revenue from contract with customers · 2018-06-18 · ind as 11 construction contracts •...
TRANSCRIPT
IND AS 115REVENUE FROM CONTRACT WITH CUSTOMERS
• IFRS 15 (IASB) & ASC 606 (FASB) issued in May 2014 to be madeeffective w.e.f. 01/01/2017
• Ind AS 115 was notified on 16/02/2015
• IFRS 15 & ASC 606 postponed in September 2015 to be madeeffective w.e.f. 01/01/2018
• Ind AS 115 replaced by Ind AS 11 (Construction Contracts) andInd AS 18 (Revenue) in March 2016
• Ind AS 115 notified on 28/03/2018 and made effective from01/04/2018
Background
• Value of a business
• Growth of business
• Market share / gross merchandise value
• Compensation packages linked to profits / revenue
• Ratio analysis – related to revenue / turnover
• Taxation based on revenue
Importance of revenue
Construction ContractsInd AS 11• Appendix A & B – Service Concession Arrangements (shall become
Appendix D & E of Ind AS 115)
RevenueInd AS 18• Appendix A – Barter transactions involving advertising services• Appendix B – Customer Loyalty Programs• Appendix C – Transfer of assets from Customers
ICAI GN
Standards superseded
Accounting for Real Estate Transactions
Objective
Revenue
What is being sold
At what price it is
being sold
When is it being sold
Whether money will be
recovered
• Lease contracts covered under Ind AS 17
• Insurance contracts covered under Ind AS 104
• Financial Instruments and other contractual rights / obligationsthat belong to Ind AS 109, 110, 111, 27 & 28
• Non-monetary exchanges between entities within the samebusiness
Exceptions
Interaction with other Ind ASsIs the contract fully within the scope of OTHER Ind AS?
Is it partially within the scope of OTHER Ind AS?
Apply the other Ind AS
Any guidance in that Ind AS to separate the components?
Apply Ind AS 115 guidance to separate
the components
• Apply that guidance to separate the components• Exclude the amount allocated to non-revenue component
under that Ind AS from the transaction price under Ind AS 115
No
No
Yes
Yes
Yes
• Contract is an agreement between two or more parties thatcreates enforceable rights and obligation.
• Customer is a party that has contracted with an entity to obtaingoods or services that are an output of the entity’s ordinaryactivities in exchange for consideration
• Stand alone selling price is the price at which an entity wouldsell a promised good or service separately to a customer
• Performance obligation is a promise in a contract with acustomer to transfer to the customer either:– A good or service (or a bundle of good or service) that is distinct; or
– A series of distinct goods or services that are substantially the same andthat have the same pattern of transfer to a customer
Concepts
Contract asset / liability
Contract Asset
An entity’s right toconsideration in exchange forgoods or services that theentity has transferred to acustomer when that right isconditioned on somethingother than the passage oftime
Contract Liability
An entity’s obligation totransfer goods or services to acustomer for which the entityhas received consideration (orthe amount is due) from thecustomer.
Distinct goods / services
Step I
Whether the good or service is
capable of being distinct
Can the customer benefit from the individual good or service
on its own or together with other readily available resources
Step II
Whether the good or service is distinct
within the context of the contract
Is the entity’s promise to transfer the good or service separately
identifiable from other promises in the contract?
A contractor contracts to build a new warehouse for a customer and is responsible for the entire project including procuring the materials, project management and other services. This involves site clearance, foundations, construction, piping and wiring, equipment installation and finishing.
Distinct goods / services
Although the goods or service to be supplied are capable of being distinct (customer can benefit from them by using or consuming the good or service, and can purchase them from other suppliers), they are not distinct in the context of the contract.
The contractor provides significant service of integrating all inputs into the warehouse which it has contracted to deliver to its customer.
A software developer contracts with a customer to transfer the following: • Software license (off the shelf software package); • Installation service; • Unspecified software updates; and • Technical support for 2 years. The installation service is routinely performed by other entities. The software remains functional without the updates and the technical support.
Distinct goods / services
• The software is delivered before the other goods or services and remains functional without the updates and the technical support. The installation service does not significantly modify or customize the software itself.
• The promise to transfer each good and service to the customer is separately identifiable from each other. The customer can benefit from each of the goods and services either on their own or together with the other goods and services that are readily available.
• Based on the assessment, four distinct goods or services are identified.
Core principle
Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services
Revenue – the 5 step approach
Identify the contract with the customer
Identify the performance obligations in the contract
Determine the transaction price
Allocate the transaction price
Recognise revenue when (or as) a performance obligation is satisfied
1
2
3
4
5
Step 1: Identify the
Contract
• Parties to the contract must have approved tothe contract and are committed to performthe promised obligations
• Each party’s right to goods / services can beidentified
• Payment terms for goods / services can beidentified
• The contract has a commercial substance
• It is probable that the entity will collect theconsideration
Attributes of a contractOral
Written
Implied
Criteria Action
Reassess only ifsignificantchangeContinue toassess
Contract does not
exist
The entity has not yet transferred any promised
goods or services to the customer
On exercise of termination right,
termination payment is NIL
or not substantive
The entity has not yet received,
and is not yet entitled to
receive, any consideration
Wholly unperformed contract
Contract does not meet criteria
Consideration received from
customer
The entity has no remaining obligations to transfer goods / services to the customer, and
all of the consideration promised by the customer has been received by the entity as
non-refundable or
The contract has been terminated and the
consideration received from the customer is non-refundable
Recognition of consideration received as revenue
Combination of contractsAre the contracts entered into at or near the same time with the same customer or related parties of the customer?
Are one or more of the following criteria met?• Contracts were negotiated as a single commercial
package• Consideration in one contract depends on the
other contract• Goods or services (or some of them are a single
performance obligation
Account for as
separate contracts
Account for together as single contract
No
No
Yes
Yes
Goods / services (1) Goods / services (2)
Car Additional Warranty
Data / Voice services Mobile handset
Audit of Standalone Financial Statements
Audit of Consolidated Financial Statements
Combination of contracts
A software company contracts to license its software. After a week, the software company agrees to provide consulting service to customise the software. The customer can use the software only after its customisation.
Original/ Modification
Additional Goods & Services are NOT
distinct Additional Goods &
Services ARE distinct
Additional consideration DOES
NOT reflect their standalone selling price
NOT a Separate Contract
Additional consideration DOES
reflect their standalone selling price
Separate Contract
Contract Modifications
OR AND
Contract ModificationsIs contract modification approved by all parties to the
contract
Yes
Does the modification only affect the transaction price?
No
Does the modification consist of a distinct PO?
Does the contract price increase by an amount that reflects the standalone price of the distinct PO?
Yes
No
Yes
Yes
No change
Are remaining POs distinct?
No
No
No
Cumulative catch up basis
Account for modification prospectively
Account for modification as a separate contract
Yes
Original contract – audit & assurance services at ` 10 lacs• Introduction of Ind AS 115 – additional ` 2 lacs
– The modification affects transaction price but additional PO is not distinct– Not a separate contract– ` 12 lacs will be accounted on cumulative catch up basis
Contract modification
• Filing of income tax return – additional ` 0.15 lacs – standalone selling price ` 0.75 lacs– Distinct PO– But does not reflect standalone selling price of additional service– Not a separate contract– ` 0.15 lacs will be accounted as modification prospectively
• Annual compliances under Companies Act – additional ` 0.45 lacs – standalone selling price ` 0.50 lacs– Distinct PO– Reflects standalone selling price of additional service– A separate contract– ` 0.50 lacs will be accounted as a separate contract
Step 2: Identify Performance Obligations
Performance Obligation (PO)Performance Obligation:A performance obligation is a promise (explicit orimplicit) to transfer to a customer either:• A distinct good or service• A series of distinct goods or services that are
substantially the same and have the same patternof transfer
Determining Performance Obligation:Performance obligations are identified at contractinception and determined based on:• Contractual terms• Customary business practices
• Entity enters into a contract to manufacture and install customized equipment and provide maintenance services for a five-year period
• Installation services include the integration of multiple pieces of equipment at the customer’s facility in order for the equipment to operate as a single unit
• Equipment cannot operate without installation
• Entity sells equipment and installation services together, it does not sell installation separately
• Other vendors can provide the installation services
• The maintenance services are sold separately
Performance Obligation
Step 1Capable of being distinct
Step 2Distinct within the context of the
contract
Equipment Equipment cannot be used without installation, but customer can obtain installation from another source. Equipment is capable of being distinct. Move to Step 2.
Equipment and installation are highly interrelated. Significant customisation is required during installation. Equipment isn’t distinct on its own because it must be combined with installation.
Installation Installation can be provided by multiple vendors, so service is capable of being distinct. Move to Step 2.
As per above, Equipment and installation are not distinct from one another.
Maintenance Services have a distinct function because they are sold separately. Move to Step 2.
Services are not highly interrelated. No integration, modification or customisation required. Services are distinct.
Performance Obligation
There would be two performance obligations: (1) the equipment and installation because they are not individually distinct; (2) maintenance services because they are distinct services in the contract.
• Entity E enters into a contract with Customer F to construct a brand new high-end power station. Control of the power station is expected to transfer at the end of five years.
• It is the first power station of this particular design and Entity E agreed to provide support to Customer F in connection with the general maintenance of the plant for the first year of operation free of charge.
• Entity E also provides similar maintenance services to other power stations.
How many performance obligations exist in this agreement?• One - the maintenance service is not a distinct performance obligation. It is a
marketing expense and costs should be expensed as incurred.• Two - the construction of the plant and maintenance represent two distinct
performance obligations. They can be sold separately to the customer.• Many - each component of the power station that can be sold separately (for example,
the generator) is a distinct performance obligation.
Performance Obligation
A telecommunications company, offers the following bundled package:
• Broadband: upto 25MB including a free router and free activation– Customers can use their own router. However, this would not result in any
discount.
• Mobile phone: a mobile phone plus 500 minutes per month– Customers can use the handset with different service providers.
• TV: 10 designated entertainment channels with a free TV box – The TV box can only be used to watch the designated channels offered by
the Company.
• An engineer activates the broadband by enabling a live connection to the customer’s house.
How many performance obligations are included in the bundled package?
Performance Obligation
Five Six Seven
Government I engaged with Entity X to build a high-security prison. Entity X is responsible for the overall management of the project, including prison design, site clearance, construction of foundations and structure, installation of CCTV and establishment of fences. There are competitors that offer similar services or sell similar goods.
How many performance obligations does Entity X have in the contract with Government I?
Performance Obligation
One Five
Step 3 Determine the transaction price
Includes
Variable Consideration
Significant Financing
Component
Non-Cash Consideration
Consideration payable to Customer
Excludes
Amounts collected on behalf of third
parties
Discount, rebate, price concessions
Time value of money
Materials, services, equity shares
Coupons, vouchers, loyalty
points
GST
Transaction Price
• Includes discounts, rebates, refunds, credits, price concessions, incentives,performance bonus, contingencies of a future event i.e. refund rights andpenalties
Factors constraining estimates of
variable consideration
Factors outside the entity’s influence
Uncertainty over long period of
time
Limited experience or
experience with limited
predictive Value Broad range of price concessions
or changing payment terms and conditions
Broad range of possible
consideration amounts
Variable Considerations
• Sale of land to real estate developer where selling price is fixed +variable upon future selling price by developers.
• Index based pricing in commodities (steel, copper) where price atthe time of shipment is provisional and final pricing is based onfuture price.
• Discount amount reimbursed by pharma company to distributorwhich sells to affiliated hospitals and historical data of sales toaffiliated hospitals varies significantly from period to period.
Examples of constraints
Variable ConsiderationConsideration in a contract with customer is FIXED?
Estimate the variable amount using:• Expected value method• Most likely method
Apply the constraint i.e. determine the amount for which it is highly probable that a significant
revenue reversal will not subsequently occur
Include the amount in the transaction price
No
Yes
Estimation of variable considerationExpected Value Method Most Likely Amount Method
• Sum of probability-weightedamounts from a range ofpossible considerationamounts.
• An appropriate estimate forlarge no. of contracts withsimilar characteristics.
• Single most likely amount in arange of possibleconsideration amounts.
• It is an appropriate estimate ifthe contract has only two orvery few possible outcomes.
• All information i.e. historical, current and forecast should be considered• Selected method to be applied consistently throughout the contract for
each type of variable consideration (different variable considerationdifferent method possible in same contract)
• Consistent method should be applied for similar types of variableconsideration in similar types of contracts
• Sale to retailer of 1,000 units @ INR 5,000 per unit totalling INR50,00,000
• Price protection to retailer for 3 months for difference between5,000 and retailer’s selling price
• Based on experience with similar retailer arrangements,following outcomes estimated:
Expected Value Method
Price reduction (` per unit) NIL 500 1,000Probability 75% 20% 5%
Transaction price shall be INR 4,850 per unit (5,000*75%) + (4,500*20%) + (4,000*5%)
• Contract to construct a factory• If completed on time consideration is INR 25 crores• If delayed then consideration will be INR 23 crores• Based on experience with similar contracts, following outcomes
estimated:
Most Likely Amount Method
Outcome Consideration ProbabilityCompleted on time INR 25 crores 75%Completion is delayed INR 23 crores 25%
Transaction price shall be INR 25 crores considering that the most likely outcome would provide the best prediction
• Retailer sells product and agrees to reimburse for the differencebetween purchase price and any lower price offered by anothervendor during the next 2 months
• The retailer has experience with similar promotions andestimates that on a probability weightage basis it will need toreimburse 2% of the selling price to 15% of the customers
Refund Obligations
The consideration expected to be repaid to the customers is excluded from the revenue and
recorded as a liability
• Recognise refund liability if consideration has been received andentity expects to refund some or all of the consideration to thecustomer
• Refund liability shall be updated at the end of each reportingperiod
• Exchanges of products for another of the same type, quality,condition and rice are not considered returns
Right of Return
• Measured at gross transaction price less expected level of returnsRevenue
• Measured at expected level of returnsRefund Liability
• Measured at previous carrying amount of the products expected to be returned, less the expected recovery cost
Asset
• Measured as the carrying amount of the products sold less the assets as measured above
Cost of Goods Sold
Right of Return
• Sale of 100 units @ 50/-; Cost of Goods Sold @ 35/-• Retailer policy – return within 30 days • Retailer estimates 20% returns; only 5% returned within 30 days
Transaction Entry Debit Credit
Sale of goods Cash / BankTo, RevenueTo, Refund Liability
5,0004,0001,000
Right to recover goods Asset (Right to recover)Cost of SalesTo, Inventory
7002,800
3,500
Return & refund Refund liabilityTo, Cash / BankInventoryTo, Asset (Right to recover)
250
175250
175
Revenue recognition – non returned
Refund LiabilityTo, RevenueCost of SalesTo, Asset (Right to recover)
750
525750
525
Right of Return
Significant financing component
Interest component to becalculated using the discountingtechnique and discount ratefixed at contract inception itself.
• Interest Expense whencustomer pays in advance.
• Interest Income whencustomer pays at a laterdate.
• To be disclosed separatelyfrom other interest incomes/ expenses
If time gap
more than one year
CONSIDER(a) Difference between
amount of promisedconsideration and thecash selling price ofthe promised goodsor services.
(b) Combined effect ofexpected length oftime between transferand payment of thepromised goods andservices andprevalent interestrates in market.
Situation ContractAdvance is paid by the customer and thetransfer of the goods and/or services is atthe discretion of the customer
Customer loyaltypoints or prepaidmobile cards
Substantial amount of the considerationpromised by customer is variable and theamount or timing varies on occurrence ornon-occurrence of future event
Sales based royalty
Difference between the promisedconsideration and the cash selling priceexists due to some other specified reason.
Price escalation
Significant financing componentA contract would not have a significant financing component
• Such consideration should be measured at fair value of the assetbeing transferred or promised to being transferred by the customer.
• If entity cannot reasonably estimate the fair value of non cashconsideration, the entity should measure such consideration at thestand alone selling price of the goods or services of the entitypromised to the customer.
• Supply of inputs by customer like materials, labour, etc. shall bevalued as non cash consideration received from customer.
Non cash consideration
• A print media company enters into advertising contract• Consideration for advertisement services is warrants convertible
into equity shares• Performance of contract is consistently satisfied over time
Non cash consideration
• Media company should recognise revenue on satisfaction ofperformance obligation each month
• Transaction price shall be the fair value of convertible warrants• There can be the following possible fair value measurement dates
• Contract inception• At the time performance obligation is completed• When shares are received
• No adjustment should be made as a result of subsequent changes in fairvalue of shares
Consideration paid /payable to customer
Does the consideration payable to a customer (direct or indirect) represent payment towards a distinct goods or service?
Can fair value of the good or service received be reasonably
estimated?
Consideration paid / payable is reduced from
transaction price
Does the consideration paid / payable exceed the fair value of the distinct good or service?
• Excess of consideration paid / payable is reduced from transaction price
• Remainder is accounted for payment towards the purchases
Yes
No
No
Yes
YesConsideration paid / payable is accounted for payment towards the purchases
No
• A global Brand enters into a contract to sell goods with a retailer• The Brand pays upfront ` 10 million for advertisement and
promotions during the 1st month of contract which is the fair valueof advertisement services that it would have paid independently
• A payment of ` 1 million is also paid by the brand for expenses to beincurred by customer in displaying its products
Consideration paid /payable to customer
Since the Brand would have had to pay similar amount for advertisementservices independently, the payment is in exchange for distinct good orservice. The consideration of ` 10 million is accounted for as advertisementexpenses. The entity shall not reduce the transaction price
The payment to the retailer is not in exchange for distinct good or servicethat transfer to the entity. This is because the Brand does not obtain control fany right to the retailers’ store. Hence, ` 1 million is a reduction of thetransaction price.
Step 4: Allocate the transaction price to
the performance obligations
No
Allocating transaction price
Determine stand-alone selling prices – is the price directly observable?
Use observable prices
Estimate the price
Adjusted market assessment approachExceptions to the
allocation requirement:• Discount• Variable consideration Residual approach
Expected cost plus approach
Performance Obligation 1
Performance Obligation 2
Performance Obligation 3
Yes
Adjusted market assessment approach
Estimate the price thata customer in thatmarket would bewilling to pay forthose goods orservices or prices fromcompetitors for similargoods or services.
Expected cost plus a margin approach
Forecasting expectedcosts of satisfying aperformanceobligation and thenadding appropriatemargin for a good orservice
Residual approach
Total transaction priceLess sum ofobservable standaloneselling prices of othergoods and services.
Estimating the price
Residual approach should only be used when• The entity sells the same goods or services to different customers for a broad
range of prices, making them highly variable, or• When the entity has not yet established a price for a good or service because it
has not been previously sold
Discount and Variable ConsiderationDiscount=Sum of StandaloneSelling Prices Less PromisedConsideration.
Allocation of Variable Consideration
If clearly observable allocate to one or moreperformance obligation; elseallocate on the basis of relative standalone sellingprices of goods or services.
Changes in Transaction PriceAfter the contract inception subsequent changes if any shall berecognized as revenue or reduction from revenue by the entity andthe transaction price should not be reallocated.
External factors Internal factorsCompetitor pricing for a similar or identical product
Internal cost and profit strategy
Market awareness and perception of the product
Pricing practices and policies
Market trends that may impact pricing
Product differentiation
Effects of customisation on pricing Pricing practices for pricing of bundled products
Effects of the geographic area on pricing
Expected life of the product, including technological advancement expected
Market share and position
Estimating stand-alone selling price
• An entity offers a new promotion package where customers can purchase a phone, subscribe for a 12-month airtime plan and receive a ‘free’ tablet for a total price of ` 8000.
• This reflects a 20% discount from the standalone selling prices of the items which are as follows:– Phone: ` 3000 – Airtime: ` 3000 – Tablet: ` 4000
• The entity regularly offers bundled packages for the phone and a 12-month airtime plan for ` 4000.
Allocation of transaction price
Phone: ` 2400, Airtime: ` 2400, Tablet: ` 3200, based on 20% discount applied proportionally to all three performance obligations
Phone: ` 2000, Airtime: ` 2000, Tablet: ` 4000, based on the entire discount being allocated to the phone and airtime because there is objective evidence that the discount relates to those two performance obligations
Step 5: Recognize Revenue
Tran
sfer
of C
ontr
ol
Ability to direct the use of, and obtain substantially all of the remaining benefits from
the asset
Ability to prevent other entities from directing the use of, and obtaining benefits from, an asset
Benefits of an asset are the potential cash flows that can be obtained directly or indirectly in
many ways
Model is based on transfer of control
Revenue from PO
• Control of an asset refers to the ability to direct the use of, and obtainsubstantially all of the remaining benefits from, the asset
• Control includes the ability to prevent other entities from directing theuse of, and obtaining the benefits from, an asset
• The benefits of an asset are the potential cash flows (inflows or savingsin outflows) that can be obtained directly or indirectly in many ways,such as by:
a) using the asset to produce goods or provide services (includingpublic services);
b) using the asset to enhance the value of other assets;c) using the asset to settle liabilities or reduce expenses;d) selling or exchanging the asset;e) pledging the asset to secure a loan; andf) holding the asset.
Transfer of Control
• A book publisher enters into a contract with a book store (customer) to provide 1,000 physical copies of a highly anticipated book
• The contract stipulates that the customer cannot sell the book until June 15th June, 2018
• The book publisher delivers the books to the customer on 5th
June, 2018
When does the customer obtain the control of the books?
Transfer of Control
• Revenue is recognized upon satisfaction of a performanceobligation by transferring the promised good or service to acustomer
• A good or service is considered to be transferred when (or as) thecustomer obtains control
• Performance obligations are either satisfied over time or at a pointin time
Recognition of Revenue
Customer simultaneously receives / consumes as the entity performs
Entity creates / enhances an asset and customer controls it during this process
Created asset has no alternative use to the entity +the entity had enforceable right to payment for
performance up to date
Rev
enue
OV
ER ti
me
Rev
enue
at P
OIN
T IN
TIM
E
NoYes
Yes
Yes
No
No
Point in Time vs. Over Time
If a performance obligation is not satisfied over time, an entity satisfies theperformance obligation at a point in time.
Indicators are as under:
i. The entity has present right to payment for the assetii. The customer has legal title to the assetiii. The entity has transferred physical possession of the assetiv. The customer has the significant risks and rewards of ownership of
the assetv. The customer has accepted the asset
Point in Time
Customer simultaneously receives / consumes as the entity performs
The part constructed real estate unit is not consumed immediately /simultaneously as work progresses
Real Estate Contracts
Entity creates / enhances an asset and customer controls it during this process Although the customer can resell or pledge its right, it is unable to sell
without holding legal title to it
Customer has no ability to direct the construction or structural design
Customer has legal right to replace the developer only if developer fails toperform as promised (protective but no control)
Exposure to changes in market value of real estate may indicate thatcustomer has ability to obtain all of the remaining benefits from the unit.However, it does not give ability to direct the use of unit as constructed.
Real Estate ContractsCreated asset has no alternative use to the entity + the entity hadenforceable right to payment for performance up to date
The developer cannot change or substitute the unit specified in thecontract. The customer can enforce its right if the developer soughtto direct the asset for another use
However, developer does not have enforceable right to payment forthe performance completed to date as the customer has the legalright to cancel the contract and termination penalty cannotcompensate the developer for the performance completed till date
POINT IN TIME
• Revenue is recognized over time by measuring progress towardcompletion
• The objective is to most faithfully depict an entity’s performance• Apply a single method of measuring progress for each performance
obligation satisfied over time• Output methods• Input methods
• Apply consistent method for similar performance obligations insimilar circumstances
• If unable to reasonably estimate progress, revenue should not berecognised until progress can be estimated
• However, if an entity expects to recover the costs, the entity shouldrecognise revenue up to costs incurred
Measuring progress
Output Method Input MethodBased on direct measurements ofthe value to the customers ofgood or service transferred todate, relative to the balancegoods or services promisedunder the contract
Based on the entity’s efforts orinputs to satisfy the performanceobligation, relative to the totalexpected inputs to thesatisfaction of that performanceobligation
• Appraisals of results achieved• Milestones reached• Survey of performance to date
• Resources consumed• Cost incurred• Time elapsed• Labour hours
Methods to measure progress
Contract Costs
Costs of obtaining a contract
Costs of fulfilling a contract
Contract costs
Costs to obtain a contractDo the costs incurred to obtain a contract represent consideration
paid/ payable to the customer?
Apply Ind AS 115 guidance (reduction
from revenue)
Would the costs be incurred regardless of whether the contract is obtained?
Do they meet the capitalisation criteria as fulfilment costs?
Expense as incurred
Yes No
Yes
No
Capitalise the costsYes
Are the costs incremental expected to be recovered?
No
Yes No
Amortise contract asset on a systematic basis consistent with transfer to customer ofgoods or services to which asset relates.Recognize impairment loss to the extent carrying amount exceeds remaining amountof consideration less costs related to goods and services not recognized as expense.
• Telecom entity sells telecom service plans from its retail store• Monthly rent paid Rs. 2 lacs• Salary to sales agent paid Rs.10 lacs• Commission on sale of 2-year plans to customers Rs. 2.50 lacs• Net subsidy on handsets sold Rs. 2.50 lacs• Monthly advertisement cost Rs. 2 lacs
Contract costs
Cost TreatmentRent ExpenseSalary ExpenseCommission Capitalise over 2 yearsHandset subsidy Cost of goods soldAdvertisement Expense
Assurance type Service typeWarranties that promise thecustomer that the deliveredproduct is as specified in thecontract
Warranties that provide a serviceto the customer in addition toassurance that the deliveredproduct is as specified in thecontract
Not a separate performanceobligation
A separate performance obligation
• Warranty with sale of printer • Extended warranty beyondperiod of assurance warranty
Warranties
• Sale of car with assurance warranty for 2 years & 3 free services in 2 years for ` 10,00,000
• Extended warranty sold for another 3 years for additional ` 25,000
Warranties
Entry Debit CreditBankTo, RevenueTo, Contract Liability (free service)To, Contract Liability (service type warranty)
10,25,000925,00075,00025,000
Warranty costsTo, Warrant provisions (assurance type warranty)
50,00050,000
Parties
• Grantor• Operator• General Public
Features
• Operator is responsible for operation & management
• Contract sets the initial price and regulates future revisions
• Operator is obliged to handover the infrastructure to the grantor at little or no incremental consideration
Grantor controls & regulates
• What services are to be provided
• To whom services are to be provided
• At what price it must be provided
Service Concession Arrangements
NoNo
No
YesYes
Yes
Yes
NoYes
Yes
No
Service Concession ArrangementsDoes the grantor control or regulate what services the operator must provide with the infrastructure, to whom it must provide & at what price?
Does the grantor control, through ownership, beneficial entitlement or otherwise, any significant residual interest in the infrastructure at the end of the service arrangements? Or is the infrastructure used in the arrangements for the entire useful life?
Outside the scope of
Appendix D to Ind AS
115
Is the infrastructure constructed or acquired by the operator from a third party for the purpose of the service arrangement?
WITHIN THE SCOPE OF APPENDIX AOperator does not recognise infrastructure as property, plant and equipment or as a leased asset.
Operator has contractual right to receive cash or other financial asset from or at direction of the grantor as per Appendix D?
Is the infrastructure existing infrastructure of the grantor to which the operator is given access
No
Operator has contractual right to charge users of the public services as per Appendix D?
Outside the scope of
Appendix A
Operator recognises a financial asset to the extent that it has a contractual right to receive cash or another financial asset
Operator recognises an intangible asset to the extent that it has a contractual right to receive an intangible asset
• the date of initial application is the start of the reporting period in which an entity first applies this Standard - 1st April, 2018
• a completed contract is a contract for which the entity has transferred all of the goods or services identified in accordance with Ind AS 11, Construction Contracts and Ind AS 18, Revenue.
• An entity shall apply this Standard using one of the following two methods:
– Full retrospective method
– Modified retrospective method
Transitional provisions
Full retrospective methodEntities can recognize the cumulative effect of applying the new standard at the start of the earliest period presented. Practical expedients:For completed contracts, an entity need not restate contracts that began and ended in the same annual reporting period.An entity can choose not to restate contracts that are completed contracts at the beginning of the earliest period presented.For completed contracts that have variable consideration, an entity may use the transaction price at the date on which the contract was completed, rather than estimating amounts for variable consideration in each comparative reporting period.For modified contracts, an entity need not separately evaluate the effects of the contract modifications before the beginning of the earliest period presented. Instead, an entity may reflect the aggregate effect of all of the modifications that occur before the beginning of the earliest period presented. For all periods presented before the date of initial application, an entity need not disclose the amount of the transaction price allocated to remaining performance obligations, nor an explanation of when it expects to recognize that amount as revenue.
Modified retrospective method• An entity applies the new standard as of the date of initial application,
with no restatement of comparative period amounts.
• It records the cumulative effect of initially applying the new standard –which affects revenue and costs – as an adjustment to the opening balance of equity at the date of initial application.
• Under the cumulative effect method, an entity can choose to apply the requirements of the new standard to
– all contracts at the date of initial application; or
– only contracts that are open (i.e. not complete as defined under the new standard) under current GAAP at the date of initial application.
Practical expedients:For modified contracts, an entity need not separately evaluate the effects of the contract modifications before the beginning of the earliest period presented. Instead, an entity may reflect the aggregate effect of all of the modifications that occur before the beginning of the earliest period presented.
Year ending 31st March 2016 2017 2018 2019 TotalComparatives Current 2017+18+19
Current GAAP 250 250 250 250 750Ind AS 115 750 150 50 50
Transitional provisions impact
Full retrospective methodRevenue 150 50 50 250Adjustment to opening equity* 500 500* Calculated as 750 - 250, being the amount of revenue that would have been recognized under the new standard in 2016 less the actual amount of revenue recognized in 2016 under current GAAP
Modified retrospective methodRevenue 250 250 50 550Adjustment to equity** 200 200** Calculated as 950 - 750, being the amount of revenue that would have been recognized under the new standard in 2016, 2017 and 2018 less the amount of revenue recognized in 2016, 2017 and 2018 under current GAAP
When either party to a contract has performed, an entity shall present the contract in the balance sheet as a contract asset or a contract liability or a receivable.
Presentation
Right to consideration in exchange for goods or servicesthat the entity has transferred to a customer
Contract Asset
Right to consideration that is unconditional, i.e. only thepassage of time is required before payment of thatconsideration is due
Receivable
Obligation to transfer goods or services to a customerfor which the entity has received consideration (or anamount of consideration is due) from the customer
Contract liability
Contract assets and receivables are subject toimpairment review in accordance with Ind AS 109
DisclosuresRequirements Disclosures
Contracts with customers Revenue from contracts, separately from itsother sources of revenue
Disaggregation of revenue into categories Contract balances Performance obligations and transaction
price allocated to the remaining obligations.Significant Judgements for performance obligations
Timing of satisfaction Transaction price and amounts allocated
Contract costs Assets recognised from the costs to obtain orfulfil a contract with customer
• 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 contract must be
capitalised• Whether revenue must be adjusted for effects of 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
Key challenges
Industry ChallengesIn
dust
rial
Pr
oduc
ts•Timing of revenue recognition
•Warranties•Long Term
Maintenance contracts
IT &
ITeS •Bundled
Services•Unspecified
Software upgrades
•Point in time
Min
ing
& M
etal
s •Production Sharing Contracts
•Provisionally priced revenue contracts
•Stripping costs
Tele
com •Identification
of distinct promises
•Upfront fees•Contract
acquisition costs
Phar
ma •Collaborative
arrangements•Right & returns•Rebates &
Customer incentives
•Free Products
Leis
ure
& H
ospi
talit
y •Distinct Performance Obligations
•Principal vs. Agent
•Membership Fees
•Customer Loyalty Points
FMC
G •Customer Incentives
•Customer Loyalty Programs
•Gift Cards
Aut
omot
ive •Tooling
Equipment•Customer
Incentive•Contract
Modification
Industry Challenges
Engi
neer
ing
and
Con
stru
ctio
n • Combining Contracts• Contract Modification• Distinct Goods & Services• Variable Consideration• Customer Furnished Material• Significant Financing Component• Point in time vs. Over time• Measuring Progress• Contract Costs
• Airbus
• Thyssenkrupp
• British Telecom
Extracts from financials
Contract with Customer
Distinct goods or services
Performance Obligations
Transaction Price
Variable consideration
Allocate Price Recognise Revenue
Presentation
Disclosures
Simple process
