3.

12 FINANCIAL REPORTING

either party at any time. Other contracts may automatically renew on a periodic basis that is
specified in the contract. An entity shall apply this Standard to the duration of the contract (ie the
contractual period) in which the parties to the contract have present enforceable rights and
obligations.
5.3.1 Termination provisions
Some contracts can be terminated by either party at any time while others may only be terminated
by one party. The 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. A ‗wholly
unperformed‘ contract means that the entity hasn‘t yet performed and is not entitled to any
consideration.
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.
However, a substantive termination penalty payable by a customer to the entity is evidence of
enforceable rights and obligations of both parties throughout the period covered by the termination
penalty. For example, consider a four-year service contract in which the customer has the right to
cancel without cause at the end of each year, but for which the customer would incur a termination
penalty that decreases each year and is determined to be substantive. Then, this arrangement
would be treated as a four-year contract only and contract term should not be assessed less than
four years unless the entity has past experience of having such contracts terminated by this
customer or class of customer which may demand to assess the contract term basis as per
previous trend.
Illustration 2
A gymnasium enters into a contract with a new member to provide access to its gym for a
12-month period at ` 4,500 per month. The member can cancel his or her membership without
penalty after three months. Specify the contract term.
Solution
The enforceable rights and obligations of this contract are for three months, and therefore the
contract term is three months.
Illustration 3
Contractor P enters into a manufacturing contract to produce 100 specialised CCTV Cameras for
Customer Q for a fixed price of ` 1,000 per sensor. Customer Q can cancel the contract without a
penalty after receiving 10 CCTV Cameras. Specify the contract units.
Solution
P determines that because there is no substantive compensation amount payable by Q on
termination of the contract – i.e. no termination penalty in the contract – it is akin to a contract to
produce 10 CCTV Cameras that gives Customer Q an option to purchase an additional 90 CCTV
Cameras. Hence, contract is for 10 units.
*****

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5.4 Combining contracts

An entity should combine two or more contracts and account for them as a single contract in
certain circumstances because the substance of the individual contracts cannot be understood
without considering the entire arrangement. This evaluation takes place at contract inception.
Two or more contracts may need to be accounted for as a single contract if they are entere d into at
or near the same time with the same customer (or with related parties of the customer), and if one
of the following conditions exists:
(a) The contracts are negotiated as a package with a single commercial objective ;
(b) The amount of consideration paid in one contract depends on the price or performance in the
other contract; or
(c) The goods or services promised in the contract are a single performance obligation.
Note: Entities will need to apply judgement to determine whether contracts are en tered into at or
near the same time because the standard does not provide a bright line for making this
assessment.

Are the contracts negotiated as a

Yes
package with a single commercial
objective?

No

Whether consideration in one contract Yes

depends on the price or performance of
Treat as a single
another contract? contract
No

Whether goods or services promised in the Yes

contract are a single performance
obligation?
No

Treat as separate contracts

Illustration 4
Manufacturer of airplanes for the air force negotiates a contract to design and manufacture new
fighter planes for a Kashmir air base. At the same meeting, the manufacturer enters into a
separate contract to supply parts for existing planes at other bases.
Would these contracts be combined?

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Solution
Contracts were negotiated at the same time, but they appear to have separate commercial
objectives. Manufacturing and supply contracts are not dependent on one another, and the planes
and the parts are not a single performance obligation. Therefore, contracts for supply of fighter
planes and supply of parts shall not be combined and instead, they shall be accounted separately.
Illustration 5
Software Company S enters into a contract to license its customer relationship management
software to Customer B. Three days later, in a separate contract, S agrees to provide consulting
services to significantly customise the licensed software to function in B’s IT environment. B is
unable to use the software until the customisation services are complete.
Would these contracts be combined?
Solution
S determines that the two contracts should be combined because they were entered into at nearly
the same time with the same customer, and the goods or services in the contracts are a single
performance obligation.
Illustration 6
Manufacturer M enters into a contract to manufacture and sell a cyber security system to
Government-related Entity P. One week later, in a separate contract, M enters into a contract to
sell the same system to Government-related Entity Q. Both entities are controlled by the same
government. During the negotiations, M agrees to sell the systems at a deep discount if both P
and Q purchases the security system.
Should these contracts be combined or separately accounted?
Solution
M concludes that the said two contracts should be combined because, among other things, P is a
related party of Q, the contracts were entered into at nearly the same time and the contracts were
negotiated as a single commercial package, which is clearly evident from the fact that discount is
being offered if both the parties purchases the security system, thereby also making the
consideration in one contract dependent on the other contract.
*****
5.5 Contract Modifications
Modifications that change the terms of a contract are common in many industries, including
manufacturing, telecommunications, defence, and construction. Depending upon the industry or
jurisdiction, the modification may be better known as a change order, a variation, or an
amendment.

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maintenance services regardless of whether the entity, the distributor, or a third party
provides the service.
II Implicit promise of service
● The entity has historically provided maintenance services for no additional consideration
(i.e. 'free') to end customers that purchase the entity's product from the distributor. The
entity does not explicitly promise maintenance services during negotiations with the
distributor and the final contract between the entity and the distributor does not specify
terms or conditions for those services.
● However, on the basis of its customary business practice, the entity determines at
contract inception that it has made an implicit promise to provide maintenance services
as part of the negotiated exchange with the distributor. That is, the entity's past
practices of providing these services create valid expectations of the entity's customers
(i.e. the distributor and end customers).
Performance obligations has been defined as a promise in a contract with a customer to transfer to
the customer either:
(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 to the customer. Performance obligations do not include activities that an
entity must undertake to fulfil a contract unless those activities transfer a good or service to a
customer. For example, a services provider may need to perform various administrative tasks
to set up a contract. The performance of those tasks does not transfer a service to the
customer as the tasks are performed. Therefore, those setup activities are not a performance
obligation.
A. Distinct performance obligations
A good or service that is promised to a customer is distinct if both of the following criteria are met:

Two-step model to identify which goods or services are distinct

Step 2 - Focus on whether the good or

Step 1 - Focus on whether the good or service is distinct in the context of
service is capable of being distinct the contract

Customer can benefit from the individual The good or service is not integrated
good or service on its own with, highly dependent on, highly
Or; interrelated with, or significantly
modifying or customising other promised
Customer can use good or service with goods or services in the contract
other readily available resources

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sure the quality of the work performed is in compliance with contract specifications and that the
individual goods or services are appropriately integrated into the combined item that the customer
has contracted to receive.
6.1.2.2 Significant modification or customization
It indicates that one or more of the goods or services do significantly modifies or customises, or
are significantly modified or customised by, one or more of the other goods or services promised in
the contract.
In some industries, such as the software industry, the notion of inseparable risks is more clearly
illustrated by assessing whether one good or service significantly modifies or customizes another
good or service in the contract. In this case, the goods or services are used as inputs and are
being assembled together to create a combined output—a customized product.
Example 1
An entity promises to provide a customer with software that it will significantly customise to make
the software function with the customer‘s existing infrastructure. Based on its facts and
circumstances, the entity determines that it is providing the customer with a fully integrated system
and that the customisation service requires it to significantly modify the software in such a way that
the risks of providing it and the customisation service are inseparable (i.e. the software and
customisation service are not separately identifiable).
6.1.2.3 Highly interdependent or highly interrelated
It indicates that two or more promises to transfer goods or services are not separately identifiable
from other goods or services in the contract if the goods or services are highly interdependent or
highly interrelated.
Sometimes it may be unclear whether the entity provides an integration service or whether the
goods or services are significantly modified or customized; yet the individual goods or services are
not separately identifiable from other goods or services because they are highly dependent on, or
highly interrelated with, other promised goods or services in the contract.
The principle in evaluating whether promises are ―distinct within the context of the contract‖ is to
consider the level of integration, interrelation, or interdependence among promises to transfer
goods or services. As a result, the entity must evaluate whether two or more promised goods or
services significantly affect the other and are therefore highly interdependent or highly interrelated
with other promised goods or services in the contract. An entity does not simply evaluate whether
one item depends on another. There must be a two-way dependency. In other words, instead of
concluding that an undelivered item would never be obtained by a customer absent the delivered
item in the contract, the entity would consider whether the undelivered item and the delivered item
each significantly affect the other and therefore are highly interdependent or highly interrelated.

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B. Promise to transfer a series of distinct goods or services that are substantially the same
and have the same pattern of transfer:
There might be cases, where distinct goods or services are provided continuously over a period of
time. For e.g. security services, or bookkeeping services. This will be considered as single
performance obligation, if the consumption of those services by the customers is symmetrical.
A series of distinct goods or services has the same pattern of transfer to the customer if both of
the following criteria are met:
(a) each distinct good or service in the series that the entity promises to transfer to the customer
would meet the criteria to be a performance obligation satisfied over time; and
(b) the same method would be used to measure the entity‘s progress towards complete
satisfaction of the performance obligation to transfer each distinct good or service in the
series to the customer.
If a series of distinct goods or services meets the criteria in paragraph 22(b) and paragraph 23 of
Ind AS 115 (the series requirement), an entity is required to treat that series as a single
performance obligation (i.e. it is not optional). Cleaning services, transaction processing services
and delivering electricity to customer are some examples that meets the series requirement.
It is important to note that, even if, the underlying activities an entity performs to satisfy a promise
vary significantly throughout the day and from day to day, that fact, by itself, do es not mean the
distinct goods or services are not substantially the same.
Example 2
A vendor enters into a 5-year contract with a customer to provide continuous access to its system
and to process all transactions on behalf of the customer. The customer is obligated to use the
vendor‘s system, but the ultimate quantity of transactions is unknown. The vendor concludes that
the customer simultaneously receives and consumes the benefits as it performs.
If the vendor concludes that the nature of its promise is to provide continuous access to its system,
rather than process a particular quantity of transactions, it might conclude that there is a single
performance obligation to stand ready to process as many transactions as the customer requires.
If that is the case, it would be reasonable to conclude that there are multiple distinct time
increments of the service. Each day of access to the service provided to the customer could be
considered substantially the same since the customer is deriving a consistent benefit from the
access each day, even if a different number of transactions are processed each day.
If the vendor concludes that the nature of the promise is the processing of each transaction, then
each transaction processed could be considered substantially the same even if there are multiple
types of transactions that generate different payments. Furthermore, each transaction processed
could be a distinct service because the customer could benefit from each transaction on its own

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the customised installation service and, therefore, the criterion on the basis of the factors is not
met. Thus, the software license and the customised installation service are not distinct .
The entity concludes that the software updates and technical support are distinct from the other
promises in the contract. This is because the customer can benefit from the updates and technical
support either on their own or together with the other goods and services that are readily available
and because the promise to transfer the software updates and the technical support to the
customer are separately identifiable from each of the other promises.
On the basis of this assessment, the entity identifies three performance obligations in the contract
for the following goods or services:
a) customised installation service (that includes the software license);
b) software updates; and
c) technical support.
Illustration 17
Telco T Ltd. enters into a two-year contract for internet services with Customer C. C also buys a
modem and a router from T Ltd. and obtains title to the equipment. T Ltd. does not require
customers to purchase its modems and routers and will provide internet services to customers
using other equipment that is compatible with T Ltd.’s network. There is a secondary market in
which modems and routers can be bought or sold for amounts greater than scrap value.
Determine how many performance obligations does the entity T Ltd. have?
Solution
T Ltd. concludes that the modem and router are each distinct and that the arrangement includes
three performance obligations (the modem, the router and the internet services) based on the
following evaluation:
Criterion 1: Capable of being distinct
 C can benefit from the modem and router on their own because they can be resold for
more than scrap value.
 C can benefit from the internet services in conjunction with readily available resources –
i.e. either the modem and router are already delivered at the time of contract set - up, they
could be bought from alternative retail vendors or the internet service could be used with
different equipment.
Criterion 2: Distinct within the context of the contract
 T Ltd. does not provide a significant integration service.
 The modem, router and internet services do not modify or customise one another.

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 C could benefit from the internet services using routers and modems that are not sold by
T Ltd. Therefore, the modem, router and internet services are not highly dependent on or
highly inter-related with each other.
*****
Illustration 18
V Ltd. grants Customer C a three-year licence for anti-virus software. Under the contract, V Ltd.
promises to provide C with when-and-if-available updates to that software during the licence
period. The updates are critical to the continued use of the anti-virus software.
Determine how many performance obligations does the entity have?
Solution
V Ltd. concludes that the licence and the updates are capable of being distinct because the anti -
virus software can still deliver its original functionality during the licence period without the
updates. C can also benefit from the updates together with the licence transferred when the
contract is signed.
However, V Ltd. concludes that the licence and the updates are not separately identifiable
because the software and the service are inputs into a combined item in the contract − i.e. the
nature of V Ltd.‘s promise is to provide continuous anti-virus protection for the term of the contract.
Therefore, V Ltd. accounts for the licence and the updates as a single performance obligation.
*****
Illustration 19
Media Company P Ltd. offers magazine subscriptions to customers. When customers subscribe,
they receive a printed copy of the magazine each month and access to the magazine’s online
content.
Determine how many performance obligations does the entity have?
Solution
P evaluates whether the promises to provide printed copies and online access are separate
performance obligations. P determines that the arrangement includes two performance obligations
for the following reasons:
 The printed copies and online access are both capable of being distinct because the
customer could use them on their own.
 The printed copies and online access are distinct within the context of the contract
because they are different formats so they do not significantly customise or modify each
other, nor is there any transformative relationship into a single output.
*****

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Illustration 20-Implied promise to reseller’s customers

Software Company K Ltd. enters into a contract with reseller D, which then sells software products
to end users. K Ltd. has a customary business practice of providing free telephone support to end
users without involving the reseller, and both reseller and the customer expect K Ltd. to continue
to provide this support.
Determine how many performance obligations does the entity K Ltd. have?
Solution
In evaluating whether the telephone support is a separate performance obligation, K Ltd. notes
that the promise to provide telephone support free of charge to end users is co nsidered a service
that meets the definition of a performance obligation when control of the software product transfers
to D. As a result, K Ltd. accounts for the telephone support as a separate performance obligation
in the transaction with D.
*****
Illustration 21-Implied performance obligation
Carmaker N Ltd. has a historical practice of offering free maintenance services – e.g. oil changes
and tyre rotation – for two years to the end customers of dealers who buy its vehicles. However,
the two years’ free maintenance is not explicitly stated in the contract with its dealers, but it is
typically stated in N’s advertisements for the vehicles.
Determine how many performance obligations does the entity have?
Solution
The maintenance is treated as a separate performance obligation in the sale of the vehicle to the
dealer. Revenue from the sale of the vehicle is recognised when control of the vehicle is
transferred to the dealer. Revenue from the maintenance services is recognised separately as and
when the maintenance services are provided to the retail customer.
*****
6.3 Customer options for additional goods or services
Retail and consumer products entities frequently give certain customers the option to purchase
additional goods or services. These options come in many forms, including sales incentives (e.g.,
coupons with a limited distribution, competitor price matching programs aimed at only some
customers, gift cards issued by a retailer as a promotion) and customer award credits (e.g., loyalty
or reward programs).
The standard states that when an entity grants a customer the option to acquire additional goods
or services, that option is only a separate performance obligation 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

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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.
If the discounted price in the option reflects the stand-alone selling price (separate from any
existing relationship or contract), the entity is deemed to have made a marketing offer rather than
having granted a material right.
In such cases, the entity has made a marketing offer that it shall account for in accordance with
this Standard only when the customer exercises the option to purchase the additional goods or
services.
This standard requires that an entity 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:
(a) any discount that the customer could receive without exercising the option; and
(b) the likelihood that the option will be exercised.

Does the option provide a material right to the customers that it would not receive
without entering into the contract?

Does the contract grant the customer the option to acquire additional goods or
services?

No Yes

Option is not a separate Option is a separate performance

performance obligation obligation

Illustration 22
Entity sells gym memberships for ` 7,500 per year to 100 customers, with an option to renew at a
discount in 2 nd and 3rd years at ` 6,000 per year. Entity estimates an annual attrition rate of 50%
each year.

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Determine the amount of revenue to be recognised in the first year and the amount of contract
liability against the option given to the customer for renewing the membership at discount.
Solution
Allocated price per unit (year) is calculated as follows:
Total estimated memberships is 175 members (Year 1 = 100; Year 2 = 50; Year 3 = 25) = 175
Total consideration is ` 12,00,000 {(100 x 7,500) + (50 x 6,000) + (25 x 6,000)}
Allocated price per membership is ` 6,857 approx. (12,00,000 / 175)
Basis on above, it is to be noted that although entity has collected ` 7,500 but revenue can be
recognised at ` 6,857 approx. per membership and remaining ` 643 should be recorded as
contract liability against option given to customer for renewing their membership at discount.
Illustration 23
An entity enters into a contract for the sale of Product A for ` 1,000. As part of the contract, the
entity gives the customer a 40% discount voucher for any future purchases up to ` 1,000 in the
next 30 days. The entity intends to offer a 10% discount on all sales during the next 30 days as
part of a seasonal promotion. The 10% discount cannot be used in addition to the 40% discount
voucher.
The entity believes there is 80% likelihood that a customer will redeem the voucher and on an
average, a customer will purchase ` 500 of additional products.
Determine how many performance obligations does the entity have and their stand-alone selling
price and allocated transaction price?
Solution
Since all customers will receive a 10% discount on purchases during the next 30 days, the only
additional discount that provides the customer with a material right is the incremental discount of
30% on the products purchased. The entity accounts for the promise to provide the incremental
discount as a separate performance obligation in the contract for the sale of Product A.
The entity believes there is 80% likelihood that a customer will redeem the voucher and on an
average, a customer will purchase ` 500 of additional products. Consequently, the entity‘s
estimated stand-alone selling price of the discount voucher is ` 120 (` 500 average purchase
price of additional products x 30% incremental discount x 80% likelihood of exercising the option).
The stand-alone selling prices of Product A and the discount voucher and the resulting allocation
of the ` 1,000 transaction price are as follows:

Performance obligations Stand-alone selling price

Product A ` 1000
Discount voucher ` 120
Total ` 1120

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(b) the entity has inventory risk for the tickets because they are purchased before they are sold
to the entity‘s customers and the entity is exposed to any loss as a result of not being able to
sell the tickets for more than the entity‘s cost.
(c) the entity has discretion in setting the sales prices for tickets to its customers.
The entity concludes that its promise is to provide a ticket (i.e. a right to fly) to the customer. On
the basis of the indicators, the entity concludes that it controls the ticket before it is transferred to
the customer. Thus, the entity concludes that it is a principal in the transaction and recognises
revenue in the gross amount of consideration to which it is entitled in exchange for the tickets
transferred.
Illustration 27
Company D Ltd. provides advertising services to customers. D Ltd. enters into a sub-contract with
a multinational online video sharing company, F Ltd. Under the sub-contract, F Ltd. places all of
D Ltd.’s customers’ adverts.
D Ltd. notes the following:
– D Ltd. works directly with customers to understand their advertising needs before placing
adverts.
– D Ltd. is responsible for ensuring that the advert meets the customer’s needs after the advert
is placed.
– D Ltd. directs F Ltd. over which advert to place and when to place it.
– D Ltd. does not bear inventory risk because there is no minimum purchase requirement with
F Ltd.
– D Ltd. does not have discretion in setting the price because fees are charged based on F
Ltd.’s scheduled rates.
D is Principal or an agent?
Solution
D Ltd. is primarily responsible for fulfilling the promise to provide advertising services. Although F
Ltd. delivers the placement service, D Ltd. directly works with customers to ensure that the
services are performed to their requirements. Even though D Ltd. does not bear inventory risk and
does not have discretion in setting the price, it controls the advertising services before they are
provided to the customer. Therefore, D Ltd. is a principal in this case.
*****
6.7 Non-refundable upfront fees
In some contracts, an entity charges the customer a non-refundable upfront fee. Examples include

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example, inventory) less any expected costs to recover those products (including potential
decreases in the value to the entity of returned products). At the end of each reporting period, an
entity shall update the measurement of the asset arising from changes in expectations about
products to be returned. An entity shall present the asset separately from the refund liability.
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.
Accounting for restocking fees for goods that are expected to be returned
Entities sometimes charge customers a ‗restocking fee‘ when a product is returned. This fee may
be levied by entities to compensate them for the costs of repackaging, shipping and/or reselling
the item at a lower price to another customer.
Restocking fees for goods that are expected to be returned would be included in the estimate of
the transaction price at contract inception and recorded as revenue when (or as) control of the
good transfers.
Example 4
An entity enters into a contract with a customer to sell 10 units of a product for ` 100 per unit. The
customer has the right to return the product, but if it does so, it will be charged a 3% restocking fee
(or ` 3 per returned unit). The entity estimates that 10% of the sold units will be returned. Upon
transfer of control of the 10 units, the entity will recognise revenue of ` 903 [(9 units not expected
to be returned x ` 100 selling price) + (1 unit expected to be returned x ` 3 restocking fee per
unit)]. A refund liability of ` 97 will also be recorded [1 unit expected to be returned x (` 100
selling price – ` 3 restocking fee)].
Contracts in which a customer may return a defective product in exchange for a functioning
product shall be evaluated in accordance with the guidance on warranties given below.
Illustration 34 : Right of return
An entity enters into 1,000 contracts with customers. Each contract includes the sale of one
product for ` 50 (1,000 total products × ` 50 = ` 50,000 total consideration). Cash is received
when control of a product transfers. The entity's customary business practice is to allow a
customer to return any unused product within 30 days and receive a full refund. The entity's cost
of each product is ` 30.
The entity applies the requirements in Ind AS 115 to the portfolio of 1,000 contracts because it
reasonably expects that, in accordance with paragraph 4, the effects on the financial statements
from applying these requirements to the portfolio would not differ materially from applying the
requirements to the individual contracts within the portfolio. Since the contract allows a customer
to return the products, the consideration received from the customer is variable. To estimate the
variable consideration to which the entity will be entitled, the entity decides to use the expected

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claims of patent, copyright, trademark or other infringement by the entity‘s products does not give
rise to a performance obligation. The entity shall account for such obligations in accordance with
Ind AS 37.
Illustration 35 : Warranty
An entity manufactures and sells computers that include an assurance-type warranty for the first
90 days. The entity offers an optional ‘extended coverage’ plan under which it will repair or replace
any defective part for three years from the expiration of the assurance-type warranty. Since the
optional ‘extended coverage’ plan is sold separately, the entity determines that the three years of
extended coverage represent a separate performance obligation (i.e. a service -type warranty).
The total transaction price for the sale of a computer and the extended warranty is ` 36,000. The
entity determines that the stand-alone selling prices of the computer and the extended warranty
are ` 32,000 and ` 4,000, respectively. The inventory value of the computer is ` 14,400.
Furthermore, the entity estimates that, based on its experience, it will incur ` 2,000 in costs to
repair defects that arise within the 90-day coverage period for the assurance-type warranty.
Pass required journal entries.
Solution
The entity will record the following journal entries:
` `
Cash / Trade receivables Dr. 36,000
Warranty expense Dr. 2,000
To Accrued warranty costs (assurance-type warranty) 2,000
To Contract liability (service-type warranty) 4,000
To Revenue 32,000
(To record revenue and contract liabilities related to warranties)
Cost of goods sold Dr. 14,400
To Inventory 14,400
(To derecognise inventory and recognise cost of goods sold)

The entity derecognises the accrued warranty liability associated with the assurance -type warranty
as actual warranty costs are incurred during the first 90 days after the customer receives the
computer. The entity recognises the contract liability associated with the service-type warranty as
revenue during the contract warranty period and recognises the costs associated with providing
the service-type warranty as they are incurred. The entity had to determine whether the repair
costs incurred are applied against the warranty reserve already established for claims that occur
during the first 90 days or recognised as an expense as incurred.

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Illustration 36 : Warranty
Entity sells 100 ultra-life batteries for ` 2,000 each and provides the customer with a five-year
guarantee that the batteries will withstand the elements and continue to perform to specifications.
The entity, which normally provides a one-year guarantee to customer purchasing ultra-life
batteries, determines that years two through five represent a separate performance obligation. The
entity determines that ` 1,70,000 of the ` 2,00,000 transaction price should be allocated to the
batteries and ` 30,000 to the service warranty (based on estimated stand-alone selling prices and
a relative selling price allocation). The entity’s normal one-year warranty cost is ` 1 per battery.
Pass required journal entries.
Solution
The entity will record the following journal entries:
Upon delivery of the batteries, the entity records the following entry:
Cash/Receivables Dr. 2,00,000
To Revenue 1,70,000
To Contract liability (service warranty) 30,000
Warranty expense Dr. 10,000
To Accrued warranty costs (assurance warranty) 10,000

The contract liability is recognised as revenue over the service warranty period (years 2 - 5). The
costs of providing the service warranty are recognised as incurred. The assurance warranty
obligation is used / derecognised as defective units are replaced / repaired during the initial year of
the warranty. Upon expiration of the assurance warranty period, any remaining assurance
warranty obligation is reversed.
7.1.8 Sales-based or usage-based royalties
As per Ind AS 115.B63, notwithstanding the requirements of Ind AS 115 related to constraining
estimate of variable consideration (discussed above), an entity shall recognise revenue for a
sales-based or usage-based royalty promised in exchange for a licence of intellectual property
only when (or as) the later of the following events occurs:
(a) the subsequent sale or usage occurs; and
(b) the performance obligation to which some or all of the sales-based or usage-based royalty
has been allocated has been satisfied (or partially satisfied).
As per Ind AS 115.B63A, the accounting requirements for a sales-based or usage-based royalty
discussed above apply when the royalty relates only to a licence of intellectual property or when a
licence of intellectual property is the predominant item to which the royalty relates (for example,
the licence of intellectual property may be the predominant item to which the royalty relates when
the entity has a reasonable expectation that the customer would ascribe significantly more value to

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share. Said another way, the share price of ` 100 is used to value the potential bonus
throughout the life of the contract.
As a result, if the entity earns the bonus, its revenue would be ` 350 crore plus
10 lakh equity shares at ` 100 per share for total consideration of ` 360 crore.
*****
Illustration 50 : Non-cash consideration - Free advertising
Production Company Y sells a television show to Television Company X. The consideration
under the arrangement is a fixed amount of ` 1,000 and 100 advertising slots. Y determines
that the stand-alone selling price of the show would be ` 1,500. Based on market rates, Y
determines that the fair value of the advertising slots is ` 600.
Determine the transaction price.
Solution
Y determines that the transaction price is ` 1,600, comprising of ` 1,000 fixed amount plus
the fair value of the advertising slots ie ` 600.
If the fair value of the advertising slots could not be reasonably estimated, then the
transaction price would be ` 1,500 i.e. Y would use the stand-alone selling price of the goods
or services promised for the non-cash consideration.
*****
7.3.2 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 so, the entity shall account for the contributed goods or
services as non-cash consideration received from the customer.
Illustration 51 : Customer-provided goods or services
MS Limited is a manufacturer of cars. It has a supplier of steering systems – SK Limited.
MS Limited places an order of 10,000 steering systems on SK Limited. It also agrees to pay
` 25,000 per steering system and contributes tooling to be used in SK’s production process.
The tooling has a fair value of ` 2 crore at contract inception. SK Limited determines that each
steering system represents a single performance obligation and that control of the steering system
transfers to MS Limited upon delivery.
SK Limited may use the tooling for other projects and determines that it obtains control of the tooling.
Determine the transaction price?

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The below diagram summarises the guidance above:

No
Is the consideration payable to a
Account for the consideration as a
customer a payment for a distinct good
reduction of the transaction price
or service from the customer?

Yes

Yes
Does the consideration exceed the fair
value of the distinct goods or services Account for the excess portion as a
that the entity receives from the reduction of the transaction price.
customer? However, remainder is accounted from
suppliers for as a purchase from
Suppliers
No

Account for the purchase of the good or

service in the same way that the entity
accounts for other purchases from
suppliers

If the consideration payable to a customer includes a variable amount, an entity shall estimate the
transaction price (including assessing whether the estimate of variable consideration is
constrained) in accordance with accounting guidance on ―variable consideration‖ discussed earlier.
As per Ind AS 115.72, if consideration payable to a customer is accounted for as a reduction of the
transaction price, an entity shall recognise the reduction of revenue when (or as) the later of either
of the following events occurs:
(a) the entity recognises revenue for the transfer of the related goods or services to the
customer; and
(b) the entity pays or promises to pay the consideration (even if the payment is conditional on a
future event). That promise might be implied by the entity‘s customary business practices.
Consideration paid or payable to a customer can take many different forms. Therefore, entities will
have to carefully evaluate each transaction to determine the appropriate treatment of such
amounts. Some common examples of consideration paid to a customer are given below:
1. Slotting fees – Manufacturers of consumer products commonly pay retailers fees to have
their goods displayed prominently on store shelves. Those shelves can be physical (i.e. in a
building where the store is located) or virtual (i.e. they represent space in an internet

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reseller‘s online catalogue). Generally, such fees do not provide a distinct good or service to
the manufacturer and are treated as a reduction of the transaction price.
Example 5
A producer entity sells energy drinks to a retailer, a convenience store. Producer also pays
Retailer a fee to ensure that its products receive prominent placement on store shelves , to
attract the customer‘s eyeballs so that chances of sales of it‘s products are higher. The fee is
negotiated as part of the contract for sale of the energy drinks. In this case, Producer should
reduce the transaction price for the sale of the energy drinks by the amount of slotting fees
paid to Retailer. Producer does not receive a good or service that is distinct in exchange for
the payment to Retailer.
2. Co-operative advertising arrangements – In some arrangements, a vendor agrees to
reimburse a reseller for a portion of costs incurred by the reseller to advertise the vendor‘s
products. The determination of whether the payment from the vendor is in exchange for a
distinct good or service at fair value will depend on a careful analysis of the facts and
circumstances of the contract.
Example 6
Mobile-Co sells 1,000 phones to Retailer for ` 10,00,000. The contract includes an
advertising arrangement that requires Mobile-Co to pay ` 1,00,000 toward a specific
advertising promotion that Retailer will provide. Retailer will provide the advertising on
strategically located billboards and in local advertisements. Mobile-Co could have elected to
engage a third party to provide similar advertising services at a cost of ` 1,00,000. In this
case, Mobile-Co should account for the payment to Retailer consistent with other purchases
of advertising services. The payment from Mobile-Co to Retailer is consideration for a
distinct service provided by Retailer and reflects fair value. The advertising is distinct
because Mobile-Co could have engaged a third party who is not its customer to perform
similar services. The transaction price is ` 10,00,000 and is not affected by the payment
made by Retailer for the sale of the phones. However, it is to be noted here that, if price paid
to retailer for this service is not the fair value of such advertising services then any excess
paid to retailer over the fair value of said services should be reduced from transaction price.
3. Price protection – A vendor may agree to reimburse a retailer up to a specified amount for
shortfalls in the sales price received by the retailer for the vendor‘s products over a specified
period of time. Normally such fees do not provide a distinct good or service to the
manufacturer and are treated as a reduction of the transaction price.
Illustration 52 : Consideration payable to a customer
An entity that manufactures consumer goods enters into a one-year contract to sell goods to a
customer that is a large global chain of retail stores. The customer commits to buy at least
` 15 crore of products during the year. The contract also requires the entity to make a non-

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refundable payment of ` 1.5 crore to the customer at the inception of the contract. The
` 1.5 crore payment will compensate the customer for the changes it needs to make to its shelving
to accommodate the entity's products. The entity does not obtain control of any rights to the
customer's shelves.
Determine the transaction price.
Solution
The entity considers the requirements in paragraphs 70 – 72 of Ind AS 115 and concludes that the
payment to the customer is not in exchange for a distinct good or service that transfers to the
entity. This is because the entity does not obtain control of any rights to the customer's shelves.
Consequently, the entity determines that, in accordance with paragraph 70 of Ind AS 115, the
` 1.5 crore payment is a reduction of the transaction price.
The entity applies the requirements in paragraph 72 of Ind AS 115 and co ncludes that the
consideration payable is accounted for as a reduction in the transaction price when the entity
recognises revenue for the transfer of the goods. Consequently, as the entity transfers goods to
the customer, the entity reduces the transaction price for each good by 10 per cent [(` 1.5 crore ÷
` 15 crore) x 100]. Therefore, in the first month in which the entity transfers goods to the
customer, the entity recognises revenue of ` 1.125 crore (` 1.25 crore invoiced amount less `
0.125 crore of consideration payable to the customer).
Illustration 53 : Credits to a new customer
Customer C is in the middle of a two-year contract with Telco B Ltd., its current wireless service
provider, and would be required to pay an early termination penalty if it terminated the contract
today. If C cancels the existing contract with B Ltd. and signs a two-year contract with Telco D
Ltd. for ` 800 per month, then D Ltd. promises at contract inception to give C a one-time credit of
` 2,000 (referred to as a ‘port-in credit’). The amount of the port-in credit does not depend on the
volume of service subsequently purchased by C during the two-year contract.
Determine the transaction price.
Solution
D Ltd. determines that it should account for the port-in credit as consideration payable to a
customer. This is because the credit will be applied against amounts owing to D Ltd. Since, D
Ltd. does not receive any distinct goods or services in exchange for this credit, it will account for it
as a reduction in the transaction price ` 17,200 [(` 800 x 24 month) – ` 2,000]. D Ltd. will
recognise the reduction in the transaction price as the promised goods or services are transferred.
*****

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The due diligence, valuation, and software implementation services are distinct and th erefore are
accounted for as separate performance obligations. The consultant allocates the transaction price,
disregarding the potential bonus, on a relative stand-alone selling price basis as follows:
 Due diligence – ` 80 lakh
 Valuation – ` 20 lakh
 Software implementation – ` 1 crore
At contract inception, the consultant believes it will complete the software implementation by
30th January, 20X1. After considering the factors in Ind AS 115, the consultant cannot conclude
that a significant reversal in the cumulative amount of revenue recognized would not occur when
the uncertainty is resolved since the consultant lacks experience in completing similar projects. As
a result, the consultant does not include the amount of the early completion bonus in its estimated
transaction price at contract inception.
On 1st July, 20X0, the consultant notes that the project has progressed better than expected and
believes that implementation will be completed by 30 th September, 20X0 based on a revised
forecast. As a result, the consultant updates its estimated transaction price to reflect a bonus of `
20 lakh.
After reviewing its progress as of 1 st July, 20X0, the consultant determines that it is 100 percent
complete in satisfying its performance obligations for due diligence and valuation and 60 percent
complete in satisfying its performance obligation for software implementation.
Determine the transaction price.
Solution
On 1st July, 20X0, the consultant allocates the bonus of ` 20 lakh to the software implementation
performance obligation, for total consideration of ` 1.2 crore allocated to that performance
obligation, and adjusts the cumulative revenue to date for the software imple mentation services to
` 72 lakh (60 percent of ` 1.2 crore).
Illustration 58 : Discretionary credit
Telco G Ltd. grants a one-time credit of ` 50 to a customer in Month 14 of a two-year contract.
The credit is discretionary and is granted as a commercial gesture, not in response to prior service
issues (often referred to as a ‘retention credit’). The contract includes a subsidised handset and a
voice and data plan. G Ltd. does not regularly provide these credits and therefore customers do
not expect them to be granted.
How this will be accounted for under Ind AS 115?
Solution
G Ltd. concludes that this is a change in the transaction price and not a variable consideration.
Since, the credit does not relate to a satisfied performance obligation, the change in transaction
price resulting from the credit is accounted for as a contract modification and recognised over the

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remaining term of the contract. If, in this example, rather than providing a one-time credit, G Ltd.
granted a discount of ` 5 per month for the remaining contract term, then also G Ltd. would
conclude that it was a change in the transaction price. It would apply the contract modification
guidance and recognise the credit over the remaining term of the contract.
*****

9. STEP 5: SATISFYING PERFORMANCE OBLIGATION

An entity shall recognise revenue when (or as) 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
(or as) the customer obtains control of that asset.
In other words, the transfer of ‗control‘ is the key determinant under Ind AS 115. Decision making
on how ‗control‘ will be transferred to the customer is done at the inception of transaction.
Following is a diagrammatic presentation of the aforesaid guidance:

Therefore, the key questions that need to be answered at contract inception to determine if the
seller has satisfied its performance obligation are –
 Establish what does transfer of control mean in the context of the arrangement between
the parties?
 Does the customer acquire control over a period of time or at a point in time?

Is the performance obligation satisfied over time

– i.e. is one of the criteria met?

Identify an appropriate method (i.e. Input Recognise revenue at the point in time
Method or Output Method) to measure progress at which control of the good or service is
and apply that method to recognise revenue transferred
over time

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(a) the reason for the bill-and-hold The customer has specifically requested
arrangement must be substantive (for for entity to store goods in their
example, the customer has requested warehouse, owing to close proximity to
the arrangement); customer‘s factory.
(b) the product must be identified The spare parts have been specifically
separately as belonging to the identified and inspected by the customer.
customer;
(c) the product currently must be ready The spares are identified and segregated,
for physical transfer to the customer; therefore, read for delivery.
and
(d) the entity cannot have the ability to Spares have been segregated and cannot
use the product or to direct it to be redirected to any other customer.
another customer
Therefore, all conditions of bill-and-hold are met and hence, company can recognize revenue
for sale of spare parts on 31 st March, 20X3.
- Custodial services: Such services shall be given for a period of 2 to 4 years from
31st March, 20X3. Where services are given uniformly and customer receives & consumes
benefits simultaneously, revenue for such service shall be recognized on a straight line basis
over a period of time.
*****
9.5 Licences of intellectual property
Ind AS 115 provides application guidance specific to the recognition of revenue for licences of
intellectual property, which differs from the recognition model for other promised goods and
services.
Considering the fact that licences include a wide range of features and economic characteristics,
an entity will need to evaluate the nature of its promise to grant a licence of intellectual propert y in
order to determine whether the promise is satisfied (and revenue is recognised) over time or at a
point in time.
A licence will either provide:
 a right to access the entity‘s intellectual property throughout the licence period, which results
in revenue that is recognised over time; or
 a right to use the entity‘s intellectual property as it exists at the point in time in which the
licence is granted, which results in revenue that is recognised at a point in time.
The standard states that licences of intellectual property establish a customer‘s rights to the
intellectual property of an entity and may include licences for any of the following: software and

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technology, media and entertainment (e.g. motion pictures and music), franchises, patents,
trademarks and copyrights.
9.5.1 Right to access
A licence that provides an entity with the right to access intellectual property is satisfied over time
‗because the customer simultaneously receives and consumes the benefit from the entity‘s
performance as the performance occurs‘, including the related activities undertaken by entity. This
conclusion is based on the determination that when a licence is subject to change (and the
customer is exposed to the positive or negative effects of that change), the custome r is not able to
fully gain control over the licence of intellectual property at any given point in time, but rather gains
control over the licence period.
Example 7
Pogo has created a popular television show called ―Chhota Bheem‖. Pogo grants a three-year
license to Toy Manufacturer for use of the character ―Chhota Bheem‖ on its toys. As per the
contract, Pogo will continue to produce the show, popularize the character, carry out marketing
activities. Toy Manufacturer produces and sells ―Chhota Bheem‖ toys. In this case, the license
provides access to Pogo‘s Intellectual Property (IP). Pogo will undertake activities that
significantly affect the IP by production and marketing of the show, development of the characters.
Toy manufacturer is directly exposed to any positive or negative effects by Pogo‘s activities ie.
how the show is received by kids and their parents. These activities are not separate performance
obligations as they do not transfer a good or service to Toy Manufacturer separate from the
license. Hence, Pogo will recognize revenue over time.
9.5.2 Right to use
In contrast, when the licence represents a right to use the intellectual property as it exists at a
specific point in time, the customer gains control over that intellectual property at the beginning of
the period for which it has the right to use the intellectual property. This timing may differ from
when the licence was granted.
Illustration 69
An entity, a music record label, licenses to a customer a 1975 recording of a classical symphony
by a noted orchestra. The customer, a consumer products company, has the right to use the
recorded symphony in all commercials, including television, radio and online advertisements for
two years in Country A. In exchange for providing the licence, the entity receives fixed
consideration of ` 50,000 per month. The contract does not include any other goods or services to
be provided by the entity. The contract is non-cancellable.
Determine how the revenue will be recognised?
Solution
The entity assesses the goods and services promised to the customer to determine which goods
and services are distinct in accordance with paragraph 27 of Ind AS 115. The entity concludes
that its only performance obligation is to grant the licence. The entity does not have any
contractual or implied obligations to change the licensed recording. The licensed recording has

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significant stand-alone functionality (i.e. the ability to be played) and, therefore, the ability of the
customer to obtain the benefits of the recording is not substantially derived from the entity‘s
ongoing activities. The entity therefore determines that the contract does not require, and the
customer does not reasonably expect, the entity to undertake activities that significantly affect the
licensed recording. Consequently, the entity concludes that the nature of its promise in transferring
the licence is to provide the customer with a right to use the entity‘s intellectual property as it
exists at the point in time that it is granted. Therefore, the promise to grant the licence is a
performance obligation satisfied at a point in time. The entity recognises all of the revenue at the
point in time when the customer can direct the use of, and obtain substantially all of the remaining
benefits from, the licensed intellectual property.
*****

Access to the IP (over time) Right to use the IP (at a point in time)

1. The entity is required (by the - If all 3 criteria for access (over
contract) or reasonably expected (by time) are not met, the nature of
the customer) to undertake activities the entity‘s promise is to provide a
that significantly affect the licensed right to use the IP as the IP exists
IP at the point in time the licence is
granted to the customer
2. The licence exposes the customer
to any effects of the entity‘s activities - Effectively, this means the
customer is able to direct the use
3. The entity’s activities are not a of and obtain all remaining benefits
performance obligation under the from the licensed IP when granted
contract (i.e., the IP is static)
All criteria must be met

Illustration 70 : Assessing the nature of a software licence with unspecified upgrades

Software Company X licenses its software application to Customer Y. Under the agreement, X will
provide updates or upgrades on a when-and-if-available basis; Y can choose whether to install them.
Y expects that X will undertake no other activities that will change the functionality of the software.

Determine the nature of license.

Solution
Basis on the facts given in question it can be concluded that, although the updates and upgrades
will change the functionality of the software, they are not activities considered in determining the
nature of the entity‘s promise in granting the licence. The activities of X to provide updates or
upgrades are not considered because they transfer a promised good or service to Y – i.e. updates

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or upgrades are distinct from the licence. Therefore, the software licence provides a right to use
the IP that is satisfied at a point in time.
*****
Illustration 71 : Assessing the nature of a film licence and the effect of marketing activities
Film Studio C grants a licence to Customer D to show a completed film. C plans to undertake
significant marketing activities that it expects will affect box office receipts for the film. The
marketing activities will not change the functionality of the film, but they could affect its value.
Determine the nature of license.
Solution
C would probably conclude that the licence provides a right to use its IP and, therefore, is
transferred at a point in time. There is no expectation that C will undertake activities to change the
form or functionality of the film. Because the IP has significant stand-alone functionality, C‘s
marketing activities do not significantly affect D‘s ability to obtain benefit from the film, nor do they
affect the IP available to D.
*****
Illustration 72 : Assessing the nature of a team name and logo
Sports Team D enters into a three-year agreement to license its team name and logo to Apparel
Maker M. The licence permits M to use the team name and logo on its products, including display
products, and in its advertising or marketing materials.
(i) Determine the nature of license in the above case.
(ii) Modifying above facts that, Sports Team D has not played games in many years and the
licensor is Brand Collector B, an entity that acquires IP such as old team or brand names and
logos from defunct entities or those in financial distress. B’s business model is to license the
IP, or obtain settlements from entities that use the IP without permission, without undertaking
any ongoing activities to promote or support the IP
Would the answer be different in this situation?
Solution
(i) The nature of D‘s promise in this contract is to provide M with the right to access the sports
team‘s IP and, accordingly, revenue from the licence will be recognised over time. In reaching
this conclusion, D considers all of the following facts:
– M reasonably expects D to continue to undertake activities that support and maintain the
value of the team name and logo by continuing to play games and field a competitive
team throughout the licence period. These activities significantly affect the IP‘s ability to
provide benefit to M because the value of the team name and logo is substantially
derived from, or dependent on, those ongoing activities.
– The activities directly expose M to positive or negative effects (i.e. whether D plays
games and fields a competitive team will have a direct effect on how successful M is in
selling its products featuring the team‘s name and logo).

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– D‘s ongoing activities do not result in the transfer of a good or a service to M as they
occur (i.e. the team playing games does not transfer a good or service to M).
(ii) Based on B‘s customary business practices, Apparel Maker M probably does not reasonably
expect B to undertake any activities to change the form of the IP or to support or maintain the
IP. Therefore, B would probably conclude that the nature of its promise is to provide M with a
right to use its IP as it exists at the point in time at which the licence is granted.
*****

10. CONTRACT COSTS

Contract Cost

Contract acquisition Contract fulfilment

Cost to fulfil (i.e.

Incremental costs to obtain a contract that perform/deliver) a
would not be incurred if contract not obtained contract. Consider deferral
(Eg. Sales commission) under Ind AS 115.95 only
if not covered in scope of
another standard.
Recognise as an asset the
incremental costs to obtain a contract Recognise as an asset
that are expected to be recovered under this standard if
costs:
All

Directly relate to a contract (or anticipated contract), such as

direct labour and materials, indirect costs of production, etc.

Generate or enhance resources that will be used to

satisfy performance obligations in the future, AND

Expect to be recovered

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TEST YOUR KNOWLEDGE

Questions
1. Q TV released an advertisement in Deshabandhu, a vernacular daily. Instead of paying for
the same, Q TV allowed Deshabandhu a free advertisement spot, which was duly utilised by
Deshabandu. How revenue for these nonmonetary transactions in the area of advertising will
be recognised and measured?
2. A Ltd. a telecommunication company, entered into an agreement with B Ltd. whic h is
engaged in generation and supply of power. The agreement provided that A Ltd. will provide
1,00,000 minutes of talk time to employees of B Ltd. in exchange for getting power equivalent
to 20,000 units. A Ltd. normally charges ` 0.50 per minute and B Ltd. charges ` 2.5 per unit.
How should revenue be measured in this case?
3. Company X enters into an agreement on 1st January, 20X1 with a customer for renovation of
hospital and install new air-conditioners for total consideration of ` 50,00,000. The promised
renovation service, including the installation of new air-conditioners is a single performance
obligation satisfied over time. Total expected costs are ` 40,00,000 including ` 10,00,000 for
the air conditioners.
Company X determines that it acts as a principal in accordance with paragraphs B34-B38 of
Ind AS 115 because it obtains control of the air conditioners before they are transferred to the
customer. The customer obtains control of the air conditioners when they are delivered to the
hospital premises.
Company X uses an input method based on costs incurred to measure its progress towards
complete satisfaction of the performance obligation.
As at 31st March, 20X1, other costs incurred excluding the air conditioners are ` 6,00,000.
Whether Company X should include cost of the air conditioners in measure of its
progress of performance obligation? How should revenue be recognised for the year
ended March 20X1?
4. An entity G Ltd. enters into a contract with a customer P Ltd. for the sale of a machinery for `
20,00,000. P Ltd. intends to use the said machinery to start a food processing unit. The food
processing industry is highly competitive and P Ltd. has very little experience in the said
industry.
P Ltd. pays a non-refundable deposit of `1,00,000 at inception of the contract and enters into
a long-term financing agreement with G Ltd. for the remaining 95 per cent of the agreed
consideration which it intends to pay primarily from income derived from its food processing
unit as it lacks any other major source of income. The financing arrangement is provided on
a non-recourse basis, which means that if P Ltd. defaults then G Ltd. can repossess the

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machinery but cannot seek further compensation from P Ltd., even if the full value of the
amount owed is not recovered from the machinery. The cost of the machinery for G Ltd. is
` 12,00,000. P Ltd. obtains control of the machinery at contract inception.
When should G Ltd. recognise revenue from sale of machinery to P Ltd. in accordance with
Ind AS 115?
5. Entity I sells a piece of machinery to the customer for ` 2 million, payable in 90 days. Entity I
is aware at contract inception that the customer might not pay the full contract price. Entity I
estimates that the customer will pay atleast ` 1.75 million, which is sufficient to cover entity
I's cost of sales (` 1.5 million) and which entity I is willing to accept because it wants to grow
its presence in this market. Entity I has granted similar price concessions in comparable
contracts.
Entity I concludes that it is highly probable that it will collect ` 1.75 million, and such amount
is not constrained under the variable consideration guidance.
What is the transaction price in this arrangement?
6. On 1 January 20X8, entity J enters into a one-year contract with a customer to deliver water
treatment chemicals. The contract stipulates that the price per container will be adjusted
retroactively once the customer reaches certain sales volume, defined, as follows:

Price per container Cumulative sales volume

` 100 1 - 1,000,000 containers
` 90 1,000,001 - 3,000,000 containers
` 85 3,000,001 containers and above

Volume is determined based on sales during the calendar year. There are no minimum
purchase requirements. Entity J estimates that the total sales volume for the year will be 2.8
million containers, based on its experience with similar contracts and forec asted sales to the
customer.
Entity J sells 700,000 containers to the customer during the first quarter ended
31st March 20X8 for a contract price of ` 100 per container.
How should entity J determine the transaction price?
7. Entity K sells electric razors to retailers for C 50 per unit. A rebate coupon is included inside
the electric razor package that can be redeemed by the end consumers for C 10 per unit.
Entity K estimates that 20% to 25% of eligible rebates will be redeemed, based on its
experience with similar programmes and rebate redemption rates available in the market for
similar programmes. Entity K concludes that the transaction price should incorporate an
assumption of 25% rebate redemption, as this is the amount for which it is highly probable

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that a significant reversal of cumulative revenue will not occur if estimates of the rebates
change.
How should entity K determine the transaction price?
8. A manufacturer enters into a contract to sell goods to a retailer for ` 1,000. The
manufacturer also offers price protection, whereby it will reimburse the retailer for any
difference between the sale price and the lowest price offered to any customer during the
following six months. This clause is consistent with other price protection clauses offered in
the past, and the manufacturer believes that it has experience which is predictive for this
contract.
Management expects that it will offer a price decrease of 5% during the price protection
period. Management concludes that it is highly probable that a significant reversal of
cumulative revenue will not occur if estimates change.
How should the manufacturer determine the transaction price?
9. Electronics Manufacturer M sells 1,000 televisions to Retailer R for ` 50,00,000 (` 5,000 per
television). M provides price protection to R by agreeing to reimburse R for the difference
between this price and the lowest price that it offers for that television during the following six
months. Based on M‘s extensive experience with similar arrangements, it estimates the
following outcomes.
Price reduction in next six months (`) Probability
0 70%
` 500 20%
` 1,000 10%
Determine the transaction price.
10. Construction Company C enters into a contract with Customer E to build an asset. Depending
on when the asset is completed, C will receive either ` 1,10,000 or ` 1,30,000.
Outcome Consideration (`) Probability
Project completes on time 1,30,000 90%
Project is delayed 1,10,000 10%
Determine the transaction price.
11. Franchisor Y Ltd. licenses the right to operate a store in a specified location to Franchisee F.
The store bears Y Ltd.‘s trade name and F will have a right to sell Y Ltd.‘s products for
10 years. F pays an up-front fixed fee. The franchise contract also requires Y Ltd. to maintain
the brand through product improvements, marketing campaigns etc. Determine the nature of
license.

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 INDIAN ACCOUNTING STANDARD 115 3.135

Revenue recognised is calculated as (20 per cent × ` 40,00,000) + ` 10,00,000.

(` 40,00,000 = ` 50,00,000 transaction price – ` 10,00,000 costs of air conditioners.)
Cost of goods sold is ` 6,00,000 of costs incurred + ` 10,00,000 costs of air conditioners.
4. As per paragraph 9 of Ind AS 115, ―An entity shall account for a contract with a customer that
is within the scope of this Standard only when all of the following criteria are met:
(a) the parties to the contract have approved the contract (in writing, orally or in accordance
with other customary business practices) and are committed to perform their respective
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 transfe rred;
(d) the contract has commercial substance (ie the risk, timing or amount of the entity‘s
future cash flows is expected to change as a result of the contract); and
(e) it is probable that the entity will collect the consideration to which it will be e ntitled in
exchange for the goods or services that will be transferred to the customer. In evaluating
whether collectability of an amount of consideration is probable, an entity shall consider
only the customer‘s ability and intention to pay that amount of consideration when it is
due. The amount of consideration to which the entity will be entitled may be less than
the price stated in the contract if the consideration is variable because the entity may
offer the customer a price concession‖.
Paragraph 9(e) above, requires that for revenue to be recognised, it should be probable that
the entity will collect the consideration to which it will be entitled in exchange for the goods or
services that will be transferred to the customer. In the given case, it is not probable that
G Ltd. will collect the consideration to which it is entitled in exchange for the transfer of the
machinery. P Ltd.‘s ability to pay may be uncertain due to the following reasons:
(a) P Ltd. intends to pay the remaining consideration (which has a significant balance)
primarily from income derived from its food processing unit (which is a business
involving significant risk because of high competition in the said industry and P Ltd.'s
little experience);
(b) P Ltd. lacks sources of other income or assets that could be used to repay the balance
consideration; and
(c) P Ltd.'s liability is limited because the financing arrangement is provided on a non -
recourse basis.
In accordance with the above, the criteria in paragraph 9 of Ind AS 115 are not met.

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 3.136 FINANCIAL REPORTING

Further, para 15 states that when a contract with a customer does not meet the criteria in
paragraph 9 and an entity receives consideration from the customer, the entity shall
recognise the consideration received as revenue only when either of the following events has
occurred:
(a) the entity has no remaining obligations to transfer goods or services to the customer and
all, or substantially all, of the consideration promised by the customer has been received
by the entity and is non-refundable; or
(b) the contract has been terminated and the consideration received from the customer is
non-refundable.
Para 16 states that an entity shall recognise the consideration received from a customer as a
liability until one of the events in paragraph 15 occurs or until the criteria in paragraph 9 are
subsequently met. Depending on the facts and circumstances relating to the contract, the
liability recognised represents the entity‘s obligation to either transfer goods or services in the
future or refund the consideration received. In either case, the liability shall be measured at
the amount of consideration received from the customer.
In accordance with the above, in the given case G Ltd. should account for the non -refundable
deposit of ` 1,00,000 payment as a deposit liability as none of the events described in
paragraph 15 have occurred—that is, neither the entity has received substantially all of the
consideration nor it has terminated the contract. Consequently, in accordance with paragraph
16, G Ltd. will continue to account for the initial deposit as well as any future payments of
principal and interest as a deposit liability until the criteria in paragraph 9 are met (i.e. the
entity is able to conclude that it is probable that the entity will collect the consideration) or one
of the events in paragraph 15 has occurred. Further, G Ltd. will continue to assess the
contract in accordance with paragraph 14 to determine whether the criteria in paragraph 9 are
subsequently met or whether the events in paragraph 15 of Ind AS 115 have occurred.
5. Entity I is likely to provide a price concession and accept an amount less than ` 2 million in
exchange for the machinery. The consideration is therefore variable. The transaction price
in this arrangement is ` 1.75 million, as this is the amount which entity I expects to receive
after providing the concession and it is not constrained under the variable consideration
guidance. Entity I can also conclude that the collectability threshold is met for ` 1.75 million
and therefore contract exists.
6. The transaction price is ` 90 per container based on entity J's estimate of total sales volume
for the year, since the estimated cumulative sales volume of 2.8 million containers would
result in a price per container of ` 90. Entity J concludes that based on a transaction price of
` 90 per container, it is highly probable that a significant reversal in the amount of cumulative
revenue recognised will not occur when the uncertainty is resolved. Revenue is therefore
recognised at a selling price of ` 90 per container as each container is sold. Entity J will
recognise a liability for cash received in excess of the transaction price for the first 1 million

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 INDIAN ACCOUNTING STANDARD 115 3.137

containers sold at ` 100 per container (that is, ` 10 per container) until the cumulative sales
volume is reached for the next pricing tier and the price is retroactively reduced.
For the quarter ended 31 st March, 20X8, entity J recognizes revenue of ` 63 million (700,000
containers x ` 90) and a liability of ` 7 million [700,000 containers x (` 100 - ` 90)].
Entity J will update its estimate of the total sales volume at each reporting date until the
uncertainty is resolved.
7. Entity K records sales to the retailer at a transaction price of ` 47.50 (` 50 less 25% of
` 10). The difference between the per unit cash selling price to the retailers and the
transaction price is recorded as a liability for cash consideration expected to be paid to the
end customer. Entity K will update its estimate of the rebate and the transaction price at each
reporting date if estimates of redemption rates change.
8. The transaction price is ` 950, because the expected reimbursement is ` 50. The expected
payment to the retailer is reflected in the transaction price at contract inception, as that is the
amount of consideration to which the manufacturer expects to be entitled after the price
protection. The manufacturer will recognise a liability for the difference between the invoice
price and the transaction price, as this represents the cash that it expects to refund to the
retailer. The manufacturer will update its estimate of expected reimbursement at each
reporting date until the uncertainty is resolved.
9. After considering all relevant facts and circumstances, M determines that the expected value
method provides the best prediction of the amount of consideration to which it will be entitled.
As a result, it estimates the transaction price to be ` 4,800 per television – i.e. (` 5,000 x
70%) + (` 4,500 x 20%) + (` 4,000 x 10%).
10. Because there are only two possible outcomes under the contract, C determines that using
the most likely amount provides the best prediction of the amount of consideration to which it
will be entitled. C estimates the transaction price to be ` 1,30,000, which is the single most
likely amount.
11. The licence provides F access to the IP as it exists at any point in time in the licence period.
This is because:
– Y Ltd. is required to maintain the brand, which will significantly affect the IP by affecting
F‘s ability to obtain benefit from the brand;
– any action by Y Ltd. may have a direct positive or negative effect on F; and
– these activities do not transfer a good or service to F.
Therefore, Y Ltd. recognises the up-front fee over the 10-year franchise period.

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