31 July 2022
How do I recognise revenue under Ind AS 115 for a lifetime subscription fee received upfront (say 10k). The company has to pay some portion (Say 200) annually for the maintenance of such subscription.
09 July 2024
Recognizing revenue for a lifetime subscription fee received upfront under Ind AS 115 involves applying the core principle of the standard, which is to recognize revenue when control of the goods or services is transferred to the customer. Here’s how you can recognize revenue for a lifetime subscription fee scenario:
### Step-by-Step Recognition Process:
1. **Identify the Performance Obligations:** - Determine the performance obligations associated with the lifetime subscription. In your case, it includes providing access to the subscription services over the customer's lifetime and ongoing maintenance services.
2. **Allocate the Transaction Price:** - Allocate the total transaction price (in this case, the upfront fee of 10,000) to each distinct performance obligation based on their standalone selling prices. If the standalone selling price of maintenance services (200 annually) is determinable, allocate a portion of the transaction price to this obligation.
3. **Recognize Revenue Over Time or at a Point in Time:** - **Over Time Recognition:** If the maintenance services are considered a series of distinct services that are substantially the same and have the same pattern of transfer to the customer, revenue is recognized over time. This could mean recognizing revenue proportionately as the maintenance services are provided.
- **At a Point in Time:** If the maintenance services are not considered a significant part of the combined item(s) for which the customer has contracted, revenue may be recognized at a point in time when the subscription service is activated or when the customer gains control of the subscription.
4. **Practical Example Application:** - Suppose the standalone selling price for the lifetime subscription service (excluding maintenance) is 10,000. - Determine the standalone selling price for the maintenance service. For instance, if the annual maintenance fee is 200, over a lifetime (assuming 30 years for simplification), the total maintenance fee would be 6,000 (30 years * 200).
5. **Recognize Revenue:** - Allocate a portion of the 10,000 upfront fee to the maintenance service based on its standalone selling price (for example, if maintenance represents 6,000 of the 10,000 total transaction price, then 60% of revenue is allocated to maintenance). - Recognize revenue for the subscription service over the lifetime period according to the pattern of transfer of control. This could be on a straight-line basis if the performance obligation is satisfied evenly over time.
### Practical Steps for Recognition:
- **Initial Recognition:** Recognize a portion of the upfront fee allocated to the subscription service immediately upon satisfying the criteria for revenue recognition under Ind AS 115 (usually upon customer payment and control transfer).
- **Ongoing Maintenance Services:** Recognize revenue for the maintenance services annually as they are provided, assuming they are distinct from the subscription service.
- **Measurement:** Ensure that revenue recognized reflects the consideration expected to be entitled in exchange for providing access to the subscription services and ongoing maintenance.
### Key Considerations:
- **Control Transfer:** Determine when control over the subscription services transfers to the customer.
- **Standalone Selling Prices:** Use observable standalone selling prices to allocate the transaction price to each performance obligation.
- **Consistency:** Apply a consistent method of revenue recognition for similar contracts to maintain comparability and relevance.
By following these steps and considerations, you can appropriately recognize revenue for a lifetime subscription fee received upfront under Ind AS 115, ensuring compliance with the principles of the standard while reflecting the economic substance of the transaction.
CAclubindia
