by IND AS 115 aims at providing the following details related to contractual revenue and cash flows to the users of financial statements:
- Nature
- Amount
- Timing
- The uncertainty of the revenue from customer contracts.
The standard shall be applied to all contracts with customers, except the following:
a) Lease contracts within the scope of Ind AS 17, Leases.
b) Insurance contracts within the scope of Ind AS 104, Insurance Contracts.
c) Financial instruments and other contractual rights or obligations within the scope of Ind AS 109, Financial Instruments, Ind AS 110, Consolidated Financial Statements, Ind AS 111, Joint Arrangements, Ind AS 27, Separate Financial Statements And Ind AS 28, Investments in Associates and Joint Ventures.
d) Non-monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers. For example, a contract between two oil companies that agree to an exchange of oil to fulfill demand from their customers in different specified locations on a timely basis. Under this standard Revenue is five steps model, when any transaction fulfill all these steps than only revenue can be recognized:
Step1: Identify Contract with Customer
Step2:Identify Performance Obligation
Step3: Identify Consideration (in Exchange of goods / Services)
Step4:Allocate Transfer Price to Performance Obligation
Step5:Recognize Revenue
Step1: Identify Contract with Customer in this step company should ensure that there is enforceable contract and should not be cancellable unilaterally.
There must be price, terms and condition and There must be expectation of completion of performance obligation and receipt of consideration, Besides all of this contract should be in scope of this IND AS collaboration agreement, sale of PPE are not come in scope of this IND AS.
Step 2: Identify Performance Obligation
- What are the performance obligation in Contract?
- Whether there is one Performance Obligation or more than one Performance obligation? Goods and services are considered as one if following conditions are satisfied:
- Entity emphasis on significance of Integration, We can understand this with following examples:
- In airlines like in Jet Airways, Air Travel cost and Food cost can be called integration of Goods and Services
- Similarly in Hotels, one day room charges and breakfast cost can be called integration of Goods and Services.
- One or more Goods and services modify significantly other Goods and Services.
Step3: Identify Consideration for each Performance Obligation (in Exchange of goods / Services)
One has to identify Transfer Price of each Performance obligation identified in Step 2 and check whether Variable consideration or Non Monetary consideration are part of total Consideration.
Variable Consideration
Escalation, Contingent Consideration, incentives, Penalties, Volume Discounts are the form of Variable consideration Variable consideration is contingent upon future event and expressed in implied contracts including methods to measure the same, it can increase total consideration in form of Incentive, Bonus, escalation etc or decrease total consideration in form of penalties.
As per IND AS -115, If you are not certain of receiving any variable consideration, you will include it in your Transaction Price since inception. if you are not certain than you consider the assumption which is most probable. But in the next year Probability of variable consideration may change and that time you should make addition / reduction of variable consideration as per circumstances.
Step4 & 5: Allocate Transfer Price to Performance Obligation and Recognition of Revenue:
Transfer price Allocation depends upon the satisfaction of Performance Obligation. So, before Allocation of TP, it is necessary to decide whether there is Single Performance Obligation or Multiple Performance Obligation.
