by Revenue from Contracts with Customers, as per Indian Accounting Standards (Ind AS) 115, establishes the principles for recognizing revenue and applies to all contracts with customers, except those specifically addressed in other standards. Ind AS 115 is based on the International Financial Reporting Standard (IFRS) 15 and follows a five-step model to recognize revenue.
Identification of the Contract (Step 1):
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- A contract is defined as an agreement between two or more parties that creates enforceable rights and obligations.
- The parties must have approved the contract and be committed to fulfilling their respective obligations.
- It must be probable that the entity will collect the consideration to which it is entitled in exchange for the goods or services that will be transferred to the customer.
Identification of Performance Obligations (Step 2):
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- A performance obligation is a promise to transfer a distinct good or service to the customer.
- Goods or services are distinct if the customer can benefit from them on their own or together with other resources that are readily available to the customer.
- If a promised good or service is not distinct, it is combined with other promised goods or services until a bundle of goods or services is identified.
Determination of Transaction Price (Step 3):
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- The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer.
- The transaction price may include fixed amounts, variable amounts (such as discounts or bonuses), and considerations payable to the customer.
- The entity estimates variable consideration using either the expected value method or the most likely amount method, depending on which method is expected to better predict the amount of consideration to which the entity will be entitled.
Allocation of Transaction Price to Performance Obligations (Step 4):
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- The transaction price is allocated to each performance obligation in the contract.
- The allocation is based on the relative standalone selling prices of each distinct good or service promised in the contract.
- If a standalone selling price is not observable, the entity estimates it.
Recognition of Revenue when Performance Obligations are Satisfied (Step 5):
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- Revenue is recognized when (or as) the entity satisfies a performance obligation by transferring a promised good or service to the customer.
- A good or service is considered transferred when the customer obtains control over that good or service.
- Control represents the ability to direct the use of, and obtain substantially all the remaining benefits from, the asset.
Ind AS 115 provides additional guidance on various topics, including contract modifications, licenses, and the time value of money. It is important for entities to carefully assess their contracts and apply the five-step model to ensure accurate and consistent revenue recognition.
Compliance with Ind AS 115 is crucial for transparent financial reporting, and entities are required to provide extensive disclosures about revenue recognition policies, the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This standard aims to enhance comparability across industries and jurisdictions by providing a comprehensive framework for recognizing revenue from contracts with customers.
Scope
The scope of Ind AS 115, Revenue from Contracts with Customers, is defined to include all contracts with customers, except for those specifically addressed in other standards. The standard provides guidance on how to recognize revenue and applies to various types of contracts where an entity transfers goods or services to a customer. Here’s an overview of the scope of Ind AS 115:
Contract with a Customer:
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- The standard applies to contracts with customers. A contract is defined as an agreement between two or more parties that creates enforceable rights and obligations.
- The parties must have approved the contract and be committed to fulfilling their respective obligations.
Transfer of Goods or Services:
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- The core principle of Ind AS 115 is that revenue is recognized when control of goods or services is transferred to the customer.
- A performance obligation is a promise in a contract to transfer a distinct good or service to the customer.
Exclusions from the Scope:
Certain transactions are excluded from the scope of Ind AS 115, and they are addressed in other standards. Examples include:
- Leases (Ind AS 116)
- Insurance contracts (Ind AS 104)
- Financial instruments and other contractual rights or obligations within the scope of Ind AS 109, Ind AS 110, or Ind AS 113
Service Concession Arrangements:
Ind AS 115 applies to service concession arrangements, except for certain aspects related to the grant of a right to charge users of a public service (which is covered by Ind AS 115).
Non-monetary Transactions:
Certain non-monetary transactions are also within the scope of Ind AS 115, such as exchanges of goods or services with customers or other parties.
Liabilities to Customers:
The standard addresses the recognition of revenue related to liabilities to customers, such as breakage, which arises when a customer pays an amount in advance for goods or services.
Contract Modifications:
Ind AS 115 provides guidance on how to account for modifications of contracts with customers. When a contract is modified, an entity determines whether to account for the modification as a separate contract or as part of the existing contract.
Impairment of Contract Assets:
The standard requires entities to assess whether there is an impairment of contract assets, including accounts receivable arising from the entity’s right to consideration in exchange for goods or services transferred to the customer.
Principal vs. Agent Considerations:
Ind AS 115 provides guidance on determining whether an entity is a principal or an agent in a transaction. The determination affects how an entity recognizes revenue.
