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Ind AS 115 Revenue from Contracts with Customers
BackgroundThe Ministry of Corporate Affairs
(MCA), Government of India vide
notification GSR 111 (E) dated 16th
February, 2015 not i f ied the
Companies (India Accounting
Standards) Rules, 2015. The
applicability of these standards to
various listed / unlisted companies
(including their holding, subsidiary,
j o i n t v e n t u r e o r a s s o c i a t e
companies) was laid down in this
notification.
The notification also laid down the
various standards commonly
known as Ind AS. Ind AS standards are in broadly line
with International Financial Reporting Standards
(IFRS).
IFRS 15
IFRS 15 Revenue from Contracts with Customers was
issued in May 2014 and was made effective for an
entity's IFRS financial statements for the periods
beginning on or after 1st January, 2017.
Subsequently, in September, 2015 International
Accounting Standard Board (IASB) deferred the
effective date to 1st January, 2018.
Ind AS 115
The MCA notification dated 16th February, 2015 had
notified Ind AS 115. However, subsequent to the
decision of IASB to defer the implementation of IFRS
15, the MCA vide Companies (Indian Accounting
Standards) (Amendment) Rules, 2016 dated 30th
March, 2016 omitted Ind AS 115 and inserted Ind AS
11 Construction Contracts and Ind AS 18 Revenue. Ind
AS 115 is yet to be notified again.
The following details are on the presumption that
Ind AS 115 when introduced shall be in line with
IFRS 15
1
Summary of Ind AS 115
Standards superseded
Ind AS 115 provides a single comprehensive framework to
be used by businesses to recognize revenue from
customers. The following current revenue recognition
standards & guidance will be superseded by Ind AS 115
Ind AS 11 Construction Contracts
Ind AS 18 Revenue
Appendix A & B – Service Concession Arrangements
(shall become Appendix C & D of Ind AS 115)
Appendix A – Barter transactions involving
advertising services
Appendix B – Customer Loyalty Programmes
Appendix C – Transfer of Assets from Customers
ObjectiveThe objective of this Standard is to establish the principles
that an entity shall apply to report useful information to
users of financial statements about the nature, amount,
timing and uncertainty of revenue and cash flows arising
from a contract with a customer.
Ind AS 115 Revenue from Contracts with Customers2
Ind AS 115 Revenue from Contracts with Customers
The 5 step model frameworkInd AS 115 moves away from the “transfer of risk and
rewards” approach and introduces a new “transfer of control”
approach delivered through the new five-step model.
Identify the with a contract
customerIdentify the
separate performance
obligations in the contract
Determine the transaction price
Allocate the transaction price
to the separate performance
obligations Recognise revenue when (or as) each performance obligation is satisfied
3
Ind AS 115 Revenue from Contracts with Customers
Brief comparison
Ind AS 18 / 11 Ind AS 115
Separate models for:
Construction contracts
Goods
Services
Single model for performance obligations
Satisfied over time
Satisfied at a point in time
Focus on risks and rewards Focus on control
Limited guidance on
Multiple element arrangements
Variable considerations
Licenses
More guidance on:
Separating elements
Allocating the transaction price
Variable consideration
Licenses
Options
Repurchase arrangements…
4
Ind AS 115 Revenue from Contracts with Customers
Key challenges for different industriesThe revenue and profit recognition will change for some entities and they will need to consider
whether revenue should be recognised over time or at a point in time
how shipping term will change the timing of recognition
the extent to which distinct goods or services are supplied, which should be accounted for separately
whether particular costs relating to obtaining a contract must be capitalised
whether revenue must be adjusted for the effects of the time value of money
how to account for contract modifications
the impact of new guidance where pricing mechanisms include variable amounts
whether accounting treatment will be changed for different types of licenses and royalties
accounting for warranty covers given to customers
5
Ind AS 115 Revenue from Contracts with Customers
Major Considerations
Contract Modif icat ion
A separate contract
NOT a separate contract
Contract
6
Modificatio
n
Original
Contract
Modifi
catio
n
Original
Original
Additional goods / services distinct
Consideration for additional goods / services reflects their stand-alone selling price
Additional goods / services distinct, NOT OR
Consideration for additional goods / services DOES NOTreflect their stand-alone selling price
7Ind AS 115 Revenue from Contracts with Customers
7
When to Recognize revenue?
Customer receives / consumes as the simultaneouslyentity performs
Entity creates / enhances an asset and customer controls it during this process
Created asset has to the entity + no alternative usethe entity had for enforceable right to paymentperformance up to date
Yes No
Revenue AT THE POINT OF time
Revenue OVER time
When control is transferred Based on progress
Ind AS 115 Revenue from Contracts with Customers
Some issues Revenues from manufactured goods may historically have been recognized on
delivery to the customer. Now, if the contract meets the 'over time' test, then the revenue would be recognized as the manufacturing happens – akin to current long-term contract accounting
Free goods and services as well as options for additional goods and services for a discounted price might be separate performance obligations
Cash incentives and incentives to provide free or discounted goods can be separate performance obligations rather than marketing incentives
Non-performance penalties (e.g. for failure to meet service level agreements) will generally need to be deducted from revenue rather than charged as an expense
The accounting for contract modifications is complex and differs significantly depending on whether a new performance obligation is created and on the pricing
Extended payment terms might result in recognition of interest revenues
Analysis of contracts for integrated solutions (more relevant in case of technology sector) to conclude whether one or multiple performance obligations exist and what revenue pattern is appropriate
The determination of whether warranty is an assurance-type or service-type warranty will require professional judgement
Cash received more than a year in advance is seen as a loan – the related 'financing cost' is recorded as an interest expense.
8
Ind AS 115 Revenue from Contracts with Customers
Way Forward
Contracts with Customers
Existing contract reassessment New contract definition Payment terms
Contract Performance Obligations
Service commitment Product delivery Method of measuring progress
Transaction Price
Discounts Refunds Rebates
Credits Incentives Bonus
Allocate Transaction Price
Standard Price Discounts Allocations
Service and Product Delivery Commitment
Recognize revenue when a Performance Obligation is met
Direct Labour Direct
Materials
Allocation of Overheads
Explicitly chargeable Cost
9
Ind AS 115 Revenue from Contracts with Customers
Disclosure Requirements
Ind AS 115 significant disclosure requirements are in line with the new standard's
objective of providing users of financial statements with information that will help them
understand the nature, amount, timing and uncertainty of revenue and cash flows
arising from the entity's contracts with customers
Disclosures
Information about
contracts with customers
Info
rmatio
n
about
perfo
rman
ce
oblig
ations
Info
rmatio
n
about co
sts to
obtain
or fu
lfill
the co
ntract
Info
rmat
ion
about
dis
aggre
gat
ion
of
reve
nue
Information
about
judgements
used
Info
rmati
on
about
reco
nci
liati
on o
f co
ntr
act
rev
enue
10
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