Revenue recognition under IND-AS and IFRS

IFRS-15

IAS-115

Applicability

Applicable all the contract with customers except

Lease Contract -IAS-17

Insurance contract- IFRS 4

Financial instruments and other contractual rights or obligations within the scope of IFRS 9 Financial Instruments, IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IAS 27 Separate Financial Statements and IAS 28 Investments in Associates and Joint Ventures; insurance contracts within the scope of IFRS 4 Insurance Contracts

Non-monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers.

Applicable all the contract with customers except

Lease  Contract - AS-17

Insurance contract- IAS-104

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

Non-monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers

Revenue recognition steps- 5 steps model

1. Identify the contract(s) with a customer

2. Identify the performance obligations in the contract

3. Determine the transaction price

4.Allocate the transaction price to the performance obligations in the contract

5. Recognise revenue when (or as) the entity satisfies a performance obligation

1. Identify the contract(s) with a customer

2. Identify the performance obligations in the contract

3. Determine the transaction price

4.Allocate the transaction price to the performance obligations in the contract

5. Recognise revenue when (or as) the entity satisfies a performance obligation

Step: 1  Identify the contract(s) with a customer

Contract has  been approved by both  parties of the contracts

Contract has  been approved by both  parties of the contracts

Each party’s rights in relation to the goods or services to be transferred can be identified

Each party’s rights in relation to the goods or services to be transferred can be identified

The payment terms for the goods or services to be transferred can be identified

The payment terms for the goods or services to be transferred can be identified

Contract has commercial substance (ie the risk, timing or amount of the entity’s future cash flows is expected to change as a result of the contract)

Contract has commercial substance (ie the risk, timing or amount of the entity’s future cash flows is expected to change as a result of the contract)

It is probable that the consideration to which the entity is entitled to in exchange for the goods or services will be collected

It is probable that the consideration to which the entity is entitled to in exchange for the goods or services will be collected

Step: 2 Identify the performance obligations in the contract

At the inception of the contract, the entity should assess the goods or services that have been promised to the customer, and identify as a performance obligation

1. a good or service (or bundle of goods or services) that is distinct; or

2.a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer

At contract inception, an entity shall assess the goods or services promised in a contract with a customer and shall identify as a performance obligation each promise to transfer to the customer either:

(a) a good or service (or a bundle of goods or services) that is distinct; or

(b) a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer

Step: 3 Determine the transaction price

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, excluding amounts collected on behalf of third parties (for example, some sales taxes). The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. While determining transaction price, the entity need to consider the following factors

a. Variable consideration like  discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties or other similar items

b. Constraints estimates of variable consideration, those factors may include volatility in a market, the judgement or actions of third parties, weather conditions and a high risk of obsolescence of the promised good or service

c. The existence of a significant financing component in the contract

d. Non cash consideration at fair value

e. Consideration payable to a customer

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, excluding amounts collected on behalf of third parties (for example, some sales taxes). The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. While determining transaction price, the entity need to consider the following factors

a. Variable consideration like  discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties or other similar items

b. Constraints estimates of variable consideration, those factors may include volatility in a market, the judgement or actions of third parties, weather conditions and a high risk of obsolescence of the promised good or service

c. The existence of a significant financing component in the contract

d. Non cash consideration at fair value

e. Consideration payable to a customer

Step: 4 Allocate the transaction price to the performance obligations in the contract

Where a contract has multiple performance obligations, an entity will allocate the transaction price to the performance obligations in the contract by reference to their relative standalone selling prices. If a standalone selling price is not directly observable, the entity will need to estimate it. IFRS 15 suggests various methods that might be used, including:

a.Adjusted market assessment approach

b. Expected cost plus a margin approach

c. Residual approach (only permissible in limited circumstances).

Any overall discount compared to the aggregate of standalone selling prices is allocated between performance obligations on a relative standalone selling price basis. In certain circumstances, it may be appropriate to allocate such a discount to some but not all of the performance obligations.

Where consideration is paid in advance or in arrears, the entity will need to consider whether the contract includes a significant financing arrangement and, if so, adjust for the time value of money.

An entity shall allocate the transaction price to each performance obligation identified in the contract on a relative stand-alone selling price basis in accordance to their relative standalone selling prices. If a standalone selling price is not directly observable, the entity will need to estimate it based on the following methods

a.Adjusted market assessment approach

b. Expected cost plus a margin approach

c. Residual approach (only permissible in limited circumstances).

The objective when allocating the transaction price is for an entity to allocate the transaction price to each performance obligation (or distinct good or service) in an amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for transferring the promised goods or services to the customer.

Any overall discount compared to the aggregate of standalone selling prices is allocated between performance obligations on a relative standalone selling price basis. In certain circumstances, it may be appropriate to allocate such a discount to some but not all of the performance obligations.

Step: 5 Allocate the transaction price to the performance obligations in the contract

Revenue is recognised as control is passed, either over time or at a point in time

Control of an asset is defined as the ability to direct the use of and obtain substantially all of the remaining benefits from the asset. This includes the ability to prevent others from directing the use of and obtaining the benefits from the asset. The benefits related to the asset are the potential cash flows that may be obtained directly or indirectly. These include, but are not limited to:

a.using the asset to produce goods or provide services;

b.using the asset to enhance the value of other assets;

c.using the asset to settle liabilities or to reduce expenses;

d.selling or exchanging the asset; pledging the asset to secure a loan; and

e.holding the asset.

An entity recognises revenue over time if one of the following criteria is met:

a. the customer simultaneously receives and consumes all of the benefits provided by the entity as the entity performs;

b.the entity’s performance creates or enhances an asset that the customer controls as the asset is created; or

c.the entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date.

If an entity does not satisfy its performance obligation over time, it satisfies it at a point in time. Revenue will therefore be recognised when control is passed at a certain point in time. Factors that may indicate the point in time at which control passes include, but are not limited to:

a.the entity has a present right to payment for the asset;

b.the customer has legal title to the asset;

c.the entity has transferred physical possession of the asset;

d.the customer has the significant risks and rewards related to the ownership of the asset; and

e.the cusomer has accepted the asset.

An entity shall recognise revenue when (or as) the entity satisfies a performance

Obligation by transferring a promised good or service (ie an asset) to a customer.

An asset is transferred when (or as) the customer obtains control of that asset.

Control of an asset is defined as the ability to direct the use of and obtain substantially all of the remaining benefits from the asset. This includes the ability to prevent others from directing the use of and obtaining the benefits from the asset. The benefits related to the asset are the potential cash flows that may be obtained directly or indirectly. These include, but are not limited to:

a.using the asset to produce goods or provide services;

b.using the asset to enhance the value of other assets;

c.using the asset to settle liabilities or to reduce expenses;

d.selling or exchanging the asset; pledging the asset to secure a loan; and

e.holding the asset.

An entity recognises revenue over time if one of the following criteria is met:

a. the customer simultaneously receives and consumes all of the benefits provided by the entity as the entity performs;

b.the entity’s performance creates or enhances an asset that the customer controls as the asset is created; or

c.the entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date.

If an entity does not satisfy its performance obligation over time, it satisfies it at a point in time. Revenue will therefore be recognised when control is passed at a certain point in time. Factors that may indicate the point in time at which control passes include, but are not limited to:

a.the entity has a present right to payment for the asset;

b.the customer has legal title to the asset;

c.the entity has transferred physical possession of the asset;

d.the customer has the significant risks and rewards related to the ownership of the asset; and

e.the customer has accepted the asset.

Contract costs

Incremental costs of obtaining a contract:

An entity shall recognise as an asset the incremental costs of obtaining a contract with a customer if the entity expects to recover those costs

Costs incurred to fulfil a contract:

Costs incurred to fulfil a contract are recognised as an asset if and only if all of the following criteria are met:

a.the costs relate directly to a contract (or a specific anticipated contract);

b.the costs generate  or enhance resources of the entity that will be used in satisfying performance obligations in the future; and

c.the costs are expected to be recovered

Incremental costs of obtaining a contract:

An entity shall recognise as an asset the incremental costs of obtaining a contract with a customer if the entity expects to recover those costs

Costs incurred to fulfil a contract:

Costs incurred to fulfil a contract are recognised as an asset if and only if all of the following criteria are met:

a.the costs relate directly to a contract (or a specific anticipated contract);

b.the costs generate  or enhance resources of the entity that will be used in satisfying performance obligations in the future; and

c.the costs are expected to be recovered