Objective of Ind AS 115: Reporting of useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with customer.
Para 9 of Ind AS 115: Revenue Recognition
Revenue shall be recognized only if ALL the below mentioned criteria are met:
a. the parties to the contract have approved the contract (in writing, orally or in accordance with other customary business practices) and are committed to perform their respective obligations;
b. the entity can identify each party’s rights regarding the goods or services to be transferred;
c. the entity can identify the payment terms for the goods or services to be transferred;
d. the contract has commercial substance (i.e. the risk, timing or amount of the entity’s future cash flows is expected to change as a result of the contract);
e. it is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. In evaluating whether collectability of an amount of consideration is probable, an entity shall consider only the customer’s ability and intention to pay that amount of consideration when it is due. The amount of consideration to which the entity will be entitled may be less than the price stated in the contract if the consideration is variable because the entity may offer the customer a price concession
Para 31 of Ind AS 115:
An entity shall recognise revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (i.e. an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset.
Para 105 of Ind AS 115: Contract Asset and Contract Liabilities:
An entity will recognise a contract asset or contract liability in its balance sheet if one of the parties to a contract has performed before the other. However, recognition shall be dependent on the relationship between the entity’s performance and customer’s payment.
An entity shall present any unconditional rights to consideration separately as a receivable.
Recognition of Contract asset: When an entity performs a service or transfers a good in advance of receiving consideration, the entity will recognize a contract asset or receivable in its statement of financial position.
Recognition of Contract liability: A contract liability is recognized if the entity receives consideration (or if it has the unconditional right to receive consideration) in advance of performance.
Presentation in financial statement: Contract assets and liabilities related to rights and obligations in a Contract are interdependent and therefore should be recorded net in the statement of financial position.
CASE STUDY:
a. Contract Liability (Unearned Revenue):
Company A has entered into an agreement on 15 September 20X7 with a customer B for delivery of finished goods within 3 months from the date of agreement for total consideration of INR 10 crores excluding taxes on the following terms:
- 20% shall be due upon signing of agreement as an advance
- 60% shall be due upon delivery of goods
- 20% shall be due on quality clearance post-delivery within period of 3 days
The amount received by Company A in first tranche i.e. on signing of the agreement on 15 September 20X7 shall be unearned revenue and be recorded as liability. As the company has an unconditional right to receive the consideration it shall recognize a corresponding receivable as well.
Accounting Entries in the books of Company A: (first tranche)
1. On raising of GST invoice:
| Accounts receivable a/c | Dr | 2.36 | |
| To Service Income | 2 | ||
| To GST Payable | 0.36 |
2. Reversal of income and recognition of contract liability as ‘Unearned revenue’ on same day:
| Service Income a/c | Dr | 2 |
| To Unearned revenue (income received in advance) | 2 |
3. On receipt of funds:
| Bank a/c | Dr | 2.36 | |
| To Accounts receivable | 2.36 | ||
| GST Payable | Dr | 0.36 | |
| To Bank | 0.36 |
Company A has performed its obligation i.e. delivery of goods at second tranche on 15 December 20X7.
Accounting entries in books of Company A (For second tranche):
4. On raising of GST invoice:
| Accounts receivable a/c | Dr | 7.08 | |
| To Service Income | 6 | ||
| To GST Payable | 1.08 |
5. On receipt of funds:
| Bank a/c | Dr | 7.08 | |
| To Accounts receivable | 7.08 | ||
| GST Payable | Dr. | 1.08 | |
| To Bank | 1.08 |
6. Reversal of liability:
| Unearned revenue | Dr | 2 | |
| To Service Income | 2 |
Accounting entries in books of Company A (For third tranche):
7. On raising of GST invoice:
| Accounts receivable a/c | Dr | 2.36 | |
| To Service Income | 2 | ||
| To GST Payable | 2.36 |
8. On receipt of funds:
| Bank a/c | Dr | 2.36 | |
| To Accounts receivable | 2.36 | ||
| GST Payable | Dr | 0.36 | |
| To Bank | 0.36 |
b. Contract Asset (Unbilled trade receivable):
A telecommunication company has entered into a contract with a customer who is a dealer to purchase 50 smart phone and a 24-month voice plan with free access to Netflix, Amazon and Hotstar. The customer must pay INR 25,00,000 /- for the smartphones in 30 days and INR 1200 per month for each smartphone for the voice plan during next 24 months. The total transaction price amounts to INR 39,40,000 /- (25,00,000 + 14,40,000) (50*1200*24)
Telecommunication company has performed its obligation of transferring the goods i.e. smartphone along with the voice plan before the receipt of consideration. Hence, as per IndAS the company shall recognize a contract asset.
Accounting entries:
1. A. On delivery of goods:
| A. Unbilled trade receivable | Dr. | 0.394 | |
| To Unbilled Income | 0.394 | ||
| Accounts receivable a/c | Dr. | 0.295 | |
| To Service income | 0.25 | ||
| To GST Liability | 0.045 | ||
| Unbilled income a/c | Dr. | 0.295 | |
| To Unbilled receivable | 0.295 | ||
| B. On receipt of money: | |||
| Bank a/c | Dr. | 0.295 | |
| To Accounts receivable | 0.295 | ||
| GST Liability a/c | Dr. | 0.045 | |
| To Bank a/c | 0.045 |
2. On subsequent invoicing and receipt of money for next 24 months each:
| Accounts receivable a/c | Dr. | 0.007 | |
| To Service income | 0.006 | ||
| To GST Liability | 0.001 | ||
| Unbilled income a/c | Dr. | 0.006 | |
| To Unbilled receivable | 0.006 | ||
| Bank a/c | Dr. | 0.007 | |
| To accounts receivable | 0.007 | ||
| GST Liability | Dr. | 0.001 | |
| To Bank | 0.001 |
Author Bio
Contract Asset – Accounting Entries – Delivery of Goods – Reversal entry for unbilled income and receivable is wrong. It should be 0.25