Revenue Reporting Challenges Under Ind AS 115: Key Findings

The Institute of Chartered Accountants of India (ICAI) released the third volume of its Study on Compliance of Financial Reporting Requirements in January 2025. This report highlights instances of non-compliances observed in Ind AS-based Financial Statements during ICAI’s review process. It specifically outlines deviations from accounting standards that affect the presentation of financial statements. Interestingly, revenue recognition under Ind AS 115—an essential aspect of financial statements due to its impact on end users—accounts for 6.83% of total deviations. This positions it among the top five accounting standards with the highest rate of non-compliance.

Although some deviations from Ind AS 115 noted by the institute may seem minor, it is crucial for us, as Chartered Accountants, to aim for zero tolerance in financial reporting and auditing process. In today’s landscape, where stakeholders entrust us with their confidence and regulators demand absolute accuracy, maintaining accuracy and compliance is non-negotiable.

Let’s delve into the identified discrepancies:

1. Timing of Recognition of Revenue:

Ind AS 115 states, for performance obligations that an entity satisfies over time, an entity shall disclose both of the following:

(a) the methods used to recognize revenue (for example, a description of the output methods or input methods used and how those methods are applied); and

(b) an explanation of why the methods used provide a faithful depiction of the transfer of goods or services.

Understanding these methods:

Output Methods: These are used to determine the timing of revenue based on the goods/services transferred to the customer.

Example ABC Ltd. is constructing a warehouse for another company. The contract specifies milestones such as completing the foundation, installing support beams, and finalising the support services required to make the warehouse fully operational. In this case, ABC Ltd. will recognise revenue each time the milestone is achieved as follows:

• Milestone 1 (Foundation Complete): ₹7 crore.
• Milestone 2 (Support Beams Installed): ₹12 crore.
• Milestone 3 (Support Services Finalised): ₹8 crore.

Input Methods: These are used to determine the timing of revenue based on the entity’s efforts or inputs toward fulfilling a performance obligation.

Example: A service delivery company undertakes a long-term project for ₹1 crore and agrees to be paid based on labour hours worked. If the total expected hours are 1,000 and 400 hours have been worked, then revenue will be recognized as ₹40 lakhs (₹1,00,00,000 ÷ 1,000 hours × 400 hours).

ICAI’s observation: The institute noted that although the notes to financial statements have covered the disclosures regarding timing of recognising revenue over a period of time but considering the above requirements, if the performance obligations are satisfied over time, then the methods used to recognize revenue, i.e. output method or input method were not disclosed along with how the followed method provides a faithful depiction of the transfer of goods or services. Accordingly, it was viewed that the requirements of Ind AS 115 have not been appropriately complied with in the preparation and presentation of financial statements

2. Revenue Reconciliation:

Ind AS 115 states, an entity shall reconcile the amount of revenue recognised in the statement of profit and loss with the contracted price showing separately each of the adjustments made to the contract price, for example, on account of discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, etc., specifying the nature and amount of each such adjustment separately.

This presentation is a part of Para 126AA of Ind AS 115 which was inserted post convergence with IFRS 15 as a separate measure to increase transparency in revenue recognition due to frequent contract changes in Indian industries like infrastructure and construction.

Example: A company provides customised software development services. The contracted price for the project is ₹20 lakh. During the reconciliation of revenue, the company identifies the following adjustments:

1. Discounts: The customer negotiated a 10% discount on the total contract price due to bulk ordering. Adjustment: ₹2 lakh.
2. Rebates: The client exceeded a predetermined sales target, qualifying for a rebate of ₹50,000.
3. Refunds: Due to a minor error in the delivered software module, the company refunded ₹30,000.
4. Performance Bonuses: The software was delivered ahead of schedule, earning the company a bonus of ₹1 lakh.

Reconciliation to be added:

ICAI’s Observation: The institute noted that the company under review has not provided the reconciliation of revenue recognised in the Statement of Profit and Loss with the contracted price showing separately the nature and amount of each such adjustment i.e., discounts, returns etc. as required under paragraph 126AA of Ind AS 115. Accordingly, the same is viewed as a non-compliance.

3. Disclosure on Price Variations:

This one is related to the construction companies which raise price variations due to time delays on long duration projections and increase in prices/quantities of raw materials.

Ind AS 115 states, 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 (presenting just one criterion below which was the basis for deviation):

“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 the 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.”

According to this criterion, additional revenue should only be recognized when it is probable that the entity will collect the consideration it is entitled to. This requires an assessment of the customer’s financial capacity (ability) and willingness (intention) to pay the agreed amount.

Now, the company under review has booked the additional revenue (variable revenue due to price escalations) and has given the following disclosure in the financial statements:

AB Ltd had issued a contract for construction. The Design Basis Note (DBN) submitted by AB Ltd during the tender stage was revised thrice. The project got delayed due to various reasons.

Due to the above, the Company has raised two variations amounting to Rs. XX crores which are towards additional expenses on account of extended stay, categorization of excavation works, compensation due to loss of productivity, expenses incurred due to change in alignment, pend period cost etc. These variation costs have already been charged off to profit and loss account in past. Apart from this, negotiations are in progress with XX Ltd for variations towards increase in raw material quantity due to change in design. The value involved is around Rs. XX crores including escalation. Against these variations and increase in raw material quantity, the total unbilled receivable amounting to Rs. XX is outstanding as at March 31, 20XX. Based on the opinion from independent expert and the facts of the case, the management is confident of getting a favorable judgment and recover all the dues related to this project.

Prima facie, this seems correct as the company has already charged the past incurred variation costs in profit and loss account and for the new costs that are under negotiations, an opinion from the independent expert has already taken, which according to the facts of the case states that the management is confident of the recovery of dues of this project.

But what institute noted comes directly from the standard which says, that a company can recognize the revenue in case of arbitration awards, claims and variations, only when they are granted in favour of the company and it is reasonable to expect ultimate collection of such awards. However, from the note given, it was noted that the Company has raised variations, out of which certain unbilled receivables were outstanding. Furthermore, it was stated that the management was confident of obtaining a favourable judgment. However, this indicates that, as of the Balance Sheet date, those claims and variations had not been granted in favour of the company. Accordingly, it was viewed that the accounting treatment followed was not in line with the adopted accounting policy.

4. First Time Adoption to Ind AS 115:

(Effective 1^st April 2018, the companies were required to shift to Ind AS 115.)

The accounting policy of the company under review states that “Revenue from the sale of goods is recognized when the significant risks and rewards of ownership of the goods have passed to the buyer, usually on delivery of the goods”

As per this policy, this company is recording the revenue basis the accounting method as per Ind AS 18 (Revenue Recognition) which focuses on “Risk and Reward” approach while Ind AS 115 focuses on “Control” approach. Let’s understand the difference with an example:

Suppose a telecom company offers a bundled package of a mobile phone (₹20,000) and a 12-month service plan (₹1,000/month) for a total of ₹30,000.

Under Ind AS 18: Revenue may be recognized upfront for the mobile phone at ₹20,000 and evenly over 12 months for the service i.e. ₹833.33 per month (₹10,000/12)

Under Ind AS 115: These will be considered as two separate performance obligations and the company will allocate the transaction price between the mobile phone and service plan using the standalone selling price of each deliverable:

1. Sale of Mobile Phone: ₹20,000 / ₹32,000 × ₹30,000 = ₹18,750
2. Sale of Service Plan: ₹12,000 / ₹32,000 × ₹30,000 = ₹11,250

Now, the revenue is recognized immediately (at a point in time) when the mobile phone is delivered to the customer, amounting to ₹18,750 and for the service plan, revenue is recognized over time on a straight-line basis as the service is provided, amounting to ₹11,250 ÷ 12 months = ₹937.50 per month.

The company under review is not following this approach and is instead recording revenue based on the obsolete Ind AS 18. This was clearly identified as non-compliance with the requirements of Ind AS 115.

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These were some of the issues noted in accounting/reporting of revenue as per Ind AS 115. We will discuss more such instances from other standards in the next article.

Conclusion:

As professional accountants, ensuring compliance with the standards is pivotal to maintaining transparency, building stakeholder trust, and meeting regulatory expectations. By addressing observed deviations, we can uphold the integrity of financial reporting and contribute to a robust, error-free ecosystem.

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Disclaimer: The opinions expressed in this article are the author’s personal views and are intended for informational purposes only. Readers should refer to official standards and professional advice for accurate guidance.