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.
📌 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
Step 2: Identify Performance Obligations
- Delivery of air purifiers
- One year of servicing
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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