Ram Agrahari

Objective of Ind AS 115

To establish the principles about the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer.

When Ind AS 115 Not Applicable

Ind AS 115 Not applicable where contract are towards non-monetary exchanges between entities in the same line of business Not applicable to contracts with customers as specific Ind AS are applicable as follows:-

Ind AS 17 Lease Ind AS 109 Financial instruments Ind AS 28 Invt. in Associates & Joint Venture Ind AS 111 Joint Arrangements
Ind AS 104 Insurance Ind AS 110 Consolidated Fin. Statements Ind AS 27 Separate Fin. Statements

Scope of Contract under Ind AS 115

An entity shall apply this Standard to a contract (other than a contract listed above table) only if the counterparty to the contract is a customer. If a contract with a customer is partially within the scope Ind AS 115 and partially in the scope of other Standards than transaction price pertaining to performance obligation covered under the other Ind AS should be excluded. If other standard does not specify how to separate or measure the part of the contract then this Ind AS should be applied to measure or separate the contract. Also specifies the accounting for the incremental costs incurred for obtaining a contract & for the costs incurred to fulfil a contract if those costs are not within the scope of another Standard

Features of Contract

Parties should have approved the contract either in writing, orally or as per other business practices & are committed to perform respective obligations. Enforceable Rights and obligation towards goods/services to be transferred can be identified. Similarly payment terms, risk, time can be identified. In case the consideration is probable to be received an entity shall consider only the customer’s ability and intention to pay therefore in such instance amount received can be less than the contract price due to price concession.

In case above criteria are not met and the consideration is received than it will be recognised as revenue only if there is no remaining obligation or if the contract has been terminated and the receipts are not refundable. In other cases the receipt is to be treated as a liability representing entities obligation

The contract will cease to exist when wholly underperformed means when entity has not transferred goods/services & hence not entitled to receive.

The contract should reassessed at the regular interval to check the change in the facts like in case the payment are deteriorating than probability of recoverability for remaining goods needs to be assessed.

Combination of Contract

An entity shall combine two or more contracts entered at/near the same time with the same customer (or related party of the customer) if:

(a) the contracts are negotiated as a package with a single commercial objective; (b) consideration of one contract depends on the price/performance of the other; or (c) all or some goods/services promised in the contracts are a single performance obligation.

Contract Modification

It is a change in the scope or price (or both) of a contract that is approved by the parties to the contract.

A contract modification may exist even though the parties to the contract have a dispute about the scope or price of the modification or the parties have approved a change in the contract but have not determined the corresponding change in price.

An entity shall account for a contract modification as a separate contract if both – a) scope increases due to addition of distinct promised goods/services.

& b) price of the contract increases by price of the additional promised goods/services and reduced by adjustments to price e.g. in case of discount. If not accounted as above then account as if its termination of existing contract and creation of a new contract. The price allocated towards remaining performance obligations is the sum of i) consideration promised not yet recognised + ii) consideration promised due to contract modification. In case goods/services are not distinct contract modification is treated as part of the existing contract that are partially satisfied at the date of the modification. The effect that the contract modification has on the transaction price is recognised as an adjustment to revenue.

In case it’s a mix of both distinct and non-distinct goods/services entity shall account for the effects of the modification on the unsatisfied performance obligations (partially or fully) in a manner that is consistent with the objectives.

Identifying performance Obligation

Assess goods or services promised and shall identify as a performance obligation promised to transfer to customer either a) a distinct good or service (single/bundled) b) a series of distinct goods or services that have same pattern (when same performance obligation and same measure to progress) Promises in the contract includes goods/services explicitly mentioned in the contract and also those which are implied due to business practice. Performance obligations do not include activities that is undertaken to fulfil a contract unless involves transfer a good or service. For example, service provider may need to perform various administrative tasks to set up a contract these are not a performance obligation. A good/service that is promised to a customer is distinct if both of the following criteria are met: (a) the customer can benefit from the good or service; and (b) the entity’s promise to transfer the good/service to the customer is separately identifiable.

Recognise

Recognise revenue when performance obligation is satisfied by transferring good/service to the customer & the customer obtains control of that asset

Control of an assets mean

The benefits of an asset are the potential cash flows (inflows or savings in outflows) that can be obtained directly or indirectly in many ways, such as by: (a) using the asset to produce goods or provide services (including public services); (b) using the asset to enhance the value of other assets; (c) using the asset to settle liabilities or reduce expenses; (d) selling or exchanging the asset; (e) pledging the asset to secure a loan; and (f) holding the asset. (Asset mean Goods and services)

Performance obligation satisfied over time

An entity transfers control of a good or service over time and recognises revenue over time, if one of the following criteria is met: (a) the customer simultaneously receives and consumes the benefits; (b) the entity’s performance creates or enhances an asset (for example, work in progress) that the customer controls as the asset; or (c) the entity’s performance does not create an asset with an alternative use & the entity has an enforceable right to payment for performance completed to date.

The assessment of whether an asset has an alternative use is made at contract inception. After contract inception, an entity shall not assess unless the parties to the contract approve a contract modification that substantively changes the performance obligation.

Satisfied at a point of time

The entity has a present right to payment when customer has obtained the ability to direct the use of & obtain substantially all of the remaining benefits from the goods/services. Following indicators: entity has a present right to payment for the asset, customer has legal title to the asset, transferred physical possession & significant risks and rewards of the asset to customer and the customer has accepted the asset.

Measuring progress

An entity shall recognise revenue over time by measuring the progress towards satisfaction of performance obligation. Object is to depict performance in transferring control of goods or services to customer. An entity shall apply a single method consistently to measure progress of each performance obligation. At the end of each reporting period entity shall remeasure its progress towards performance obligation satisfied over time.

Determining the transaction price

When a performance obligation is satisfied entity shall recognise the transaction price as revenue. Transaction Price means the amount of consideration that entity is entitled in exchange for transferring promised goods or services excluding amounts collected on behalf of third parties (for example, sales taxes). The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. variable consideration mean discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, or other similar items, refund liability if the entity receives consideration from a customer and expects to refund the same.

Constraints – factors outside the entity’s influence which make consideration susceptible should be excluded from estimates of variable consideration. Reassessment of variable consideration – At the end of each reporting period an entity shall update the estimated transaction price.

Effects of the time value of money should be factored if significant benefit of financing the transfer of goods or services to the customer

The objective of adjusting the consideration for a significant financing component is to recognise revenue that reflects the price that a customer would have paid in cash for goods when transferred (i.e. the cash selling price).

The financing component is significant when there is difference in Cash Selling Price and Consideration or there is combined effect of expected length of time between transfer of goods and payment & interest factor. No above adjustment is required if Customers pays in advance or reason of difference in price is beyond financing factors or difference in timing is dependent on happening or non-happening of future event e.g. sales based royalty or when the payment terms provide protection to both parties in case of failing to adequately complete some or all of the contractual obligations.

Non Cash Consideration:- where the transaction price consideration is in a form other than cash it shall be measured at fair value. If a customer contributes goods or services (for example, materials, equipment or labour) then the entity should account for such received goods and services. Consideration payable to customer includes cash that pays or payable to customer to be reduced from transaction price unless it’s in exchange of goods.

Allocating the transaction price to performance obligations

Objective is to allocate the transaction price to each performance obligation. To meet this an entity shall allocate the transaction price to each performance obligation identified. This do not apply if a contract has only one performance obligation. The stand-alone selling price shall be determined at contract inception & it is the price at which an entity would sell a promised good/service separately in similar circumstance to similar customer. If a stand-alone selling price is not directly observable the same shall be estimated at an amount that an entity shall consider all information (including market conditions, entity-specific factors and information about the customer or class of customer).

Method of estimating:- Adjusted market assessment approach, Expected cost plus a margin approach, or residual approach.

A combination of methods may be used if two or more of those goods or services have highly variable or uncertain stand-alone selling prices. For example, an entity may use a residual approach to estimate the aggregate stand-alone selling price for those with high variable or uncertain stand-alone selling prices and then use another method to estimate the stand-alone selling prices of the individual goods or services relative to that by the residual approach. When an entity uses a combination of methods to estimate the stand-alone selling price of each promised good or service in the contract, the entity shall evaluate whether allocating the transaction price at those estimated standalone selling prices would be consistent with the allocation objective.

The best evidence of a stand-alone selling price is when the entity sells that good or service separately in similar circumstances and to similar customers.

Allocation of Discount

A customer receives a discount for purchasing a bundle of goods or services if the sum of the stand-alone selling prices of goods/services in the contract exceeds the promised consideration in a contract

An entity shall allocate a discount entirely to one or more performance obligations if all the following met: (a) the entity regularly sells each distinct good or service (or each bundle of distinct goods or services) in the contract on a stand-alone basis; (b) the entity also regularly sells on a stand­alone basis a bundle (or bundles) of some of those distinct goods or services at a discount to the stand-alone selling prices; and (c) the discount attributable to each bundle of goods or services described in (b) is substantially the same as the discount in the contract and an analysis of the goods or services in each bundle provides observable evidence of the performance obligation to which the entire discount in the contract belongs.

Allocation of variable consideration

Variable consideration that is promised in a contract may be attributable to the entire contract or to a specific part of the contract, either of the following: (a) one or more, but not all, performance obligations in the contract or (b) one or more, but not all, distinct goods or services promised in a series of distinct goods or services that forms part of a single performance obligation (for example, the consideration promised for the second year of a two-year cleaning service contract will increase on the basis of movements in a specified inflation index)

An entity shall allocate a variable amount entirely to the performance obligation or the distinct good or service if both of the following criteria are met: (a) the terms of a variable payment relate specifically to the entity’s efforts to satisfy the performance obligation; and (b) it is consistent with the allocation objective when considering all of the performance obligations and payment terms in the contract. After contract inception, the transaction price can change for uncertain events or other changes in circumstances that may change the amount of consideration

Incremental costs and Cost to Fulfill the contract

An entity shall recognise as an asset the incremental costs of obtaining a contract with a customer if the entity expects to recover those costs.

If the costs incurred in fulfilling a contract with a customer are not within the scope of another Standard (for example, Ind AS 2, Inventories, Ind AS 16, PPE or Ind AS 38, Intangible Assets), than shall recognise an asset only if meet all of the following criteria: (a) the costs relate directly to a contract (for example, costs relating to services to be provided under renewal of an existing contract or costs of designing an asset to be transferred under a specific contract that has not yet been approved); (b) the costs generate or enhance resources of the entity that will be used in satisfying performance obligations in the future; and (c) the costs are expected to be recovered.

Amortisation and impairment

An asset recognised in accordance with paragraph 91 or 95 shall be amortised on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the asset relates. The asset may relate to goods or services to be transferred under a specific anticipated contract. An entity shall recognise an impairment loss in profit or loss to the extent that the carrying amount of an asset recognised exceeds a) the remaining amount of consideration that the entity expects to receive; less (b) the costs that relate directly to providing those goods or services not been recognised earlier.

Presentation

When either party to a contract has performed, an entity shall present the contract in the balance sheet as a contract asset or a contract liability. An entity shall present any unconditional rights to consideration separately as a receivable

Disclosure

To enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. To disclose qualitative and quantitative information of the following: (a) its contracts with customers; (b) the significant judgements, and changes in the judgements; and (c) any assets recognised from the costs to obtain or fulfil a contract with a customer in accordance.

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