Indian Accounting Standard (IND AS) 115, Revenue from Contracts with Customers
Indian Accounting Standard (IND AS) 115, ‘Revenue from Contracts with Customers’, is a principle-based standard that provides guidance on how to account for revenue arising from contracts with customers. It replaces the previous standard, IND AS 18, “Revenue”, and is based on the principles outlined in the International Financial Reporting Standard (IFRS) 15.
The main objective of IND AS 115 is to ensure that revenue is recognized in a way that reflects the underlying economics of a transaction and is consistent with the principles of accrual accounting. The standard requires entities to recognize revenue when control of a good or service is transferred to a customer, in exchange for an invoice or payment.
The standard outlines a five-step model for the recognition of revenue, which includes:
1. Identifying the contract with a customer
2. Identifying the performance obligations in the contract
3. Determining the transaction price
4. Allocating the transaction price to performance obligations
5. Recognizing revenue when (or as) performance obligations are satisfied
The key elements of IND AS 115 that entities need to consider include:
1. Performance obligations: entities need to identify the performance obligations in a contract, which are promises to transfer goods or services to a customer.
2. Transaction price: entities need to determine the transaction price, which is the amount of consideration that the customer is expected to pay in exchange for the goods or services provided.
3. Allocation of transaction price: entities need to allocate the transaction price to each performance obligation in the contract, based on the relative stand-alone selling price of each good or service.
4. Timing of revenue recognition: entities need to recognize revenue when (or as) the performance obligations are satisfied.
IND AS 115 is effective for annual periods beginning on or after 1 April 2018 and its implementation has led to significant changes in the way entities recognize revenue in their financial statements. Entities need to carefully assess the impact of IND AS 115 on their revenue recognition policies and processes and ensure that they are in compliance with the standard.
In conclusion, IND AS 115 provides a comprehensive and consistent framework for the recognition of revenue from contracts with customers and helps entities to better reflect the underlying economics of transactions in their financial statements.