of these standards.

?Five Step Model

1.??????Identify the Contracts with customer.

A. Contract – a. An agreement

????????????? ??b. Can be written, oral or implied by entity’s customary business practice

c. 2 or more parties

??????????????? d. Legally enforceable

??????????????? e. Right and obligation of both parties must be defined

B. When customer contract does not meet the criteria for identifying the contract and entity have received consideration, revenue to be recognized either in below two cases.

i. The entity has no remaining obligation or all, substantially all of the consideration has been received which is nonrefundable, and

ii. The contract has been terminated and the consideration is nonrefundable.

Until the one of the above events doesn’t occur or the criteria of identifying the contract are not met, consideration received should be recognized as deposit inability. ?

2. Identify the performance obligation in the contract – An entity shall assess each goods or services promised in contract to customer and shall identify as performance obligation either

a. A good or service that is distinct, or

b. Series of similar performance obligation treated as single performance obligation if pattern of transfer is similar.

3. Determine the transaction price

·????????Transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer.

·????????Nature, time and amount of consideration promised in customer may affect he estimate of transaction price.

·????????As or as the entity satisfy the performance obligation, recognizes revenue at the amount of the transaction prices which is allocated to that performance allocation.

4. Allocate the transaction price to performance obligation

·????????General allocation principal – Fairly depict consideration from each performance obligation i.e. based on standalone selling price.

·????????Standalone selling price is the price at which entity would sell a promised goods or service separately to a customer.

5. Revenue Recognition

·????????An entity shall recognize revenue as and when entity satisfies a performance obligation by transferring good or service to a customer.

·????????Transfer refers to when customer obtains control of goods or service. Control can be transferred over a period of time or at a point of time.

·????????Control of an asset refers to the ability to direct the use and ability to prevent other entities from directing the use of, obtaining benefits from an asset.

Some Special Cases

Warranties

1.??????Customer has option to purchase warranty separately - Entity will provide distinct service, as the entity promises to provide in addition to the product’s described functionality.

Here, account for the promised warranty as a performance obligation and allocate a portion of the transaction price to that performance obligation. ?

2.??????Customer does not have the option to purchase separately – Where warranty provides an assurance that product complies with agreed upon specifications.

Here, account for the warranty in accordance with Ind as 37 – Provisions, Contingent Liabilities and Contingent Assets. ?

Significant Financing Component

If the gap between performance obligation and payment is significant (more than 12 months), there is significant financing involved.

Exceptions –

1.??????Transfer of goods/services is at customer’s discretion

2.??????Involvement of variable consideration

3.??????The reason of gap arises for reasons other than the provision of finance. Ex – Customer will pay money retained after the checking the performance of PPE.

Non Cash Consideration

An entity shall measure the non- cash consideration at fair value where customer promises consideration in a form other than cash.

Allocation of Discount

Ex 1-

Situation -1 - Reliance Mart sells product A at Rs. 100000 and B at Rs. 200000. Reliance introduced a product C and which was not previously sold in the market by Reliance or any other entity. It sold the bundle of products A,B,C at Rs. 500000 to a customer. How the reliance will determine the standalone selling price of Product C.

Situation -2- Bundle of Product A and B regularly sold at Rs. 240000.

Sol.

Situation – 1- Here, the Reliance can use residual approach to estimate the standalone selling price of product C. But before applying residual approach, Reliance should assess whether any other observable data exists with the entity to estimate the stand alone selling price of Product C.

As per the residual approach, the stand alone selling price of Product C

= Bundle product price – Price of Product A and B

=500000-300000

=200000

Situation -2- Here, the regular price of bundle of Product A and B is Rs. 240000 which means the discount of Rs. 60,000 belongs to Product A and B. Hence, Reliance will allocate 240000 to product A and B and Rs. 300000 to product C.

Right of Return ??

Ex 2- Entity enters into 1000 contracts with customers with Rs. 50 per contract. Cost of each good is Rs. 30. 30 products will be returned. Find out the amount of revenue, refund liability and the asset to be recognized.

Sol. -

Additional discount offered to Customer on additional purchase of goods or services

Ex 3- Big Bazar offered 40% discount voucher on future purchase to a customer on sale of Rs. 100. Although 10% discount voucher is provided to all the customers for new year promotion activity. As per the entity, there is an 80% likelihood of redemption and estimates customers on an average made additional purchase of Rs. 50 with the voucher. Find out the revenue to be recognized by the entity.

Sol.-

Incremental discount = 40% - 10% = 30%

Standalone selling price of voucher = Avg Purchase * Incremental Discount * Likelihood of redemption

????????????????????????????????????????????????????????????????????= 50*30%*80%

????????????????????????????????????????????????????????????????????= 12

Journal