Explore the impact of Ind AS 115 on revenue recognition across diverse industries. Learn the five-step model, examples for construction, software, telecom, retail, and healthcare sectors, and understand the shift towards a more accurate and transparent revenue recognition framework. Ensure compliance with the new standards for a comprehensive understanding of your company’s revenue activities.
Ind AS 115 Revenue from Contracts with Customers, replaces the previous revenue recognition standards in India and brings about significant changes in the way companies recognize revenue. The new standard provides a comprehensive framework for recognizing revenue from contracts with customers and requires companies to apply a five-step model to determine the timing and amount of revenue to be recognized.
Under the previous accounting standards, companies recognized revenue based on the point of sale or delivery of goods or services. However, this approach could result in inconsistencies in revenue recognition across different industries and companies, and did not always reflect the substance of the transaction.
Under Ind AS 115, companies are required to recognize revenue when they satisfy performance obligations under the contract with the customer. The five-step model requires companies to:
1. Identify the contract with the customer.
2. Identify the performance obligations in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to the performance obligations.
5. Recognize revenue when the performance obligations are satisfied.
Example 1: Construction Contract
Under the previous accounting standards, a construction company would recognize revenue as construction progressed. However, under Ind AS 115, revenue is recognized based on the transfer of control of the asset being constructed to the customer.
For example, if a construction company is building a bridge for a customer, it would need to identify the performance obligations in the contract, such as the design, construction, and testing of the bridge. The company would recognize revenue as it satisfies each performance obligation, such as when it completes the design or construction of the bridge.
Example 2: Software Company
Under the previous accounting standards, a software company would recognize revenue when the software was shipped or downloaded by the customer. However, under Ind AS 115, revenue is recognized as the company satisfies its performance obligations under the contract.
For example, if a software company sells software licenses to a customer, it would need to identify the performance obligations in the contract, such as the delivery of the software, installation services, and training services. The company would recognize revenue as it satisfies each performance obligation, such as when it delivers the software license or completes the installation and training services.
Example 3: Telecom Company
Under the previous accounting standards, a telecom company would recognize revenue as the services were provided to the customer. However, under Ind AS 115, revenue is recognized based on the transfer of control of the services to the customer.
For example, if a telecom company provides a mobile phone plan to a customer, it would need to identify the performance obligations in the contract, such as the provision of mobile services and the sale of a mobile device. The company would recognize revenue as it satisfies each performance obligation, such as when it provides the mobile services or delivers the mobile device to the customer.
In conclusion, Ind AS 115 provides a more comprehensive framework for recognizing revenue from contracts with customers. The five-step model ensures that revenue is recognized when performance obligations are satisfied, which provides a more accurate and transparent picture of a company’s revenue and related activities. Companies should review their contracts and revenue recognition policies to ensure compliance with the new standard.
Example 4: Retail Company
Under the previous accounting standards, a retail company would recognize revenue at the point of sale or delivery of goods. However, under Ind AS 115, revenue is recognized as the company satisfies its performance obligations under the contract.
For example, if a retail company sells goods to a customer, it would need to identify the performance obligations in the contract, such as the delivery of goods, installation services, and warranties. The company would recognize revenue as it satisfies each performance obligation, such as when it delivers the goods or completes the installation and warranty services.
Example 5: Healthcare Company
Under the previous accounting standards, a healthcare company would recognize revenue as services were provided to the patient. However, under Ind AS 115, revenue is recognized based on the transfer of control of the services to the patient.
For example, if a healthcare company provides medical services to a patient, it would need to identify the performance obligations in the contract, such as the diagnosis, treatment, and follow-up care. The company would recognize revenue as it satisfies each performance obligation, such as when it completes the diagnosis, provides the treatment, or completes the follow-up care.
By applying a comprehensive framework for recognizing revenue from contracts with customers, the new standard provides a more accurate and transparent picture of a company’s revenue and related activities.
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