INDAS 15 Revenue from contract with Customer's

Part 1

Ind AS 115 Revenue from contract with customer

Ind AS 115 is the Indian Accounting Standard issued by the Ministry of Corporate Affairs (MCA), Ind AS 115 became effective for accounting periods beginning on or after April 1, 2018. It replaces the previous Indian standards, including AS 9 "Revenue" and AS 7 "Construction Contracts."

It deals with accounting of revenue from contract with customer to provide goods of services in entity’s ordinary course of business. ???

Overview of Key Principles

Five-Step Model

Ind AS 115 are built around a five-step model for recognizing revenue, which provides a structured approach to dealing with complex revenue transactions. The five steps are:

Contract Identification

The criteria for identifying a contract are consistent across IFRS 15, ASC 606, and Ind AS 115. A contract is identified when:

1. The parties have approved the contract and are committed to performing their respective obligations (parties can terminate the contract on payment of penalty.
2. The rights of each party regarding goods or services to be transferred can be identified.
3. Payment terms are identified.
4. The commercial benefit will flow to the parties.
5. It is reasonably assured that the entity will collect the consideration from the customer.

Identifying Performance Obligations in the contract

The standards require entities to identify distinct performance obligations within a contract. A good or service is distinct if:

1. The customer can benefit from the good or service on its own or when grouped together with other resources readily available to the customer.
2. The promise to transfer the goods or service is separately identifiable from other promises in the contract.

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Transaction Price

Transaction price means consideration that entity expects for transferring promised goods or services to customer(It excludes amount collected on behalf of 3rd party Eg GST).

The transaction price may include fixed amounts, variable consideration, non-cash consideration, and consideration payable by the customer. Variable consideration shall be included in the transaction price if a significant reversal is not expected to occur when the uncertainty is resolved. Variable consideration will not be included in transaction price if consideration is dependent on factors outside the entity influence like Market volatility or amount of price.

Entity shall re-estimate the variable consideration at end of each reporting period. If there is any change in variable consideration on re-estimation, then such change should be accounted for on cumulative catchup basis. ?

Non cash considerations in transaction price measure at fair value of non-consideration received from the customer

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Allocation of Transaction Price

The transaction price is allocated to performance obligations based on the relative standalone selling prices of the goods or services. If standalone selling prices are not directly observable, they must be estimated using appropriate methods such as adjusted market assessment, expected cost plus margin, or the residual approach.

Revenue Recognition

Revenue is recognized when control of the promised goods or services is transferred to the customer. Control can be transferred over time or at a point in time, depending on when the customer gains the ability to direct the use of and obtain the benefits from the asset.

- Over Time: Revenue is recognized over time if any of the following criteria are met:

1. Customer simultaneously receives & consumes the benefit as the entity performs
2. The customer controls the asset as entity creates or enhances the asset.
3. Asset created does not have any alternative use to the entity and entity has enforceable right to receive payment equals to cost incurred plus margin of performance till date in case of termination on contract before maturity.

- Point in Time: If none of the overtime criteria are met, revenue is recognized at a point in time, which is typically when the customer obtains control of the asset.

In case of sales based royalty, Revenue is recognized when the subsequent sale occurs or P.O of which sales based royalty has been allocated is satisfied whichever is later.

Industry-Specific Considerations

While the core principles of IFRS 15, ASC 606, and Ind AS 115 are applicable across industries, certain industry-specific considerations may affect the application of these standards:

Telecommunications

Telecommunications companies often bundle products and services (e.g., a phone with a service contract). The standards require these companies to separate the contract into distinct performance obligations (e.g., the phone and the service) and allocate the transaction price accordingly.

Software and Technology

Software companies frequently sell licenses bundled with maintenance and support services. The standards necessitate identifying distinct performance obligations and recognizing revenue based on the transfer of control over time or at a point in time, depending on the nature of the services.

Construction and Real Estate

For construction and real estate entities, revenue recognition over time is common, as performance obligations are typically satisfied over time. This requires careful consideration of progress measures and the timing of revenue recognition.