Ind AS 115 – Revenue from Contracts with Customers: A Complete Guide with Computation Examples


Ind AS 115 – Revenue from Contracts with Customers


Ind AS 115: Revenue from Contracts with Customers

A Comprehensive and Professional Guide with Practical Examples


Ind AS 115 – Revenue from Contracts with Customers is a critical accounting standard introduced to align Indian financial reporting with global practices, specifically IFRS 15. It establishes a robust framework for recognizing revenue from customer contracts, replacing legacy standards Ind AS 11 (Construction Contracts) and Ind AS 18 (Revenue).

The objective of Ind AS 115 is to provide financial statement users with clear, consistent, and transparent information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

This article offers an in-depth examination of the standard, its five-step revenue recognition model, and illustrative examples demonstrating how to compute and account for revenue in accordance with Ind AS 115.


📌 Scope and Applicability of Ind AS 115

  • Ind AS 115 is applicable to all contracts with customers except the following:
  • Lease contracts governed by Ind AS 116
  • Insurance contracts under Ind AS 104
  • Financial instruments covered by Ind AS 109, 32, and 107
  • Non-monetary exchanges between entities in the same line of business


🎯 Objective of Ind AS 115


To establish principles that ensure revenue is recognized in a manner that accurately reflects the transfer of goods or services to customers, in an amount that represents the consideration to which the entity expects to be entitled.


📘 The Five-Step Revenue Recognition Model

Ind AS 115 prescribes a five-step model to achieve revenue recognition:

Step 1: Identify the Contract with a Customer

A contract is defined as an agreement between two or more parties that creates enforceable rights and obligations. A contract qualifies under Ind AS 115 if:

  • It has been approved by all parties involved
  • Rights and payment terms can be clearly identified
  • It has commercial substance
  • It is probable that the entity will collect the consideration

Example:

ABC Ltd. signs a contract to supply 10 machines to a customer for ₹5,00,000. Both parties agree to the terms, and collection is probable. The contract qualifies under Step 1.

Step 2: Identify the Performance Obligations

A performance obligation is a distinct good or service promised to a customer. A good or service is considered distinct if:

  • The customer can benefit from it either on its own or with other resources readily available
  • It is separately identifiable in the context of the contract

Example:

If ABC Ltd. sells machines and offers a 2-year maintenance service, these are two separate performance obligations if the customer can use the machines without the service and both elements are independently identifiable.

Step 3: Determine the Transaction Price

The transaction price is the amount of consideration an entity expects to be entitled to in exchange for transferring promised goods or services. It may include:

  • Fixed amounts
  • Variable consideration (e.g., discounts, incentives, penalties)
  • Consideration with a significant financing component
  • Non-cash consideration
  • Consideration payable to the customer

Example:

If ABC Ltd. provides a 5% early payment discount on a contract of ₹5,00,000, and early payment is probable, the transaction price becomes ₹4,75,000.

Step 4: Allocate the Transaction Price

The transaction price is allocated to each performance obligation based on their standalone selling prices.

Example:

Deliverables Standalone Price (₹) Allocation % Allocated Amount (₹)
10 Machines     4,50,000     90%     4,27,500
Maintenance (2 yrs)     50,000     10%     47,500
Total     5,00,000     100%     4,75,000

The allocation is done proportionately based on individual standalone prices.

Step 5: Recognize Revenue

Revenue is recognized when or as a performance obligation is satisfied, i.e., when control of a good or service transfers to the customer. This can happen:

  • At a point in time (e.g., delivery of goods)
  • Over time (e.g., services rendered over a period)


🧮 Practical Example of Revenue Recognition and Computation

Scenario:

XYZ Ltd. enters into a contract on 1 April 2024 to:

  • Deliver 5 air purifiers @ ₹20,000 each
  • Provide one year of complimentary servicing
  • Total contract price: ₹1,00,000
  • Standalone selling price of air purifiers: ₹90,000
  • Standalone selling price of service: ₹15,000

Application of Ind AS 115:


Step 1: Identify the Contract

  • Approved by both parties
  • Payment and performance terms identified
  • Probable that consideration will be collected
✅ Criteria met


Step 2: Identify Performance Obligations

  • Delivery of air purifiers
  • One year of servicing
✅ Two distinct performance obligations


Step 3: Determine the Transaction Price

  • ₹1,00,000 (fixed consideration)


Step 4: Allocate the Transaction Price

Total Standalone Selling Price = ₹90,000 + ₹15,000 = ₹1,05,000

Component Standalone Price % Allocation Revenue Allocated
Air Purifiers     ₹90,000 90,000/1,05,000     ₹85,714
Servicing     ₹15,000 15,000/1,05,000     ₹14,286


Step 5: Revenue Recognition

  • ₹85,714 recognized at the time of delivery
  • ₹14,286 recognized over 12 months = ₹1,190.50 per month

🔄 Contract Modifications under Ind AS 115

Contract modifications may be accounted for as:

1. Separate Contracts, if:

  • The modification adds distinct goods/services.
  • The price reflects the standalone selling price.

2. Modification of Existing Contracts, if:

  • The goods/services are not distinct.
  • The price does not reflect a standalone rate.


📝 Disclosure Requirements under Ind AS 115

Entities are required to disclose:

  • Disaggregation of revenue by product/service, geography, contract type, etc.
  • Details of contract balances (assets/liabilities)
  • Performance obligations and when they are typically satisfied
  • Significant judgments in applying the standard
  • Assets recognized from costs to obtain/fulfill a contract


⚖️ Comparison: Ind AS 115 vs Ind AS 18

Criteria Ind AS 18 Ind AS 115
Revenue recognition basis     Transfer of risks and rewards         Transfer of control
Performance obligations     Not clearly defined         Explicitly addressed
Multiple element contracts     Limited guidance         Comprehensive treatment
Variable consideration     Minimal guidance         Extensive and prescriptive
Construction contracts     Separate standard (Ind AS 11)         Unified under a single framework


🧩 Key Challenges in Implementing Ind AS 115

  • Identifying performance obligations in complex contracts
  • Estimating and constraining variable consideration
  • Determining appropriate methods for recognizing revenue over time
  • Managing disclosures and systems integration
  • Training teams and ensuring internal control alignment


✅ Key Takeaway

Ind AS 115 brings much-needed clarity and consistency to revenue recognition across sectors. Its five-step framework ensures a principles-based, control-focused approach that reflects the economic reality of contracts with customers.

While the transition to Ind AS 115 can pose challenges, particularly in areas like construction, telecom, and bundled sales, it also offers greater transparency and comparability for stakeholders. Businesses should ensure robust contract analysis, appropriate internal systems, and professional guidance to ensure seamless compliance with the standard.

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