“Explore the intricacies of revenue recognition under Ind AS 115 and IFRS 15, ‘Revenue from Contracts with Customers.’ Understand the amendments introduced by the Companies (Indian Accounting Standards) Amendment Rules 2023. This comprehensive guide covers accounting standards, differences between Ind AS 115 and IFRS 15, the five-step model for revenue recognition, and recent amendments, providing valuable insights for financial practitioners and entities navigating these standards.”
Ind AS 115, IFRS 15, ‘Revenue from contracts with customers’ by incorporating Companies (Indian Accounting Standards) Amendment Rules 2023.
1. The Accounting Standards related with “Revenue from contracts with customers.”
A. Ind As -115
B. IFRS -15, IFRIC12, SIC29
C. Now Ind AS 11 Construction contracts and INDAS 18 Revenue are omitted.
D. No contract, then No revenue
2. Some Important Differences between IFRS -15, IFRIC12, SIC29 and Ind AS 15.
|
Ind AS-115 |
IFRS-15, IFRIC12, SIC29 |
| 1. However, paragraph 51 of Ind AS 115 has been amended to exclude penalties from the list of examples given the paragraph 51 due to which an amount of consideration can vary. However ,paragraph 51AA has been inserted to explain the accounting treatment of ‘penalties’ | 1. As per paragraph of 15 of IFRS 15, an amount of consideration, among other things, can vary because of penalties. |
| 2. Paragraph 109AA has been inserted to require an entity to present separately the amount of excise duty included in the revenue recognized in the statement of profit and loss | 2. ———— |
| 3.Relevant terms are Statement of profit and loss and balance sheet | 3. Relevant terms are Statement of Comprehensive Income and Statement of Financial Position |
No major differences between Ind AS -115and IFRS-15. Therefore, the following paragraphs relate to both Ind AS -115and IFRS-15.
3. Objective.
The 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.
4. Scope.
An entity shall apply this Standard to all contracts with customers, except the following:
(a) Lease contracts within the scope of IFRS 16 Leases;
(b) Contracts within the scope of IFRS 17 Insurance Contracts. However, an entity may choose to apply this Standard to insurance contracts that have as their primary purpose the provision of services for a fixed fee in accordance with paragraph 8 of IFRS 17;
(c) Financial instruments and other contractual rights or obligations within the scope of IFRS 9 Financial Instruments, IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IAS 27 Separate Financial Statements and IAS 28 Investments in Associates and Joint Ventures;
This Standard is applicable only when counterparty to the contract is a customer. For example, developing the asset in a collaboration arrangement, both entities work together and none of them are customer to each other.
If other specific standard apply on a contract with customer then entity shall apply that standard ,not Ind AS 115.
5. Five step model for revenue recognition &measurement
Step I—–Identifying the contract.
An entity shall account for a contract with a customer that is within the scope of this Standard only when all of the following 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 (ie the risk, timing or amount of the entity’s future cash flows is expected to change as a result of the contract); and
(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.
Combination of contracts
An entity shall combine two or more contracts entered into at or near the same time with the same customer (or related parties of the customer) and account for the contracts as a single contract if one or more of the following criteria are met:
(a) The contracts are negotiated as a package with a single commercial objective;
(b) The amount of consideration to be paid in one contract depends on the price or performance of the other contract; or
(c) The goods or services promised in the contracts (or some goods or services promised in each of the contracts) are a single performance obligation.
Contract modifications
A contract modification is a change in the scope or price (or both) of a contract that is approved by the parties to the contract. In some industries and jurisdictions, a contract modification may be described as a change order, a variation or an amendment.
Ind AS 115 precisely specifies how to account for contract modifications, based on the terms of modification:
Contract modification -2 cases
A Separate contract
*Additional goods or services -distinct
*Consideration for add. goods /services reflects their standalone prices
Not a Separate Contract
Additional goods or services -not distinct
*Consideration for add. goods /services does not reflect their stand -alone prices .
STEP-II
Identifying performance obligations
At contract inception, an entity shall assess the goods or services promised in a contract with a customer and shall identify as a performance obligation each promise to transfer to the customer either:
(a) A good or service (or a bundle of goods or services) that is distinct; or
(b) A series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer
Distinct goods or services.
Depending on the contract, promised goods or services may include, but are not limited to, the following: (A Few examples are given)
(a) Sale of goods produced by an entity (for example, inventory of a manufacturer);
(b) Resale of goods purchased by an entity (for example, merchandise of a retailer);
(c) Resale of rights to goods or services purchased by an entity (for example, a ticket resold by an entity acting as a principal,
(d) Performing a contractually agreed-upon task (or tasks) for a customer;
Satisfaction of performance obligations.
An entity shall recognize revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (ie an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset.
Performance obligations satisfied over time.
An entity transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognizes revenue over time, if one of the following criteria is met:
(a) The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs;
(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;
or (c) the entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date
Performance obligations satisfied at a point in time.
If an entity dose not satisfy its performance obligation over time, it satisfies it at a point of time. This will be the point in time at which the customer obtains control of the promised asset and the entity satisfies a performance obligation .Then Recognize revenue when control is passed at a certain point in time.
Measurement.
When (or as) a performance obligation is satisfied, an entity shall recognize as revenue the amount of the transaction price (which excludes estimates of variable consideration that are constrained in accordance with paragraphs 56–58) that is allocated to that performance obligation.
Step III-Determining the transaction price.
An entity shall consider the terms of the contract and its customary business practices to determine the transaction price. The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes). The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. The nature, timing and amount of consideration promised by a customer affect the estimate of the transaction price. When determining the transaction price, an entity shall consider the effects of all of the following:
(a) variable consideration ;
Variable consideration must be estimated using either:
Expected value method: based on probability weighted amounts within a range (i.e. for large number of similar contracts)
Single most likely amount: the amount within a range that is most likely to eventuate (i.e. where there are few amounts to consider)
E.g. Discounts, rebates, credits, concessions, incentives, performance bonuses, contingent payments etc.
If penalty is inherent in determination of transaction price, than it shall form part of variable consideration.
(b) constraining estimates of variable consideration;
Variable consideration is only recognized if it is highly probable that a subsequent change in its estimate would not result in a significant revenue reversal (i.e.a significant reduction in cumulative revenue recognized).
(c) the existence of a significant financing component in the contract
The transaction price would reflect the effects of the customer’s credit risk and the time value of money.
(d) Non-cash consideration;
and
(e) Consideration payable to a customer.
Step IV- Allocating the transaction price to performance obligations.
The objective when allocating the transaction price is for an entity to allocate the transaction price to each performance obligation (or distinct good or service) in an amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for transferring the promised goods or services to the customer.
Important points with this concept
1. The allocation is made in proportion to the stand-alone selling prices of each distinct good or service (or performance obligation) in the contract.
2. Allocation of a discount
Entity shall allocate a discount proportionately to all performance obligations in the contract
3. Changes in the transaction price
An entity shall allocate to the performance obligations in the contract any subsequent changes in the transaction price on the same basis as at contract inception
Costs to fulfil a contract
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 Property, Plant and Equipment or Ind AS 38 Intangible Assets), an entity shall recognize an asset from the costs incurred to fulfil a contract only if those costs meet all of the following criteria:
(a) the costs relate directly to a contract or;
(b) The costs generate or enhance resources of the entity that will be used in satisfying (or in continuing to satisfy) performance obligations in the future; and
(c) The costs are expected to be recovered.
For costs incurred in fulfilling a contract with a customer that are within the scope of another Standard, an entity shall account for those costs in accordance with those other Standards.
Costs that relate directly to a contract (or a specific anticipated contract) include any of the following:
(a) Direct labour (for example, salaries and wages of employees who provide the promised services directly to the customer);
(b) Direct materials (for example, supplies used in providing the promised services to a customer);
(c) Allocations of costs that relate directly to the contract or to contract activities (for example, costs of contract management and supervision, insurance and depreciation of tools, equipment and right‑of‑use assets used in fulfilling the contract);
(d) Costs that are explicitly chargeable to the customer under the contract; and
(e) Other costs that are incurred only because an entity entered into the contract (for example, payments to subcontractors).
An entity shall recognize the following costs as expenses when incurred:
(a) General and administrative costs.
(b) Costs of wasted materials, labour or other resources to fulfil the contract that were not reflected in the price of the contract;
(c) Costs that relate to satisfied performance obligations (or partially satisfied performance obligations) in the contract (ie costs that relate to past performance); and
(d) Costs for which an entity cannot distinguish whether the costs relate to unsatisfied performance obligations or to satisfied performance obligations (or partially satisfied performance obligations)
Step V-Recognize Revenue.
Companies (Indian Accounting Standards) Amendment Rules 2021.
Following amendments have been made.
(K) In ―Indian Accounting Standard (Ind AS) 115
(i) In Appendix D, after paragraph 27, the following shall be inserted, namely;- ―
Effective date 28
[Refer Appendix 1]
28A-28C [Refer Appendix 1]
28D Ind AS 115 amended paragraphs 13–15, 18–20 and 27 of Appendix D (which was earlier notified as Appendix A of erstwhile Ind AS 11). An entity shall apply those amendments when it applies Ind AS 115. 28E [Refer Appendix 1]
28F Ind AS 116, amended paragraph AG8. An entity shall apply that amendment when it applies Ind AS 116;
(ii) In Appendix 1,-
(a) In paragraph 6,
(i) For the opening paragraph, the following shall be substituted, namely: ―6. Paragraphs C1B, C8A and C9 of Appendix C and paragraphs 28 and 28E of Appendix D related to effective date and transition have been deleted due to following reasons:;
(ii) After item (b), the following shall be inserted, namely: ―
(c) Paragraphs 28 and 28E of Appendix D are not relevant in Indian context as the same relate to effective date of IFRIC 12;
(b) For paragraph 7, the following shall be substituted, namely: ―
Paragraph B57 of Appendix B of IFRS 15 and paragraphs 28A-28C of IFRIC 12 appear as Deleted‘. However, in order to maintain consistency with paragraph numbers of IFRS 15 and IFRIC 12, the paragraph numbers are retained in Ind AS 115;
Companies (Indian Accounting Standards Amendment Rules) 2023
Following amendments have been made.
In Appendix I;
i. In paragraph 2, for the words and figure “paragraph of 15”, the word and figure “paragraph 51” shall be substituted;
ii. In paragraph 5, for the word and letter “Appendix D” the word and letter “Appendix B” shall be substituted;
(Republished with amendments)
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