Ind AS 115, “Revenue from Contracts with Customers,” is an accounting standard that outlines the principles for recognizing revenue from contracts with customers. This standard provides a five-step model for revenue recognition and aims to ensure that entities provide useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
FAQs on Ind AS 115
Q.1 What is Ind AS 115?
Ans. Ind AS 115 is an accounting standard issued by the Institute of Chartered Accountants of India (ICAI) that prescribes how and when an entity should recognize revenue from contracts with customers. It is based on the IFRS 15 standard issued by the International Accounting Standards Board (IASB).
Q.2 When did Ind AS 115 become effective?
Ans. Ind AS 115 became effective for accounting periods beginning on or after April 1, 2018.
Q.3 What are the key principles of Ind AS 115?
Ans. The core principle of Ind AS 115 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
Q.4 What is the five-step model for revenue recognition under Ind AS 115?
Ans. The five-step model for revenue recognition under Ind AS 115 is as follows:
i. . Identify the contract(s) with a customer.
ii. Identify the performance obligations in the contract.
iii. Determine the transaction price.
iv. Allocate the transaction price to the performance obligations in the contract.
v. Recognize revenue when (or as) the entity satisfies a performance obligation.
Q.5 What is a performance obligation?
Ans. A performance obligation is a promise in a contract to transfer a good or service to the customer. It is the unit of account for revenue recognition.
Q.6 How is the transaction price determined?
Ans. The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. It can include fixed amounts, variable amounts, or both.
Q.7 How is the transaction price allocated to performance obligations?
Ans. The transaction price is allocated to each performance obligation based on the relative standalone selling prices of the goods or services promised in the contract.
Q.8 When should revenue be recognized?
Ans. Revenue should be recognized when (or as) the entity satisfies a performance obligation by transferring a promised good or service to the customer. The transfer is considered to occur when the customer obtains control of that good or service.
Q.9 What are some common challenges in applying Ind AS 115?
Ans. Common challenges include:
– Identifying performance obligations.
– Determining whether performance obligations are satisfied over time or at a point in time.
– Estimating variable consideration.
– Allocating the transaction price to performance obligations.
– Assessing whether contracts are combined or treated separately.
Q.10 How does Ind AS 115 differ from previous revenue recognition standards?
Ans. Ind AS 115 provides a more comprehensive framework for addressing revenue recognition issues compared to previous standards (such as AS 9). It introduces more detailed guidance and requires more extensive disclosures, enhancing transparency and comparability.
Q.11 What are the disclosure requirements under Ind AS 115?
Ans. Entities must provide detailed disclosures about:
– Contracts with customers.
– Significant judgments and changes in judgments made in applying the standard.
– Assets recognized from costs to obtain or fulfill a contract.
Q.12 Can revenue be recognized before the receipt of payment?
Ans. Yes, revenue can be recognized before receipt of payment if the entity has satisfied a performance obligation. The timing of revenue recognition is based on when control of the goods or services is transferred to the customer, not on when payment is received.
Q.13 What is the impact of Ind AS 115 on financial statements?
Ans. Ind AS 115 can impact the timing and amount of revenue recognized, leading to changes in key financial metrics. It also requires more detailed disclosures, providing better insights into an entity’s revenue-generating activities.
Q.14 How are contract modifications handled under Ind AS 115?
Ans. Contract modifications are changes in the scope or price (or both) of a contract. Under Ind AS 115, contract modifications are accounted for as either:
– A separate contract, if the modification adds distinct goods or services and the price increases by an amount that reflects their standalone selling prices.
– A part of the existing contract, either through a prospective approach (if remaining goods or services are distinct) or a cumulative catch-up adjustment (if remaining goods or services are not distinct).
Q.15 What is the treatment of warranties under Ind AS 115?
Ans. Warranties are categorized into:
– Assurance-type warranties: These ensure that the product complies with agreed-upon specifications and are accounted for under IAS 37.
– Service-type warranties: These provide a service in addition to the assurance and are treated as separate performance obligations. The transaction price is allocated between the product and the service.
Q.16 How is the impact of significant financing components addressed?
Ans. If a contract includes a significant financing component (either explicitly or implicitly), the transaction price is adjusted to reflect the time value of money. This adjustment is required when the timing of payments agreed upon by the parties provides the customer or the entity with a significant benefit of financing.
Q.17 How are non-refundable upfront fees accounted for?
Ans. Non-refundable upfront fees (e.g., membership fees) are generally not considered to transfer a good or service to the customer and are typically allocated over the period in which the related services are provided.
Q.18 What are the considerations for revenue recognition from licenses?
Ans. Revenue from licenses of intellectual property is recognized either over time or at a point in time, depending on the nature of the license. Licenses granting a right to use intellectual property as it exists at the point in time the license is granted are recognized at a point in time. Licenses granting a right to access intellectual property over the license period are recognized over time.
Q.19 What is the accounting treatment for costs to obtain or fulfill a contract?
Ans. Costs to obtain a contract (e.g., sales commissions) are capitalized if they are incremental and expected to be recovered. Costs to fulfill a contract are capitalized if they relate directly to a contract, generate or enhance resources that will be used to satisfy performance obligations, and are expected to be recovered.
Q.20 How is variable consideration treated under Ind AS 115?
Ans. Variable consideration, such as discounts, rebates, refunds, credits, incentives, or other similar items, is estimated at contract inception and constrained to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
Q.21 What are the indicators of control transfer for revenue recognition?
Ans. Indicators that control has transferred to the customer include:
– The entity has a present right to payment for the asset.
– The customer has legal title to the asset.
– The entity has transferred physical possession of the asset.
– The customer has the significant risks and rewards of ownership of the asset.
– The customer has accepted the asset.
Q.22 What is the impact of principal versus agent considerations?
Ans. When another party is involved in providing goods or services to a customer, the entity must determine whether it is acting as a principal or an agent. As a principal, the entity recognizes revenue on a gross basis. As an agent, the entity recognizes revenue on a net basis (i.e., the fee or commission earned).
Q.23 How should entities handle the disclosure of significant judgments?
Ans. Entities are required to disclose judgments, and changes in judgments, that significantly affect the determination of the amount and timing of revenue from contracts with customers. This includes methods used to recognize revenue for performance obligations satisfied over time and the methods used to allocate the transaction price.
Q.24 What is the impact of Ind AS 115 on industry-specific practices?
Ans. Ind AS 115 affects various industries differently, depending on the nature of the contracts and the goods or services provided. Industries such as telecommunications, construction, and software might see significant changes in revenue recognition practices due to the specific guidance provided on multiple-element arrangements, long-term contracts, and licenses.
Q.25 Can revenue be recognized for partially satisfied performance obligations?
Ans. Yes, revenue can be recognized for partially satisfied performance obligations if the entity can reasonably measure its progress toward complete satisfaction of the performance obligation. This is often done using output or input methods, such as milestones reached or costs incurred.
Q.26 How are contract liabilities and assets recognized and presented?
Ans. –
Contract liabilities: These represent the entity’s obligation to transfer goods or services to a customer for which the entity has received consideration (or the amount is due) from the customer. They are recognized as revenue when the performance obligation is satisfied.
– Contract assets: These represent the entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer when that right is conditional on something other than the passage of time. They become receivables once the right to payment is unconditional.
Q.27 What are the indicators of the principal-agent relationship?
Ans. Indicators that an entity is acting as a principal include:
– The entity controls the good or service before it is transferred to the customer.
– The entity is primarily responsible for fulfilling the contract.
– The entity has inventory risk.
– The entity has discretion in establishing prices.
Q.28 How are loyalty programs treated under Ind AS 115?
Ans. Loyalty programs often create a separate performance obligation. The consideration allocated to the loyalty points is deferred and recognized as revenue when the points are redeemed or when it is probable that they will not be redeemed.
Q.29 What is the treatment of bill-and-hold arrangements?
Ans. In a bill-and-hold arrangement, revenue can be recognized before delivery if specific criteria are met, including:
– The reason for the bill-and-hold arrangement is substantive.
– The product is identified separately as belonging to the customer.
– The product is ready for physical transfer to the customer.
– The entity does not have the ability to use the product or direct it to another customer.
Q.30 How are consignment arrangements accounted for?
Ans. Revenue in consignment arrangements is recognized when the consignee sells the goods to a third party, as control is typically transferred to the consignee only upon sale.
Q.31 How should an entity account for non-cash consideration?
Ans. Non-cash consideration is measured at fair value. If the fair value cannot be reasonably estimated, the entity measures the consideration indirectly by reference to the standalone selling price of the goods or services promised in exchange for the consideration.
Q.32 What are the implications of recognizing revenue over time versus at a point in time?
Ans. The determination of whether revenue is recognized over time or at a point in time affects the timing of revenue recognition. For revenue to be recognized over time, one of the following criteria must be met:
– The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs.
– The entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced.
– The entity’s performance does not create an asset with an alternative use, and the entity has an enforceable right to payment for performance completed to date.
Q.33 How are contract costs capitalized and amortized?
Ans.
– Incremental costs to obtain a contract: These are costs that would not have been incurred if the contract had not been obtained (e.g., sales commissions). These costs are capitalized and amortized on a systematic basis consistent with the transfer of goods or services to the customer.
– Costs to fulfill a contract: These costs are capitalized if they relate directly to a contract, generate or enhance resources that will be used to satisfy performance obligations, and are expected to be recovered. They are amortized on a systematic basis consistent with the transfer of goods or services to the customer.
Q.34 How are returns and refunds accounted for?
Ans. Revenue recognition is adjusted for expected returns and refunds. An entity recognizes a refund liability and an asset for the right to recover products from customers on settling the refund liability.
Q.35 What disclosures are required about contract balances?
Ans. Entities must disclose information about:
– Contract assets and liabilities, including the opening and closing balances.
– Significant changes in contract assets and liabilities.
– The amount of revenue recognized in the reporting period from performance obligations satisfied (or partially satisfied) in previous periods.
Q.36 How are costs to obtain and fulfill a contract amortized?
Ans. Costs to obtain and fulfill a contract are amortized over the period of the contract, including anticipated renewals, if the renewal is expected and the costs would not have been incurred if the contract had not been obtained. The amortization pattern should reflect the transfer of goods or services to the customer.
Q.37 What happens if a contract includes both goods and services?
Ans. The entity must evaluate whether the goods and services are distinct within the context of the contract. If they are distinct, they are treated as separate performance obligations. The transaction price is allocated to each performance obligation based on the relative standalone selling prices.
Q.38 How should an entity treat a series of distinct goods or services?
Ans. If a series of distinct goods or services are substantially the same and have the same pattern of transfer to the customer, they are treated as a single performance obligation. Revenue is recognized over time as the performance obligation is satisfied.
Q.39 How are volume discounts and rebates treated?
Ans. Volume discounts and rebates result in variable consideration. They are estimated at contract inception and constrained to the extent that it is highly probable that a significant reversal of revenue will not occur. The transaction price is adjusted for the estimated discounts or rebates.
Q.40 What are the effects of Ind AS 115 on financial statement users?
Ans. Ind AS 115 provides more detailed and transparent information about revenue recognition, which helps financial statement users better understand an entity’s revenue streams, the timing of revenue recognition, and the judgments and estimates involved.
Q.41 How is revenue recognized for construction contracts under Ind AS 115?
Ans. Revenue from construction contracts is typically recognized over time, as the entity’s performance creates or enhances an asset that the customer controls as it is being constructed. The progress towards completion can be measured using output methods (e.g., milestones) or input methods (e.g., costs incurred).
Q.42 What is the approach for recognizing revenue from the sale of real estate?
Ans. For the sale of real estate, revenue is recognized when control of the property is transferred to the buyer. This could be at a point in time (e.g., upon legal transfer) or over time if the criteria for over-time recognition are met (e.g., if the buyer controls the asset as it is being constructed).
Q.43 How are performance obligations identified in bundled contracts?
Ans. In bundled contracts, each distinct good or service within the bundle is identified as a separate performance obligation. Distinct goods or services are those that the customer can benefit from on their own or together with other readily available resources and that are separately identifiable in the contract.
Q.44 What happens if a contract contains a significant financing component?
Ans. If a contract contains a significant financing component, the transaction price is adjusted for the time value of money. This adjustment is not required if the period between the transfer of goods or services and the payment is less than one year.
Q.45 How is revenue recognized for service contracts?
Ans. Revenue for service contracts is generally recognized over time as the services are performed. This can be measured using an output method (e.g., surveys of performance completed) or an input method (e.g., costs incurred).
Q.46 What are the key disclosures related to performance obligations?
Ans. Entities must disclose:
– A description of the performance obligations in contracts with customers.
– The timing of satisfaction of performance obligations.
– Significant payment terms.
– The nature of the goods or services promised.
– Obligations for returns, refunds, and other similar obligations.
– Types of warranties and related obligations.
Q.47 How should changes in transaction price be handled?
Ans. Changes in transaction price after contract inception (e.g., due to changes in variable consideration) are allocated to the performance obligations in the contract on the same basis as at inception. Adjustments are recognized in the period in which the change occurs.
Q.48 What are some common transition methods for adopting Ind AS 115?
Ans. Entities can adopt Ind AS 115 using one of the following methods:
– Full retrospective method: Restating comparative periods presented.
– Modified retrospective method: Recognizing the cumulative effect of initially applying the standard at the date of initial application, with no restatement of comparative periods.
Q.49 How are contract combinations handled?
Ans. Contracts entered into at or near the same time with the same customer (or related parties) should be combined if they are negotiated as a package with a single commercial objective, if the amount of consideration in one contract depends on the price or performance of another contract, or if the goods or services promised are a single performance obligation.
Q.50 How should an entity account for contract modifications that create new performance obligations?
Ans.If a contract modification adds distinct goods or services and the price increases by an amount that reflects the standalone selling prices of those goods or services, the modification is accounted for as a separate contract. Otherwise, it is treated as a modification to the existing contract.
Q.51 How are prepayments and non-refundable upfront fees treated?
Ans. Prepayments and non-refundable upfront fees are generally deferred and recognized over the period during which the related goods or services are provided. They are not immediately recognized as revenue upon receipt.
Q.52 What considerations are there for determining the standalone selling price?
Ans. The standalone selling price is the price at which an entity would sell a promised good or service separately to a customer. If the price is not directly observable, the entity estimates it using methods such as the adjusted market assessment approach, the expected cost plus a margin approach, or the residual approach.
Q.53 How does Ind AS 115 handle customer options for additional goods or services?
Ans. Customer options for additional goods or services (e.g., renewal options, discounts on future purchases) are considered separate performance obligations if they provide a material right to the customer that the customer would not receive without entering into the contract.
Q.54 How are rights of return accounted for?
Entities recognize revenue for products expected to be returned by recognizing a refund liability and a corresponding asset for the right to recover the product. The revenue recognized is adjusted for expected returns.
Q.55 What are the key considerations for recognizing revenue in the software industry?
Ans. In the software industry, revenue recognition depends on whether the software license is distinct and whether it provides a right to use (recognized at a point in time) or a right to access (recognized over time). Maintenance and support services, customization, and implementation services are typically separate performance obligations.
Q.56 How should an entity account for contract fulfillment costs?
Ans. Costs to fulfill a contract are capitalized if they relate directly to a contract, generate or enhance resources used to satisfy performance obligations, and are expected to be recovered. These costs are amortized on a systematic basis consistent with the transfer of goods or services to the customer.
Q.57 How is revenue recognized for milestone payments?
Ans. For contracts with milestone payments, revenue is recognized to the extent that the milestone reflects the transfer of control of goods or services to the customer. This often involves measuring progress toward completion using input or output methods.
Q.58 What are the implications of customer acceptance clauses?
Ans. If a contract includes a customer acceptance clause, revenue is recognized when the customer accepts the goods or services or when the acceptance period lapses, unless the entity can objectively demonstrate that the criteria for acceptance have been met.
Q.59 How should an entity account for barter transactions?
Ans. Revenue from barter transactions involving non-monetary exchanges is measured at the fair value of the goods or services received, or if that cannot be reliably measured, at the fair value of the goods or services given up.
Q.60 What impact does Ind AS 115 have on disclosures for interim financial reports?
Ans. Entities are required to provide sufficient disclosures in interim financial reports to explain the nature and effects of changes in revenue recognition policies. This includes disaggregated revenue information, contract balances, and significant judgments made in applying the standard.
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Disclaimer: This article provides general information existing at the time of preparation and author takes no responsibility to update it with the subsequent changes in the law. The article is intended as a news update and author neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this article. It is recommended that professional advice be taken based on specific facts and circumstances. This article does not substitute the need to refer to the original pronouncement.
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