Indian Accounting Standard (Ind AS) 115

Revenue from Contracts with Customers

Ind AS 115 Revenue from Contracts with Customers

BackgroundThe Ministry of Corporate Affairs

(MCA), Government of India vide

notification GSR 111 (E) dated 16th

February, 2015 not i f ied the

Companies (India Accounting

Standards) Rules, 2015. The

applicability of these standards to

various listed / unlisted companies

(including their holding, subsidiary,

j o i n t v e n t u r e o r a s s o c i a t e

companies) was laid down in this

notification.

The notification also laid down the

various standards commonly

known as Ind AS. Ind AS standards are in broadly line

with International Financial Reporting Standards

(IFRS).

IFRS 15

IFRS 15 Revenue from Contracts with Customers was

issued in May 2014 and was made effective for an

entity's IFRS financial statements for the periods

beginning on or after 1st January, 2017.

Subsequently, in September, 2015 International

Accounting Standard Board (IASB) deferred the

effective date to 1st January, 2018.

Ind AS 115

The MCA notification dated 16th February, 2015 had

notified Ind AS 115. However, subsequent to the

decision of IASB to defer the implementation of IFRS

15, the MCA vide Companies (Indian Accounting

Standards) (Amendment) Rules, 2016 dated 30th

March, 2016 omitted Ind AS 115 and inserted Ind AS

11 Construction Contracts and Ind AS 18 Revenue. Ind

AS 115 is yet to be notified again.

The following details are on the presumption that

Ind AS 115 when introduced shall be in line with

IFRS 15

1

Summary of Ind AS 115

Standards superseded

Ind AS 115 provides a single comprehensive framework to

be used by businesses to recognize revenue from

customers. The following current revenue recognition

standards & guidance will be superseded by Ind AS 115

Ind AS 11 Construction Contracts

Ind AS 18 Revenue

Appendix A & B – Service Concession Arrangements

(shall become Appendix C & D of Ind AS 115)

Appendix A – Barter transactions involving

advertising services

Appendix B – Customer Loyalty Programmes

Appendix C – Transfer of Assets from Customers

ObjectiveThe objective of this Standard is to establish the principles

that an entity shall apply to report useful information to

users of financial statements about the nature, amount,

timing and uncertainty of revenue and cash flows arising

from a contract with a customer.

Ind AS 115 Revenue from Contracts with Customers2

Ind AS 115 Revenue from Contracts with Customers

The 5 step model frameworkInd AS 115 moves away from the “transfer of risk and

rewards” approach and introduces a new “transfer of control”

approach delivered through the new five-step model.

Identify the with a contract

customerIdentify the

separate performance

obligations in the contract

Determine the transaction price

Allocate the transaction price

to the separate performance

obligations Recognise revenue when (or as) each performance obligation is satisfied

3

Ind AS 115 Revenue from Contracts with Customers

Brief comparison

Ind AS 18 / 11 Ind AS 115

Separate models for:

Construction contracts

Goods

Services

Single model for performance obligations

Satisfied over time

Satisfied at a point in time

Focus on risks and rewards Focus on control

Limited guidance on

Multiple element arrangements

Variable considerations

Licenses

More guidance on:

Separating elements

Allocating the transaction price

Variable consideration

Licenses

Options

Repurchase arrangements…

4

Ind AS 115 Revenue from Contracts with Customers

Key challenges for different industriesThe revenue and profit recognition will change for some entities and they will need to consider

whether revenue should be recognised over time or at a point in time

how shipping term will change the timing of recognition

the extent to which distinct goods or services are supplied, which should be accounted for separately

whether particular costs relating to obtaining a contract must be capitalised

whether revenue must be adjusted for the effects of the time value of money

how to account for contract modifications

the impact of new guidance where pricing mechanisms include variable amounts

whether accounting treatment will be changed for different types of licenses and royalties

accounting for warranty covers given to customers

5

Ind AS 115 Revenue from Contracts with Customers

Major Considerations

Contract Modif icat ion

A separate contract

NOT a separate contract

Contract

6

Modificatio

n

Original

Contract

Modifi

catio

n

Original

Original

Additional goods / services distinct

Consideration for additional goods / services reflects their stand-alone selling price

Additional goods / services distinct, NOT OR

Consideration for additional goods / services DOES NOTreflect their stand-alone selling price

7Ind AS 115 Revenue from Contracts with Customers

7

When to Recognize revenue?

Customer receives / consumes as the simultaneouslyentity performs

Entity creates / enhances an asset and customer controls it during this process

Created asset has to the entity + no alternative usethe entity had for enforceable right to paymentperformance up to date

Yes No

Revenue AT THE POINT OF time

Revenue OVER time

When control is transferred Based on progress

Ind AS 115 Revenue from Contracts with Customers

Some issues Revenues from manufactured goods may historically have been recognized on

delivery to the customer. Now, if the contract meets the 'over time' test, then the revenue would be recognized as the manufacturing happens – akin to current long-term contract accounting

Free goods and services as well as options for additional goods and services for a discounted price might be separate performance obligations

Cash incentives and incentives to provide free or discounted goods can be separate performance obligations rather than marketing incentives

Non-performance penalties (e.g. for failure to meet service level agreements) will generally need to be deducted from revenue rather than charged as an expense

The accounting for contract modifications is complex and differs significantly depending on whether a new performance obligation is created and on the pricing

Extended payment terms might result in recognition of interest revenues

Analysis of contracts for integrated solutions (more relevant in case of technology sector) to conclude whether one or multiple performance obligations exist and what revenue pattern is appropriate

The determination of whether warranty is an assurance-type or service-type warranty will require professional judgement

Cash received more than a year in advance is seen as a loan – the related 'financing cost' is recorded as an interest expense.

8

Ind AS 115 Revenue from Contracts with Customers

Way Forward

Contracts with Customers

Existing contract reassessment New contract definition Payment terms

Contract Performance Obligations

Service commitment Product delivery Method of measuring progress

Transaction Price

Discounts Refunds Rebates

Credits Incentives Bonus

Allocate Transaction Price

Standard Price Discounts Allocations

Service and Product Delivery Commitment

Recognize revenue when a Performance Obligation is met

Direct Labour Direct

Materials

Allocation of Overheads

Explicitly chargeable Cost

9

Ind AS 115 Revenue from Contracts with Customers

Disclosure Requirements

Ind AS 115 significant disclosure requirements are in line with the new standard's

objective of providing users of financial statements with information that will help them

understand the nature, amount, timing and uncertainty of revenue and cash flows

arising from the entity's contracts with customers

Disclosures

Information about

contracts with customers

Info

rmatio

n

about

perfo

rman

ce

oblig

ations

Info

rmatio

n

about co

sts to

obtain

or fu

lfill

the co

ntract

Info

rmat

ion

about

dis

aggre

gat

ion

of

reve

nue

Information

about

judgements

used

Info

rmati

on

about

reco

nci

liati

on o

f co

ntr

act

rev

enue

10

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