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determined fair value. In December 20X1, F receives Borrower B‘s

financial statements for the year ended 30th September, 20X1, which indicate significant decrease in Borrower B‘s income from
operations. Basis this, the fair value of the loan to B at the acquisition date is determined to be less than the amount recognised
earlier on a provisional basis.
Scenario 2: Decrease in fair value of acquired loan resulting from an event occurring during the measurement period
Bank F acquires Bank E in a business combination in October, 20X1. The loan by Bank E to Borrower B is recognised at its
provisionally determined fair value. In December 20X1, F receives information that Borrower B has lost its major customer
earlier that month and this is expected to have a significant negative effect on B‘s operations.
Comment on the treatment done by Bank F.
Solution
Scenario 1: The new information obtained by F subsequent to the acquisition relates to facts and circumstances that
existed at the acquisition date. Accordingly, an adjustment (i.e., decrease) to in theprovisional amount should be recognised for
loan to B with a corresponding increase in goodwill.
Scenario 2: Basis this, the fair value of the loan to B will be less than the amount recognised earlier at the acquisition date.
The new information resulting in the change in the estimated fair value of the loan to B does not relate to facts and
circumstances that existed at the acquisition date, but rather is due to a new event i.e., the loss of a major customer
subsequent to the acquisition date. Therefore, based on the new information, F should determine and recognise anallowance
for loss on the loan in accordance with Ind AS 109, Financial Instruments: Recognition and Measurement, with a
corresponding charge to profit or loss; goodwill is not adjusted.

Questions 4.

Company A acquired 90% equity interest in Company B on 1st April, 20X1 for a consideration of Rs. 85 crores in a distress sale.
Company B did not have any instrument recognised in equity. The Company appointed a registered valuer with whose
assistance, the Company valued the fair value of NCI and the fair value identifiable net assets at Rs. 15 crores and
Rs. 100 crores respectively.
Find the value at which NCI has to be shown in the financial statements
Solution
In this case, Company A has the option to measure NCI as follows:
 Option 1: Measure NCI at fair value i.e., Rs. 15 crores as derived by the valuer;
 Option 2: Measure NCI as proportion of fair value of identifiable net assets i.e., Rs. 10 crores (100 crores x 10%)
Questions 5.

On 1st April, 20X1, Company A acquired 5% of the equity share capital of Company B for 1,00,000. A accounts for its
investment in Bat Fair Value through OCI (FVOCI) under Ind AS 109, Financial Instruments: Recognition and Measurement.
At 31st March, 20X2, A carried its investment in B at fair value and reported an unrealised gain of Rs. 5,000 in other
comprehensive income, which was presented as a separate component of equity. On 1st April, 20X2, A obtains control of B
by acquiring the remaining 95 percent of B.
Comment on the treatment to be done based on the facts given in the question.
Solution
At the acquisition date A recognises the gain of Rs. 5,000 in OCI as the gain or loss is not allowed to be recycled to
income statement as per the requirement of Ind AS 109. A‘s investment in B would be at fair value and therefore does not
require remeasurement as a result ofthe business combination. The fair value of the 5 percent investment (1,05,000) plus the fair
value of the consideration for the 95 percent newly acquired interest is included in the acquisition accounting.
Questions 6.
Company A acquires 70 percent of Company S on 1st January, 20X1 for consideration transferred of Rs. 5 million.
Company A intends to recognise the NCI at proportionate share of fair value of identifiable net assets. With the assistance of
a suitably qualified valuation professional, A measures the identifiable net assets of B at Rs. 10 million. A performs a review
and determines that the business combination did not include any transactions that should be accounted for separately from
the business combination.
State whether the procedures followed by A and the resulting measurements are appropriate or not. Also calculate the bargain
purchase gain in the process.
Solution
The amount of B‘s identifiable net assets exceeds the fair value of the consideration transferred plus the fair value of the
NCI in B, resulting in an initial indication of a gain on a bargain purchase. Accordingly, A reviews the procedures it used to
identify and measure the identifiable net assets acquired, to measure the fair value of both the NCI and the consideration
transferred, and to identify transactions that were not part of the business combination.
Following that review, A concludes that the procedures followed andthe resulting measurements were appropriate. ( R s . )
Identifiable net assets 1,00,00,00 0
Less: Consideration transferred (50,00,000 )

NCI (10 million x 30%)

(30,00,000)
Gain on bargain purchase 20,00,000

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IND AS 115 - QueStIoNS

Illustration 1
New way limited decides to enter a new market that is currently experiencing economic difficulty and expects that in future
economy will improve. New way enters into an arrangement with a customer in the new region for networking products for
promised consideration of Rs. 1,250,000. At contract inception, New way expects that it may not be able to collect the full
amount from the customer.
Determine how New way will recognise this transaction?
Ans:
Assuming the contract meets the other criteria covered within the scope of the model in Ind AS 115, New way need to assesses
whether collectability is probable.
In making this assessment, New way 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.

Illustration 2

A gymnasium enters into a contract with a new member to provide access to its gym for a 12-month period at Rs. 4,500 per
month. The member can cancel his or her membership without penalty after three months. Specify the contract term.
Ans:
The enforceable rights and obligations of this contract are for three months, andtherefore the contract term is three months

Illustration 3

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?
Ans:
Contracts were negotiated at the same time, but they appear to have separate commercial objectives. Manufacturing and
supply contracts are not dependent on one another, and the planes and the parts are not a single performance obligation.
Therefore, contracts for supply of fighter planes and supply of parts shall not be combined and instead, they shall be
accounted separately.

Illustration 4

An entity promises to sell 120 products to a customer for Rs. 120,000 (Rs. 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 Rs. 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?
Ans:

When the contract is modified, the price of the contract modification for the additional 30 products is an additional Rs. 28,500
or Rs. 950 per product. The pricing for the additional products reflects the stand-alone selling price of theproducts 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 Rs. 950 per product for the 30 products in the new
contract.

Illustration 5

On 1st April, 20X1, KLC Ltd. enters into a contract with Mr. K to provide
- A machine for Rs. 2.5 million

- One year of maintenance services for Rs. 55,000 per month

On 1st October, 20X1, KLC Ltd. and Mr. K agree to modify the contract to reducethe amount of services from Rs. 55,000 per
month to Rs. 45,000 per month. Determine the effect of change in the contract?

Ans:

The next six months of services are distinct from the services provided in the firstsix months before modification in contract,
Therefore, KLC Ltd. will account for the contract modification as if it were atermination of the existing contract and the creation
of a new contract.

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The consideration allocated to remaining performance obligation is Rs. 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 ie Rs. 270,000.

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 6

Growth Ltd enters into an arrangement with a customer for infrastructure outsourcing deal.
Based on its experience, Growth Ltd determines that customising the infrastructure will take approximately 200 hours in total to
complete the project and charges Rs. 150 per hour.
After incurring 100 hours of time, Growth Ltd and the customer agree to change an aspect of the project and increases the
estimate of labour hours by 50 hours at the rate of Rs. 100 per hour.
Determine how contract modification will be accounted as per Ind AS 115?
Ans:

Considering that the remaining goods or services are not distinct, the modificationwill be accounted for on a cumulative catch
up basis, as given below:
Particulars Hours Rate (Rs.) Amount (Rs.)

Initial contract amount 200 150 30,000

Modification in contract 50 100 5,000
Contract amount aftermodification 250 140* 35,000
Revenue to be recognised 100 140 14,000
Revenue already booked 100 150 15,000
Adjustment in revenue (1,000)

*35,000 / 250 = 140

Illustration 7
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?
Ans-

Determining whether a good 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 good 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 8
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?

Ans-
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 good or service either on its own or together with other resources that are readily

BY CA PRATIK JAGATI{7002630110,9864047095} 52
 FINAL KICK
available to the customer, and
 entity’s promise to transfer the good 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 performanceobligation: -
 Broadband Service
 Voice Call services

 Modem

Illustration 9
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?

Ans-
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 AS115. 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 has 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.

Illustration 10

Could the series requirement apply to hotel management services where day to day activities vary, involve employee
management, procurement, accounting, etc?
Ans-
The series guidance requires each distinct good 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 incrementof performing the service.

Illustration 11

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 of 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 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?

Ans-

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.

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Illustration 12
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?

Ans-

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 good 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 customise the software itself and, as such, the software and the installation service are
separateoutputs 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 13 : 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?

Ans-
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
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 14

An entity enters into a contract for the sale of Product A for Rs. 1,000. As part of the contract, the entity gives the
customer a 40% discount voucher for any future purchases up to Rs. 1,000 in the next 30 days. The entity intends to offera
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 Rs. 500 of additional products.
Determine how many performance obligations does the entity have and their stand-alone selling price and allocated
transaction price?

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Illustration 15

A cable company provides television services for a fixed rate fee of Rs. 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?

Ans-
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 recognise revenue on its cable television service regardless of the contract’s time period.

Illustration 16
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 Rs. 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.
Ans-
Manufacturer M determines that control has not been transferred to Retailer Aon delivery, for the following reasons:

(a) Retailer A does not have an unconditional obligation to pay for the dressesuntil 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 themto another retailer.
Manufacturer M determines that control of the dresses transfers when they aresold to an end customer i.e. when Retailer A
has an unconditional obligation topay Manufacturer M and can no longer return or otherwise transfer the dresses. Manufacturer
M recognises revenue as the dresses are sold to the end customer.
Illustration 17

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 purchased; 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.
Ans-

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 is providing 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 recognises revenue in the gross amount of consideration to which it is entitled in exchange
for the tickets transferred.

Illustration 18

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.
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Are the performance obligations under the contract distinct?

Ans-

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 aseparate performance obligation.

Illustration 19 – Estimating variable consideration

XYZ Limited enters into a contract with a customer to build a sophisticated machinery. The promise to transfer the asset is
a performance obligation that is satisfied over time. The promised consideration is Rs. 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 Rs. 1 lakh. For each day before 31st
March, 20X1 that the asset is complete, the promised consideration increases by Rs. 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 Rs. 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:

(a) the entity decides to use the expected value method to estimate the variable consideration associated with the
daily penalty or incentive (i.e. Rs. 2.5 crore, plus or minus Rs. 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 (Rs. 15 lakh or Rs. Nil) and it is the method that
the entity expects to better predict the amount of consideration to which it will be entitled.
Illustration 20 – 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 36 th month for an agreed-upon price of Rs. 25 crore.

The entity has the opportunity to earn a performance bonus for earlycompletion 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 Rs. 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 ie 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 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 theearly 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

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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.

Illustration 21– Volume discount incentive

HT Limited enters into a contract with a customer on 1st April, 20X1 to sell Product X for Rs. 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 Rs. 900 per unit. Consequently, the consideration in the contract is variable.

For the first quarter ended 30th 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 recognised (i.e. Rs. 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 Rs. 900.

Determine the amount of revenue to be recognise by HT Ltd. for the quarter ended 30th June, 20X1 and
30 th September, 20X1.
Solution

The entity recognises revenue of Rs. 10,000 (10 units × Rs. 1,000 per unit) for the quarter ended 30th June, 20X1.HT Limited
recognises revenue of Rs. 44,000 for the quarter ended 30 th September, 20X1.That amount is calculated from Rs. 45,000
for the sale of 500 units (50 units x Rs. 900 per unit) less the change in transaction price of Rs. 1,000 (10 units xRs.
100 price reduction) for the reduction of revenue relating to units sold for the quarter ended 30th June, 20X1.

Illustration 22 – Measurement of variable consideration

An entity has a fixed fee contract for Rs. 1 million to develop a product that meets specified performance criteria. Estimated
cost to complete the contract is Rs. 950,000. 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% Rs. 100,000
700 or less 25% Rs. 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 itis on 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 isas follows:
Year Rs.
1 50,000
2 1,75,000
3 4,00,000
4 2,75,000
5 50,000

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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

* 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.

Calculation of cumulative catch-up adjustment:

Updated variable consideration L 250,000

Percent complete in Year 4: (rounded off) M=N/O 95%

Cumulative costs through Year 4 N 900,000

Estimated costs to complete O 950,000

Cumulative variable revenue through Year 4: P 138,130

Cumulative catch-up adjustment F=L x M–P 99,370

Illustration 23 – 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 31 st March, 20X2, the client's assets under management are Rs. 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
consideration. Analyse the revenue to be recognised 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 recognised would not
occur if the entity included its estimate of the management fee or the incentive fee in the transaction price.
At each reporting date, the entity updates its estimate of the transaction price. Consequently, atthe 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 recognised 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 distinctservices 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 inother quarters.
Consequently, the entity recognises ₹ 2 crore as revenue for the quarter ended 31st March, 20X2.

Illustration 24 – Right of return

An entity enters into 1,000 contracts with customers. Each contract includes the sale of one product for Rs. 50 (1,000 total
products × Rs. 50 = Rs. 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 Rs. 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.
The entity estimates that the costs of recovering the products will be immaterial and expects that the returned products can

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be resold at a profit.
Determine the amount of revenue, refund liability and the asset to be recognised by the entity for the said contracts.
Solution
The entity also 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 recognised (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 thatthe returned products can be resold at a profit.
Upon transfer of control of the 1,000 products, the entity does not recognise revenue for the 30 products that it expects to be returned. Consequently, in
accordance with paragraphs 55 and B21of Ind AS 115, the entity recognises 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).

Illustration 25 – Financing component: significant or insignificant?

A commercial airplane component supplier enters into a contract with a customer for promised consideration of Rs. 7,000,000.
Based on an evaluation of the facts and circumstances, the supplier concluded that Rs. 140,000 represented a 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 Rs. 1,400,000 represented the financing component
basedon an analysis of the facts and circumstances.

Solution

The entity may conclude that Rs. 140,000, 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 Rs. 1,400,000 represents the financing component based on an
analysis of the facts and circumstances. In such a case, the entity may conclude that Rs. 1,400,000, 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 26 – Accounting for significant financing component

NKT Limited sells a product to a customer for Rs. 121,000 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 Rs. 100,000 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 Rs.
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 ofRs. 121,000 to the cash selling price of Rs. 100,000). 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 Rs. 121,000 and the cash selling price of Rs. 100,000 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 Rs. 121,000 to the cash selling price of Rs. 100,000). 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.
Until the entity receives the cash payment from the customer, interest revenue would be recognised 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.
Illustration 27 – 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 Rs. 1 crore plus a 10% contractual rate of interest, payable in 60
monthly instalments of Rs. 212,470.
Determine the discounting rate and the transaction price when
Case A—Contractual discount rate reflects the rate in a separate financing transaction

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Case B—Contractual discount rate does not reflect the rate in a separate financing transaction ie 14%.
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 reflectsthe 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 Rs. 1 crore. This amount is recognised 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 Rs. 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 Rs. 9,131,346 (60 monthly payments of Rs. 212,470 discounted at 14%). The entity recognises revenue and
a loan receivable for that amount. The entity accounts for the loan receivable in accordance with IndAS 109.

Illustration 28– 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 willbe satisfied at a point in time). The contract includes two alternative payment options:
1. Payment of Rs. 5,000 in two years when the customer obtains control of the assetor
2. Payment of Rs. 4,000 when the contract is signed. The customer elects to pay Rs. 4,000 when the contract is signed.
ST Limited concludes that the contract contains a significant financing component because of 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 interestrates 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 significantfinancing component

Solution

Journal Entries showing accounting for the significant financing component:

a. Recognise a contract liability for the Rs. 4,000 payment received at contractinception:
Cash Dr. Rs. 4,000
To Contract liability Rs. 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 recognising interest on Rs. 4,000 at 6% for two years:

Interest expense Dr. Rs. 494*

To Contract liability Rs. 494

*(Rs. 4,000 contract liability × (6% per year for two years).

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

Contract liability Dr. Rs. 4,494
To Revenue Rs. 4,494
Illustration 29– 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 completeits obligations under the contract.
Illustration 30– Advance payment
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XYZ Limited, a personal computer (PC) manufacturer, enters into a contract witha 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 Rs. 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.
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 31– Advance payment

A computer hardware vendor enters into a three-year arrangement with a customerto provide support services. For customers
with low credit ratings, the vendor requires the customer to pay for the entire arrangement in advance of the provisionof service.
Other customers pay over time.
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.

Illustration 32 – 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 33 – 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 contractconstitute 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 cashselling price (that is, the customer did not
pay a premium for paying a portion ofthe consideration in arrears). The payment terms included a holdback payment onlyto
ensure successful completion of the project, and no other factors exist to suggestthe arrangement contains a financing. Hence,
the contractor concludes this contractdoes not provide the customer or the contractor with a significant benefit of financing.
Illustration 34– 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 Rs. 100
crore. The consideration will be paid by the customer related to costs incurred near the time Company Z incurs such costs.
However, the Rs. 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 Rs. 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.
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Partial award fees may be awarded based on a pre-determined scale based on theirsuccess.
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 Rs. 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.
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 good or service to a customer and
(b) when the customer pays for that good or service will be one year or less.
Illustration 35– 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 expenseis recognised
only to the extent that a contract asset (or receivable) or a contract liability is recognised in accounting for a contract with a
customer.

Illustration 36– 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?
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 recognised), 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 37– Fair value of non-cash consideration varies for reasons other thanthe 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 Rs. 350 crore forthe project. RT Limited will receive a bonus of 10 lakh equity shares of AT Limitedif it
completes construction of the office building within one year. Assume a fair value of Rs. 100 per share at contract inception.
Determine the transaction price.

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Solution
The ultimate value of any shares the entity might receive could change for tworeasons:

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 Rs. 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 Rs. 350 crore plus 10 lakh equity shares at Rs. 100
per share for total consideration of Rs. 360 crore.

Illustration 38– 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 Rs. 25,000 per steering system and contributes tooling to be used in
SK‘s production process.The tooling has a fair value of Rs. 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, at contract inception, SK Limited includes the fair value of the tooling in the transaction price at contract
inception, which it determines to be Rs. 27 crore (Rs. 25 crore for the steering systems and Rs. 2 crore for the tooling).
Illustration 39– 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 Rs. 15 crore of products during the year. The contract also
requires the entity to make a non-refundable payment of Rs. 1.5 crore to the customer at the inception of the contract. The Rs.
1.5 crore payment will compensate the customer for the changes it needs to make to its shelving to accommodate the entity's
products. The entity does not obtain control of any rights to the customer's shelves.
Determine the transaction price.

Solution

The entity considers the requirements in paragraphs 70 – 72 of Ind AS 115 and concludes that the payment to the customer is not
in exchange for a distinct good or service that transfers to the entity. This is because the entity does not obtain control of any
rights to the customer's shelves. Consequently, the entity determines that, in accordance with paragraph 70 of Ind AS 115, the
Rs. 1.5 crore payment is a reduction of the transaction price.The entity applies the requirements in paragraph 72 of Ind AS 115
and concludesthat the consideration payable is accounted for as a reduction in the transaction price when the entity recognises
revenue for the transfer of the goods. Consequently, as the entity transfers goods to the customer, the entity reduces the
transaction price for each good by 10 per cent [(Rs. 1.5 crore ÷ Rs. 15 crore) x 100]. Therefore, in the first month in which the entity
transfers goods to the customer, the entity recognises revenue of Rs. 1.125 crore (Rs. 1.25 crore invoiced amount less Rs.
0.125 crore of consideration payable to the customer).
Illustration 40– Allocation methodology

An entity enters into a contract with a customer to sell Products A, B and C in exchange for Rs. 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.
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-aloneselling price Method
Rs.
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 (Rs.
15,000) exceeds the promised consideration (Rs. 10,000).
The entity considers that there is no observable evidence about the performance obligation to which the entire discount
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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 Rs.100)

Rs.
Product A 3,300 (Rs. 5,000 ÷ Rs. 15,000 × Rs. 10,000)
Product B 1,700 (Rs. 2,500 ÷ Rs. 15,000 × Rs. 10,000)

Product C 5,000 (Rs. 7,500 ÷ Rs. 15,000 × Rs. 10,000)

Total 10,000

Illustration 41– Allocating a discount

An entity regularly sells Products X, Y and Z individually, thereby establishing thefollowing stand-alone selling prices:
Product Stand-alone selling price
Rs.
Product X 50,000
Product Y 25,000
Product Z 45,000
Total 1,20,000

In addition,the entity regularly sells products y and z togather for Rs.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 Rs. 100,000. The entity will satisfy
the performance obligations for eachof 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 Rs. 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 (Rs.
15,000 – Rs. 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 Rs. 1,05,000 instead of Rs. 130,000.
Solution

Case A—Allocating a discount to one or more performance obligations

Because the entity regularly sells Products Y and Z together for Rs. 50,000 and Product X for Rs. 50,000, it has evidence that
the entire discount should be allocated to the promises to transfer Products Y and Z in accordance with Ind AS 115.

1. If the entity transfers control of ProductsY 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 Rs. 50,000 of the transaction price to the single performance obligation and recognise
revenue of Rs. 50,000 when Products Y and Z simultaneously transfer to the customer.
2. Ifthe contract requires the entity to transfer control of Products Y and Z at different points in time, then the
allocated amount of Rs. 50,000 is individually allocated to the promises to transfer Product Y and Product Z as follows:

Product Allocated transaction price

Rs.
Product Y 17,857 50000 x 25000/70000
Product Z 32,143 50000 x 45000/70000
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 Rs. 50,000 and Product X for Rs. 50,000, it has observable evidence that Rs.
100,000 should be allocated to those three products and a Rs. 20,000 discount should be allocated to the promises to
transfer Products Y and Z in accordance with Ind AS 115.
Using the residual approach, the entity estimates the stand-alone selling price of Product Alpha to be Rs. 30,000 as follows:

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Product Stand-alone sellingprice Method
Rs.
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 Rs. 30,000 allocated to Product Alpha is within the range of its observable selling prices
(Rs. 15,000 – Rs. 45,000).
Case C—Residual approach is inappropriate
The same facts as in Case B apply to Case C except the transaction price is Rs. 105,000 instead of Rs. 130,000.
Consequently, the application of the residual approach would result in a stand- alone selling price of Rs. 5,000 (1,05,000-
1,00,000) for Product Alpha.
The entity concludes that Rs. 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 Rs. 5,000 does not
approximate the stand-alone selling price of Product Alpha, which ranges from Rs. 15,000 – Rs. 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 Rs. 1,05,000 to Products X,
Y, Z and Alpha using the relative stand-alone selling prices of those products in accordance with Ind AS 115

Illustration 42– 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 Rs. 1,600,000 and Rs. 2,000,000, 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 Rs. 1,600,000 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 Rs. 2,000,000. 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 Rs. 600,000 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 Rs. 3,000,000. Here, Licence A is transferred 3 months later. The royalty due from the customer‘s
first month of sale is Rs. 4,00,000.
Allocate the transaction price and determine the revenue to be recognised 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 Rs. 2,000,000 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 (Rs.
2,000,000) approximates the stand-alone selling price of Licence B and the fixed amount of Rs. 1,600,000
approximates the stand-alone selling price of Licence A.
The entity allocates Rs. 1,600,000 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.
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 recognise revenue because the consideration allocated to Licence B is in the form of a sales- based
royalty. Therefore, the entity recognises revenue for the sales-based royalty when those subsequent sales occur.
When Licence A is transferred, the entity recognises as revenue the Rs. 1,600,000 allocated to Licence A.

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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 ofInd 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 Rs. 600,000 to Licence A and Rs. 3,000,000 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 Rs. 1,600,000 and Rs.
2,000,000, respectively. Consequently, the entity applies the general allocation requirements of Ind AS 115.
The entity allocates the transaction price of Rs. 600,000 to Licences A and B on the basis of relative stand-alone selling prices of Rs.
1,600,000 and Rs. 2,000,000, 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 recognise 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 recognises as revenue Rs. 333,333
[(Rs. 2,000,000 ÷ Rs. 3,600,000) × Rs. 600,000] allocated to Licence B. When Licence A is transferred, the entity recognisesas
revenue Rs. 266,667 [(Rs. 1,600,000 ÷ Rs. 3,600,000) × Rs. 600,000] allocated to Licence A.
In the first month, the royalty due from the customer's first month of sales is Rs. 400,000. Consequently, the entity recognises as
revenue Rs. 222,222 (Rs. 2,000,000 ÷ Rs. 3,600,000 × Rs. 400,000) allocated to Licence B (which has been transferred to the
customer and is therefore a satisfied performance obligation). The entity recognises a contract liability for the Rs. 177,778
(Rs. 1,600,000 ÷ Rs. 3,600,000 × Rs. 400,000) 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.
Illustration 43– Allocating a change in transaction price

On 1st April, 20X0, a consultant enters into an arrangement to provide due diligence, valuation, and software implementation
services to a customer for Rs. 2 crore. The consultant can earn Rs. 20 lakh bonus if it completes the software
implementation by 30 th September, 20X0 or
Rs. 10 lakh bonus if it completes the software implementation by 31 st 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 – Rs. 80 lakh
Valuation – Rs. 20 lakh
Software implementation – Rs. 1 crore

At contract inception, the consultant believes it will complete the software implementation by 30 th 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 30th September, 20X0 based on a revised forecast. As a
result, the consultant updates its estimated transaction price to reflect a bonus of Rs. 20 lakh.
After reviewing its progress as of 1st July, 20X0, the consultant determines that it is 100 percent complete in satisfying its
performance obligations for due diligence and valuation and 60 percent complete in satisfying its performance obligation for
software implementation.
Determine the transaction price.
Solution
On 1st July, 20X0, the consultant allocates the bonus of Rs. 20 lakh to the software implementation performance obligation, for
total consideration of Rs. 1.2 crore allocated to that performance obligation, and adjusts the cumulative revenue to date for
the software implementation services to Rs. 72 lakh (60 percent of Rs.
1.2 crore).
Illustration 44

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 recognise the revenue?
Solution

Payroll processing is a single performance obligation. On a monthly basis, asMicrotek 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.

 Further, once the services have been performed for a particular month, in case of termination of the agreement before

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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 recognised 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 obligationis 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 otherentity 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 45

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 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.
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 recognise revenue over a period of time

Illustration 46

AFS Ltd. is a risk advisory firm and enters into a contract with a company – WBCLtd 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 recognising revenue over a period of time or at a point in time, Ind AS
115 requires one of the following criterion 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. And in case the contract was to be terminated,
any other firm engaged to perform similar services will have tosubstantially re-perform.Hence, this criterion is not met.
Criterion (b) – An asset created that customer controls: This is service contractand 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
Further, AFS has a right to enforce payment if contract was early terminated, for reasons other than AFS‘s failure to perform.
And the profit margin approximates what entity otherwise earns.
Therefore, criterion (c) is met and such performance obligation is said to be met over a period of time.

Illustration 47

Space Ltd. enters into an arrangement with a government agency for construction of a space satellite. Although Space Ltd is
in this business for building such satellites for various customers across the world, however the specifications for each
satellite may vary based on technology that is incorporated in the satellite. In the event of termination, Company has right to
enforce payment for work completed to date.Evaluate if contract will qualify for satisfaction of performance obligation over a
period of time.

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Solution

While evaluating the pattern of transfer of control to the customer, the Companyshall 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 contract was early terminated, for reasons other than 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.

Illustration 48
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: 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 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. Thus, revenue cannot be recognised over a period of time.

Illustration 49: 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. Theentity‘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?
Solution

The entity shall determine if revenue should be recognised over a period of time byevaluating 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 recognise revenue on a straight line basis over the year.

Illustration 50: Uninstalled materials

On 1st January, 20X1, an entity contracts to renovate a building including theinstallation of new elevators. The entity estimates
the following with respect to the contract:
Particulars Amount (Rs.)
Transaction price 5,000,000
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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. The entity has incurred actual other costs of 500,000
by 31 st March, 20X1.
How will the Company recognize revenue, if performance obligation is met over a period of time?
Solution

Costs to be incurred comprise two major components – elevators and cost ofconstruction service.

(a) The elevators are part of the overall construction project and are not a distinctperformance obligation
(b) The cost of elevators is substantial to the overall project and are incurred wellin advance.
(c) Upon delivery at site, customer acquires control of such elevators.
(d) And there is no modification done 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 percentage of costs incurredrelative to the total budgeted costs.
- The cost of elevators should be excluded when measuring such progress andrevenue for such elevators should be
recognized to the extent of costs incurred.
The revenue to be recognized is measured as follows:

Particulars Amount (Rs.)

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 recognised:
(a) For costs incurred (other thanelevators) Total attributable revenue = 3,500,000
% of work completed = 20%
Revenue to be recognised = 700,000
(b) Revenue for elevators 1,500,000 (equal to costs incurred)
Total revenue to be recognised 1,500,000 + 700,000 = 2,200,000

Therefore, for the year ended 31st March, 20X1, the Company shall recognizerevenue of Rs. 2,200,000 on the project.

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