CHAPTER 9

INDIAN ACCOUNTING
STANDARD 115: REVENUE
FROM CONTRACTS
WITH CUSTOMERS
LEARNING OUTCOMES
After studying this chapter, you will be able to:
 Appreciate the scope and definition of the standard.
 Identify the contract.
 Comprehend the criteria for revenue recognition.
 Gain knowledge on accounting treatment of various aspects like combination of
contracts, contract modifications etc.
 Identify performance obligations and when the performance obligation is satisfied.
 Determine the transaction price and allocate the performance obligation to
transaction price.
 Allocate discount to various performance obligations in determining their
transaction price.
 Account for the changes in the transaction price.
 Account for variable considerations while determining the transaction price.
 Deal with contract costs.
 Comply with the Presentation and disclosure requirements of the standard.

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CHAPTER OVERVIEW

Ind AS 115 Revenue from contracts with customers

Scope Definitions Recognition Contract costs Presentation and

disclosure

Incremental costs
Five step model
v/s Fulfilment costs

Step 1 – Step 2 – Step 3 – Step 4 –

Step 5 –
Identifying Identifying Determination of Allocation of
Satisfaction of
the contract performance transaction price transaction price
performance
obligation to performance
obligation
obligation
Criteria for Variable
Promises Performance
recognizing a consideration – Methods of
in obligations
contract contracts constraints in allocating
estimating transaction satisfied over
with
customers variable price time
Contract consideration
term Performance
Allocation of
Distinct obligations
Combining a discount
goods or satisfied at a
Existence of
contracts point in time
services significant
financing Allocation of
Contract component variable Measuring
modifications Long term consideration, progress
arrangements discount towards
Non cash
complete
Consignment consideration
satisfaction of
Arrangements Changes in
a performance
Consideration transaction
obligation
payable to a price
Principal vs
agent customer
consideration

Non-
refundable
upfront fees

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 INDIAN ACCOUNTING STANDARD 115 9.3 5.3

This standard establishes principles to report useful information about the nature, amount, timing
and uncertainty of revenue and cash flows arising from a contract with a customer.

The core principle is that an entity shall 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.

The standard specifies the accounting for an individual contract with a customer. However, as a
practical expedient, an entity may apply this Standard to a portfolio of contracts (or performance
obligations) with similar characteristics if the entity reasonably expects that the effects of applying
the Standard to the portfolio would not differ materially from applying this Standard to the
individual contracts (or performance obligations) within that portfolio.

1. SCOPE
Ind AS 115 applies to all contracts with customers to provide goods or services that are outputs
of the entity’s ordinary course of business in exchange for consideration, unless specifically
excluded from the scope of the new guidance, as described below.
An entity shall apply this Standard to all contracts with customers, except the following:
(a) lease contracts within the scope of Ind AS 116, Leases;
(b) contracts within the scope of Ind AS 117, Insurance Contracts. However, an entity
may choose to apply this Standard to insurance contracts that have as their
primary purpose the provision of services for a fixed fee in accordance with
Ind AS 117
(c) financial instruments and other contractual rights or obligations within the scope of
Ind AS 109, Financial Instruments, Ind AS 110, Consolidated Financial Statements,
Ind AS 111, Joint Arrangements, Ind AS 27, Separate Financial Statements and
Ind AS 28, Investments in Associates and Joint Ventures; and
(d) non-monetary exchanges between entities in the same line of business to facilitate sales
to customers or potential customers. For example, this Standard would not apply to a
contract between two oil companies that agree to an exchange of oil to fulfil demand from
their customers in different specified locations on a timely basis.
This standard is applicable only if the counterparty to the contract is a customer. A customer is
a party that has contracted with an entity to obtain goods or services that are an output of the
entity’s ordinary activities in exchange for a consideration.

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A counterparty to the contract would not be a customer if, for example, the counterparty has
contracted with the entity to participate in an activity or process in which the parties to the
contract share in the risks and benefits that result from the activity or process (such as
developing an asset in a collaboration arrangement) rather than to obtain the output of the
entity’s ordinary activities.
A contract with a customer may be partially within the scope of Ind AS 115 and partially within
the scope of other Ind AS. In such cases, the following steps should be followed to identify how
it should be split between Ind AS 115 and other Ind AS:

(i) If the other Ind AS specifies how to separate and/or measure a portion of the contract,
then that guidance should be applied first. The amounts measured under other Ind AS
should be excluded from the transaction price that is allocated to performance obligations
under Ind AS 115.
(ii) If the other Ind AS does not stipulate how to separate and/or measure a portion of the
contract, then Ind AS 115 would be used to separate and/or measure that portion of the
contract (refer discussion relating to Step 4 - Allocation of transaction price to
performance obligation).
Ind AS 115 also specifies the accounting for the incremental costs of obtaining a contract with a
customer and for the costs incurred to fulfil a contract with a customer if those costs are not
within the scope of another Standard (see section related to Contract Costs). An entity shall
apply those paragraphs only to the costs incurred that relate to a contract with a customer (or
part of that contract) that is within the scope of this Standard.

2. DEFINITIONS
Contract An agreement between two or more parties that creates enforceable rights
and obligations.
Contract asset An entity’s right to consideration in exchange for goods or services that the
entity has transferred to a customer when that right is conditioned on
something other than the passage of time (for example, the entity’s future
performance).
Contract liability An entity’s obligation to transfer goods or services to a customer for which
the entity has received consideration (or the amount is due) from the
customer.

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 INDIAN ACCOUNTING STANDARD 115 9.5 5.5

Customer A party that has contracted with an entity to obtain goods or services that
are an output of the entity’s ordinary activities in exchange for a
consideration.
Income Increases in economic benefits during the accounting period in the form of
inflows or enhancements of assets or decreases of liabilities that result in
an increase in equity, other than those relating to contributions from equity
participants.
Performance A promise in a contract with a customer to transfer to the customer either:
obligation (a) a goods 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.
Revenue Income arising in the course of an entity’s ordinary activities.
Stand-alone The price at which an entity would sell a promised goods or service
selling price (of separately to a customer.
goods or service)
Transaction The amount of consideration to which an entity expects to be entitled in
price (for a exchange for transferring promised goods or services to a customer,
contract with a excluding amounts collected on behalf of third parties.
customer)

3. OVERVIEW
After more than a decade of work, the International Accounting Standards Board (IASB) and
Financial Accounting Standards Board (FASB) had published their largely converged standards on
revenue recognition in May, 2014. The IASB issued IFRS 15 Revenue from Contracts with
Customers and FASB issued ASU 2014-09 with the same name.
In convergence with IFRS, the Ministry of Corporate Affairs (MCA) issued Ind AS 115, Revenue
from Contracts with Customers vide its notification dated 28th March, 20X2.
Ind AS 115 supersedes and replaces Ind AS 11 and Ind AS 18.
Ind AS 115 is based on a core principle that requires an entity to recognize revenue:

(a) In a manner that depicts the transfer of goods or services to customers

(b) At an amount that reflects the consideration the entity expects to be entitled to in exchange
for those goods or services.

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To achieve the core principle, an entity should apply the following five-step model:
Step 1: Identify the contract with the customer.
Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies its performance obligations.

Identify the contract(s) with a customer

Identify the performance obligations

Determine the transaction price

Allocate the transaction price to the performance obligations

Recognize revenue when or as an entity satisfies performance obligations

Each of these steps, and some other related guidance, is discussed in details below.
Entities will need to exercise judgement when considering the terms of the contract(s) and all of
the facts and circumstances, including implied contract terms. Entities will also have to apply the
requirements of the standard consistently to contracts with similar characteristics and in similar
circumstances.

4. TRANSITION
Ind AS 115 is effective for annual reporting periods beginning on or after 1 st April, 20X2.
Entities are required to apply the new revenue standard using either of the following two
approaches:
(a) Full retrospective approach: apply retrospectively to each prior period presented in
accordance with Ind AS 8, subject to some practical expedients mentioned in the standard
or
(b) Modified retrospective approach: apply retrospectively with the cumulative effect of initial
application recognized at the date of initial application

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 INDIAN ACCOUNTING STANDARD 115 9.7 5.7

When applying the full retrospective method, an entity shall restate all prior periods presented in
accordance with Ind AS 8. This results in comparative statements in which all periods are
presented as if Ind AS 115 had been in effect since the beginning of the earliest period presented.
When applying modified retrospective approach, an entity does not restate prior periods presented
and the cumulative effect of initial application is recognized in the opening retained earnings of the
first year of application of Ind AS 115.

5. STEP 1: IDENTIFYING THE CONTRACT

As the guidance in Ind AS 115 applies only to contracts with customers, the first step in the model
is to identify such contracts.
A contract is an agreement between two or more parties that creates enforceable rights and
obligations. Enforceability of the rights and obligations in a contract is a matter of law. Contracts
can be written, oral, or implied by an entity’s customary business practices. The practices and
processes for establishing contracts with customers vary across legal jurisdictions, industries, and
entities. In addition, they may vary within an entity (for example, they may depend on the class of
customer or the nature of the promised goods or services). An entity shall consider those
practices and processes in determining whether and when an agreement with a customer creates
enforceable rights and obligations. For example, if an entity has an established practice of starting
performance based on oral agreements with its customers, it may determine that such oral
agreements meet the definition of a contract. As a result, an entity may need to account for a
contract as soon as performance begins, rather than delay revenue recognition until the
arrangement is documented in a signed contract.
The guidance in Ind AS makes it clear that the rights and obligations in a contract must be
“enforceable” in order for an entity to apply the five-step revenue model. Enforceability is a matter
of law, so an entity needs to consider the local relevant legal environment to make that
determination. That said, while the contract must be legally enforceable, oral or implied promises
may give rise to performance obligations in the contract.

5.1 Criteria for recognizing a contract

Step 1 serves as a ‘gateway’ through which an entity must pass before proceeding to the later
steps of the model. In other words, if at the inception of an arrangement, an entity concludes that
the criteria below are not met, it should not apply Step 2 to 5 of the model until it determines that
the Step 1 criteria are subsequently met. When a contract meets the five criteria and ‘passes’

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Step 1, the entity will not reassess the Step 1 criteria unless there is an indication of a significant
change in facts and circumstances.
Ind AS 115 requires an entity to account for a contract with a customer that is within the scope
of the model in this standard only when all the following criteria are met:
(a) The parties have approved (in writing, orally or in accordance with other customary
business practices) the contract and are committed to perform their contractual 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 transferred
(d) The contract has commercial substance (i.e. 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 substantially all of the consideration to which it
expects to be entitled in exchange for the goods or services that will be transferred to the
customer.

If the arrangement does not meet the five criteria at inception, an accounting contract, for
purposes of applying Ind AS 115, does not exist, and the entity should continue to reassess
whether the five criteria are subsequently met. For example, if a customer’s ability to pay the
consideration deteriorates significantly, an entity would reassess whether it is probable that the
entity will collect the consideration to which it will be entitled in exchange for the remaining goods
or services that will be transferred to the customer.
A contract may not pass Step 1, but the entity may still transfer goods or services to the customer
and receive non-refundable consideration in exchange for those goods or services. In that
circumstance, the entity cannot recognize revenue for the non-refundable consideration received
until either the Step 1 criteria are subsequently met, or one of the events outlined below 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.

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 INDIAN ACCOUNTING STANDARD 115 9.9 5.9

Consider if the contract meets each of the five criteria to Continue to assess the
pass Step 1: contract to determine if the
Step 1 criteria are met.
Have the parties approved the contract? No

Yes Recognize consideration

Can the entity identify each party's rights regarding the received as a liability until
No
goods/services to be transferred? each of the five criteria in
Yes Step 1 are met or one of
the following occurs:
Can the entity identify the payment terms for the No
goods/services to be transferred? 1. entity has no remaining
performance obligations
Yes and substantially all
No
Does the contract have commercial substance? consideration has been
Yes received and is non-
refundable.
Is it probable that the entity will collect substantially all the No
consideration to which it will be entitled in exchange for 2. contract is terminated
the goods/services that will be transferred to the and consideration is
customer? non-refundable
Yes

Proceed to Step 2 and only reassess the Step 1 criteria if

there is an indication of a significant change in facts and
circumstances.

Each of the criteria mentioned above are discussed in more detail below:
5.1.1 Criteria 1: The parties have approved the contract and are committed to
perform
To pass Step 1, the parties must approve the contract. This approval may be written, oral, or
implied, as long as the parties intend to be bound by the terms and conditions of the contract. The
form of the contract (i.e. oral, written or implied) is not determinative, in assessing whether the
parties have approved the contract. Instead, an entity must consider all relevant facts and
circumstances when assessing whether the parties intend to be bound by the terms and conditions
of the contract. In some cases, the parties to an oral or implied contract may have the intent to
fulfil their respective obligations. However, in other cases, a written contract may be required
before an entity can conclude that the parties have approved the arrangement.

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In addition to approving the contract, the entity must also be able to conclude that both parties are
committed to performing their respective obligations under the contract. This does not mean that the
parties need to be committed to fulfil all of their respective rights and obligations in order for this
criterion to be met. For example, an entity may include a requirement in a contract for the customer
to purchase a minimum quantity of goods each month, but the entity may have a history of not
enforcing the requirement. In this example, the contract approval criterion can still be satisfied if
evidence supports that the customer and the entity are both substantially committed to the contract.
Termination clauses are also an important consideration when determining whether both parties are
committed to perform under a contract and, consequently, whether a contract exists. See 5.3.1
below for further discussion of termination clauses and how they affect contract duration.
5.1.2 Criteria 2: The entity can identify each party’s rights
An entity must be able to identify its rights, as well as the rights of all other parties to the contract.
An entity cannot assess the transfer of goods or services if it cannot identify each party’s rights
regarding those goods or services.
5.1.3 Criteria 3: The entity can identify the payment terms for the goods or
services
An entity must also be able to identify the payment terms for the promised goods or services within
the contract. Identifying the payment terms does not require that the transaction price be fixed or
stated in the contract with the customer. As long as there is an enforceable right to payment (i.e.
enforceability as a matter of law) and the contract contains sufficient information to enable the
entity to estimate the transaction price, the contract would meet this criterion. The entity cannot
determine how much it will receive in exchange for the promised goods or services (the
“transaction price” in Step 3 of the model) if it cannot identify the contractual payment terms.
5.1.4 Criteria 4: The contract has commercial substance
A contract has commercial substance if the risk, timing, or amount of the entity’s cash flows is
expected to change as a result of the contract. In other words, the contract must have economic
consequences. This criterion was added to prevent entities from transferring goods or services
back and forth to each other for little or no consideration to artificially inflate their revenue. This
criterion is applicable for both monetary and non-monetary transactions, because without
commercial substance, it is questionable whether an entity has entered into a transaction that has
economic consequences. Determining whether a contract has commercial substance for the
purposes of Ind AS 115 may require significant judgement. In all situations, the entity must be
able to demonstrate that a substantive business purpose exists, considering the nature and
structure of its transactions.

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5.1.5. Criteria 5: It is probable the entity will collect substantially all of the
consideration
To pass Step 1, an entity must determine that it is probable that it will collect substantially all of the
consideration to which it will be entitled under the contract in exchange for goods or services that it
will transfer to the customer. This criterion is also referred to as the ‘collectability assessment’. In
determining whether collection is probable, the entity considers the customer’s ability and intention
to pay considering all relevant facts and circumstances, including past experiences with that
customer or customer class. In making the determination of customer’s ability to pay, the credit
risk was an important thing to determine if the contract is valid. However, customer’s credit risk
should not affect the measurement or presentation of revenue. The standard requires an entity to
evaluate at contract inception (and when significant facts and circumstances change) whether it is
probable that it will collect the consideration to which it will be entitled in exchange for the goods or
services that will be transferred to a customer. For purposes of this analysis, the meaning of the
term ‘probable’ means ‘more likely than not’. If it is not probable that the entity will collect amounts
to which it is entitled, the model in Ind AS 115 is not applied to the contract until the concerns
about collectability have been resolved.
Illustration 1
New Way Ltd. decides to enter a new market that is currently experiencing economic difficulty and
expects that in future the economy will improve. New Way Ltd. enters into an arrangement with a
customer in the new region for networking products for promised consideration of
` 1,250,000. At contract inception, New Way Ltd. expects that it may not be able to collect the full
amount from the customer.
Determine how New Way Ltd. will recognize this transaction?
Solution
Assuming the contract meets the other criteria covered within the scope of the model in
Ind AS 115, New Way Ltd. need to assess whether collection is probable.
In making this assessment, New Way Ltd. considers whether the customer has the ability and
intent to pay the estimated transaction price, which may be an amount less than the contract price.
*****

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5.2 Contracts that do not pass Step 1: Reassessing the Step 1

criteria
When an entity determines that a contract passes Step 1, it should not reassess contract existence
unless there is an indication of a significant change in facts and circumstances.
For example, if the customer’s ability to pay significantly deteriorates, an entity would have to
reassess whether it is probable that the entity will collect the consideration to which it is entitled in
exchange for transferring the remaining goods and services under the contract. The updated
assessment is prospective in nature and would not change the conclusions associated with goods
and services already transferred. That is, an entity would not reverse any receivables, revenue or
contract assets already recognized under the contract.
However, the revenue related to the remaining goods or services yet to be transferred is impacted.

5.3 Contract term

An entity applies Ind AS 115 to the contractual period over which the parties to the contract have
present enforceable rights and obligations.
Some contracts with customers may have no fixed duration and can be terminated or modified by
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 has not 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 that stated in the
contract.
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

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 INDIAN ACCOUNTING STANDARD 115 9.13 5.13

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 assessment of the contract term based on
previous trend or experience.
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 additional 90 CCTV
cameras. Hence, contract is for 10 units.
*****

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 entered 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;

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(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 entered 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 package Yes
with a single commercial objective?

No
Whether consideration in one contract Yes
depends on the price or performance Treat as a single
obligation in another contract?
contract
No
Whether goods or services promised in the contract Yes
are leading to 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?
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.
*****

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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 purchase 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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The modification guidance under Ind AS 115 requires an entity to

(a) Identify if a contract has been modified.
(b) Determine if the modification results in a separate contract, a termination of the existing
contract and the creation of a new contract, or a continuation of the existing contract.
(c) Account for the contract modification accordingly.
5.5.1 Identifying a modification
A contract modification exists if three conditions are met:
(a) There is a change in the scope, price, or both in a contract.

(b) That change is approved by both the entity and the customer.
(c) The change is enforceable.
Similar to the criterion discussed above, the approval of a contract modification may be written,
oral, or implied by customary business practice.
Contract modifications may take many forms and the following list includes some common
examples:
(a) Partially terminating the contract
(b) Extending the contract term with or without a corresponding increase in price
(c) Adding new goods and/or services to the contract, with or without a corresponding change
in price
(d) Reducing the contract price without a change in goods or services promised
5.5.2 Accounting for the modification
Once an entity determines that a contract with a customer has been modified, it needs to
determine whether the modification should be accounted for as a separate contract as discussed
above. If the modification is not accounted for as a separate contract, it will be accounted for in
one of the following three ways:

(a) As a termination of the old contract and the creation of a new contract
(b) By making a cumulative catch-up adjustment to the original contract
(c) A combination of the two

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Accounting for the modification

Are both of the following true:

• The scope of the contract increases because Yes

distinct promised goods or services are added to Account for the modification as a separate
the contract. contract
• The consideration increases by the stand-alone
selling price of the added goods or services.
Allocate the remaining transaction price not
No
Yes yet recognized to the outstanding
Are the remaining goods or services distinct from the performance obligations. In other words,
goods or services transferred on or before the date of treat as a termination of the old contract and
the contract modification? the creation of a new contract
No
Are the remaining goods or services not distinct and, Yes Account for the contract modification as if it
therefore, form part of a single performance obligation were a part of the existing contract—that is,
that is partially satisfied at the date of the contract the adjustment to revenue is made on a
modification? cumulative catch-up basis

No
Yes
Follow the guidance above for distinct and
Are some of the remaining goods or services distinct
non-distinct remaining goods or services
and others not distinct?

5.5.2.1 Modifications that constitute separate contracts

An entity accounts for a contract modification as a separate contract if the modification both
(1) increases the scope of the work promised under the original contract by adding new
promised goods or services that are considered distinct, and
(2) the increase in the contract price reflects the stand-alone selling price of the additional
goods or services. An entity determines if the additional promised goods or services are
distinct using the guidance in Section 6.1.
The logic behind this guidance is that there is no economic difference between the entity entering
into a separate contract or modifying an existing contract for the additional goods or services.
When assessing whether the transaction price increases by an amount of consideration that
reflects the stand-alone selling prices of the additional goods or services, an entity is allowed to
adjust the stand-alone selling price for costs that it does not incur because it is contracting with a
repeat customer. Therefore, if the stand-alone selling price in the original contract is ` 10 per unit,
a modification that adds units for ` 9.50 per unit might reflect a stand-alone selling price of the
additional units. For example, the selling effort and administration costs might be much lower

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when incremental units are added, in contrast to the effort and cost of the original quantity. The
entity needs to exercise judgment to make that determination.

If a modification adds a distinct goods or service to a series of distinct goods or services that is
accounted for as a single performance obligation, the modification is accounted for as a separate
contract as long as the transaction price increases by the stand-alone selling price for those added
goods or services.
Illustration 7
An entity promises to sell 120 products to a customer for ` 120,000 (` 1,000 per product). The
products are transferred to the customer over a six-month period. The entity transfers control of
each product at a point in time. After the entity has transferred control of 60 products to the
customer, the contract is modified to require the delivery of an additional 30 products (a total of
150 identical products) to the customer at a price of ` 950 per product which is the standalone
selling price for such additional products at the time of placing this additional order. The additional
30 products were not included in the initial contract.
It is assumed that additional products are contracted for a price that reflects the stand-alone
selling price.
Determine the accounting for the modified contract?
Solution
When the contract is modified, the price of the contract modification for the additional
30 products is an additional ` 28,500 or ` 950 per product. The pricing for the additional products
reflects the stand-alone selling price of the products at the time of the contract modification and
the additional products are distinct from the original products.
Accordingly, the contract modification for the additional 30 products is, in effect, a new and
separate contract for future products that does not affect the accounting for the existing contract
and ` 950 per product for the 30 products in the new contract.
*****
5.5.2.2 Modifications that do not constitute separate contracts
If a contract modification is not accounted for as a separate contract, the guidance provides the
following three methods to account for the modification:
(a) First, account for the modification prospectively as long as the goods or services to be
provided after the modification are distinct from the goods or services that were already
provided to the customer. The logic behind this guidance is that accounting for these

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types of modifications on a cumulative catch-up basis could be complex and may not
faithfully depict the economics of the modification since the modification is negotiated
based on facts and circumstances that exist after the original contract’s inception.
Illustration 8
On 1st April, 20X1, KLC Ltd. enters into a contract with Mr. K to provide
- A machine for ` 2.5 million
- One year of maintenance services for ` 55,000 per month
On 1st October, 20X1, KLC Ltd. and Mr. K agree to modify the contract to reduce the
amount of services from ` 55,000 per month to ` 45,000 per month.
Determine the effect of change in the contract?
Solution

The next six months of services are distinct from the services provided in the first six
months before modification in contract,
Therefore, KLC Ltd. will account for the contract modification as if it were a termination of
the existing contract and the creation of a new contract.
The consideration allocated to remaining performance obligation is ` 270,000, which is the
sum of

● The consideration promised by the customer (including amounts already received

from the customer) that was included in the estimate of the transaction price and
had not yet been recognized as revenue. This amount is zero.
● The consideration promised as part of the contract modification i.e. ` 270,000.
*****
(b) Second, when the remaining goods or services are not distinct and are part of a single
performance obligation that is partially satisfied, the entity recognizes the effect of the
modification on a cumulative catch-up basis. This is the case in many construction
contracts where a modification does not result in the transfer of additional distinct goods
or services.
Illustration 9
Growth Ltd. enters into an arrangement with a customer for infrastructure outsourcing
deal.

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Based on its experience, Growth Ltd. determines that customising the infrastructure will
take approximately 200 hours in total to complete the project and charges ` 150 per hour.
After incurring 100 hours of time, Growth Ltd. and the customer agree to change an
aspect of the project and increase the estimate of labour hours by 50 hours at the rate of
` 100 per hour.
Determine how contract modification will be accounted for as per Ind AS 115?
Solution
Considering that the remaining goods or services are not distinct, the modification will be
accounted for on a cumulative catch up basis, as given below:

Particulars Hours Rate (`) Amount (`)

Initial contract amount 200 150 30,000
Modification in contract 50 100 5,000
Contract amount after modification 250 140* 35,000
Revenue to be recognized 100 140 14,000
Revenue already booked 100 150 15,000
Adjustment in revenue (1,000)

*35,000 / 250 = 140

*****
(c) Third, there may be cases where the remaining goods or services provided after a
modification are a combination of both distinct and non-distinct goods or services. In this
case, the entity accounts for those remaining goods or services that are distinct on a
prospective basis and for those goods and services that are not distinct on a cumulative
catch-up basis.

6. STEP 2: IDENTIFYING PERFORMANCE OBLIGATIONS

Under the five-step model of Ind AS 115, the second step in accounting for a contract with a
customer is identifying the performance obligations. Identifying performance obligations is a
crucial process in the five-step model. Performance obligations are considered as unit of account
for the purposes of applying the revenue standard. Identification of performance obligations
requires high degree of judgment in cases where multiple goods or services are promised in a

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contract. Also, it needs to be determined whether those performance obligations should be

accounted for separately or as in combination with other promised goods or services in the
contract.
The concept of performance obligations is a cornerstone of the Ind AS 115 revenue recognition
model. The timing of revenue recognition is based on satisfaction of performance obligations
rather than the contract as a whole. This area is sometimes referred to as ‘multiple element
arrangements’.

6.1 Criteria for identifying performance obligation

At contract inception, an entity shall assess
(a) the goods or services promised in a contract with a customer and
(b) shall identify performance obligation under each promise to be transferred to the customer.
A contract with a customer generally states explicitly, the goods or services that an entity promises
to transfer to the customer. However, the performance obligations identified in a contract with the
customer may not be limited to the goods or services that are explicitly stated in that contract.
This is because a contract with a customer may also include promises that are implied by an
entity’s customary business practices, published policies or specific statements if, at the time of
entering into the contract, those promises to create a valid expectation of the customer that the
entity will transfer goods or service to the customer. Therefore, performance obligations under a
contract with the customer are not always explicit or clearly mentioned in the contract, but there
can be implied promises or performance obligation under the contract as well.

Promises under the contract can be explicit or implicit if the same creates a valid expectation by
the customer that the entity will provide those goods or service based on the customary business
practices, published policies, or specific statements. Some of the examples of promised goods or
services include:

Promise Example
• Sale of manufactured goods • A manufacturing entity sells inventory
• Resale of goods purchased • A retail entity sells purchased merchandise
• Resale of rights to goods or • A hospitality entity that purchased a concert
services purchased by an entity ticket resells the ticket, acting as principal

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• Performing tasks • A professional services entity provides

consulting services

• Providing goods or services to • A manufacturing entity provides maintenance

customers on stand-by basis services on machines sold to a customer
i.e. as and when required when the customer decides it wants the
services performed

• Construction of an asset for the • A contractor builds a hospital

customers

• Use or access to intellectual • An entity grants a license to use its trade

property rights of the entity name

• Right to purchase additional • A retailer grants a customer an option to buy

goods or services to the three items and to receive 60 percent off of a
customer in the future fourth item at a later date

An entity, a manufacturer, sells a product to a distributor (i.e. its customer) who will then resell it
to an end customer.
I Explicit promise of service
● The entity promises to the distributor to provide maintenance services for no
additional consideration or free of cost to any party that purchases the product
from the distributor. The entity in turn appoints the distributor and pays the
distributor to provide the maintenance services on company’s behalf to the
customer for an agreed payment. In case no one avails those services, the
company is not required to pay anything to the distributor.
● Under this contract promise to provide maintenance services in the future will be
considered as a performance obligation. The entity has promised to provide
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.

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● 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) goods 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 the goods or
service to a customer. For example, a service 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 goods 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 service is distinct in the context of
capable of being distinct the contract

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

Each of the criteria mentioned above are discussed in more detail below:
6.1.1 Customer can benefit either on a stand-alone basis or with other readily
available resources
The customer can benefit from the goods or service either on its own or with other resources
readily available to them. A readily available resource is a goods or service that is sold separately
(by the entity or by another entity) or that the customer has already obtained from the entity or
from other transactions or events.

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A customer can benefit from a goods or service if the goods or service could be used, consumed,
sold for an amount that is greater than its scrap value or otherwise held in a way that generates
economic benefits.
Sometimes, a customer can benefit from a goods or service only with other readily available
resources. A readily available resource is a goods or service that is sold separately (by the entity
or another entity) or a resource that the customer has already obtained from the entity (including
goods or services that the entity will have already transferred to the customer under the contract)
or from other transactions or events. Various factors may provide evidence that the customer can
benefit from a goods or service either on its own or in conjunction with other readily available
resources.
For e.g, the fact that the entity regularly sells a goods or service on its own is an indicator that the
goods or service is capable of being distinct.
6.1.2 Separately identifiable from other promises in the contract
Factors that indicate that an entity's promise to transfer a goods or service to a customer is
separately identifiable include, but are not limited to, the following:
6.1.2.1 Significant integration service
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 entity provides significant integration services.
Stated differently, the entity is using the goods or services as inputs to produce the combined
output promised in the contract. When an entity provides a significant service of integrating a
goods or service with other goods or services in a contract, the bundle of integrated goods or
services represents a combined output or outputs. In other words, when an entity provides a
significant integration service, the risk of transferring individual goods or services is inseparable
from the bundle of integrated goods or services because a substantial part of an entity’s promise
to the customer is to make sure the individual goods or services are incorporated into the
combined output or outputs.
For example, construction contracts in which a contractor provides an integration (or contract
management) service to manage and coordinate the various construction tasks and to assume the
risks associated with the integration of those tasks. An integration service provided by the
contractor often includes coordinating the activities performed by any subcontractors and making
sure the quality of the work performed is in compliance with the contract specifications and that the
individual goods or services are appropriately integrated into the combined item that the customer
has contracted to receive.

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6.1.2.2 Significant modification or customization

It indicates that one or more of the goods or services 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 goods or service significantly modifies or customizes another
goods 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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Illustration 10

A construction services company enters into a contract with a customer to build a water
purification plant. The company is responsible for all aspects of the plant including overall
project management, engineering and design services, site preparation, physical construction of
the plant, procurement of pumps and equipment for measuring and testing flow volumes and
water quality, and the integration of all components.

Determine whether the company has a single or multiple performance obligations under the
contract?
Solution

Determining whether a goods or service represents a performance obligation on its own or is

required to be aggregated with other goods or services can have a significant impact on the timing
of revenue recognition. In order to determine how many performance obligations are present in
the contract, the company applies the guidance above. While the customer may be able to benefit
from each promised goods or service on its own (or together with other readily available
resources), they do not appear to be separately identifiable within the context of the contract. That
is, the promised goods and services are subject to significant integration, and as a result will be
treated as a single performance obligation.

This is consistent with a view that the customer is primarily interested in acquiring a single asset (a
water purification plant) rather than a collection of related components and services.
*****
Illustration 11
An entity provides broadband services to its customers along with voice call service.

Customer buys modem from the entity. However, customer can also get the connection from the
entity and modem from any other vendor. The installation activity requires limited effort and the
cost involved is almost insignificant. It has various plans where it provides either broadband
services or voice call services or both.

Are the performance obligations under the contract distinct?

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Solution
Entity promises to customer to provide

 Broadband Service
 Voice Call services
 Modem

Entity’s promise to provide goods and services is distinct if

 customer can benefit from the goods or service either on its own or together with other
resources that are readily available to the customer, and

 entity’s promise to transfer the goods or service to the customer is separately identifiable
from other promises in the contract
For broadband and voice call services -
 Broadband and voice services are separately identifiable from other promises as
company has various plans to provide the two services separately. These two services
are not dependant or interrelated. Also the customer can benefit on its own from the
services received.
For sale of modem -
 Customer can either buy product from entity or third party. No significant customisation or
modification is required for selling product.
Based on the evaluation we can say that there are three separate performance obligation: -
 Broadband Service
 Voice Call services
 Modem
*****
Illustration 12
An entity enters into a contract to build a power plant for a customer. The entity will be
responsible for the overall management of the project including services to be provided like
engineering, site clearance, foundation, procurement, construction of the structure, piping and
wiring, installation of equipment and finishing.
Determine how many performance obligations does the entity have?

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Solution
Based on the discussion above it needs to be determined that the promised goods and services
are capable of being distinct as per the principles of Ind AS 115. That is, whether the customer
can benefit from the goods and services either on their own or together with other readily available
resources. This is evidenced by the fact that the entity, or competitors of the entity, regularly sells
many of these goods and services separately to other customers. In addition, the customer could
generate economic benefit from the individual goods and services by using, consuming, selling or
holding those goods or services.
However, the goods and services are not distinct within the context of the contract. That is, the
entity's promise to transfer individual goods and services in the contract are not separately
identifiable from other promises in the contract. This is evidenced by the fact that the entity
provides a significant service of putting together the various inputs or goods and services into the
power plant or the output for which the customer has contracted.

Since both the criteria have not met, the goods and services are not distinct. The entity accounts
for all of the goods and services in the contract as a single performance obligation.
*****
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 goods 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 goods 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 customers are some examples that meet the series requirement.

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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, does 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 and each transaction could be separately identifiable. Accordingly, it would be
reasonable for an entity to conclude that this contract meets the series’ requirement.

Illustration 13
Could the series requirement apply to hotel management services where day to day activities
vary, involve employee management, procurement, accounting, etc?
Solution
The series guidance requires each distinct goods or service to be “substantially the same.”
Management should evaluate this requirement based on the nature of its promise to customer.
For example, a promise to provide hotel management services for a specified contract term may
meet the series criteria. This is because the entity is providing the same service of “hotel
management” each period, even though some on underlying activities may vary each day. The
underlying activities for e.g. reservation services, property maintenance services are activities to
fulfil the hotel management service rather than separate promises. The distinct service within the
series is each time increment of performing the service.
*****

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6.2 Multiple Element Arrangements/ Goods and services that are not
distinct
Once an entity determines whether the goods and services would be distinct based on their
individual characteristics, the entity then has to consider if the manner in which the goods and
services have been bundled in an arrangement would require the entity to account for two or more
goods or services as one performance obligation. This determination would be required
regardless of whether or not those goods and services were determined to be distinct on their own.
If the goods or services are not considered as distinct, those goods or services are combined with
other goods or services under the contract till the time the entity identifies a bundle of distinct
goods or services.
This combination would result in accounting of multiple goods or services in the contract as a
single performance obligation. This could also result in an entity combining a goods or service that
is not considered distinct with another goods or service that, on its own, would have met the
criteria to be considered distinct. An entity may end up accounting for all the goods or services
promised in a contract as a single performance obligation if the entire bundle of promised goods
and services is the only distinct performance obligation identified.
It is important to note that the assessment of whether a goods or service is distinct must consider
the specific contract with a customer. That is, an entity cannot assume that a particular goods or
service is distinct (or not distinct) in all instances. The manner in which promised goods and
services are bundled within a contract can affect the conclusion of whether a goods or service is
distinct. Entities may treat the same goods and services differently, depending on how those
goods and services are bundled within a contract.
Illustration 14
Entity A, a specialty construction firm, enters into a contract with Entity B to design and construct a
multi-level shopping centre with a customer car parking facility located in sub-levels underneath
the shopping centre. Entity B solicited bids from multiple firms on both phases of the project —
design and construction.
The design and construction of the shopping centre and parking facility involves multiple goods
and services from architectural consultation and engineering through procurement and installation
of all the materials. Several of these goods and services could be considered separate
performance obligations because Entity A frequently sells the services, such as architectural
consulting and engineering services, as well as standalone construction services based on third
party design, separately. Entity A may require to continually alter the design of the shopping

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centre and parking facility during construction as well as continually assess the propriety of the
materials initially selected for the project.
Determine how many performance obligations does the entity A have?
Solution
Entity A analyses that it will be required to continually alter the design of the shopping centre and
parking facility during construction as well as continually assess the propriety of the materials
initially selected for the project. Therefore, the design and construction phases are highly
dependent on one another (i.e., the two phases are highly interrelated). Entity A also determines
that significant customisation and modification of the design and construction services is required
in order to fulfil the performance obligation under the contract. As such, Entity A concludes that
the design and construction services will be bundled and accounted for as one performance
obligation.
*****
Illustration 15
An entity, a software developer, enters into a contract with a customer to transfer a software
license, perform an installation service and provide unspecified software updates and technical
support (online and telephone) for a two-year period. The entity sells the license, installation
service and technical support separately. The installation service includes changing the web
screen for each type of user (for example, marketing, inventory management and information
technology). The installation service is routinely performed by other entities and does not
significantly modify the software. The software remains functional without the updates and the
technical support.
Determine how many performance obligations does the entity have?
Solution
The entity assesses the goods and services promised to the customer to determine which goods
and services are distinct. The entity observes that the software is delivered before the other goods
and services and remains functional without the updates and the technical support. Thus, the
entity concludes that 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.
The entity also considers the factors of Ind AS 115 and determines that the promise to transfer
each goods and service to the customer is separately identifiable from each of the other promises.
In particular, the entity observes that the installation service does not significantly modify or

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customise the software itself and, as such, the software and the installation service are separate
outputs promised by the entity instead of inputs used to produce a combined output.

On the basis of this assessment, the entity identifies four performance obligations in the contract
for the following goods or services:
• The software license

• An installation service
• Software updates
• Technical support
*****
Illustration 16 : Significant customisation
The promised goods and services are the same as in the above Illustration, except that the
contract specifies that, as part of the installation service, the software is to be substantially
customised to add significant new functionality to enable the software to interface with other
customised software applications used by the customer. The customised installation service can
be provided by other entities.
Determine how many performance obligations does the entity have?
Solution
The entity assesses the goods and services promised to the customer to determine which goods
and services are distinct. The entity observes that the terms of the contract result in a promise to
provide a significant service of integrating the licensed software into the existing software system
by performing a customised installation service as specified in the contract. In other words, the
entity is using the license and the customised installation service as inputs to produce the
combined output (i.e. a functional and integrated software system) specified in the contract. In
addition, the software is significantly modified and customised by the service. Although the
customised installation service can be provided by other entities, the entity determines that within
the context of the contract, the promise to transfer the license is not separately identifiable from
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

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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 not distinct because the updates are critical
to the continued use of the anti-virus during the licence period. C can benefit from the updates
together with the licence transferred when the contract is signed.
Therefore, 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.

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• 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.
*****
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 considered 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 recognized when control of the vehicle is
transferred to the dealer. Revenue from the maintenance services is recognized separately as
and when the maintenance services are provided to the retail customer.
*****

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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
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 recognizes 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 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.

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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 2nd and 3rd years at ` 6,000 per year. Entity estimates an annual attrition rate of 50%
each year.
Determine the amount of revenue to be recognized 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)
Based on above, it is to be noted that although entity has collected ` 7,500 but revenue can be
recognized 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.
*****

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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 worth 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

Performance obligations Allocated transaction price

(to nearest `10)
Product A (` 1000 ÷ ` 1120 × ` 1000) ` 890
Discount voucher (` 120 ÷ ` 1120 × ` 1000) ` 110
Total ` 1000

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The entity allocates ` 890 to Product A and recognizes revenue for Product A when control
transfers. The entity allocates ` 110 to the discount voucher and recognizes revenue for the
voucher when the customer redeems it for goods or services or when it expires.
*****

6.4 Long term arrangements

Entities frequently enter into arrangements to provide services on a long-term basis, such as
maintenance services to be provided over a long period of time.
For example, should a three-year maintenance agreement be considered a single performance
obligation representing the entire contractual period, or should it be broken into smaller periods
(daily, monthly or yearly)? It may be appropriate to treat a three-year services contract as three
separate one-year performance obligations, if the contract can be renewed or cancelled by either
party at discrete points in time (that is, at the end of each service year).
The entity would separately account for its rights and obligations for each period in which the
contract cannot be cancelled by either party.
In long-term service agreements when the consideration is fixed, the accounting generally will not
change regardless of whether a single performance obligation or multiple performance obligations
are identified.
Illustration 24
A cable company provides television services for a fixed rate fee of ` 800 per month for a period of
3 years. Cable services is satisfied overtime because customer consumes and receives benefit
from services as it is provided i.e. customer generally benefits each day that they have access to
cable service.
Determine how many performance obligations does the cable company have?
Solution
Cable company determines that each increment of its services e.g. day or month, is a distinct
performance obligation because customer benefits from that period of services on its own.
Additionally, each increment of service is separately identifiable from those preceding and
following it i.e. one service period does not significantly affect, modify or customise another.
Therefore, it can be concluded that its contract with customer is a single performance obligation to
provide three years of cable service because each of the distinct increments of service is satisfied
over time. Also, cable company uses the same measure of progress to recognize revenue on its
cable television service regardless of the contract’s time period.
*****

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6.5 Consignment Arrangements

Entities frequently deliver inventory on a consignment basis to other parties (e.g. distributor,
dealer). By shipping on a consignment basis, consignors are able to achieve better sales by
moving them closer to the end-customer. However, they do so without selling the goods to the
intermediary (consignee). A consignment agreement is an agreement between a consignee and
consignor for the storage, transfer, sale or resale and use of the goods. The consignee may take
goods from the consignment stock for use or resale subject to payment to the consignor agreeably
to the terms bargained in the consignment agreement. Entities frequently deliver inventory on a
consignment basis to other parties (e.g., distributor, dealer).
The following indicators have been provided to evaluate whether the arrangement is a
consignment arrangement:
(a) the product is controlled by the entity until a specified event occurs, such as the sale of the
product to a customer of the dealer or until a specified period expires;
(b) the entity is able to require the return of the product or transfer the product to a third party
(such as another dealer); and

(c) the dealer does not have an unconditional obligation to pay for the product (although it
might be required to pay a deposit).
Entities entering into a consignment arrangement must determine the nature of the performance
obligation (i.e., whether the obligation is to transfer the inventory to the consignee or to transfer
the inventory to the end customer). This determination is based on whether control of the
inventory has passed to the consignee upon delivery. In case of consignment arrangement, a
consignor will not relinquish control of consignment inventory until the inventory is sold to the
consumer or on the expiry of an agreed period. Consignees does not have an obligation to pay,
until the goods are sold to the ultimate or end consumer. As a result, revenue generally would not
be recognized for consignment arrangements when the goods are delivered to the consignee
because control has been not yet transferred. Revenue is recognized when the entity has
transferred control of the goods to the consignor or the end consumer. A consignment sale differs
from a sale with a right of return. The customer has control of the goods in a sale with right of
return and can decide whether to put the goods back to the seller. In case of consignment sales,
the consignee does not have the control over the goods.

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Illustration 25
Manufacturer M enters into a 60-day consignment contract to ship 1,000 dresses to Retailer A’s
stores. Retailer A is obligated to pay Manufacturer M ` 20 per dress when the dress is sold to an
end customer.
During the consignment period, Manufacturer M has the contractual right to require Retailer A to
either return the dresses or transfer them to another retailer. Manufacturer M is also required to
accept the return of the inventory. State when the control is transferred.
Solution
Manufacturer M determines that control has not been transferred to Retailer A on delivery, for the
following reasons:
(a) Retailer A does not have an unconditional obligation to pay for the dresses until they have
been sold to an end customer;
(b) Manufacturer M is able to require that the dresses be transferred to another retailer at any
time before Retailer A sells them to an end customer; and
(c) Manufacturer M is able to require the return of the dresses or transfer them to another
retailer.
Manufacturer M determines that control of the dresses transfers when they are sold to an end
customer i.e. when Retailer A has an unconditional obligation to pay Manufacturer M and can no
longer return or otherwise transfer the dresses.
Manufacturer M recognizes revenue as the dresses are sold to the end customer.
*****

6.6 Principal vs agent consideration

Some contracts result in an entity’s customer receiving goods or services from another entity that
is not a direct party to the contract with the customer. The standard states that when other parties
are involved in providing goods or services to an entity’s customer, the entity must determine
whether its performance obligation is to provide the goods or service itself (i.e., the entity is a
principal) or to arrange for another party to provide the goods or service (i.e., the entity is an
agent). The determination of whether the entity is acting as a principal, or an agent affects the
amount of revenue the entity recognizes. That is,
• when the entity is the principal in the arrangement, the revenue recognized is the gross
amount to which the entity expects to be entitled.

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• when the entity is acting as an agent, the revenue recognized is the net amount i.e. the
amount, entity is entitled to retain in return for its services under the contract. The
entity’s fee or commission may be the net amount of consideration that the entity retains
after paying the other party the consideration received in exchange for the goods or
services to be provided by that party.
A principal’s performance obligations in an arrangement differ from an agent’s performance
obligations. For example, if an entity obtains control of the goods or services of another party
before it transfers those goods or services to the customer, the entity’s performance obligation
may be to provide the goods or services itself. Hence, the entity likely is acting as a principal and
would recognize revenue in the gross amount to which it is entitled. An entity that obtains legal
title of a product only momentarily before legal title is transferred to the customer is not necessarily
acting as a principal. In contrast, an agent facilitates the sale of goods or services to the customer
in exchange for a fee or commission and generally does not control the goods or services for any
length of time. Therefore, the agent’s performance obligation is to arrange for another party to
provide the goods or services to the customer. Since the identification of the principal in a contract
is not always clear, Ind AS 115 provides indicators that a performance obligation involves an
agency relationship.
Indicators that an entity is a principal (and therefore controls the goods or service before it is
provided to a customer) include the following:
(a) the entity is primarily responsible for fulfilling the contract. This typically includes
responsibility for the acceptability of the specified goods or service;
(b) the entity has inventory risk before the specified good or service has been transferred to a
customer or after transfer of control to the customer (for example, if the customer has a
right of return).
(c) the entity has discretion in establishing prices for the goods or services.
After an entity identifies its promise and determines whether it is the principal or the agent, the
entity recognizes revenue when it satisfies that performance obligation. In some contracts in
which the entity is the agent, control of the goods or services promised by the agent might transfer
before the customer receives the goods or services from the principal.
For example, an entity might satisfy its promise to provide customers with loyalty points when
those points are transferred to the customer if:
(a) The entity’s promise is to provide loyalty points to customers when the customer purchases
goods or services from the entity

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(b) The points entitle the customers to future discounted purchases with another party (i.e., the
points represent a material right to a future discount)

(c) The entity determines that it is an agent (i.e., its promise is to arrange for the customers to
be provided with points) and the entity does not control those points before they are
transferred to the customer.

In contrast, if the points entitle the customers to future goods or services to be provided by the
entity, the entity may conclude it is not an agent. This is because the entity’s promise is to provide
those future goods or services.
Therefore, the entity controls both the points and the future goods or services before they are
transferred to the customer. In these cases, the entity’s performance obligation may only be
satisfied when the future goods or services are provided.
In other cases, the points may entitle customers to choose between future goods or services
provided by either the entity or another party. In this situation, the nature of the entity’s
performance obligation may not be known until the customer makes its choice. That is, until the
customer has chosen the goods or services to be provided (and, therefore, whether the entity or
the third party will provide those goods or services), the entity is obliged to stand ready to deliver
goods or services. Therefore, the entity may not satisfy its performance obligation until it either
delivers the goods or services or is no longer obliged to stand ready. If the customer subsequently
chooses the goods or services from another party, the entity would need to consider whether it
was acting as an agent. If so, it would recognize revenue, but only for the fee or commission that
the entity receives in return for providing the services to the customer and the third party.
Following illustrations explain the application of the principal versus agent application guidance:
Illustration 26
An entity negotiates with major airlines to purchase tickets at reduced rates compared with the
price of tickets sold directly by the airlines to the public. The entity agrees to buy a specific
number of tickets and will pay for those tickets even if it is not able to resell them. The reduced
rate paid by the entity for each ticket purchased is negotiated and agreed in advance. The
entity determines the prices at which the airline tickets will be sold to its customers. The entity
sells the tickets and collects the consideration from customers when the tickets are sold;
therefore, there is no credit risk.
The entity also assists the customers in resolving complaints with the service provided by
airlines. However, each airline is responsible for fulfilling obligations associated with the ticket,
including remedies to a customer for dissatisfaction with the service.
Determine whether the entity is a principal or an agent.

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Solution
To determine whether the entity’s performance obligation is to provide the specified goods or
services itself (i.e. the entity is a principal) or to arrange for another party to provide those goods
or services (i.e. the entity is an agent), the entity considers the nature of its promise. The entity
determines that its promise is to provide the customer with a ticket, which provides the right to fly
on the specified flight or another flight if the specified flight is changed or cancelled. The entity
considers the following indicators for assessment as principal or agent under the contract with the
customers:
(a) the entity is primarily responsible for fulfilling the contract, which provides the right to fly.
However, the entity is not responsible for providing the flight itself, which will be provided by
the airline.
(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 recognizes
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.

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– 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. works directly 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 the 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
joining fees in health club membership, activation fees for telecom services, setup fees in certain
service contracts and initial fees or joining fees in some supply contracts with the distributors or
customers.

To identify performance obligations in such contracts, an entity shall assess whether the fee
relates to an activity that the entity is required to undertake at the inception of the contract, or that
activity does not result in the transfer of a promised goods or service to the customer.
In many cases, even though a non-refundable upfront fee relates to an activity that the entity is
required to undertake at or near contract inception to fulfil the contract, that activity does not result
in the transfer of a promised goods or service to the customer. Instead, the upfront fee is an
advance payment for future goods and services and, therefore, would be recognized as revenue
when those future goods and services are provided.
If the non-refundable upfront fee relates to a goods or service, the entity shall evaluate whether to
account for the goods or services as a separate performance obligation. An entity may charge a
non-refundable fee as a part of compensation of costs incurred in setting up a contract (or other
administrative tasks). If those setup activities do not satisfy performance obligation, the entity
shall disregard those activities (and related costs) when measuring progress. That is because the
costs of setup activities do not depict transfer of services to customer.

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Does the fee relate to specific goods or services transferred to customer?

Yes No

Account for as a promised good or Account for as an advanced payment

service for future goods or services

Recognize allocated consideration Recognize as revenue when control of

as revenue on transfer of promised future goods or services is transferred,
good or service which may include future contract
periods

Illustration 28
A customer buy a new data connection from the telecom entity. It pays one-time registration and
activation fees at the time of purchase of new connection. The customer will be charged based on
the usage of the data services of the connection on monthly basis.
Are the performance obligations under the contract distinct?
Solution
By selling a new connection, the entity promises to supply data services to customer. Customer
will not be able to benefit from just buying a data card and data services from third party. The
activity of registering and activating connection is not a service to customer and therefore does not
represent satisfaction of performance obligation.
Entity’s obligation is to provide data service and hence activation is not a separate performance
obligation.
*****

7. STEP 3: DETERMINING THE TRANSACTION PRICE

Measurement
“When (or as) a performance obligation is satisfied, an entity shall recognize as revenue the
amount of the transaction price (which excludes estimates of variable consideration that are
constrained in accordance with paragraphs 56 – 58) that is allocated to that performance
obligation.”

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After identifying the contract in Step 1 and the performance obligations in Step 2, an entity next
applies Step 3 to determine the transaction price of the contract. The objective of Step 3 is to
predict the total amount of consideration to which the entity will be entitled from the contract.

What is the transaction price?

“The transaction price is the amount of consideration to which an entity expects to be entitled in
exchange for transferring promised goods or services to a customer, excluding amounts
collected on behalf of third parties (for example, some sales taxes).”

The consideration promised in a contract with a customer may include fixed amounts, variable
amounts, or both. Further, an entity shall consider the terms of the contract and its customary
business practices to determine the transaction price.
For the purpose of determining the transaction price, an entity shall assume that the goods or
services will be transferred to the customer as promised in accordance with the existing contract
and that the contract will not be cancelled, renewed or modified.
The nature, timing and amount of consideration promised by a customer affect the estimate of the
transaction price. When determining the transaction price, an entity shall consider the effects of all
of the following:

Variable consideration (and the constraint) Significant financing component

An entity estimates the amount of For contracts with a significant financing

variable consideration to which it expects component, an entity adjusts the promised
to be entitled, considering the risk of amount of consideration to reflect the time
reversal of revenue in making the value of money
estimate

Price
Non-cash consideration Consideration payable to a
customer
Non-cash consideration is measured at fair
value, if that can be reasonably estimated. An entity needs to determine whether
If not, then an entity uses the stand-alone consideration payable to a customer
selling price of the goods or service that represents a reduction of the transaction
was promised in exchange for non-cash price, a payment for a distinct good or
consideration service, or a combination of the two.

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Comparison with AS 7 and AS 9

Neither AS 7 nor AS 9 has any specific mention about significant financing component in a
transaction price.

7.1 Variable consideration

What is variable consideration?
“If the consideration promised in a contract includes a variable amount, an entity shall estimate
the amount of consideration to which the entity will be entitled in exchange for transferring the
promised goods or services to a customer.”
Examples of variable consideration
“An amount of consideration can vary because of discounts, rebates, refunds, credits, price
concessions, incentives, performance bonuses, or other similar items. The promised
consideration can also vary if an entity’s entitlement to the consideration is contingent on the
occurrence or non-occurrence of a future event. For example, an amount of consideration would
be variable if either a product was sold with a right of return, or a fixed amount is promised as a
performance bonus on achievement of a specified milestone.”

Variable consideration may be fixed in amount, but the entity’s right to receive that consideration is
contingent on a future outcome. For example, the amount of a performance bonus might be fixed,
but because the entity is not entitled to that bonus until a performance target is met, the outcome
is uncertain and therefore the amount is considered variable. Items such as discounts, rebates,
refunds, rights of return, early settlement discounts, credits, price concessions, incentives,
performance bonuses, penalties or similar items may result in variable consideration.

The variability relating to the consideration promised by a customer may be explicitly stated in
the contract. In addition to the terms of the contract, the promised consideration is variable if
either of the following circumstances exists:

(a) the customer has a valid expectation arising from an entity’s customary business
practices, published policies or specific statements that the entity will accept an amount of
consideration that is less than the price stated in the contract. That is, it is expected that
the entity will offer a price concession. Depending on the jurisdiction, industry or customer
this offer may be referred to as a discount, rebate, refund or credit.
(b) other facts and circumstances indicate that the entity’s intention, when entering into the
contract with the customer, is to offer a price concession to the customer.

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Is the amount of consideration variable or fixed?

Variable Fixed

Estimate the amount using the expected value or the most likely amount

Apply the constraint – i.e. determine the portion of the amount, if any, for which
it is highly probable that a significant revenue reversal will not subsequently
occur

Include the amount in the transaction price

7.1.1 Penalties
Penalties shall be accounted for as per the substance of the contract. Where the penalty is
inherent in determination of transaction price, it shall form part of variable consideration.

Example 3
Where an entity agrees to transfer control of a goods or service in a contract with customer at
the end of 30 days for ` 100,000 and if it exceeds 30 days, the entity is entitled to receive only
` 95,000, the reduction of ` 5,000 shall be regarded as variable consideration. In other cases,
the transaction price shall be considered as fixed at ` 95,000.

7.1.2 Estimating the amount of variable consideration

As per Ind AS 115.53, an entity shall estimate an amount of variable consideration by using either
of the following methods, depending on which method the entity expects to better predict the
amount of consideration to which it will be entitled:
(a) The expected value - the expected value is the sum of probability-weighted amounts in a
range of possible consideration amounts. An expected value may be an appropriate
estimate of the amount of variable consideration if an entity has a large number of
contracts with similar characteristics.

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(b) The most likely amount - the most likely amount is the single most likely amount in a
range of possible consideration amounts (ie the single most likely outcome of the
contract). The most likely amount may be an appropriate estimate of the amount of
variable consideration if the contract has only two possible outcomes (for example, an
entity either achieves a performance bonus or does not).
An entity is required to choose between the expected value method and the most likely
amount method. The choice is based on the method which better predicts the amount of
consideration to be entitled. That is, the method selected is not meant to be a ‘free
choice’. Rather, an entity selects the method that is best suited, based on the specific
facts and circumstances of the contract.
An entity shall apply one method consistently throughout the contract when estimating the
effect of an uncertainty on an amount of variable consideration to which the entity will be
entitled. An entity shall consider all the information that is reasonably available to the
entity and shall identify a reasonable number of possible consideration amounts.
A contract may contain different types of variable consideration. It may be appropriate for
an entity to use different methods (i.e. expected value or most likely amount) for
estimating different types of variable consideration within a single contract.
Illustration 29 : Estimating variable consideration
XYZ Limited enters into a contract with a customer to build sophisticated machinery. The promise
to transfer the asset is a performance obligation that is satisfied over time. The promised
consideration is ` 2.5 crore, but that amount will be reduced or increased depending on the timing
of completion of the asset. Specifically, for each day after 31st March, 20X1 that the asset is
incomplete, the promised consideration is reduced by ` 1 lakh. For each day before
31st March, 20X1 that the asset is complete, the promised consideration increases by ` 1 lakh.

In addition, upon completion of the asset, a third party will inspect the asset and assign a rating
based on metrics that are defined in the contract. If the asset receives a specified rating, the entity
will be entitled to an incentive bonus of ` 15 lakh.

Determine the transaction price.

Solution
In determining the transaction price, the entity prepares a separate estimate for each element of
variable consideration to which the entity will be entitled using the estimation methods described in
paragraph 53 of Ind AS 115:

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 INDIAN ACCOUNTING STANDARD 115 9.51 5.51

(a) the entity decides to use the expected value method to estimate the variable consideration
associated with the daily penalty or incentive (i.e. ` 2.5 crore, plus or minus ` 1 lakh per
day). This is because it is the method that the entity expects to better predict the amount of
consideration to which it will be entitled.
(b) the entity decides to use the most likely amount to estimate the variable consideration
associated with the incentive bonus. This is because there are only two possible outcomes
(` 15 lakh or Nil) and it is the method that the entity expects to better predict the amount of
consideration to which it will be entitled.
*****
The entity considers the requirements in paragraphs 56–58 of Ind AS 115 (discussed below) on
constraining estimates of variable consideration to determine whether the XYZ Limited should
include some or all of its estimate of variable consideration in the transaction price.
Illustration 30 : Estimating variable consideration
AST Limited enters into a contract with a customer to build a manufacturing facility. The entity
determines that the contract contains one performance obligation satisfied over time.
Construction is scheduled to be completed by the end of the 36th month for an agreed-upon
price of ` 25 crore.
The entity has the opportunity to earn a performance bonus for early completion as follows:
• 15 percent bonus of the contract price if completed by the 30th month (25% likelihood)
• 10 percent bonus if completed by the 32nd month (40% likelihood)
• 5 percent bonus if completed by the 34th month (15% likelihood)
In addition to the potential performance bonus for early completion, AST Limited is entitled to a
quality bonus of ` 2 crore if a health and safety inspector assigns the facility a gold star rating
as defined by the agency in the terms of the contract. AST Limited concludes that it is 60%
likely that it will receive the quality bonus.
Determine the transaction price.
Solution
In determining the transaction price, AST Limited separately estimates variable consideration for
each element of variability i.e. the early completion bonus and the quality bonus.
AST Limited decides to use the expected value method to estimate the variable consideration
associated with the early completion bonus because there is a range of possible outcomes, and

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the entity has experience with a large number of similar contracts that provide a reasonable basis
to predict future outcomes. Therefore, the entity expects this method to best predict the amount of
variable consideration associated with the early completion bonus. AST’s best estimate of the
early completion bonus is ` 2.13 crore, calculated as shown in the following table:

Bonus % Amount of bonus (` in crore) Probability Probability-weighted

amount (` in crore)
15% 3.75 25% 0.9375
10% 2.50 40% 1.00
5% 1.25 15% 0.1875
0% - 20% -
2.125
AST Limited decides to use the most likely amount to estimate the variable consideration
associated with the potential quality bonus because there are only two possible outcomes
(` 2 crore or Nil) and this method would best predict the amount of consideration associated with
the quality bonus. AST Limited believes the most likely amount of the quality bonus is
` 2 crore.

Accordingly, the transaction price would be

` 25 crore + ` 2.125 crore + ` 2 crore = ` 29.125 crore.
*****
As per para 54 of Ind AS 115, an entity shall apply one method consistently throughout the
contract when estimating the effect of an uncertainty on an amount of variable consideration to
which the entity will be entitled. In addition, an entity shall consider all the information (historical,
current and forecast) that is reasonably available to the entity and shall identify a reasonable
number of possible consideration amounts. The information that an entity uses to estimate the
amount of variable consideration would typically be similar to the information that the entity’s
management uses during the bid-and-proposal process and in establishing prices for promised
goods or services.
7.1.3 Refund liabilities
An entity shall recognize a refund liability if the entity receives consideration from a customer and
expects to refund some or all of that consideration to the customer. A refund liability is measured
at the amount of consideration received (or receivable) for which the entity does not expect to be
entitled (i.e. amounts not included in the transaction price). The refund liability (and corresponding

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change in the transaction price and, therefore, the contract liability) shall be updated at the end of
each reporting period for changes in circumstances.
While the most common form of refund liabilities may be related to sales with a right of return, the
refund liability requirements also apply when an entity expects that it will need to refund
consideration received due to poor customer satisfaction with a service provided (i.e. there was no
goods delivered or returned) and/or if an entity expects to have to provide retrospective price
reductions to a customer (e.g. if a customer reaches a certain threshold of purchases, the unit
price will be retrospectively adjusted).
7.1.4 Constraining estimates of variable consideration
An entity shall include in the transaction price some or all of an amount of variable consideration
estimated in accordance with paragraph 53 only to the extent that it is highly probable that a
significant reversal in the amount of cumulative revenue recognized will not occur when the
uncertainty associated with the variable consideration is subsequently resolved.
In assessing whether it is highly probable that a significant reversal in the amount of cumulative
revenue recognized will not occur once the uncertainty related to the variable consideration is
subsequently resolved, an entity shall consider both the likelihood and the magnitude of the
revenue reversal. Factors that could increase the likelihood or the magnitude of a revenue
reversal include, but are not limited to, any of the following:
(a) the amount of consideration is highly susceptible to factors outside the entity’s influence.
Those factors may include volatility in a market, the judgement or actions of third parties,
weather conditions and a high risk of obsolescence of the promised goods or service.
(b) the uncertainty about the amount of consideration is not expected to be resolved for a long
period of time.
(c) the entity’s experience (or other evidence) with similar types of contracts is limited, or that
experience (or other evidence) has limited predictive value.
(d) the entity has a practice of either offering a broad range of price concessions or changing
the payment terms and conditions of similar contracts in similar circumstances.
(e) the contract has a large number and broad range of possible consideration amounts.
7.1.5 Reassessment of variable consideration
At the end of each reporting period, an entity shall update the estimated transaction price
(including updating its assessment of whether an estimate of variable consideration is constrained)
to represent faithfully the circumstances present at the end of the reporting period and the
changes in circumstances during the reporting period. The entity shall account for changes in the
transaction price in accordance with paragraphs 87 – 90 of Ind AS 115.

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Comparison with AS 7 and AS 9

AS 7 and AS 9 both are silent on a situation where revenue should be reversed as specified in
Ind AS 115.

Illustration 31 : Volume discount incentive

HT Limited enters into a contract with a customer on 1st April, 20X1 to sell Product X for ` 1,000
per unit. If the customer purchases more than 100 units of Product A in a financial year, the
contract specifies that the price per unit is retrospectively reduced to ` 900 per unit.
Consequently, the consideration in the contract is variable.

For the first quarter ended 30 th June, 20X1, the entity sells 10 units of Product A to the
customer. The entity estimates that the customer's purchases will not exceed the 100 unit
threshold required for the volume discount in the financial year. HT Limited determines that it
has significant experience with this product and with the purchasing pattern of the customer.
Thus, HT Limited concludes that it is highly probable that a significant reversal in the cumulative
amount of revenue recognized (i.e. ` 1,000 per unit) will not occur when the uncertainty is
resolved (i.e. when the total amount of purchases is known).
Further, in May, 20X1, the customer acquires another company and in the second quarter ended
30th September, 20X1 the entity sells an additional 50 units of Product A to the customer. In the
light of the new fact, the entity estimates that the customer's purchases will exceed the 100-unit
threshold for the financial year and therefore it will be required to retrospectively reduce the
price per unit to ` 900.

Determine the amount of revenue to be recognize by HT Ltd. for the quarter ended
30th June, 20X1 and 30th September, 20X1.
Solution
The entity recognizes revenue of ` 10,000 (10 units × ` 1,000 per unit) for the quarter ended
30th June, 20X1.
HT Limited recognizes revenue of ` 44,000 for the quarter ended 30th September, 20X1. That
amount is calculated from ` 45,000 for the sale of 50 units (50 units x ` 900 per unit) less the
change in transaction price of ` 1,000 (10 units x ` 100 price reduction) for the reduction of
revenue relating to units sold for the quarter ended 30th June, 20X1.
*****

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Illustration 32 : Measurement of variable consideration

An entity has a fixed fee contract for ` 1 million to develop a product that meets specified
performance criteria. Estimated cost to complete the contract is ` 9,50,000. The entity will
transfer control of the product over five years, and the entity uses the cost-to-cost input method
to measure progress on the contract. An incentive award is available if the product meets the
following weight criteria:
Weight (kg) Award % of fixed fee Incentive fee
951 or greater 0% —
701–950 10% ` 100,000
700 or less 25% ` 250,000

The entity has extensive experience creating products that meet the specific performance
criteria. Based on its experience, the entity has identified five engineering alternatives that will
achieve the 10 percent incentive and two that will achieve the 25 percent incentive. In this case,
the entity determined that it has 95 percent confidence that it will achieve the 10 percent
incentive and 20 percent confidence that it will achieve the 25 percent incentive.
Based on this analysis, the entity believes 10 percent to be the most likely amount when
estimating the transaction price. Therefore, the entity includes only the 10 percent award in the
transaction price when calculating revenue because the entity has concluded it is probable that
a significant reversal in the amount of cumulative revenue recognized will not occur when the
uncertainty associated with the variable consideration is subsequently resolved due to its
95 percent confidence in achieving the 10 percent award.
The entity reassesses its production status quarterly to determine whether it is on the track to
meet the criteria for the incentive award. At the end of the year four, it becomes apparent that
this contract will fully achieve the weight-based criterion. Therefore, the entity revises its
estimate of variable consideration to include the entire 25 percent incentive fee in the year four
because, at this point, it is probable that a significant reversal in the amount of cumulative
revenue recognized will not occur when including the entire variable consideration in the
transaction price.
Evaluate the impact of changes in variable consideration when cost incurred is as follows:

Year `
1 50,000

2 1,75,000

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3 4,00,000
4 2,75,000
5 50,000

Solution
Note: For simplification purposes, the table calculates revenue for the year independently based
on costs incurred during the year divided by total expected costs, with the assumption that total
expected costs do not change.

Fixed A 1,000,000
consideration
Estimated costs B 950,000
to complete*
Year 1 Year 2 Year 3 Year 4 Year 5
Total estimated C 100,000 100,000 100,000 250,000 250,000
variable amount
Fixed revenue D=A x H/B 52,632 184,211 421,053 289,474 52,632
Variable revenue E=C x H/B 5,263 18,421 42,105 72,368 13,158
Cumulative F (see below) — — — 98,683 —
revenue
adjustment
Total revenue G=D+E+F 57,895 202,632 463,158 460,527 65,790
Costs H 50,000 175,000 400,000 275,000 50,000
Operating profit I=G–H 7,895 27,632 63,158 185,527 15,790
Margin (rounded J=I/G 14% 14% 14% 40% 24%
off)
* For simplicity, it is assumed there is no change to the estimated costs to complete
throughout the contract period.
* In practice, under the cost-to-cost measure of progress, total revenue for each period is
determined by multiplying the total transaction price (fixed and variable) by the ratio of
cumulative cost incurred to total estimated costs to complete, less revenue recognized to
date.

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Calculation of cumulative catch-up adjustment:

Updated variable consideration L 250,000
Percent complete in Year 4: (rounded off) M=N/O 94.736%
Cumulative costs through Year 4 N 900,000
Estimated costs to complete O 950,000
Cumulative variable revenue through Year 4: P 138,157
Cumulative catch-up adjustment F= (L x M)–P 98,683

*****
Illustration 33 : Management fees subject to the constraint
On 1st April, 20X1, an entity enters into a contract with a client to provide asset management
services for five years. The entity receives a two per cent quarterly management fee based on
the client's assets under management at the end of each quarter. At 31st March, 20X2, the
client's assets under management are ` 100 crore. In addition, the entity receives a
performance-based incentive fee of 20 per cent of the fund's return in excess of the return of an
observable market index over the five-year period. Consequently, both the management fee
and the performance fee in the contract are variable considerations.

Analyse the revenue to be recognized on 31 st March, 20X2.

Solution
The entity accounts for the services as a single performance obligation because it is providing a
series of distinct services that are substantially the same and have the same pattern of transfer
(the services transfer to the customer over time and use the same method to measure progress —
that is, a time-based measure of progress).
The entity observes that the promised consideration is dependent on the market and thus is highly
susceptible to factors outside the entity's influence. In addition, the incentive fee has a large
number and a broad range of possible consideration amounts. The entity also observes that
although it has experience with similar contracts, that experience is of little predictive value in
determining the future performance of the market. Therefore, at contract inception, the entity
cannot conclude that it is highly probable that a significant reversal in the cumulative amount of
revenue recognized would not occur if the entity included its estimate of the management fee or
the incentive fee in the transaction price.

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At each reporting date, the entity updates its estimate of the transaction price. Consequently, at
the end of each quarter, the entity concludes that it can include in the transaction price the actual
amount of the quarterly management fee because the uncertainty is resolved. However, the entity
concludes that it cannot include its estimate of the incentive fee in the transaction price at those
dates. This is because there has not been a change in its assessment from contract inception —
the variability of the fee based on the market index indicates that the entity cannot conclude that it
is highly probable that a significant reversal in the cumulative amount of revenue recognized would
not occur if the entity included its estimate of the incentive fee in the transaction price.

At 31st March, 20X2, the client's assets under management are ` 100 crore. Therefore, the
resulting quarterly management fee and the transaction price is ` 2 crore.
At the end of each quarter, the entity allocates the quarterly management fee to the distinct
services provided during the quarter. This is because the fee relates specifically to the entity's
efforts to transfer the services for that quarter, which are distinct from the services provided in
other quarters.

Consequently, the entity recognizes ` 2 crore as revenue for the quarter ended
31st March, 20X2.
*****
7.1.6 Sale with a right of return
In some contracts, an entity transfers control of a product to a customer (refer Step 5) and also
grants the customer the right to return the product for various reasons (such as dissatisfaction with
the product) and receive any combination of the following:
(a) a full or partial refund of any consideration paid;
(b) a credit that can be applied against amounts owed, or that will be owed, to the entity; and
(c) another product in exchange.
In some contracts, an entity transfers control of a product to a customer with an unconditional right
of return. In such cases, the recognition of revenue shall be as per the substance of the
arrangement. Where the substance is that of a consignment sale, the entity shall account for such
a contract as per the provisions of Ind AS 115’s application guidance related to consignment sales
(refer paragraph B77 and B78 of Application Guidance to Ind AS 115). In other cases, the
accounting for contracts with customers shall be as per provisions laid out below.

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To account for the transfer of products with a right of return (and for some services that are
provided subject to a refund), an entity shall recognize all of the following:

(a) revenue for the transferred products in the amount of consideration to which the entity
expects to be entitled (therefore, revenue would not be recognized for the products
expected to be returned);

(b) a refund liability; and

(c) an asset (and corresponding adjustment to cost of sales) for its right to recover products
from customers on settling the refund liability.
An entity’s promise to stand ready to accept a returned product during the return period shall not
be accounted for as a performance obligation in addition to the obligation to provide a refund.
An entity shall apply the requirements in paragraphs 47 – 72 (including the requirements for
constraining estimates of variable consideration in paragraphs 56 – 58) to determine the amount of
consideration to which the entity expects to be entitled (i.e. excluding the products expected to be
returned). For any amounts received (or receivable) for which an entity does not expect to be
entitled, the entity shall not recognize revenue when it transfers products to customers but shall
recognize those amounts received (or receivable) as a refund liability. Subsequently, at the end of
each reporting period, the entity shall update its assessment of amounts for which it expects to be
entitled in exchange for the transferred products and make a corresponding change to the
transaction price and, therefore, in the amount of revenue recognized.
An entity shall update the measurement of the refund liability at the end of each reporting period
for changes in expectations about the amount of refunds. An entity shall recognize corresponding
adjustments as revenue (or reductions of revenue).
An asset recognized for an entity’s right to recover products from a customer on settling a refund
liability shall initially be measured by reference to the former carrying amount of the product (for
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.

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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
goods 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 recognize 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 contracts with 1,000 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
value method (see paragraph 53(a) of Ind AS 115) because it is the method that the entity expects
to better predict the amount of consideration to which it will be entitled. Using the expected value
method, the entity estimates that 970 products will not be returned.

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The entity estimates that the costs of recovering the products will be immaterial and expects that
the returned products can be resold at a profit.
Determine the amount of revenue, refund liability and the asset to be recognized by the entity for
the said contracts.
Solution
The entity considers the requirements in paragraphs 56 – 58 of Ind AS 115 on constraining
estimates of variable consideration to determine whether the estimated amount of variable
consideration of ` 48,500 (` 50 × 970 products not expected to be returned) can be included in the
transaction price. The entity considers the factors in paragraph 57 of Ind AS 115 and determines
that although the returns are outside the entity's influence, it has significant experience in
estimating returns for this product and customer class. In addition, the uncertainty will be resolved
within a short time frame (ie the 30-day return period). Thus, the entity concludes that it is highly
probable that a significant reversal in the cumulative amount of revenue recognized (i.e. ` 48,500)
will not occur as the uncertainty is resolved (i.e. over the return period).
The entity estimates that the costs of recovering the products will be immaterial and expects that
the returned products can be resold at a profit.
Upon transfer of control of the 1,000 products, the entity does not recognize revenue for the 30
products that it expects to be returned. Consequently, in accordance with paragraphs 55 and B21
of Ind AS 115, the entity recognizes the following:
(a) revenue of ` 48,500 (` 50 × 970 products not expected to be returned)
(b) a refund liability of ` 1,500 (` 50 refund × 30 products expected to be returned), and
(c) an asset of ` 900 (` 30 × 30 products for its right to recover products from customers on
settling the refund liability).
*****
7.1.7 Warranties
It is common for an entity to provide (in accordance with the contract, the law or the entity’s
customary business practices) a warranty in connection with the sale of a product (whether a
goods or service). The nature of a warranty can vary significantly across industries and contracts.
Some warranties provide a customer with assurance that the related product will function as the
parties intended because it complies with agreed-upon specifications. Other warranties provide
the customer with a service in addition to the assurance that the product complies with agreed-
upon specifications.

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The flowchart below summarises the accounting treatment for the two broad types of warranties:
Warranties

Customer has option to Customer does not have option

purchase separately to purchase separately

Distinct service, as the entity promises to provide Warranty provides an assurance that the
service in addition to the product’s described product complies with agreed-upon
functionality specifications

Account for the promised warranty as a performance Account for the warranty in accordance with
obligation and allocate a portion of the transaction Ind AS 37
price to that performance obligation

In assessing whether a warranty provides a customer with a service in addition to the assurance
that the product complies with agreed-upon specifications, an entity shall consider factors such as:
(a) Whether the warranty is required by law — if the entity is required by law to provide a
warranty, the existence of that law indicates that the promised warranty is not a
performance obligation because such requirements typically exist to protect customers from
the risk of purchasing defective products.
(b) The length of the warranty coverage period — the longer the coverage period, the more
likely it is that the promised warranty is a performance obligation because it is more likely to
provide a service in addition to the assurance that the product complies with agreed-upon
specifications.
(c) The nature of the tasks that the entity promises to perform — if it is necessary for an entity
to perform specified tasks to provide the assurance that a product complies with agreed-
upon specifications (for example, a return shipping service for a defective product), then
those tasks likely do not give rise to a performance obligation.

If an entity promises both an assurance-type warranty and a service-type warranty but cannot
reasonably account for them separately, the entity shall account for both of the warranties together
as a single performance obligation.

A law that requires an entity to pay compensation if its products cause harm or damage does not
give rise to a performance obligation. For example, a manufacturer might sell products in a
jurisdiction in which the law holds the manufacturer liable for any damages (for example, to

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personal property) that might be caused by a consumer using a product for its intended purpose.
Similarly, an entity’s promise to indemnify the customer for liabilities and damages arising from
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.

Comparison with AS 7 and AS 9

Ind AS 115 deals with warrantees in two specific ways as discussed above. However, as per
AS 9 only a general provision for warrantees is sufficient without revenue reversal or recognition
of a contractual liability.

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)

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Cost of goods sold Dr. 14,400

To Inventory 14,400
(To derecognize inventory and recognize cost of goods sold)
The entity derecognizes 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 recognizes the contract liability associated with the service-type warranty as
revenue during the contract warranty period and recognizes 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 recognized as an expense as incurred.
*****
In the above illustration, the net effect of the accounting treatment can be seen as follows:
Accounting point Treatment under Ind AS 115 Treatment as per AS 9
How warranty is Expense and liability effect Provision is made on past
accounted created at the inception of experience based on a certain
contract with customer percentage of total revenue to give
effect to subsequent warranty
costs, say 5% of revenue.
Accounting Total cash inflow ` 36,000 Total cash inflow ` 36,000
treatment Warranty expense ` 2000 Provision for warranty (at 5% of
Accrued warranty cost ` 2,000 transaction price) ` 1800
Contract liability (for future Contract liability – None
service cost) ` 4000 Actual revenue ` 34,200
Actual revenue ` 32,000

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 from the years 2 to 5 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 ` 100 per battery.
Pass required journal entries.

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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 recognized as revenue over the service warranty period (years 2 - 5). The
costs of providing the service warranty are recognized as incurred. The assurance warranty
obligation is used / derecognized 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 recognize 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
the licence than to the other goods or services to which the royalty relates).
As per Ind AS 115.B63B, when the requirement in paragraph B63A is met, revenue from a sales-
based or usage-based royalty shall be recognized wholly in accordance with paragraph B63. When
the requirement in paragraph B63A is not met, the requirements on variable consideration
discussed earlier apply to the sales-based or usage-based royalty.

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7.2 Significant financing component

In determining the transaction price, an entity shall adjust the promised amount of consideration
for the effects of the time value of money if the timing of payments agreed to by the parties to the
contract (either explicitly or implicitly) provides the customer or the entity with a significant benefit
of financing the transfer of goods or services to the customer. Either party may benefit from
financing — that is, the customer may pay before the entity performs its obligation (a customer
loan to the entity) or the customer may pay after the entity performs its obligation (a loan by the
entity to the customer). In those circumstances, the contract contains a significant financing
component.
A significant financing component may exist regardless of whether the promise of financing is
explicitly stated in the contract or implied by the payment terms agreed to by the parties to the
contract.
The objective when adjusting the promised amount of consideration for a significant financing
component is for an entity to recognize revenue at an amount that reflects the price that a
customer would have paid for the promised goods or services if the customer had paid cash for
those goods or services when (or as) they transfer to the customer (ie the cash selling price).
An entity shall consider all relevant facts and circumstances in assessing whether a contract
contains a financing component and whether that financing component is significant to the
contract, including both of the following:
(a) the difference, if any, between the amount of promised consideration and the cash selling
price of the promised goods or services; and
(b) the combined effect of both of the following:
(i) the expected length of time between when the entity transfers the promised goods
or services to the customer and when the customer pays for those goods or
services; and
(ii) the prevailing interest rates in the relevant market.
To meet the objective stated above, when adjusting the promised amount of consideration for a
significant financing component, an entity shall use the discount rate that would be reflected in a
separate financing transaction between the entity and its customer at contract inception. That rate
would reflect the credit characteristics of the party receiving financing in the contract, as well as any
collateral or security provided by the customer or the entity, including assets transferred in the contract.

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An entity may be able to determine that rate by identifying the rate that discounts the nominal
amount of the promised consideration to the price that the customer would pay in cash for the
goods or services when (or as) they transfer to the customer. After contract inception, an entity
shall not update the discount rate for changes in interest rates or other circumstances (such as a
change in the assessment of the customer’s credit risk).
An entity considers the significance of a financing component only at a contract level and not
whether the financing is material at a portfolio level. In other words, if the combined effects for a
portfolio of similar contracts were material to the entity as a whole, but if the effects of the
financing component were not material to the individual contract, such financing component shall
not be considered significant and shall not be separately accounted for.
As mentioned above, when a significant financing component exists in a contract, the transaction
price is adjusted so that the amount recognized as revenue is the ‘cash selling price’ of the
underlying goods or services at the time of transfer. Essentially, a contract with a customer that
has a significant financing component would be separated into a revenue component (for the
notional cash sales price) and a loan component (for the effect of the deferred or advance
payment terms). Consequently, the accounting for accounts receivable arising from a contract that
has a significant financing component should be comparable to the accounting for a loan with the
same features.
The amount allocated to the significant financing component would have to be presented
separately from revenue recognized from contracts with customers. The financing component is
recognized as interest expense (when the customer pays in advance) or interest income (when the
customer pays in arrears). The interest income or expense is recognized over the financing period
using the effective interest method described in Ind AS 109. The standard notes that interest is
only recognized to the extent that a contract asset, contract liability or receivable is recognized in
accordance with Ind AS 115. An entity may present interest income as revenue only when interest
income represents income from an entity’s ordinary activities.
Illustration 37 : Financing component: significant or insignificant?
A commercial airplane component supplier enters into a contract with a customer for a promised
consideration of ` 70,00,000. Based on an evaluation of the facts and circumstances, the supplier
concluded that ` 1,40,000 represented an insignificant financing component because of an
advance payment received in excess of a year before the transfer of control of the product.
State whether company needs to make any adjustment in determining the transaction price.

What if the advance payment was larger and received further in advance, such that the entity
concluded that ` 14,00,000 represented the financing component based on an analysis of the facts
and circumstances.

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Solution
The entity may conclude that ` 1,40,000, or 2 percent of the contract price, is not significant, and
the entity may not need to adjust the consideration promised in determining the transaction price.
However, when the advance payment was larger and received further in advance, such that the
entity may conclude that ` 14,00,000 represents the financing component based on an analysis of
the facts and circumstances. In such a case, the entity may conclude that ` 14,00,000, or 20
percent of the contract price, is significant, and the entity should adjust the consideration promised
in determining the transaction price.
Note: In this illustration, the entity’s conclusion that 2 percent of the transaction price was not
significant and 20 percent was significant is a judgment based on the entity’s facts and
circumstances. An entity may reach a different conclusion based on its facts and circumstances.
*****
Illustration 38 : Accounting for significant financing component
NKT Limited sells a product to a customer for ` 1,21,000 that is payable 24 months after delivery.
The customer obtains control of the product at contract inception. The contract permits the
customer to return the product within 90 days. The product is new, and the entity has no relevant
historical evidence of product returns or other available market evidence.

The cash selling price of the product is ` 1,00,000 which represents the amount that the customer
would pay upon delivery for the same product sold under otherwise identical terms and conditions
as at contract inception. The entity's cost of the product is ` 80,000. The contract includes an
implicit interest rate of 10 per cent (i.e. the interest rate that over 24 months discounts the
promised consideration of ` 1,21,000 to the cash selling price of ` 1,00,000). Analyse the above
transaction with respect to its financing component.
Solution
The contract includes a significant financing component. This is evident from the difference
between the amount of promised consideration of ` 1,21,000 and the cash selling price of
` 1,00,000 at the date that the goods are transferred to the customer.

The contract includes an implicit interest rate of 10 per cent (i.e. the interest rate that over
24 months discounts the promised consideration of ` 1,21,000 to the cash selling price of
` 1,00,000). The entity evaluates the rate and concludes that it is commensurate with the rate that
would be reflected in a separate financing transaction between the entity and its customer at
contract inception.

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Until the entity receives the cash payment from the customer, interest revenue would be
recognized in accordance with Ind AS 109. In determining the effective interest rate in accordance
with Ind AS 109, the entity would consider the remaining contractual term.

Comparison with AS 9

Point of accounting Treatment under Ind AS 115 Treatment under AS 9

Cash selling price ` 1,00,000 Transaction price will be Transaction price of

Promised selling price of bifurcated as ` 1,00,000 and ` 1,21,000 shall be treated as
` 1,21,000 ` 21,000 revenue once the risk and
` 1,00,000 will be recognised rewards are transferred to the
as revenue and ` 21,000 shall customer.
be treated as interest income Here, there is no requirement
being a price difference due to to dissect the transaction price
financing arrangement involved to look for multiple element
in the transaction arrangement like financing
component.

Revenue recognized ` 1,00,000 ` 1,21,000

Other income (interest) ` 21,000 over 2 years as per No interest income is

Ind AS 109 recognized.
*****
Illustration 39 : Determining the discount rate
VT Limited enters into a contract with a customer to sell equipment. Control of the equipment
transfers to the customer when the contract is signed. The price stated in the contract is
` 1 crore plus a 10% contractual rate of interest, payable in 60 monthly instalments of
` 2,12,470.
Determine the discounting rate and the transaction price when -
Case A — Contractual discount rate reflects the rate in a separate financing transaction.

Case B — Contractual discount rate does not reflect the rate in a separate financing transaction ie
14%.

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Solution
Case A — Contractual discount rate reflects the rate in a separate financing transaction
In evaluating the discount rate in the contract that contains a significant financing component,
VT Limited observes that the 10% contractual rate of interest reflects the rate that would be used
in a separate financing transaction between the entity and its customer at contract inception (i.e.
the contractual rate of interest of 10% reflects the credit characteristics of the customer).
The market terms of the financing mean that the cash selling price of the equipment is ` 1 crore.
This amount is recognized as revenue and as a loan receivable when control of the equipment
transfers to the customer. The entity accounts for the receivable in accordance with Ind AS 109.
Case B — Contractual discount rate does not reflect the rate in a separate financing transaction
In evaluating the discount rate in the contract that contains a significant financing component, the
entity observes that the 10% contractual rate of interest is significantly lower than the 14% interest
rate that would be used in a separate financing transaction between the entity and its customer at
contract inception (i.e. the contractual rate of interest of 10% does not reflect the credit
characteristics of the customer). This suggests that the cash selling price is less than
` 1 crore.
VT Limited determines the transaction price by adjusting the promised amount of consideration to
reflect the contractual payments using the 14% interest rate that reflects the credit characteristics
of the customer. Consequently, the entity determines that the transaction price is ` 9,131,346 (60
monthly payments of ` 212,470 discounted at 14%). The entity recognizes revenue and a loan
receivable for that amount. The entity accounts for the loan receivable in accordance with Ind AS
109.
*****
Illustration 40 : Advance payment and assessment of discount rate
ST Limited enters into a contract with a customer to sell an asset. Control of the asset will
transfer to the customer in two years (i.e. the performance obligation will be satisfied at a point
in time). The contract includes two alternative payment options:
1) Payment of ` 5,000 in two years when the customer obtains control of the asset or

2) Payment of ` 4,000 when the contract is signed. The customer elects to pay ` 4,000
when the contract is signed.
ST Limited concludes that the contract contains a significant financing component because of

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the length of time between when the customer pays for the asset and when the entity transfers
the asset to the customer, as well as the prevailing interest rates in the market.
The interest rate implicit in the transaction is 11.8 per cent, which is the interest rate necessary
to make the two alternative payment options economically equivalent. However, the entity
determines that, the rate that should be used in adjusting the promised consideration is 6%,
which is the entity's incremental borrowing rate.
Pass journal entries showing how the entity would account for the significant financing
component.
Solution
Journal Entries showing accounting for the significant financing component:
(a) Recognize a contract liability for the ` 4,000 payment received at contract inception:
Cash Dr. ` 4,000
To Contract liability ` 4,000
(b) During the two years from contract inception until the transfer of the asset, the entity adjusts
the promised amount of consideration and accretes the contract liability by recognizing
interest on ` 4,000 at 6% for two years:
Interest expense Dr. ` 494*
To Contract liability ` 494
*` 494 = ` 4,000 contract liability × (6% interest per year
for two years).

(c) Recognize revenue for the transfer of the asset:

Contract liability Dr. ` 4,494

To Revenue ` 4,494

*****
Ind AS 115.62 contains an overriding provision, which specifies that, a contract with a customer
would not have a significant financing component if any of the following factors exist:
(a) the customer paid for the goods or services in advance and the timing of the transfer of
those goods or services is at the discretion of the customer. For example, consider a
prepaid card for mobile phone services, wherein the customer has the discretion to avail
mobile services within a certain band of time.

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(b) a substantial amount of the consideration promised by the customer is variable and
the amount or timing of that consideration varies on the basis of the occurrence or non-
occurrence of a future event that is not substantially within the control of the customer
or the entity (for example, if the consideration is a sales-based royalty).
(c) the difference between the promised consideration and the cash selling price of the goods
or service arises for reasons other than the provision of finance to either the customer
or the entity, and the difference between those amounts is proportional to the reason for
the difference. For example, the payment terms might provide the entity or the customer
with protection from the other party failing to adequately complete some or all of its
obligations under the contract.
Illustration 41 : Withheld payments on a long-term contract
ABC Limited enters into a contract for the construction of a power plant that includes scheduled
milestone payments for the performance by ABC Limited throughout the contract term of three
years. The performance obligation will be satisfied over time and the milestone payments are
scheduled to coincide with the expected performance by ABC Limited. The contract provides that
a specified percentage of each milestone payment is to be withheld as retention money by the
customer throughout the arrangement and paid to the entity only when the building is complete.
Analyse whether the contract contains any financing component.
Solution
ABC Limited concludes that the contract does not include a significant financing component since
the milestone payments coincide with its performance and the contract requires amounts to be
retained for reasons other than the provision of finance. The withholding of a specified percentage
of each milestone payment is intended to protect the customer from the contractor failing to
adequately complete its obligations under the contract.
*****
Illustration 42 : Advance payment
XYZ Limited, a personal computer (PC) manufacturer, enters into a contract with a customer to
provide global PC support and repair coverage for three years along with its PC. The customer
purchases this support service at the time of buying the product. Consideration for the service is
an additional ` 3,000. Customers electing to buy this service must pay for it upfront (i.e. a monthly
payment option is not available).
Analyse whether there is any significant financing component in the contract or not.

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Solution
To determine whether there is a significant financing component in the contract, the entity
considers the nature of the service being offered and the purpose of the payment terms. The
entity charges a single upfront amount, not with the primary purpose of obtaining financing from
the customer but, instead, to maximise profitability, taking into consideration the risks associated
with providing the service. Specifically, if customers could pay monthly, they would be less likely
to renew and the population of customers that continue to use the support service in the later
years may become smaller and less diverse over time (i.e. customers that choose to renew
historically are those that make greater use of the service, thereby increasing the entity's costs). In
addition, customers tend to use services more if they pay monthly rather than making an upfront
payment. Finally, the entity would incur higher administration costs such as the costs related to
administering renewals and collection of monthly payments.
In assessing whether or not the contract contains a significant financing component, XYZ Limited
determines that the payment terms were structured primarily for reasons other than the provision
of finance to the entity. XYZ Limited charges a single upfront amount for the services because
other payment terms (such as a monthly payment plan) would affect the nature of the risks it
assumes to provide the service and may make it uneconomical to provide the service. As a result
of its analysis, XYZ Limited concludes that there is not a significant financing component.
*****
Illustration 43 : Advance payment
A computer hardware vendor enters into a three-year arrangement with a customer to provide
support services. For customers with low credit ratings, the vendor requires the customer to pay
for the entire arrangement in advance of the provision of service. Other customers pay overtime.

Analyse whether there is any significant financing component in the contract or not.
Solution
Due to this customer’s credit rating, the customer pays in advance for the three-year term.
Because there is no difference between the amount of promised consideration and the cash selling
price (that is, the customer does not receive a discount for paying in advance), the vendor requires
payment in advance only to protect against customer non-payment, and no other factors exist to
suggest the arrangement contains a financing, the vendor concludes this contract does not provide
the customer or the entity with a significant benefit of financing.
*****

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Illustration 44 : Sales based royalty

A software vendor enters into a contract with a customer to provide a license solely in exchange
for a sales-based royalty.
Analyse whether there is any significant financing component in the contract or not.
Solution
Although the payment will be made in arrears, because the total consideration varies based on the
occurrence or non-occurrence of a future event that is not within the control of the customer or the
entity, the software vendor concludes the contract does not provide the customer or the entity with
a significant benefit of financing.
*****
Illustration 45 : Payment in arrears
An EPC contractor enters into a two-year contract to develop customized machine for a customer.
The contractor concludes that the goods and services in this contract constitute a single
performance obligation.
Based on the terms of the contract, the contractor determines that it transfers control over time,
and recognizes revenue based on an input method best reflecting the transfer of control to the
customer. The customer agrees to provide the contractor monthly progress payments, with the
final 25 percent payment (holdback payment) due upon contract completion. As a result of the
holdback payment, there is a gap between when control transfers and when consideration is
received, creating a financing component.
Analyse whether there is any significant financing component in the contract or not.
Solution
There is no difference between the amount of promised consideration and the cash selling price
(that is, the customer did not pay a premium for paying a portion of the consideration in arrears).
The payment terms included a holdback payment only to ensure successful completion of the
project, and no other factors exist to suggest the arrangement contains a financing. Hence, the
contractor concludes this contract does not provide the customer or the contractor with a
significant benefit of financing.
*****

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Illustration 46 : Payment in arrears

Company Z is a developer and manufacturer of defence systems that is primarily a Tier-II supplier
of parts and integrated systems to original equipment manufacturers (OEMs) in the commercial
markets. Company Z enters into a contract with Company X for the development and delivery of
5,000 highly technical, specialized missiles for use in one of Company X’s platforms.
As a part of the contract, Company X has agreed to pay Company Z for their cost plus an award
fee up to ` 100 crore. The consideration will be paid by the customer related to costs incurred
near the time Company Z incurs such costs. However, the ` 100 crore award fee is awarded upon
successful completion of the development and test fire of a missile to occur in 16 months from the
time the contract is executed.
The contract specifies Company Z will earn up to ` 100 crore based on Company X’s assessment
of Company Z’s ability to develop and manufacture a missile that achieves multiple factors,
including final weight, velocity, and accuracy.
Partial award fees may be awarded based on a pre-determined scale based on their success.
Assume Company Z has assessed the contract under Ind AS 115 and determined the award fee
represents variable consideration. Based on their assessment, Company Z has estimated a total
of ` 80 crore in the transaction price related to the variable consideration pursuant to guidance
within Ind AS 115. Further, the entity has concluded it should recognize revenue over time for a
single performance obligation using a cost-to-cost input method.
Analyse whether there is any significant financing component in the contract or not.
Solution
Company Z will transfer control over time beginning shortly after the contract is executed but will
not receive the cash consideration related to the award fee component from Company X for more
than one year in the future. Hence, Company Z should assess whether the award fee represents a
significant financing component.

The intention of the parties in negotiating the award fee due upon completion of the test fire, and
based on the results of that test fire, was to provide incentive to Company Z to produce high
functioning missiles that achieved successful scoring from Company X. Therefore, it was
determined the contract does not contain a significant financing component, and Company Z
should not adjust the transaction price.
*****

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As per Ind AS 115.63, as a practical expedient, an entity need not adjust the promised amount of
consideration for the effects of a significant financing component if the entity expects, at contract
inception, that the period between:

(a) when the entity transfers a promised goods or service to a customer and

(b) when the customer pays for that goods or service

will be one year or less.

Illustration 47 : Applying practical expedient

Company H enters into a two-year contract to develop customized software for Company C.
Company H concludes that the goods and services in this contract constitute a single performance
obligation.

Based on the terms of the contract, Company H determines that it transfers control over time, and
recognizes revenue based on an input method best reflecting the transfer of control to Company
C.

Company C agrees to provide Company H monthly progress payments. Based on the expectation
of the timing of costs to be incurred, Company H concludes that progress payments are being
made such that the timing between the transfer of control and payment is never expected to
exceed one year.

Analyse whether there is any significant financing component in the contract or not.
Solution

Company H concludes it will not need to further assess whether a significant financing component
is present and does not adjust the promised consideration in determining the transaction price, as
they are applying the practical expedient under Ind AS 115.

As per Ind AS 115.65, an entity shall present the effects of financing (interest revenue or interest
expense) separately from revenue from contracts with customers in the statement of profit and
loss. Interest revenue or interest expense is recognized only to the extent that a contract asset (or
receivable) or a contract liability is recognized in accounting for a contract with a customer.
*****

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7.3 Non-cash consideration

Sometimes a customer promises to pay for a goods or service in a form other than cash, such as
shares of common stock or other equity instruments, advertising, or equipment.

To determine the transaction price for contracts in which a customer promises consideration in a
form other than cash, an entity shall:
• In the first instance, measure the non-cash consideration (or promise of non-cash
consideration) at fair value.
• And, if it cannot reasonably estimate the fair value of the non-cash consideration, it shall
measure the consideration indirectly by reference to the stand-alone selling price of the
goods or services promised to the customer (or a class of customers) in exchange for the
consideration.
The fair value of non-cash consideration may change both because of the form of consideration
(e.g. a change in the price of a share an entity is entitled to receive from a customer) and for
reasons other than the form of consideration (e.g. a change in the exercise price of a share option
because of the entity’s performance).
7.3.1 Subsequent measurement of non-cash consideration
• If the fair value of the non-cash consideration varies after contract inception because of
its form (for example, a change in the price of a share to which an entity is entitled to
receive from a customer), the entity does not adjust the transaction price for any changes
in the fair value of the consideration.
Illustration 48 : Entitlement to non-cash consideration
An entity enters into a contract with a customer to provide a weekly service for one year.
The contract is signed on 1st April, 20X1 and work begins immediately. The entity
concludes that the service is a single performance obligation. This is because the entity is
providing a series of distinct services that are substantially the same and have the same
pattern of transfer (the services transfer to the customer over time and use the same
method to measure progress — that is, a time-based measure of progress).
In exchange for the service, the customer promises its 100 equity shares per week of
service (a total of 5,200 shares for the contract). The terms in the contract require that the
shares must be paid upon the successful completion of each week of service.
How should the entity decide the transaction price?

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Solution
The entity measures its progress towards complete satisfaction of the performance
obligation as each week of service is complete. To determine the transaction price (and the
amount of revenue to be recognized), the entity has to measure the fair value of 100 shares
that are received upon completion of each weekly service. The entity shall not reflect any
subsequent changes in the fair value of the shares received (or receivable) in revenue.
*****
• If the fair value of the non-cash consideration promised by a customer varies for reasons
other than only the form of the consideration (for example, the fair value could vary
because of the entity’s performance), the entity is required to apply the guidance on
variable consideration and the constraint when determining the transaction price.
Illustration 49 : Fair value of non-cash consideration varies for reasons other than
the form of the consideration

RT Limited enters into a contract to build an office building for AT Limited over an 18-
month period. AT Limited agrees to pay the construction entity ` 350 crore for the
project. RT Limited will receive a bonus of 10 lakh equity shares of AT Limited if it
completes construction of the office building within one year. Assume a fair value of
` 100 per share at contract inception.
Determine the transaction price.
Solution
The ultimate value of any shares the entity might receive could change for two reasons:
1) the entity earns or does not earn the shares and
2) the fair value per share may change during the contract term.
When determining the transaction price, the entity would reflect changes in the number of
shares to be earned. However, the entity would not reflect changes in the fair value per
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.
*****

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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?
Solution
As a result, SK Limited includes the fair value of the tooling in the transaction price at contract
inception, which it determines to be ` 27 crore (` 25 crore for the steering systems and
` 2 crore for the tooling).
*****

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7.4 Consideration payable to a customer

The rationale behind the accounting provisions related to “consideration payable to a customer” is
that an entity should not overstate its revenue by amounts given to customers in a contract that it
will receive back through the purchase of its goods or services.

Consideration payable to a customer includes cash amounts that an entity pays, or expects to pay,
to the customer (or to other parties that purchase the entity’s goods or services from the
customer). Consideration payable to a customer also includes credit or other items (for example, a
coupon or voucher) that can be applied against amounts owed to the entity (or to other parties that
purchase the entity’s goods or services from the customer).
The key to appropriately accounting for consideration payable to a customer is
determining whether the payment is made in exchange for a distinct goods or service:

• When the entity receives a goods or service from the customer, it applies the guidance in
Step 2 in identifying its performance obligations to determine if that goods or service is
distinct.

When an entity concludes that the consideration paid to a customer is in exchange for a
distinct goods or service, it accounts for the distinct goods or service as it would any other
purchase from a supplier, as long as the consideration paid does not exceed the fair value
of the goods or services received. When the consideration exceeds the fair value of the
distinct goods or services received, any excess is accounted for as a reduction in the
transaction price. If the entity cannot reasonably estimate the fair value of the goods or
service received from the customer, it shall account for all of the consideration payable to
the customer as a reduction of the transaction price.

• If, on the other hand, the entity concludes that the consideration paid to the customer is
not in exchange for a distinct goods or service, the entity would reduce the transaction
price by the amount it pays or owes the customer.

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The below diagram summarises the guidance above:

Is the consideration payable to a customer No

Account for the consideration as a
a payment for a distinct goods or service reduction of the transaction price
from the customer?
Yes

Does the consideration exceed the fair Yes Account for the excess portion as a
value of the distinct goods or services that reduction of the transaction price.
the entity receives from the customer? However, remainder is accounted 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 recognize the reduction of revenue when (or as) the later of either
of the following events occurs:
(a) the entity recognizes 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
reseller’s online catalogue). Generally, such fees do not provide a distinct goods or service
to the manufacturer and are treated as a reduction of the transaction price.

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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 its 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 goods 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 goods 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. The 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 the 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 goods or service to
the manufacturer and are treated as a reduction of the transaction price.

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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-
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 goods 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 concludes that the
consideration payable is accounted for as a reduction in the transaction price when the entity
recognizes revenue for the transfer of the goods. Consequently, as the entity transfers goods to
the customer, the entity reduces the transaction price for each goods 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 recognizes 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.

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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
recognize the reduction in the transaction price as the promised goods or services are transferred.
*****

8. STEP 4: ALLOCATING THE TRANSACTION PRICE TO

PERFORMANCE OBLIGATIONS
Allocation objective- While allocating the transaction price, the objective of the entity should be
to allocate the transaction price to each performance obligation (or distinct goods or service) in an
amount that depicts the amount of consideration to which the entity expects to be entitled in
exchange for transferring the promised goods or services to the customer.

To meet the above allocation objective, an entity shall allocate the transaction price to each
performance obligation identified in the contract on a relative stand-alone selling price basis as per
the standard, except for allocating discounts and for allocating consideration that includes variable
amounts.
Simply put, there are two exceptions to the general allocation guidance:
• allocating discounts, and

• allocating variable consideration

Under these exceptions, an entity allocates a disproportionate amount of the transaction price to
specific performance obligations based on evidence that suggests the discount or variable
consideration relates to those specific performance obligations.

8.1 Determining stand-alone selling price

To allocate the transaction price on a relative stand-alone selling price basis, an entity must first
determine the stand-alone selling price of the distinct goods or service underlying each
performance obligation. The stand-alone selling price is the price at which an entity would sell a
promised goods or service separately to a customer.

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The best evidence of a stand-alone selling price is - the observable price of a goods or service
when the entity sells that goods or service separately in similar circumstances and to
similar customers.
An entity shall determine the stand-alone selling price at contract inception of the distinct goods or
service underlying each performance obligation in the contract and allocate the transaction price in
proportion to those stand-alone selling prices, to allocate the transaction price to each
performance obligation on a relative stand-alone selling price basis. Stand-alone selling prices are
determined at contract inception and are not updated to reflect changes between contract
inception and when performance is complete. Furthermore, if the contract is modified and that
modification is treated as a termination of the existing contract and the creation of a new contract
(see 5.5.2 above), the entity would update its estimate of the stand-alone selling price at the time
of the modification. If the contract is modified and the modification is treated as a separate
contract (see 5.5.2.1 above), the accounting for the original contact would not be affected (and the
stand-alone selling prices of the underlying goods and services would not be updated), but the
stand-alone selling prices of the distinct goods or services of the new, separate contract would
have to be determined at the time of the modification.
A contractually stated price or a list price for a goods or service may be (but shall not be
presumed to be) the stand-alone selling price of that goods or service.
If a stand-alone selling price is not directly observable, for example, the entity does not sell the
goods or service separately, an entity shall estimate the stand-alone selling price at an amount
that would result in the allocation of the transaction price meeting the allocation objective in
paragraph 73 above. When estimating a stand-alone selling price, an entity shall consider all
information (including market conditions, entity-specific factors and information about the customer
or class of customer) that is reasonably available to the entity. In doing so, an entity shall
maximise the use of observable inputs and apply estimation methods consistently in similar
circumstances.
Evaluating the evidence related to estimating a stand-alone selling price may require significant
judgment.
An entity should establish policies and procedures for estimating stand-alone selling price and
apply those policies and procedures consistently to similar performance obligations. As a best
practice, an entity should document its evaluation of the market conditions and entity-specific
factors considered in estimating each stand-alone selling price, including factors that it considers
to be irrelevant and the reasons why.

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Suitable methods for estimating the stand-alone selling price of a goods or service include, but are
not limited to, the following:

(a) Adjusted market assessment approach—an entity could evaluate the market in which it
sells goods or services and estimate the price that a customer in that market would be
willing to pay for those goods or services. That approach might also include referring to
prices from the entity’s competitors for similar goods or services and adjusting those prices
as necessary to reflect the entity’s costs and margins. Applying this approach will likely be
convenient when an entity has sold the goods or service for a period of time (such that it
has data about customer demand), or a competitor offers similar goods or services that the
entity can use as a basis for its analysis. However, applying this approach would be difficult
when an entity is selling entirely new goods or service because in that case it may be
difficult to anticipate market demand.
(b) Expected cost plus a margin approach—an entity could forecast its expected costs of
satisfying a performance obligation and then add an appropriate margin for that goods or
service. When determining which costs to include in the selling price analysis, an entity
should develop and consistently apply a methodology that considers direct and indirect
costs, as well as other relevant costs considered in its normal pricing practices, such as
research and development costs. Determining the margin to use when applying a cost-
plus-a-margin approach requires significant judgment, particularly when the entity is not
planning to separately sell a product or service. Furthermore, using an expected cost-plus-
margin approach may not be appropriate in many circumstances, such as when direct
fulfillment costs are not easily identifiable or when costs are not a significant input in setting
the price for the goods or services.

(c) Residual approach—an entity may estimate the stand-alone selling price by reference to
(1) the total transaction price, less (2) the sum of the observable stand-alone selling prices
of other goods or services promised in the contract.
However, an entity may use a residual approach to estimate the stand-alone selling price of
a goods or service only if one of the following criteria is met:
(i) the entity sells the same goods or service to different customers (at or near the same
time) for a broad range of amounts (ie the selling price is highly variable because a
representative stand-alone selling price is not discernible from past transactions or
other observable evidence); or

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(ii) the entity has not yet established a price for that goods or service and the goods or
service has not previously been sold on a stand-alone basis (ie the selling price is
uncertain).
An entity shall allocate the discount before using the residual approach to estimate the stand-alone
selling price of a goods or service where the discount is allocated entirely to one or more
performance obligations in the contract.
A combination of methods may need to be used to estimate the stand-alone selling prices of the
goods or services promised in the contract if two or more of those goods or services have highly
variable or uncertain stand-alone selling prices. For example, an entity may use a residual
approach to estimate the aggregate stand-alone selling price for those promised goods or services
with highly variable or uncertain stand-alone selling prices and then use another method to
estimate the stand-alone selling prices of the individual goods or services relative to that estimated
aggregate stand-alone selling price determined by the residual approach. When an entity uses a
combination of methods to estimate the stand-alone selling price of each promised goods or
service in the contract, the entity shall evaluate whether allocating the transaction price at those
estimated stand-alone selling prices would be consistent with the allocation objective in paragraph
73 and the requirements for estimating stand-alone selling prices.
Below chart summarises the above concept:

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8.1.1 Allocation of a discount

A customer receives a discount for purchasing a bundle of goods or services if the sum of the
stand-alone selling prices of those promised goods or services in the contract exceeds the
promised consideration in a contract.
Unless an entity has observable evidence (if (c) criteria below are fulfilled) that the entire discount
relates to only one or more, but not all, performance obligations in a contract, the entity shall
allocate a discount proportionately to all performance obligations in the contract. The
proportionate allocation of the discount in those circumstances is a consequence of the entity
allocating the transaction price to each performance obligation on the basis of the relative stand-
alone selling prices of the underlying distinct goods or services (as discussed earlier).
When to allocate discount to ‘less than all’ performance obligations?
As per Ind AS 115.82, an entity shall allocate a discount entirely to one or more, but not all,
performance obligations in the contract if all of the following criteria are met:
(a) the entity regularly sells each distinct goods or service (or each bundle of distinct goods or
services) in the contract on a stand-alone basis;
(b) the entity also regularly sells on a stand-alone basis a bundle (or bundles) of some of those
distinct goods or services at a discount to the stand-alone selling prices of the goods or
services in each bundle; and
(c) the discount attributable to each bundle of goods or services described in (b) above is
substantially the same as the discount in the contract and an analysis of the goods or
services in each bundle provides observable evidence of the performance obligation (or
performance obligations) to which the entire discount in the contract belongs.

Note: As a first step, always allocate the discount entirely to one or more performance
obligations in the contract (if applicable), and then as a second step, use the residual
approach to estimate the stand-alone selling price of a goods or service.

Illustration 54 : Allocation methodology

An entity enters into a contract with a customer to sell Products A, B and C in exchange for
` 10,000. The entity will satisfy the performance obligations for each of the products at different
points in time. The entity regularly sells Product A separately and therefore the stand-alone
selling price is directly observable. The stand-alone selling prices of Products B and C are not
directly observable.

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Because the stand-alone selling prices for Products B and C are not directly observable, the
entity must estimate them. To estimate the stand-alone selling prices, the entity uses the
adjusted market assessment approach for Product B and the expected cost plus a margin
approach for Product C. In making those estimates, the entity maximises the use of observable
inputs.
The entity estimates the stand-alone selling prices as follows:
Product Stand-alone selling price Method
`
Product A 5,000 Directly observable
Product B 2,500 Adjusted market assessment approach
Product C 7,500 Expected cost plus a margin approach
Total 15,000
Determine the transaction price allocated to each product.

Solution
The customer receives a discount for purchasing the bundle of goods because the sum of the
stand-alone selling prices (` 15,000) exceeds the promised consideration (` 10,000). The entity
considers that there is no observable evidence about the performance obligation to which the
entire discount belongs. The discount is allocated proportionately across Products A, B and C.
The discount, and therefore the transaction price, is allocated as follows:

Product Allocated transaction price (to nearest `100)

`
Product A 3,300 (` 5,000 ÷ ` 15,000 × ` 10,000)
Product B 1,700 (` 2,500 ÷ ` 15,000 × ` 10,000)
Product C 5,000 (` 7,500 ÷ ` 15,000 × ` 10,000)
Total 10,000

*****

Illustration 55 : Allocating a discount

An entity regularly sells Products X, Y and Z individually, thereby establishing the following
stand-alone selling prices:
Product Stand-alone selling price
`
Product X 50,000

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Product Y 25,000
Product Z 45,000
Total 1,20,000
In addition, the entity regularly sells Products Y and Z together for ` 50,000.
Case A—Allocating a discount to one or more performance obligations
The entity enters into a contract with a customer to sell Products X, Y and Z in exchange for
` 100,000. The entity will satisfy the performance obligations for each of the products at
different points in time; or Product Y and Z at same point of time. Determine the allocation of
transaction price to Product Y and Z.

Case B—Residual approach is appropriate

The entity enters into a contract with a customer to sell Products X, Y and Z as described in
Case A. The contract also includes a promise to transfer Product Alpha. Total
consideration in the contract is ` 130,000. The stand-alone selling price for Product Alpha is
highly variable because the entity sells Product Alpha to different customers for a broad
range of amounts (` 15,000 – ` 45,000). Determine the stand-alone selling price of
Products, X, Y, Z and Alpha using the residual approach.
Case C—Residual approach is inappropriate
The same facts as in Case B apply to Case C except the transaction price is ` 1,05,000
instead of ` 130,000.

Solution
Case A—Allocating a discount to one or more performance obligations
The contract includes a discount of ` 20,000 on the overall transaction, which would be allocated
proportionately to all three performance obligations when allocating the transaction price using the
relative stand-alone selling price method.
However, because the entity regularly sells Products Y and Z together for ` 50,000 and Product X
for ` 50,000, it has evidence that the entire discount of ` 20,000 should be allocated to the
promises to transfer Products Y and Z in accordance with paragraph 82 of Ind AS 115.
If the entity transfers control of Products Y and Z at the same point in time, then the entity
could, as a practical matter, account for the transfer of those products as a single performance
obligation. That is, the entity could allocate ` 50,000 of the transaction price to the single
performance obligation of Product X and recognize revenue of ` 50,000 when Products Y and Z
simultaneously transfer to the customer.

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If the contract requires the entity to transfer control of Products Y and Z at different points
in time, then the allocated amount of ` 50,000 is individually allocated to the promises to transfer
Product Y (stand-alone selling price of ` 25,000) and Product Z (stand-alone selling price of
` 45,000) as follows:
Product Allocated transaction price
`
Product Y 17,857 (` 25,000 ÷ ` 70,000 total stand-alone selling price × ` 50,000)
Product Z 32,143 (` 45,000 ÷ ` 70,000 total stand-alone selling price × ` 50,000)
Total 50,000

Case B—Residual approach is appropriate

Before estimating the stand-alone selling price of Product Alpha using the residual approach, the
entity determines whether any discount should be allocated to the other performance obligations in
the contract.
As in Case A, because the entity regularly sells Products Y and Z together for ` 50,000 and
Product X for ` 50,000, it has observable evidence that ` 1,00,000 should be allocated to those
three products and a ` 20,000 discount should be allocated to the promises to transfer Products Y
and Z in accordance with paragraph 82 of Ind AS 115.

Using the residual approach, the entity estimates the stand-alone selling price of Product Alpha to
be ` 30,000 as follows:
Product Stand-alone selling price Method
`
Product X 50,000 Directly observable
Products Y and Z 50,000 Directly observable with discount
Product Alpha 30,000 Residual approach
Total 130,000
The entity observes that the resulting ` 30,000 allocated to Product Alpha is within the range of its
observable selling prices (` 15,000 – ` 45,000).
Case C—Residual approach is inappropriate
The same facts as in Case B apply to Case C except the transaction price is ` 1,05,000 instead of
` 1,30,000. Consequently, the application of the residual approach would result in a stand-alone
selling price of ` 5,000 for Product Alpha (` 105,000 transaction price less ` 1,00,000 allocated to
Products X, Y and Z).

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The entity concludes that ` 5,000 would not faithfully depict the amount of consideration to which
the entity expects to be entitled in exchange for satisfying its performance obligation to transfer
Product Alpha, because ` 5,000 does not approximate the stand-alone selling price of Product
Alpha, which ranges from ` 15,000 – ` 45,000.
Consequently, the entity reviews its observable data, including sales and margin reports, to
estimate the stand-alone selling price of Product Alpha using another suitable method. The entity
allocates the transaction price of ` 1,05,000 to Products X, Y, Z and Alpha using the relative
stand-alone selling prices of those products in accordance with paragraphs 73–80 of
Ind AS 115.
*****
8.1.2 Allocation of variable consideration
Variable consideration may be attributable to (1) the entire contract or (2) a specific part of the
contract, such as either of the following:
(a) one or more, but not all, performance obligations in the contract. For example, a contract
may include two performance obligations: the construction of a building and the provision of
services related to the ongoing maintenance of the property after construction. But a bonus
for early completion may relate entirely to the construction of the building; or
(b) one or more, but not all, distinct goods or services promised in a series of distinct goods or
services that forms part of a single performance obligation (for example, the consideration
promised for the second year of a two-year cleaning service contract will increase on the
basis of movements in a specified inflation index).
How to allocate variable consideration?
In accordance with Ind AS 115.85, an entity shall allocate a variable amount (and subsequent
changes to that amount) entirely to a performance obligation or to a distinct goods or service that
forms part of a single performance obligation if both of the following criteria are met:
• the terms of a variable payment relate specifically to the entity’s efforts to satisfy the
performance obligation or transfer the distinct goods or service (or to a specific outcome
from satisfying the performance obligation or transferring the distinct goods or service);
and
• allocating the variable amount of consideration entirely to the performance obligation or
the distinct goods or service is consistent with the allocation objective in paragraph 73
when considering all of the performance obligations and payment terms in the contract.
The general principles of allocation of transaction price shall be applied to allocate the remaining
amount of the transaction price that does not meet the criteria in paragraph 85 above.

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Illustration 56 : Allocation of variable consideration

An entity enters into a contract with a customer for two intellectual property licences (Licences A
and B), which the entity determines to represent two performance obligations each satisfied at a
point in time. The stand-alone selling prices of Licences A and B are ` 16,00,000 and
` 20,00,000, respectively. The entity transfers Licence B at inception of the contract and
transfers Licence A one month later.
Case A—Variable consideration allocated entirely to one performance obligation
The price stated in the contract for Licence A is a fixed amount of ` 16,00,000 and for Licence B
the consideration is three per cent of the customer's future sales of products that use Licence B.
For purposes of allocation, the entity estimates its sales-based royalties (ie the variable
consideration) to be ` 20,00,000. Allocate the transaction price.
Case B — Variable consideration allocated on the basis of stand-alone selling prices
The price stated in the contract for Licence A is a fixed amount of ` 6,00,000 and for Licence B
the consideration is five per cent of the customer's future sales of products that use Licence B.
The entity's estimate of the sales-based royalties (ie the variable consideration) is ` 30,00,000.
Here, Licence A is transferred 3 months later. The royalty due from the customer’s first month
of sale is ` 4,00,000.
Allocate the transaction price and determine the revenue to be recognized for each licence and
the contract liability, if any.
Solution
Case A—Variable consideration allocated entirely to one performance obligation
To allocate the transaction price, the entity considers the criteria in paragraph 85 and concludes
that the variable consideration (ie the sales-based royalties) should be allocated entirely to
Licence B. The entity concludes that the criteria are met for the following reasons:
(a) the variable payment relates specifically to an outcome from the performance obligation to
transfer Licence B (ie the customer's subsequent sales of products that use Licence B).

(b) allocating the expected royalty amounts of ` 20,00,000 entirely to Licence B is consistent
with the allocation objective in paragraph 73 of Ind AS 115. This is because the entity's
estimate of the amount of sales-based royalties (` 20,00,000) approximates the stand-alone
selling price of Licence B and the fixed amount of ` 16,00,000 approximates the stand-
alone selling price of Licence A. The entity allocates ` 16,00,000 to Licence A. This is
because, based on an assessment of the facts and circumstances relating to both licences,
allocating to Licence B some of the fixed consideration in addition to all of the variable
consideration would not meet the allocation objective in paragraph 73 of Ind AS 115.

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The entity transfers Licence B at inception of the contract and transfers Licence A one month later.
Upon the transfer of Licence B, the entity does not recognize revenue because the consideration
allocated to Licence B is in the form of a sales-based royalty. Therefore, the entity recognizes
revenue for the sales-based royalty when those subsequent sales occur.
When Licence A is transferred, the entity recognizes as revenue the ` 16,00,000 allocated to
Licence A.
Case B—Variable consideration allocated on the basis of stand-alone selling prices
To allocate the transaction price, the entity applies the criteria in paragraph 85 of Ind AS 115 to
determine whether to allocate the variable consideration (ie the sales-based royalties) entirely to
Licence B.
In applying the criteria, the entity concludes that even though the variable payments relate
specifically to an outcome from the performance obligation to transfer Licence B (ie the customer's
subsequent sales of products that use Licence B), allocating the variable consideration entirely to
Licence B would be inconsistent with the principle for allocating the transaction price. Allocating
` 6,00,000 to Licence A and ` 30,00,000 to Licence B does not reflect a reasonable allocation of
the transaction price on the basis of the stand-alone selling prices of Licences A and B of `
16,00,000 and ` 20,00,000, respectively. Consequently, the entity applies the general allocation
requirements of Ind AS 115.
The entity allocates the transaction price of ` 6,00,000 to Licences A and B on the basis of relative
stand-alone selling prices of ` 16,00,000 and ` 20,00,000, respectively. The entity also allocates
the consideration related to the sales-based royalty on a relative stand-alone selling price basis.
However, when an entity licenses intellectual property in which the consideration is in the form of a
sales-based royalty, the entity cannot recognize revenue until the later of the following events: the
subsequent sales occur or the performance obligation is satisfied (or partially satisfied).
Licence B is transferred to the customer at the inception of the contract and Licence A is
transferred three months later. When Licence B is transferred, the entity recognizes as revenue `
3,33,333 [(` 20,00,000 ÷ ` 36,00,000) × ` 6,00,000] allocated to Licence B. When Licence A is
transferred, the entity recognizes as revenue ` 2,66,667 [(` 16,00,000 ÷ ` 36,00,000) ×
` 6,00,000] allocated to Licence A.
In the first month, the royalty due from the customer's first month of sales is ` 4,00,000.
Consequently, the entity recognizes as revenue ` 2,22,222 (` 20,00,000 ÷ ` 36,00,000 ×
` 4,00,000) allocated to Licence B (which has been transferred to the customer and is therefore a
satisfied performance obligation). The entity recognizes a contract liability for the ` 1,77,778
(` 16,00,000 ÷ ` 36,00,000 × ` 4,00,000) allocated to Licence A. This is because although the
subsequent sale by the entity's customer has occurred, the performance obligation to which the
royalty has been allocated has not been satisfied.
*****

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8.2 Changes in the transaction price

After contract inception, the transaction price can change for various reasons, including the
resolution of uncertain events or other changes in circumstances that change the amount of
consideration to which an entity expects to be entitled in exchange for the promised goods or
services.
The following principles should be noted:
• An entity shall allocate to the performance obligations in the contract any subsequent
changes in the transaction price on the same basis as at contract inception.
Consequently, an entity shall not reallocate the transaction price to reflect changes
in stand-alone selling prices after contract inception.
• Amounts allocated to a satisfied performance obligation shall be recognized as revenue,
or as a reduction of revenue, in the period in which the transaction price changes.
When reallocating consideration because of a change in the transaction price, the entity continues
to allocate the variable amount entirely to a performance obligation or to a distinct goods or
service that forms part of a single performance obligation if the criteria in
Ind AS 115.85 (as discussed above) continue to be met.
If the change in transaction price is the result of a contract modification, the entity should follow
the contract modification guidance.
However, when the transaction price changes after a modification, the entity should allocate the
change in transaction price to the performance obligations identified before the modification if
both:
• The change in the transaction price is attributable to variable consideration promised prior
to the modification.
• The modification is accounted for as a termination of the old contract and the creation of
a new contract.
An entity allocates all other changes in the transaction price to performance obligations under the
modified contract (i.e. the performance obligations that were unsatisfied or partially satisfied
immediately after the modification) as long as the modification was not accounted for as a
separate contract.
Changes in the transaction price should be allocated entirely to one or more, but not all, distinct goods
or services promised in a series that forms part of a single performance obligation if the criteria for
allocating variable consideration are met.

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Comparison with AS 7 and AS 9

Subsequent changes in transaction price are not specifically dealt with either AS 7 or AS 9 unlike
in Ind AS 115.

Illustration 57 : Allocating a change in transaction price

On 1 st April, 20X0, a consultant enters into an arrangement to provide due diligence, valuation,
and software implementation services to a customer for ` 2 crore. The consultant can earn
` 20 lakh bonus if it completes the software implementation by 30 th September, 20X0 or
` 10 lakh bonus if it completes the software implementation by 31st December, 20X0.
The due diligence, valuation, and software implementation services are distinct and therefore
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.

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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 implementation 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 recognized over the
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 recognize the credit over the remaining term of the contract.
*****

9. STEP 5: SATISFYING PERFORMANCE OBLIGATION

An entity shall recognize revenue when (or as) the entity satisfies a performance obligation by
transferring a promised goods 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.

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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 Recognize 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 recognize revenue transferred
over time

9.1 What does transfer of control mean?

Control is…
the ability – The customer has a present right

to direct the – The right enables it to:

use of - deploy the asset in its activities
- allow another entity to deploy the asset in its activities
- prevent another entity from deploying the asset

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and obtain – The right also enables it to obtain potential cash flows directly or
the indirectly – e.g. through:
remaining - use of the asset
benefits
- consumption of the asset
from
- sale or exchange of the asset
- pledging the asset
- holding the asset
… an asset

Control of an asset refers to –

(i) the ability to direct the use of, and obtain substantially all of the remaining benefits from,
the asset.
(ii) Control includes the ability to prevent other entities from directing the use of, and obtaining
the benefits from, an asset.
• The benefits of an asset are the potential cash flows (inflows or savings in outflows) that
can be obtained directly or indirectly in many ways, such as by:

(a) using the asset to produce goods or provide services (including public 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; and
(f) holding the asset.
• In addition, an entity shall consider indicators of the transfer of control, which include, but
are not limited to, the following:
(a) The entity has a present right to payment for the asset;

(b) The customer has legal title to the asset;

(c) The entity has transferred physical possession of the asset;
(d) The customer has the significant risks and rewards of ownership of the asset;

(e) The customer has accepted the asset.

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The standard indicates that an entity must determine, at contract inception, whether it will transfer
control of a promised goods or service over time. If an entity does not satisfy a performance
obligation over time, the performance obligation is satisfied at a point in time.

To help entities determine whether control transfers over time (rather than at a point in time), the
standard states below guidance:

9.2 Does the customer acquire control over a period of time or at a

point in time?
9.2.1 Transfer of control over a period of time:
Per para 35 of Ind AS 115, an entity transfers control of a goods or service over time and,
therefore, satisfies a performance obligation and recognizes revenue over time, if any of the
following criteria is met:

Criteria (a) – The customer simultaneously receives and consumes the benefits provided by the
entity's performance as the entity performs;

Or

Criteria (b) – the entity's performance creates or enhances an asset (for example, work in
progress) that the customer controls as the asset is created or enhanced; or

Or

Criteria (c) – the entity's performance does not create an asset with an alternative use to the
entity and the entity has an enforceable right to payment for performance completed to date.

Following diagram below depicts if the control is transferred over a period of time.

- If any of the criteria are met, then revenue is recognized over a period of time.

- If none of the criteria are met, then revenue is recognized at a point in time.

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Does customer control the asset

as it is created or enhanced? Yes

No
Does customer receive and consume
the benefits as the entity performs? Yes
No Does entity have
the enforceable
right to receive Yes
Does asset have an alternative use
to the entity? payment for work to
No date?
Yes
No
Control is transferred at a Control is transferred
point in time over time

In this regard, it is important to understand how each of the above criteria are evaluated –
Criteria (a) – Customer simultaneously receives and consumes the benefits provided by
the entity's performance as the entity performs
This criterion is ordinarily applied in situations in which the benefits of seller’s performance are
immediately consumed by the customer, for eg.: routine or recurring services in which the
consumer consumes the benefits immediately as the services are performed, which means that the
customer obtains control of seller entity’s output as soon as the entity performs.
Hence, in such situations, entity’s performance is said to be performed over a period of time.
Illustration 59
Minitek Ltd. is a payroll processing company. Minitek Ltd. enters into a contract to provide
monthly payroll processing services to ABC limited for one year. Determine how entity will
recognize the revenue?
Solution
Payroll processing is a single performance obligation. On a monthly basis, as Minitek Ltd carries
out the payroll processing –

• The customer, ie, ABC Limited simultaneously receives and consumes the benefits of the
entity’s performance in processing each payroll transaction.

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• Further, once the services have been performed for a particular month, in case of
termination of the agreement before maturity and contract is transferred to another entity,
then such new entity will not need to re-perform the services for expired months.
Therefore, it satisfies the first criterion, ie, services completed on a monthly basis are consumed
by the entity at the same time and hence, revenue shall be recognized over the period of time.

*****
For certain performance obligations, an entity may not be able to readily identify whether a
customer simultaneously receives and consumes the benefits from the entity's performance as the
entity performs. In such cases, a performance obligation is satisfied over time if an entity
determines that another entity would not need to substantially re-perform the work that the entity
has completed to date if that other entity were to fulfil the remaining performance obligation to the
customer.
In making such determination, an entity shall make both of the following assumptions:
(a) disregard potential contractual restrictions or practical limitations that otherwise would
prevent the entity from transferring the remaining performance obligation to another entity;
and
(b) presume that another entity fulfilling the remainder of the performance obligation would not
have the benefit of any work in progress.
Illustration 60
T&L Limited (‘T&L’) is a logistics company that provides inland and sea transportation services. A
customer – Horizon Limited (‘Horizon’) enters into a contract with T&L for transportation of its
goods from India to Sri Lanka through sea. The voyage is expected to take 20 days from Mumbai
to Colombo. T&L is responsible for shipping the goods from Mumbai port to Colombo port.

Whether T&L’s performance obligation is met over period of time?

Solution
T&L has a single performance to ship the goods from one port to another. The following factors
are critical for assessing how services performed by T&L are consumed by the customer –
• As the voyage is performed, the service undertaken by T&L is progressing, such that no
other entity will need to re-perform the service till so far as the voyage has been
performed, if T&L was to deliver only part-way.

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• The customer is directly benefitting from the performance of the voyage as & when it
progresses.

Therefore, such performance obligation is said to be met over a period of time.

*****
Criteria (b) – the entity's performance creates or enhances an asset (for example, work in
progress) that the customer controls as the asset is created or enhanced. Refer guidance on
“control” given at the beginning of this section.
• In such cases, the customer ordinarily obtains control of the asset whose work is in
progress and therefore, the entity carrying out the work can recognize revenue over a
period of time.
• Ordinarily, this criterion is applied to the following type of contracts with customers:
(a) Construction contracts, wherein the contractor engages to construct a specific asset
for the customer on customer’s land;
(b) Contracts with the government, wherein the government agency is ordinarily entitled
to any work in process performed by the service provider.

Criteria (c) – the entity's performance does not create an asset with an alternative use to the
entity and the entity has an enforceable right to payment for performance completed to date.
Where a customer does not meet either criterion (a) or criterion (b), the seller entity evaluates the
third and last criterion to determine if performance obligation is satisfied over a period of time.
• This criterion refers to situations in which an asset is created at customer’s discretion,
which the seller is restricted from using for any other purpose and at the same time, the
seller entity reserves a right to seek payment for work in process. Therefore, this
criterion is met if two factors exist simultaneously –
(i) The asset so created does not have an alternate use to the entity; and
(ii) Seller entity has a legally enforceable right to payment for performance completed to
date.

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This evaluation is done at contract inception and involves

consideration of following factors –
Asset has no  For the asset created - Seller is restricted contractually from
alternate use to readily directing the asset for another use during its creation
Seller entity or enhancement; or
 The seller is limited practically from readily directing the asset
in it completed state for another use.

And

 An entity has a right to payment at all times that at least

compensates for performance completed to date, i.e, an
Legally amount that approximates selling price of goods which is
enforceable right equal to cost of goods plus a reasonable profit margin
to payment for  Legally enforceable right comes from operation of law or
work completed legal precedent that could supplement or override
contractual terms. This may be affected if company’s
customary business practice is to not enforce payment if
customer defaults, etc.

Let’s take a closer look at each of the above-mentioned factors.

 Asset does not have alternate use to the seller entity:
This evaluation is carried out at inception of transaction and is not reassessed
unless the contract is substantially modified. In doing this assessment, the entity
shall consider the practical limitations and/ or contractual restrictions in redirecting
the asset for another use, like selling to another customer.
 A contractual restriction referred to above must be substantive, ie, a
customer should be able to enforce its right to the asset if at any time the
seller tries to redirect the asset to another customer. Therefore, if any
customer’s right to an asset is inter-changeable with other equivalent
assets, then the right is not substantive to restrict the seller entity from
redirecting the use of the asset.
 A practical limitation exists when the seller entity would require incurring
significant economic losses to direct the asset for another use, such that the
seller is practically limited from doing so. This may occur, for example, if

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the costs of rework of the asset are significant to direct for another use, or a
significant loss would occur upon selling the asset to another customer, etc.

 Right to payment for performance completed to date

 An entity has a right to payment for performance completed to date if the
entity would be entitled to an amount that at least compensates the entity
for its performance completed to date in the event that the customer or
another party terminates the contract for reasons other than the entity's
failure to perform as promised.
 Such a right to enforce payment should result in compensation for the
costs incurred by the entity for work completed to date, plus a
reasonable profit margin. A meagre compensation for potential loss of
profit, if the contract was to be terminated does not tantamount to legally
enforceable right for work completed to date.
 Compensation for a reasonable profit margin need not equal the profit
margin expected if the contract was fulfilled as promised, but an entity
should be entitled to compensation for either of the following amounts:
(a) a proportion of the expected profit margin in the contract that
reasonably reflects the extent of the entity's performance under the
contract before termination by the customer (or another party); or
(b) a reasonable return on the entity's cost of capital for similar contracts
(or the entity's typical operating margin for similar contracts) if the
contract-specific margin is higher than the return the entity usually
generates from similar contracts.
 Sometimes, the right of the entity need not be a present unconditional right.
Entity may have a right to seek payment only upon achievement of specific
milestones or upon completion of entire performance obligation. In such
case, entity would need to determine if it has a right to enforce payment, in
case the contract was to be terminated prior to completion, for reasons
other than company’s failure to perform.
 Also, sometimes termination clauses in an agreement may not provide the
customer with right to cancel or terminate. In such cases, if the customer
seeks cancellation, the entity may still have a right to complete performance
and seek payment for work carried out.

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 Alternatively, if the contract provides for right to demand payment as work

progresses, but customer may have a right to refund if he proposes to
terminate the contract before completion. In such cases, entity cannot be
said to have a right to enforce payment for work completed to date.
Illustration 61
AFS Ltd. is a risk advisory firm and enters into a contract with a company – WBC Ltd to provide
audit services that results in AFS issuing an audit opinion to the Company. The professional
opinion relates to facts and circumstances that are specific to the company. If the Company was
to terminate the consulting contract for reasons other than the entity's failure to perform as
promised, the contract requires the Company to compensate the risk advisory firm for its costs
incurred plus a 15 per cent margin. The 15 per cent margin approximates the profit margin that
the entity earns from similar contracts.
Whether risk advisory firm’s performance obligation is met over period of time?
Solution

AFS has a single performance to provide an opinion on the professional audit services proposed to
be provided under the contract with the customer. Evaluating the criterion for recognizing revenue
over a period of time or at a point in time, Ind AS 115 requires one of the following criteria to be
met –

• Criterion (a) – whether the customer simultaneously receives and consumes the benefits
from services provided by AFS: Company shall benefit only when the audit opinion is
provided upon completion. Further, in case the contract was to be terminated, any other
firm engaged to perform similar services will have to substantially re-perform.

Hence, this criterion is not met.

• Criterion (b) – An asset created that customer controls: This is service contract and no
asset created, over which customer acquires control.

• Criterion (c) – no alternate use to entity and right to seek payment:

 The services provided by AFS are specific to the company – WBC and do not have
any alternate use to AFS

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 Further, AFS has a right to enforce payment if the contract was early terminated, for
reasons other than AFS’s failure to perform. And the profit margin approximates what
the entity otherwise earns.

Therefore, criterion (c) is met, and such performance obligation is said to be met over a period of
time.
*****
Illustration 62
Space Ltd. enters into an arrangement with a government agency for construction of a space
satellite. Although Space Ltd is in the business of building such satellites for various customers
across the world, the specifications for each satellite may vary based on technology that is
incorporated in the satellite. In the event of termination, Company has a right to enforce payment
for work completed to date.
Evaluate if contract will qualify for satisfaction of performance obligation over a period of time.
Solution
While evaluating the pattern of transfer of control to the customer, the Company shall evaluate
conditions laid in para 35 of Ind AS 115 as follows:
• Criterion (a) – whether the customer simultaneously receives and consumes the benefits:
Customer can benefit only when the satellite is fully constructed, and no benefits are
consumed as its constructed. Hence, this criterion is not met.
• Criterion (b) – An asset created that customer controls: Per provided facts, the customer
does not acquire control of the asset as its created.
• Criterion (c) – no alternate use to entity and right to seek payment:
 The asset is being specifically created for the customer. The asset is customised
to customer’s requirements, such that any diversion for a different customer will
require significant work. Therefore, the asset has practical limitation in being put
to alternate use.
 Further, Space Ltd. has a right to enforce payment if the contract was terminated
early, for reasons other then Space Ltd.’s failure to perform.
Therefore, criterion (c) is met and such performance obligation is said to be met over a period of
time.
*****

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Illustration 63
ABC enters into a contract with a customer to build an item of equipment. The customer pays 10%
advance and then 80% in instalments of 10% each over the period of construction with balance
10% payable at the end of construction period. The payments are non-refundable unless the
company fails to perform as per the contract. Further, if the customer terminates the contract, then
entity is entitled to retain payments made. The company will have no further right to compensation
from the customer.
Evaluate if contract will qualify for satisfaction of performance obligation over a period of time.
Solution
The Company shall evaluate conditions laid in para 35 of Ind AS 115 as follows:
• Criterion (a) – whether the customer simultaneously receives and consumes the benefits:
Customer can benefit only when the asset is fully constructed and no benefits are
consumed as its constructed. Hence, this criterion is not met.
• Criterion (b) – An asset created that customer controls: As per provided facts, the
customer does not acquire control of the asset as it is created.

• Criterion (c) – no alternate use to entity and right to seek payment:

 The customer has specific right over the asset and company does not have right to
divert it for any alternate use. In other words, there is contractual restriction to use
the asset for any alternate purpose.
 In the event of early termination, Company has a right to retain any payments
made by the customer. However, such payments need not necessarily
compensate the selling price of the partially constructed asset, if the customer was
to stop making payments.
Therefore, Company does not have a legally enforceable right to payment for work
completed to date and the criterion under para 35 is not satisfied. Thus, revenue cannot be
recognized over a period of time.
*****

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All above discussed three criteria can be summarized in below table:

Criterion Example
1. The customer simultaneously receives and Routine or recurring services – e.g.
consumes the benefits provided by the cleaning services, Routine transaction
entity’s performance as the entity performs processing services, Hotel management
services.
2. The entity’s performance creates or Building an asset on a customer’s site
enhances an asset that the customer
controls as the asset is created or enhanced
3. The entity’s performance does not create an Building a specialized/highly customized
asset with an alternative use to the entity asset that only the customer can use or
and the entity has an enforceable right to building an asset according to a
payment for performance completed to date customer’s specifications
When an entity has determined that a performance obligation is satisfied over time, the standard
requires the entity to select a single revenue recognition method for the relevant performance
obligation. The objective is to faithfully depict an entity’s performance in transferring control of
goods or services promised to a customer (i.e. the satisfaction of an entity’s performance
obligation). The standard provides two methods for recognizing revenue on contracts involving the
transfer of goods and services over time: input methods and output methods.
Methods of measuring progress of a performance obligation satisfied over time

Output Methods Input Methods

Recognize revenue based on direct Recognize revenue based on the entity’s
measurements of the value to the customer of efforts or inputs to the satisfaction of a
the goods or services transferred to date performance obligation.
relative to the remaining goods or services
promised under the contract.
For Example: Surveys of performance For Example: Resources consumed labour
completed to date, appraisals of results hours expended, costs incurred, time
achieved elapsed or machine hours used

A. Output methods:
 Output methods recognize revenue on the basis of direct measurements of the
value, to the customer, of the goods or services transferred to date relative to the
remaining goods or services promised under the contract. Output methods include
methods such as surveys of performance completed to date, appraisals of results
achieved, milestones reached, time elapsed and units produced or units delivered.

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Output method is selected if it would faithfully depict the entity's performance

towards complete satisfaction of the performance obligation. It may not be useful
in depicting the entity's performance if it would fail to measure some of the goods
or services for which control has transferred to the customer. For example, output
methods based on units produced or units delivered would not faithfully depict an
entity's performance in satisfying a performance obligation if, at the end of the
reporting period, the entity's performance has produced work in progress or
finished goods controlled by the customer that are not included in the
measurement of the output.
 As a practical expedient – if a company has a right to consideration from a
customer in an amount which corresponds directly with the value billed to the
customer of the entity’s performance completed to date, then company may
recognize revenue for the amount to which the entity has a right to invoice. For
eg.: a service contract in which entity bills a fixed amount for each hour of service
provided, etc.
B. Input methods:
 Input methods recognize revenue on the basis of the entity’s efforts or inputs to the
satisfaction of a performance obligation (e.g. resources consumed, labour hours
expended, costs incurred, time elapsed or machine hours used) relative to the total
expected inputs to the satisfaction of that performance obligation. If the entity's
efforts or inputs are expended evenly throughout the performance period, it may be
appropriate for the entity to recognize revenue on a straight-line basis.
 While applying input method, a careful consideration should be given for events
that do not depict a direct relationship between entity’s inputs and transfer of
control of goods or services. For example, when cost-based input method is used,
an adjustment may be required in the following cases –

(a) When any cost incurred does not contribute to an entity’s progress in
satisfying performance obligation – any excess costs incurred owing to
entity’s inefficiencies that were not reflected in the price of the contract must
be ignored for measuring progress of work. For eg: cost of wasted materials,
labour or other resources, etc.
(b) When cost incurred is not proportionate to entity’s progress in satisfying its
performance obligation. In such cases, the best reflection is to adjust the input

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method to recognize revenue only to the extent of costs incurred. Such

recognition of revenue to the extent of costs incurred is appropriate, if at
contract inception, all the following conditions exist:
(i) The goods do not represent a distinct performance obligation;
(ii) Customer is expected to obtain control of the goods significantly
before receiving the services;
(iii) Cost of such goods is significant relative to the total expected costs
to complete the performance obligation; and
(iv) The entity procures the goods from a third party and does not
significantly involve in designing / manufacturing the goods (even if
the entity is a principal in the arrangement between the entity and
end customer).
An entity shall apply a single method of measuring progress for each performance obligation
satisfied over time, and the entity shall apply that method consistently to similar performance
obligations and in similar circumstances. At the end of each reporting period, an entity shall
remeasure its progress towards complete satisfaction of a performance obligation satisfied over
time.

As circumstances change over time, an entity shall update its measure of progress to reflect any
changes in the outcome of the performance obligation. Such changes to an entity’s measure of
progress shall be accounted for as a change in accounting estimate in accordance with
Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors.
*****
Illustration 64 : Measuring progress on straight line basis
An entity, an owner and manager of health clubs, enters into a contract with a customer for one
year of access to any of its health clubs. The customer has unlimited use of the health clubs
and promises to pay CU100 per month. The entity’s promise to the customer is to provide a
service of making the health clubs available for the customer to use as and when the customer
wishes.
Evaluate if contract will qualify for satisfaction of performance obligation over a period of time. If
yes, how should an entity measure its progress of service provided?

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Solution
The entity shall determine if revenue should be recognized over a period of time by evaluating the
conditions laid in para 35 of Ind AS 115.
- Applying the first criterion of para 35 to establish if the customer simultaneously receives
and consumes the benefits, as the entity provides service – The health club provides
access to services uniformly through the year. The extent to which the customer uses the
health clubs does not affect the amount of the remaining goods and services to which the
customer is entitled. The customer therefore simultaneously receives and consumes the
benefits of the entity's performance as it performs by making the health clubs available.
- Consequently, the entity's performance obligation is satisfied over time
- Once the pattern of satisfying performance obligation is defined, the Company then
determines how progress should be measured. The services are uniformly provided to
the customer through the year. Therefore, the best measure of progress is to recognize
revenue on a straight line basis over the year.
*****

Illustration 65 : Uninstalled materials

On 1 st January, 20X1, an entity contracts to renovate a building including the installation of new
elevators. The entity estimates the following with respect to the contract:
Particulars Amount ( `)
Transaction price 5,000,000
Expected costs:
(a) Elevators 1,500,000
(b) Other costs 2,500,000
Total 4,000,000

The entity purchases the elevators, and they are delivered to the site six months before they will
be installed. The entity uses an input method based on cost to measure progress towards
completion of the contract. The entity has incurred actual other costs of 500,000 by
31st March, 20X1.
How will the Company recognize revenue for the year ended 31st March, 20X1, if performance
obligation is met over a period of time?

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Solution
Costs to be incurred comprise two major components – elevators and cost of construction service.
(a) The elevators are part of the overall construction project and are not a distinct performance
obligation
(b) The cost of elevators is substantial to the overall project and are incurred well in advance.

(c) Upon delivery at site, the customer acquires control of such elevators.
(d) And there is no modification made to the elevators, which the company only procures and
delivers at site. Nevertheless, as part of materials used in overall construction project, the
company is a principal in the transaction with the customer for such elevators also.
Therefore, applying the guidance on Input method –
- The measure of progress should be made based on the percentage of costs incurred
relative to the total budgeted costs.
- The cost of elevators should be excluded when measuring such progress and revenue for
such elevators should be recognized to the extent of costs incurred.

The revenue to be recognized is measured as follows:

Particulars Amount (`)
Transaction price 5,000,000
Costs incurred:
(a) Cost of elevators 1,500,000
(b) Other costs 500,000
Measure of progress: 500,000 / 2,500,000 = 20%
Revenue to be recognized:
(a) For costs incurred (other than elevators) Total attributable revenue = 3,500,000
% of work completed = 20%
Revenue to be recognized = 700,000
(b) Revenue for elevators 1,500,000 (equal to costs incurred)
Total revenue to be recognized 1,500,000 + 700,000 = 2,200,000
Therefore, for the year ended 31st March, 20X1, the Company shall recognize revenue of
` 2,200,000 on the project.
*****

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Other considerations in measuring progress of work:

Stand-Ready Obligations
When the nature of an entity’s performance obligation is to stand ready to provide goods or
services, it may be appropriate to utilize a time-based measure of progress.
- When the pattern of benefit and the entity’s efforts to fulfill the contract are not even
throughout the contract period, a time-based method of measuring progress may not be
appropriate.

- On the other hand, when an entity expects the customer will receive and consume the
benefits of the entity’s promise equally throughout the contract period, or if the entity
does not know and cannot reasonably estimate how and when the customer will request
performance, then a straight-line revenue attribution resulting from a time-based measure
of progress may be appropriate.
9.2.2 Transfer of control at a point in time:
Where a company does not meet any of the aforementioned criteria for recognizing revenue over a
period of time, then revenue shall be recognized at a point in time.
The following is an indicative list of indicators which may exist, to imply the point of time at which
control of goods has been passed to the customer. This is not an exhaustive list and there may be
more factors that may be considered to determine the point in time at which revenue shall be
recognized:

Indicators that control has passed include a customer having

a present risks and

physical accepted the
obligation to legal title rewards of
possession asset
pay ownership

Indicator Evaluation
The entity has a If a customer is presently obliged to pay for an asset, then that may
present right to indicate that the customer has obtained the ability to direct the use of,
payment and obtain substantially all of the remaining benefits from, the asset in
exchange.

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The customer has a - Legal title may indicate which party to a contract has the ability to
legal title to the asset direct the use of, and obtain substantially all of the remaining
benefits from, an asset or to restrict the access of other entities to
those benefits.
- If an entity retains legal title solely as protection against the
customer's failure to pay, those rights of the entity would not
preclude the customer from obtaining control of an asset.
The customer has - The customer's physical possession of an asset may indicate that
physical possession of the customer has the ability to direct the use of the asset.
the asset - However, physical possession may not coincide with control of an
asset. For example, in some repurchase agreements and in some
consignment arrangements, a customer or consignee may have
physical possession of an asset that the entity controls.
The customer has - Transfer of risks & rewards for an asset may indicate that the
assumed significant customer has the ability to direct the use of and obtain
risks & rewards of substantially all of the benefits from the asset.
owning the asset - When evaluating the risks and rewards of ownership of a
promised asset, an entity shall exclude any risks that give rise to
a separate performance obligation in addition to the performance
obligation to transfer the asset. For example, an entity may have
transferred control of an asset to a customer but not yet satisfied
an additional performance obligation to provide maintenance
services related to the transferred asset.
The customer has - Customer acceptance clauses allow a customer to cancel a
accepted the asset contract or require an entity to take remedial action if a goods or
service does not meet agreed-upon specifications.
- An entity shall consider such clauses to evaluate when a
customer obtains control of a goods or service.
- If an entity can objectively determine that control of a goods or
service has been transferred to the customer in accordance with
the agreed-upon specifications in the contract, then customer
acceptance is a formality that would not affect the entity's
determination of when the customer has obtained control of the
goods or service.
- However, if an entity cannot objectively determine that the goods
or service provided to the customer is in accordance with the
agreed-upon specifications in the contract, then the entity would
not be able to conclude that the customer has obtained control
until the entity receives the customer's acceptance.

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9.3 Repurchase agreements

When a company determines the timing of transfer of control, it is important to take into
consideration any repurchase agreements that may have been executed by the Company.

A repurchase agreement is a contract in which an entity sells an asset and also promises or has
the option (either in the same contract or in another contract) to repurchase the asset. The
repurchased asset may be the asset that was originally sold to the customer, an asset that is
substantially the same as that asset, or another asset of which the asset that was originally sold is
a component.
Repurchase agreements generally come in three forms:

Put option:
Forward: Call option: An entity's
An entity's obligation to
An entity's right to repurchase the
obligation to repurchase the
repurchase the asset at the
asset customer's
asset
request

A. Forward or call option:

 If an entity has an obligation or a right to repurchase the asset (a forward or a call
option), a customer does not obtain control of the asset because the customer is limited
in its ability to direct the use of, and obtain substantially all of the remaining benefits from,
the asset even though the customer may have physical possession of the asset.
Consequently, the entity shall account for the contract as either of the following:

(a) a lease in accordance with Ind AS 116, Leases, if the entity can or must
repurchase the asset for an amount that is less than the original selling price of the
asset, unless the contract is part of a sale and leaseback transaction. If the
contract is part of a sale and leaseback transaction, the entity shall continue to
recognize the asset and shall recognize financial liability for any consideration
received from the customer. The entity shall account for the financial liability in
accordance with Ind AS 109; or

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(b) a financing arrangement, if the entity can or must repurchase the asset for an
amount that is equal to or more than the original selling price of the asset.

 When comparing the repurchase price with the selling price, an entity shall consider the
time value of money.
 If the repurchase agreement is a financing arrangement, the entity shall continue to
recognize the asset and also recognize a financial liability for any consideration received
from the customer.
 The entity shall recognize the difference between the amount of consideration received
from the customer and the amount of consideration to be paid to the customer as interest
and, if applicable, as processing or holding costs (for example, insurance).
 If the option lapses unexercised, an entity shall derecognize the liability and recognize
revenue.
B. Put option
 If an entity has an obligation to repurchase the asset at the customer's request (a put
option) at a price that is lower than the original selling price of the asset, the entity shall
consider at contract inception whether the customer has a significant economic incentive
to exercise that right. The customer's exercising of that right results in the customer
effectively paying the entity consideration for the right to use a specified asset for a
period of time. Therefore, the entity shall account for the agreement as a lease in
accordance with Ind AS 116, unless the contract is part of a sale and leaseback
transaction. If the contract is part of a sale and leaseback transaction, the entity shall
continue to recognize the asset and shall recognize a financial liability for any
consideration received from the customer. The entity shall account for the financial
liability in accordance with Ind AS 109.
 To determine whether a customer has a significant economic incentive to exercise its
right, an entity shall consider various factors, including the relationship of the repurchase
price to the expected market value of the asset at the date of the repurchase and the
amount of time until the right expires. For example, if the repurchase price is expected to
significantly exceed the market value of the asset, this may indicate that the customer
has a significant economic incentive to exercise the put option and hence the customer is
expected to ultimately return the asset to the entity.
 If the repurchase price is equal to or greater than original selling price and more than the
expected market value of the asset, the contract is in effect a financing arrangement.

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 If the repurchase price of the asset is equal to or greater than the original selling price
and is less than or equal to the expected market value of the asset, and the customer
does not have a significant economic incentive to exercise its right, then the entity shall
account for the agreement as if it were the sale of a product with a right of return.
 If the customer does not have a significant economic incentive to exercise its right at a
price that is lower than the original selling price of the asset, the entity shall account for
the agreement as if it were the sale of a product with a right of return.
 The following decision tree may be useful to account for the arrangement –

Is the repurchase price => Original Yes

Selling price and; Account for the transaction as a
the repurchase price > expected market financing arrangement
price of the asset

No
Is the repurchase price < Original
Is the repurchase price => Original Selling No Selling Price and Significant
Price and; economic
Repurchase price <= to expected market incentive to exercise?
price
Yes No
Yes

Account for the agreement as lease

Yes under Ind AS 116 unless the contract
Does the customer have significant is part of a sale and lease back
economic incentive to exercise the right? transaction

No If the contract is part of a sale and

leaseback transaction, the entity
shall continue to recognize the asset
Recognize revenue with a right to return and shall recognize a financial
liability (as per Ind AS 109) for any
consideration received from the
customer.

 When comparing the repurchase price with the selling price, an entity shall consider the
time value of money.

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 If the option lapses unexercised, an entity shall derecognize the liability and recognize
revenue.
Illustration 66
An entity enters into a contract with a customer for the sale of a tangible asset on
1 st January, 20X1 for ` 1 million. The contract includes a call option that gives the entity the
right to repurchase the asset for ` 1.1 million on or before 31 st December, 20X1.
How would the entity account for this transaction?
Solution
In the above case, where the entity has a right to call back the goods upto a certain date –
• The customer cannot be said to have acquired control, owing to the repurchase right with
the seller entity
• Since the original selling price (` 1 million) is lower than the repurchase price
(` 1.1 million), this is construed to be a financing arrangement and accounted as follows:

(a) Amount received shall be recognized as ‘liability’

(b) Difference between sale price and repurchase price to be recognized as ‘finance
cost’ and recognized over the repurchase term.
*****
Illustration 67
An entity enters into a contract with a customer for the sale of a tangible asset on
1 st January, 20X1 for ` 10,00,000. The contract includes a put option that gives the customer
the right to sell the asset for ` 9,00,000 on or before 31st December, 20X1. The market price for
such goods is expected to be ` 7,50,000
How would the entity account for this transaction?
Solution
In the above case, where the entity has an obligation to buy back the goods upto a certain date–

• The entity shall evaluate if the customer has a significant economic incentive to return the
goods. Since the repurchase price is significantly higher than market price, therefore,
customer has a significant economic incentive to return the goods. There are no other
factors which may affect this assessment.

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• Therefore, company determines that ‘control’ of goods is not transferred to the customer
till 31st December, 20X1, ie, till the put option expires.
• Against payment of ` 10,00,000; the customer only has a right to use the asset and put it
back to the entity for ` 9,00,000. Therefore, this will be accounted as a lease transaction
in which difference between original selling price (ie, ` 10,00,000) and repurchase price
(ie, ` 9,00,000) shall be recognized as lease income over the period of lease.
• At the end of repurchase term, ie, 31 st December, 20X1, if the customer does not
exercise such right, then the control of goods would be passed to the customer at that
time and revenue shall be recognized for sale of goods for repurchase price (ie,
` 9,00,000).
*****

9.4 Bill-and-hold
 A bill-and-hold arrangement is a contract under which an entity bills a customer for a
product but the entity retains physical possession of the product until it is transferred to
the customer at a point in time in the future. For example, a customer may request an
entity to enter into such a contract because of the customer's lack of available space for
the product or because of delays in the customer's production schedules.
 In such arrangements, the entity shall determine at which point does control transfer to
the customer.
In some cases, control is transferred either when the product is delivered to the customer’s
site or when the product is shipped, depending on the terms of the contract (including
delivery and shipping terms). While in other cases, a customer may obtain control of a
product even though that product remains in an entity’s physical possession. In that case,
the customer has the ability to direct the use of, and obtain substantially all of the remaining
benefits from, the product even though it has decided not to exercise its right to take
physical possession of that product. Consequently, the entity does not control the product.
Instead, the entity provides custodial services to the customer over the customer’s asset
 In addition, the indicators defined earlier in this chapter for establishing transfer of
control, all the following criteria must be met:
(a) the reason for the bill-and-hold arrangement must be substantive (for example, the
customer has requested the arrangement);

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(b) the product must be identified separately as belonging to the customer;

(c) the product currently must be ready for physical transfer to the customer; and
(d) the entity cannot have the ability to use the product or to direct it to another
customer.
 Where an entity recognizes revenue on bill & hold basis, the entity shall determine if it
has any additional performance obligations forming part of the transaction price, which
would need to be segregated and accounted separately, when such performance
obligations are met. (for eg.: custodial services for goods held, extended warranty, etc.)
For identification of performance obligations, refer step 2 – identifying performance
obligations.
Illustration 68
An entity enters into a contract with a customer on 1st April, 20X1 for the sale of a machine and
spare parts. The manufacturing lead time for the machine and spare parts is two years.
Upon completion of manufacturing, the entity demonstrates that the machine and spare parts
meet the agreed-upon specifications in the contract. The promises to transfer the machine and
spare parts are distinct and result in two performance obligations that each will be satisfied at a
point in time. On 31st March, 20X3, the customer pays for the machine and spare parts, but only
takes physical possession of the machine. Although the customer inspects and accepts the
spare parts, the customer requests that the spare parts be stored at the entity's warehouse
because of its close proximity to the customer's factory. The customer has legal title to the
spare parts and the parts can be identified as belonging to the customer. Furthermore, the
entity stores the spare parts in a separate section of its warehouse and the parts are ready for
immediate shipment at the customer's request. The entity expects to hold the spare parts for
two to four years and the entity does not have the ability to use the spare parts or direct them to
another customer.
How will the Company recognize revenue for sale of machine and spare parts? Is there any
other performance obligation attached to this sale of goods?
Solution
In the facts provided above, the entity has made sale of two goods – machine and space parts,
whose control is transferred at a point in time. Additionally, company agrees to hold the spare
parts for the customer for a period of 2-4 years, which is a separate performance obligation.
Therefore, total transaction price shall be divided amongst 3 performance obligations –
(i) Sale of machinery

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(ii) Sale of spare parts

(iii) Custodial services for storing spare parts.
Recognition of revenue for each of the three performance obligations shall occur as follows:
- Sale of machinery: Machine has been sold to the customer and physical possession as
well as legal title passed to the customer on 31st March, 20X3. Accordingly, revenue for
sale of machinery shall be recognized on 31 st March, 20X3.
- Sale of spare parts: The customer has made payment for the spare parts and legal title
has been passed to specifically identified goods, but such spares continue to be
physically held by the entity. In this regard, the company shall evaluate if revenue can be
recognized on bill-and-hold basis if all below criteria are met:

(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
for physical transfer to the customer; segregated, therefore, ready for delivery.
and
(d) the entity cannot have the ability to Spares have been segregated and
use the product or to direct it to cannot be redirected to any other
another customer customer.
Therefore, all conditions of bill-and-hold are met and hence, company can recognize
revenue for sale of spare parts on 31st 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.
*****

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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 property in
order to determine whether the promise is satisfied (and revenue is recognized) 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 recognized 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 recognized 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
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 customer 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

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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 goods 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 recognized?
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
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 recognizes 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.
*****

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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
2. The licence exposes the customer granted to the customer
to any effects of the entity’s activities
- Effectively, this means the
3. The entity’s activities are not a customer is able to direct the use
performance obligation under the of and obtain all remaining
contract benefits from the licensed IP when
granted (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
Based 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 goods or service to Y – i.e.
updates 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.

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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 (Intellectual Property) 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 recognized 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 goods or a service to M as

they occur (i.e. the team playing games does not transfer a goods 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

Incremental costs to obtain a contract that Cost to fulfil (i.e. perform /

deliver) a contract. Consider
would not be incurred if contract not obtained
deferral under Ind AS 115.95
(Eg. Sales commission) only if not covered in scope
of another standard.
Recognize as an asset the
incremental costs to obtain a contract Recognize 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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10.1 Costs to obtain a contract (contract acquisition costs)

Entities may incur various costs to obtain or acquire a contract with a customer, including, but not
limited to, legal fees, advertising expenses, travel expenses, and salespersons’ salaries and
commissions.
Incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract
with a customer that it would not have incurred if the contract had not been obtained (for example,
a sales commission).
Once an entity has determined that costs incurred relate to a specific contract with a customer, it
should then determine if the costs meet the conditions for capitalisation. Incremental costs to
obtain a contract that an entity expects to recover should be capitalised, while costs to obtain a
contract that do not qualify for capitalisation should be expensed as incurred.
The test to determine if a cost is incremental is to ask whether the entity would have incurred the
cost had one or both of the parties decided to walk away just before signing the arrangement. In
this context, any legal costs (for example, to draft or negotiate the contract) or salaries for
salespeople would be incurred regardless of whether the contract is finalized. Therefore, these
costs are not incremental. On the other hand, a commission paid only upon the successful signing
of the contract would be incremental and should be capitalized.
As a practical expedient, Ind AS 115 allows an entity to expense the incremental costs of obtaining
a contract as incurred if the amortisation period of the asset that the entity would have otherwise
recognized is one year or less.
Cost Capitalize Reason
or expense
Commission paid only Capitalize Assuming the entity expects to recover the cost,
upon successful signing of the commission is incremental since it would not
a contract have been paid if the parties decided not to enter
into the arrangement just before signing.
Travel expenses for sales Expense Because the costs are incurred regardless of
person pitching a new whether the new contract is won or lost, the entity
client contract incurs the costs, unless they are expressly
reimbursable.
Legal fees for drafting Expense If the parties walk away during negotiations, the
terms of arrangement for costs would still be incurred and therefore are not
parties to approve and incremental costs of obtaining the contract.
sign

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Salaries for sales people Expense Salaries are incurred regardless of whether
working exclusively on contracts are won or lost and therefore are not
obtaining new clients incremental costs to obtain the contract.
Bonus based on quarterly Capitalize Bonuses based solely on sales are incremental
sales target costs to obtain a contract.
Commission paid to sales Capitalize The commissions are incremental costs that
manager based on would not have been incurred had the entity not
contracts obtained by the obtained the contract. Ind AS 115 does not
sales manager’s local differentiate costs based on the function or title of
employees the employee that receives the commission.

Comparison with AS 7 and AS 9

Contract acquisition cost is not specifically dealt with in either in AS 7 or AS 9. Let’s take an
illustration to understand the treatment in AS 7 / AS 9 and how it is different from Ind AS:
Example 8
A software company has agreed to pay a special commission of 1% of the contract value to a
sales consultant who has agreed to work based on the successful bidding of the proposal to a
customer. In case the contract is not signed by the company and the customer, for whatever
reason, then there is no commission to be paid to the sales consultant.
The contract value is ` 1 crore over 3 years and the company has signed the contract with the
customer after successful bidding with the help of the sales consultant.
In this context, the accounting differences will be as follows:

Particulars Treatment under Ind AS 115 Treatment under AS 9

1st year of operations - • Amortization as expense of Expense of ` 1 crore as sales
Contract acquisition cost of the year ` 33.33 lakhs commission
` 1 crore • Contract asset ` 66.67 lakhs
2nd year of operations - • Amortization as expense of No accounting treatment
Contract acquisition cost of the year ` 33.33 lakhs
` 1 crore • Contract asset ` 33.34 lakhs
3rd year of operations - • Amortization as expense of No accounting treatment
Contract acquisition cost of the year ` 33.34 lakhs
` 1 crore • Contract asset of nil

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10.2 Costs to fulfil a contract (contract fulfilment costs)

If costs incurred in fulfilling a contract with a customer are covered under another Standard (such
as Ind AS 2 'Inventories' and Ind AS 16 'Property, Plant, and Equipment'), an entity accounts for
those costs in accordance with those Standards. If not, an entity recognizes an asset for such
costs, provided all of the criteria mentioned below are met:
(a) the costs relate directly to a contract or to an anticipated contract that the entity can
specifically identify (for example, costs relating to services to be provided under renewal of
an existing contract or costs of designing an asset to be transferred under a specific
contract that has not yet been approved), including:

(i) direct labour

(ii) direct materials
(iii) allocations that relate directly to the contract or contract activities (for example,
contract management and supervision costs and depreciation of tools and equipment
and right-of-use assets used in fulfilling the contract)
(iv) costs that are explicitly chargeable to the customer
(v) other costs that the entity incurs only because it entered into the contract (e.g.
payments to subcontractors)
(b) the costs generate or enhance resources of the entity that will be used to satisfy
performance obligations in the future
(c) the entity expects to recover the costs, for e.g. through the expected margin
The following costs should be expensed as incurred:
(a) general and administrative costs that are not explicitly chargeable to the customer
(b) costs of wasted materials, labour, or other resources that were not reflected in the contract
price
(c) costs that relate to satisfied performance obligations
(d) costs related to remaining performance obligations that cannot be distinguished from costs
related to satisfied performance obligations.

Costs incurred in fulfilling a contract with a customer that are within the scope of another Standard,
an entity shall account for those costs in accordance with those other Standards.

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Illustration 73
Customer outsources its information technology data centre
Term = 5 years plus two 1-yr renewal options
Average customer relationship is 7 years

Entity spends ` 4,00,000 designing and building the technology platform needed to
accommodate out-sourcing contract:
Design services ` 50,000
Hardware ` 140,000
Software ` 100,000
Migration and testing of data centre ` 110,000
TOTAL ` 400,000

Solution

Design services ` 50,000 Assess under Ind AS 115. Any resulting

asset would be amortised over 7 years
(i.e. include renewals)
Hardware ` 140,000 Account for asset under Ind AS 16
Software ` 100,000 Account for asset under Ind AS 38
Migration and testing of data ` 110,000 Assess under Ind AS 115. Any resulting
centre asset would be amortised over 7 years
(i.e. include renewals)
TOTAL ` 400,000

*****

10.3 Amortisation and impairment

Under Ind AS 115, an entity amortises capitalised contract costs on a systematic basis consistent
with the pattern of transferring the goods or services related to those costs. If an entity identifies a
significant change to the expected pattern of transfer, it updates its amortisation to reflect that
change in estimate in accordance with Ind AS 8.
An entity recognizes an impairment loss in earnings if the carrying amount of an asset exceeds the
remaining amount of consideration that the entity expects to receive in connection with the related

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goods or services less any directly related contract costs yet to be recognized. When determining
the amount of consideration, it expects to receive, an entity ignores the constraint on variable
consideration previously discussed, and adjusts for the effects of the customer's credit risk.
Before recognizing an impairment loss under the revenue recognition guidance, an entity
recognizes impairment losses associated with assets related to the contract that are accounted in
accordance with another Standard (for example, Ind AS 2, Ind AS 16 and Ind AS 38).
An entity would reverse a previously recognized impairment loss when the impairment conditions
no longer exist or have improved. The increased carrying amount of the asset shall not exceed
the amount that would have been determined (net of amortisation) if no impairment loss had been
recognized previously.
Illustration 74 : Amortisation
An entity enters into a service contract with a customer and incurs incremental costs to obtain the
contract and costs to fulfil the contract. These costs are capitalised as assets in accordance with
Ind AS 115. The initial term of the contract is five years but it can be renewed for subsequent one-
year periods up to a maximum of 10 years. The average contract term for similar contracts
entered into by entity is seven years.

Determine appropriate method of amortisation?

Solution
The most appropriate amortisation period is likely to be seven years (i.e. the initial term of five
years plus two anticipated one year renewals) because that is the period over which the entity
expects to provide services under the contract to which the capitalised costs relate.
*****

11. PRESENTATION & DISCLOSURE

11.1 Presentation
Under Ind AS 115, an entity presents a contract in its balance sheet as a contract liability, a
contract asset, or a receivable, depending on the relationship between the entity’s performance
and the customer’s payment at the reporting date. An entity shall present any unconditional rights
to consideration separately as a receivable.

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An entity presents a contract as a contract liability if the customer has paid consideration, or if
payment is due as of the reporting date but the entity has not yet satisfied a performance
obligation by transferring a goods or service. Conversely, if the entity has transferred goods or
services as of the reporting date but the customer has not yet paid, the entity recognizes either a
contract asset or a receivable. An entity recognizes a contract asset if it’s right to consideration is
conditioned on something other than the passage of time; otherwise, an entity recognizes a
receivable.
A receivable is an entity’s right to consideration that is unconditional. A right to consideration is
unconditional if only the passage of time is required before payment of that consideration is due.
An entity shall account for a receivable in accordance with Ind AS 109. Upon initial recognition of
a receivable from a contract with a customer, any difference between the measurement of the
receivable in accordance with Ind AS 109 and the corresponding amount of revenue recognized
shall be presented as an expense.
An entity shall also present separately the amount of excise duty included in the revenue
recognized in the statement of profit and loss. This is an additional requirement inserted due to
the Indian context in Ind AS 115.

11.2 Disclosure
Ind AS 115 requires many new disclosures about contracts with customers. The following table
provides a summary:

Disclosures
Disclosure area Summary of requirements
General • revenue recognized from contracts with customers, separately from its
other sources of revenue
• impairment losses on receivables or contract assets
Disaggregation of • categories that depict the nature, amount, timing, and uncertainty of
revenue revenue and cash flows
• sufficient information to enable users of financial statements to
understand the relationship with revenue information disclosed for
reportable segments under Ind AS 108 'Operating Segments'
Information about • including opening and closing balances of contract assets, contract
contract balances liabilities, and receivables (if not separately presented)

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• revenue recognized in the period that was included in contract

liabilities at the beginning of the period and revenue from performance
obligations (wholly or partly) satisfied in prior periods
• explanation of relationship between timing of satisfying performance
obligations and payment
• explanation of significant changes in the balances of contract assets
and liabilities
Information about • when the entity typically satisfies performance obligations
performance • significant payment terms
obligations • nature of goods and services
• obligations for returns, refunds and similar obligations
• types of warranties and related obligations
Transaction price • transaction price allocated to the performance obligations that are
allocated to the unsatisfied and an explanation of when the entity expects to recognize
remaining such revenue.
performance
obligations
Timing of • performance obligations that an entity satisfies over time:
satisfaction of o methods used to recognize revenue
performance o why the methods used provide a faithful depiction
obligations
• performance obligations satisfied at a point in time:
o judgements made in evaluating when a customer obtains control
Information about • judgements impacting the expected timing of satisfying performance
significant obligations transaction price and amounts allocated to performance
judgements obligations (e.g. estimating variable consideration and assessing if
constrained and allocating to performance obligations).
Transaction price • determining transaction price, estimating variable consideration,
and amount adjusting the consideration for the effects of the time value of money
allocated to and measuring non-cash consideration
performance • estimate of variable consideration is constrained
obligations • measuring obligations for returns, refunds and other similar obligations
• allocating the transaction price, discounts and variable consideration
to a specific part of the contract

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• reconcile the amount of revenue recognized in the statement of profit

and loss with the contracted price
Assets recognized • judgements made in determining costs amount of the costs incurred
from the costs to • to obtain or fulfil a contract with a customer
obtain or fulfil a • amortisation method used
contract
• closing balances by main category and amortisation expense
Practical • practical expedient elected by an entity in either paragraph 63 (about
expedients the existence of a significant financing component) or paragraph 94
(about the incremental costs of obtaining a contract)

12. SERVICE CONCESSION ARRANGEMENTS

12.1 About Arrangement

• Service Concession Arrangement involves a private sector entity (an operator)
constructing the infrastructure used to provide the public service or upgrading it (for
example, by increasing its capacity) and operating and maintaining that infrastructure for
a specified period of time. The operator is paid for its services over the period of the
arrangement. The arrangement is governed by a contract that sets out performance
standards, mechanisms for adjusting prices, and arrangements for arbitrating disputes.
• Such an arrangement is often described as a ‘build-operate-transfer’, a ‘rehabilitate-
operate-transfer’ or a ‘public-to-private’ service concession arrangement.
Infrastructure for public services—such as roads, bridges, tunnels, prisons, hospitals,
airports, water distribution facilities, energy supply and telecommunication networks—has
traditionally been constructed, operated and maintained by the public sector and financed
through public budget appropriation.
• A feature of these service arrangements is the public service nature of the obligation
undertaken by the operator.
• Public policy is for the services related to the infrastructure to be provided to the public,
irrespective of the identity of the party that operates the services. The service
arrangement contractually obliges the operator to provide the services to the public on
behalf of the public sector entity. Other common features are:
(a) the party that grants the service arrangement (the grantor) is a public sector entity,
including a governmental body, or a private sector entity to which the responsibility
for the service has been devolved.

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(b) the operator is responsible for at least some of the management of the infrastructure
and related services and does not merely act as an agent on behalf of the grantor.

(c) the contract sets the initial prices to be levied by the operator and regulates price
revisions over the period of the service arrangement.
(d) the operator is obliged to hand over the infrastructure to the grantor in a specified
condition at the end of the period of the arrangement, for little or no incremental
consideration, irrespective of which party initially financed it.

12.2 Accounting Principles

12.2.1 Treatment of the operator’s rights over the infrastructure
• Infrastructure shall not be recognized as property, plant and equipment of the operator
because the contractual service arrangement does not convey the right to control the use
of the public service infrastructure to the operator.
• The operator has access to operate the infrastructure to provide the public service on
behalf of the grantor in accordance with the terms specified in the contract.
12.2.2 Recognition and measurement
• Since the operator acts as a service provider, he shall recognize and measure revenue in
accordance with Ind AS 115 for the services it performs. The operator constructs or
upgrades infrastructure (construction or upgrade services) used to provide a public
service and operates and maintains that infrastructure (operation services) for a specified
period of time.
• If the operator performs more than one service (ie construction or upgrade services and
operation services) under a single contract or arrangement, consideration received or
receivable shall be allocated by reference to the relative fair values of the services
delivered, when the amounts are separately identifiable.
• The nature of the consideration i.e. whether financial asset or intangible asset determines
its subsequent accounting treatment.
• The operator shall account for revenue and costs relating to construction or upgrade
services.
• The operator shall account for revenue and costs relating to operation services in
accordance with Ind AS 115.

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12.2.3 Consideration given by the grantor to the operator

• If the operator provides construction or upgrade services, the consideration received or
receivable by the operator shall be recognized at its fair value. The consideration may be
rights to:
(a) a financial asset, or
(b) an intangible asset.

• The operator shall recognize a financial asset to the extent that

 it has an unconditional contractual right to receive cash or another financial asset
from or at the direction of the grantor for the construction services; the grantor has
little, if any, discretion to avoid payment, usually because the agreement is
enforceable by law.
 it has an unconditional right to receive cash if the grantor contractually guarantees
to pay the operator (a) specified or determinable amounts or (b) the shortfall, if
any, between amounts received from users of the public service and specified or
determinable amounts, even if payment is contingent on the operator ensuring that
the infrastructure meets specified quality or efficiency requirements.
• The operator shall recognize an intangible asset to the extent that it receives a right (a
licence) to charge users of the public service. A right to charge users of the public service
is not an unconditional right to receive cash because the amounts are contingent on the
extent that the public uses the service.
• If the operator is paid for the construction services partly by a financial asset and partly
by an intangible asset it is necessary to account separately for each component of the
operator’s consideration. The consideration received or receivable for both components
shall be recognized initially at the fair value of the consideration received or receivable.
12.2.4 Contractual obligations to restore the infrastructure to a specified level of
serviceability
The operator may have contractual obligations it must fulfil as a condition of its licence, like to
maintain or restore infrastructure, except for any upgrade element, which shall be recognized and
measured in accordance with Ind AS 37, ie at the best estimate of the expenditure that would be
required to settle the present obligation at the end of the reporting period.

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12.2.5 Borrowing costs incurred by the operator

• Borrowing costs attributable to the arrangement shall be recognized as an expense in the
period in which they are incurred unless the operator has a contractual right to receive an
intangible asset (a right to charge users of the public service).
• If the operator does not have a contractual right to receive an intangible asset, borrowing
costs attributable to the arrangement shall be capitalised during the construction phase of
the arrangement.
12.2.6 Financial asset
• For recognition of financial asset, Ind AS 32, Ind AS 107 and Ind AS 109 shall be applied.
The amount due from or at the direction of the grantor is accounted at:
(a) amortised cost;
(b) fair value through other comprehensive income; or
(c) fair value through profit or loss.
• If the amount due from the grantor is measured at amortised cost or fair value through
other comprehensive income, Ind AS 109 requires interest calculated using the effective
interest method to be recognized in profit or loss.
12.2.7 Intangible asset
For recognition and measurement of intangible asset, one has to apply Ind AS 38 for guidance on
measuring intangible assets acquired in exchange for a non-monetary asset or assets or a
combination of monetary and non-monetary assets.

Comparison with AS 7 and AS 9

Service concession arrangements are specifically dealt with in detail unlike with AS 9 or AS 7.
Also, there’s a specific mention about recognition of financial asset or intangible asset as per Ind
AS 115 which is not mentioned in either AS 7 or AS 9.

12.2.8 Items provided to the operator by the grantor

• Infrastructure items to which the operator is given access by the grantor for the purposes
of the service arrangement are not recognized as property, plant and equipment of the
operator.
• The grantor may also provide other items to the operator that the operator can keep or
deal with as it wishes. If such assets form part of the consideration payable by the grantor

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for the services, they are not government grants as defined in Ind AS 20. They are
recognized as assets of the operator, measured at fair value on initial recognition.

• The operator shall recognize a liability in respect of unfulfilled obligations it has assumed
in exchange for the assets.
Information note 1
Accounting framework for public-to-private service arrangements

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12.3 Service Concession Arrangements: Disclosures

• All aspects of a service concession arrangement shall be considered in determining the
appropriate disclosures in the notes. An operator and a grantor shall disclose the
following in each period:
(a) a description of the arrangement;
(b) significant terms of the arrangement that may affect the amount, timing and certainty
of future cash flows (eg the period of the concession, re-pricing dates and the basis
upon which re-pricing or re-negotiation is determined);
(c) the nature and extent (eg quantity, time period or amount as appropriate) of:
(i) rights to use specified assets;
(ii) obligations to provide or rights to expect provision of services;
(iii) obligations to acquire or build items of property, plant and equipment;
(iv) obligations to deliver or rights to receive specified assets at the end of the
concession period;
(v) renewal and termination options; and
(vi) other rights and obligations (eg major overhauls);
(d) changes in the arrangement occurring during the period; and
(e) how the service arrangement has been classified.
• An operator shall disclose the amount of revenue and profits or losses recognized in the
period on exchanging construction services for a financial asset or an intangible asset.
• The disclosures required in accordance with paragraph 6 of this Appendix shall be
provided individually for each service concession arrangement or in aggregate for each
class of service concession arrangements. A class is a grouping of service concession
arrangements involving services of a similar nature (eg toll collections,
telecommunications and water treatment services).

Illustration 75
A Ltd. is in the business of infrastructure and has two divisions; (I) Toll Roads and (II) Wind
Power. The brief details of these business and underlying project details are as follows:
I. Bhilwara-Jabalpur Toll Project - The Company has commenced the construction of the
project in the current year and has incurred total expenses aggregating to ` 50 crore as

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 INDIAN ACCOUNTING STANDARD 115 9.141 5.141

on 31st December, 20X1. Under IGAAP, the Company has 'recorded such expenses as
Intangible Assets in the books of account. The brief details of the Concession Agreement
are as follows:
• Total Expenses estimated to be incurred on the project ` 100 crore;
• Fair Value of the construction services is ` 110 crore;
• Total Cash Flow guaranteed by the Government under the concession agreement
is ` 200 crore;
• Finance revenue over the period of operation phase is ` 15 crore:
• Other income relates to the services provided during the operation phase.
II. Kolhapur- Nagpur Expressway - The Company has also entered into another concession
agreement with Government of Maharashtra in the current year. The construction cost for
the said project will be ` 110 crore. The fair value of such construction cost is
approximately ` 200 crore. The said concession agreement is Toll based project and the
Company needs to collect the toll from the users of the expressway. Under IGAAP, A Ltd.
has recorded the expenses incurred on the said project as an Intangible Asset.
Required
(i) What would be the classification of Bhilwara-Jabalpur Toll Project as per applicable
Ind AS? Give brief reasoning.
(ii) What would be the classification of Kolhapur-Nagpur Expressway Toll Project as per
applicable Ind AS? Give brief reasoning.
(iii) Also, suggest suitable accounting entries for the preparation of financial statements as
per Ind AS for the above 2 projects.

Solution
(i) Here the operator has a contractual right to receive cash from the grantor. The grantor has
little, if any, discretion to avoid payment, usually because the agreement is enforceable by
law. The operator has an unconditional right to receive cash if the grantor contractually
guarantees to pay the operator. Hence, the operator recognizes a financial asset to the
extent it has a contractual right to receive cash.
(ii) Here the operator has a contractual right to charge users of the public services. A right to
charge users of the public service is not an unconditional right to receive cash because the
amounts are contingent on the extent that the public uses the service. Therefore, the
operator shall recognize an intangible asset to the extent it receives the right (a licence) to
charge users of the public service.

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(iii) Accounting treatment for preparation of financial statements

Bhilwara-Jabalpur Toll Project
Journal Entries
Particulars Dr. Cr.
(` in crore) (` in crore)
During construction:
1 Financial asset A/c Dr. 110
To Construction revenue 110
[To recognize revenue relating to construction services, to
be settled in case]
2 Cost of construction (profit or loss) Dr. 100
To Bank A/c (As and when incurred) 100
[To recognize costs relating to construction services]
During the operation phase:
3 Financial asset Dr. 15
To Finance revenue (As and when received or due 15
to receive)
[To recognize interest income under the financial asset
model]
4 Financial asset Dr. 75
To Revenue [(200-110) – 15] 75
[To recognize revenue relating to the operation phase]
5 Bank A/c Dr. 200
To Financial asset 200
[To recognize cash received from the grantor]
Kolhapur-Nagpur Expressway -Intangible asset
Journal Entries
Particulars Dr. Cr.
(` in crore) (` in crore)
During construction:
1 Cost of construction (profit or loss) Dr. 110
To Bank A/c (As and when incurred) 110
[To recognize costs relating to construction services]

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2 Intangible asset Dr. 200

To Revenue 200
[To recognize revenue relating to construction services
provided for non-cash consideration]
During the operation phase:
3 Amortisation expense Dr. 200
To Intangible asset (accumulated amortisation) 200
[To recognize amortisation expense relating to the
operation phase over the period of operation]
4 Bank A/c Dr. ?
To Revenue ?
[To recognize revenue relating to the operation phase]

Note: Amount in entry 4 is kept blank as no information in this regard is given in the question.
*****

13. EXTRACTS OF FINANCIAL STATEMENTS OF LISTED

ENTITY
Following is the extract from the financial statements of the listed entity ‘Hindustan Unilever
Limited’ for the financial year 2021-2022 with respect to ‘Revenue from Contract with Customers’
and its accounting policy thereon.

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(Source: Annual Report 2021-2022 – Hindustan Unilever Limited)

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14. SIGNIFICANT DIFFERENCES IN IND AS 115 VIS-À-VIS

AS 7 AND AS 9
S. Particular Ind AS 115 AS 7 and AS 9
No.
1. Framework of Ind AS 115 gives a framework of AS 7 and AS 9 do not
Revenue revenue recognition within a provide any such
Recognition standard. It specifies the core overarching principle to fall
principle for revenue recognition upon in case of doubt.
which requires the ‘revenue to There is no emphasis on
depict the transfer of promised performance obligation under
goods or services to customers in the contract with customer.
an amount that reflects the
consideration to which the entity
expects to be entitled in exchange
for those goods or services’.
2. Comprehensive Ind AS 115 gives comprehensive AS 7 and AS 9 do not
Guidance on guidance on how to recognize and provide comprehensive
Recognition and measure multiple elements within guidance on this aspect.
Measurement of a contract with customer.
Multiple Elements
within a Contract
with Customer:

3. Coverage Ind AS 115 comprehensively deals AS 7 covers only revenue

with all types of performance from construction contracts
obligation contracts with which is measured at
customers. However, it does not consideration received /
deal with revenue from ‘interest’ receivable. AS 9 deals only
and ‘dividend’ which are covered with recognition of revenue
in financial instruments standard. from sale of goods, rendering
of services, interest, royalties
and dividends.

4. Measurement of As per Ind AS 115, revenue is As per AS 9, Revenue is the

Revenue measured at transaction price, i.e., gross inflow of cash,
the amount of consideration to receivables or other

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which an entity expects to be considerations arising in the

entitled in exchange for course of the ordinary
transferring promised goods or activities. Revenue is
services to a customer, excluding measured by the charges
amounts collected on behalf of made to customers or clients
third parties. for goods supplied and
services rendered to them
and by the charges and
rewards arising from the use
of resources by them. As
per AS 7, revenue from
construction contracts is
measured at consideration
received / receivable and to
be recognized as revenue as
construction progresses if
certain conditions are met.

5. Recognition of As per Ind AS 115, revenue is As per AS 9, revenue is

Revenue recognized when the control is recognized when significant
transferred to the customer. It risks and rewards of
introduces a 5-step model for ownership is transferred to
revenue recognition. the buyer. As per AS 7,
revenue is recognized when
the outcome of a
construction contract can be
estimated reliably, contract
revenue should be
recognized by reference to
the stage of completion of
the contract activity at the
reporting date.

6. Multiple element or Ind AS 115 gives comprehensive AS 7 and AS 9 provide no

linked transactions guidance on how to recognize and specific guidance for
measure multiple elements / multiple element or linked
performance obligations within a transactions.
contract with customer.

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7. Capitalisation of Ind AS 115 provides guidance on AS 7 and AS 9 do not deal

Costs recognition of costs to obtain and with such capitalisation of
fulfil a contract, as asset. costs.

8. Guidance on Ind AS 115 provides guidance on AS 7 and AS 9 do not deal

combining contracts combining contracts entered into with such aspects.
and variable and at or near the same time with the
contingent same customer (or related parties
consideration of the customer), guidance on
treatment of variable and
contingent consideration.

9. Adjustment for time As per Ind AS 115, transaction As per AS 9, revenue is not
value of money price is adjusted for the effect of adjusted for time value of
time value of money when a money.
significant financing component
exists.

10. Guidance on Service Ind AS 115 gives guidance on AS does not provide such
Concession service concession arrangements guidance.
Arrangements and disclosures thereof.

11. Disclosure Ind AS 115 contains detailed Less disclosure

Requirements disclosure requirements. requirements are prescribed
in AS.

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FOR SHORTCUT TO IND AS WISDOM: SCAN ME!

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 non-monetary transactions in the area of advertising
will be recognized and measured?

2. A Ltd. a telecommunication company, entered into an agreement with B Ltd. which 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.

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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 recognized 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
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. recognize 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 1st 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:

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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 forecasted 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
that a significant reversal of cumulative revenue will not occur if estimates of the rebates
change.
How should entity K determine the transaction price?

Answers
1. Paragraph 5(d) of Ind AS 115 excludes non-monetary exchanges between entities in the
same line of business to facilitate sales to customers or potential customers. For example,
this Standard would not apply to a contract between two oil companies that agree to an
exchange of oil to fulfil demand from their customers in different specified locations on a
timely basis.
In industries with homogenous products, it is common for entities in the same line of
business to exchange products in order to sell them to customers or potential customers
other than parties to exchange. The current scenario, on the contrary, will be covered

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under Ind AS 115 since the same is exchange of dissimilar goods or services because both
of the entities deal in different mode of media, i.e., one is print media and another is
electronic media and both parties are acting as customers and suppliers for each other.
Further, in the current scenario, it seems it is for consumption by the said parties and hence
it does not fall under paragraph 5(d). It may also be noted that, even if it was to facilitate
sales to customers or potential customers, it would not be scoped out since the parties are
not in the same line of business.
As per paragraph 47 of Ind AS 115, “An entity shall consider the terms of the contract and
its customary business practices to determine the transaction price. The transaction price
is the amount of consideration to which an entity expects to be entitled in exchange for
transferring promised goods or services to a customer, excluding amounts collected on
behalf of third parties (for example, some sales taxes). The consideration promised in a
contract with a customer may include fixed amounts, variable amounts, or both”.
Paragraph 66 of Ind AS 115 provides that to determine the transaction price for contracts in
which a customer promises consideration in a form other than cash, an entity shall measure
the non-cash consideration (or promise of non-cash consideration) at fair value.
In accordance with the above, Q TV and Deshabandhu should measure the revenue
promised in the form of non-cash consideration as per the above referred principles of
Ind AS 115.
2. Paragraph 5(d) of Ind AS 115 excludes non-monetary exchanges between entities in the
same line of business to facilitate sales to customers or potential customers. For example,
this Standard would not apply to a contract between two oil companies that agree to an
exchange of oil to fulfil demand from their customers in different specified locations on a
timely basis.
However, the current scenario will be covered under Ind AS 115 since the same is
exchange of dissimilar goods or services.
As per paragraph 47 of Ind AS 115, “an entity shall consider the terms of the contract and
its customary business practices to determine the transaction price. The transaction price
is the amount of consideration to which an entity expects to be entitled in exchange for
transferring promised goods or services to a customer, excluding amounts collected on
behalf of third parties (for example, some sales taxes). The consideration promised in a
contract with a customer may include fixed amounts, variable amounts, or both”.

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Paragraph 66 of Ind AS 115 provides that to determine the transaction price for contracts in
which a customer promises consideration in a form other than cash, an entity shall measure
the non-cash consideration (or promise of noncash consideration) at fair value.
On the basis of the above, revenue recognized by A Ltd. will be the consideration in the
form of power units that it expects to be entitled for talktime sold, i.e. ` 50,000 (20,000 units
x ` 2.5). The revenue recognized by B Ltd. will be the consideration in the form of talk time
that it expects to be entitled for the power units sold, i.e., ` 50,000 (1,00,000 minutes x `
0.50).

3. Paragraph B19 of Ind AS 115 inter alia, states that, “an entity shall exclude from an input
method the effects of any inputs that, in accordance with the objective of measuring
progress in paragraph 39, do not depict the entity’s performance in transferring control of
goods or services to the customer”.
In accordance with the above, Company X assesses whether the costs incurred to procure
the air conditioners are proportionate to the entity’s progress in satisfying the performance
obligation. The costs incurred to procure the air conditioners (` 10,00,000) are significant
relative to the total costs to completely satisfy the performance obligation (` 40,00,000).
Also, Company X is not involved in manufacturing or designing the air conditioners.
Company X concludes that including the costs to procure the air conditioners in the
measure of progress would overstate the extent of the entity’s performance. Consequently,
in accordance with paragraph B19 of Ind AS 115, the entity adjusts its measure of progress
to exclude the costs to procure the air conditioners from the measure of costs incurred and
from the transaction price. The entity recognizes revenue for the transfer of the air
conditioners at an amount equal to the costs to procure the air conditioners (i.e., at a zero
margin).
Company X assesses that as at March, 20X1, the performance is 20 per cent complete (i.e.,
` 6,00,000 / ` 30,00,000). Consequently, Company X recognizes the following-
As at 31 st March, 20X1

Amount in `
Revenue 18,00,000
Cost of goods sold 16,00,000
Profit 2,00,000

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Revenue recognized 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 transferred;
(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 entitled 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 recognized, 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

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(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.
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
recognize 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 recognize 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 recognized 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

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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 recognized will not occur when the uncertainty is resolved. Revenue is
therefore recognized at a selling price of ` 90 per container as each container is sold.
Entity J will recognize a liability for cash received in excess of the transaction price for the
first 1 million 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 31st 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.

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