IND AS 115

REVENUE FROM CONTRACT WITH

CUSTOMER
Objective & Scope
• Principles to report useful information about the nature, amount, timing and
uncertainty of revenue and cash flows arising from a contract with a customer

• Ind AS 115 applies only if the counterparty to a contract is a customer.

Exclusions:
• Lease contracts (Ind AS 116)
• Insurance contracts (Ind AS 104)
• Financial instruments (Ind AS 109)
• Non-monetary exchanges without commercial substance between entities in the
same line of business to facilitate sales to customers or potential customers
Example - Non-monetary exchanges

• A Ltd. and B Ltd. both are engaged in manufacturing of homogeneous bottles. A

Ltd. operates in northern, eastern and central parts of India. B Ltd. operates in
western and southern parts of India. A Ltd. fulfils the demands of its customers
based on western and southern India by using the bottles manufactured by B Ltd.
Similarly, B Ltd. fulfils the demands of customer based on northern, eastern and
central parts of India by delivering bottles manufactured by A Ltd. How A Ltd. and
B Ltd. should recognize the revenue?
Example- Analysis
• In industries with homogeneous products, it is common for entities in the same line of business
to exchange products in order to sell them to customers or potential customers other than
parties to exchange.
• It is to be noted that all contracts (including contract for non-monetary exchanges) should have
commercial substance before an entity can apply the other requirements in the revenue
recognition model prescribed in Ind AS 115.
Commercial Substance (i.e. the risk, timing or amount of the entity’s future cash flows is
expected to change as a result of the contract. In other words, the contract must have economic
consequences.)
• In this case, the exchange of bottles qualifies as a non-monetary exchange between customers
in the same line of business.
• Accordingly, A Ltd. and B Ltd. should not recognize any revenue on account of exchange of
goods as Ind AS 115 will not apply to the contract as there is no commercial substance.
Example - Non-monetary exchanges

• A Ltd. a telecommunication company, entered into an agreement with

B Ltd. which is engaged in generation and supply of power. The
agreement provided that A Ltd. will provide 1,00,000 minutes of talk
time to employees of B Ltd. in exchange for getting power equivalent
to 20,000 units. A Ltd. normally charges ₹ 0.50 per minute and B Ltd.
charges ₹ 2.5 per unit. How should revenue be measured in this case?
Example- Analysis
• The current scenario will be covered under Ind AS 115 since the same is an exchange of
dissimilar goods or services.
• As per Ind AS 115 an entity shall consider the terms of the contract and its customary business
practices to 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.
• To determine the transaction price for contracts in which a customer promises consideration in
a form other than cash, an entity shall measure the non-cash consideration (or promise of
non-cash consideration) at fair value.
• Hence, Revenue recognized by A Ltd. will be the consideration in the form of power units that
it expects to be entitled for talk time sold, i.e. ₹ 50,000 (20,000 units x ₹ 2.5).
• The revenue recognized by B Ltd. will be the consideration in the form of talk time that it
expects to be entitled for the power units sold, i.e., ₹ 50,000 (1,00,000 minutes x ₹ 0.50).
Revenue Recognition: Five step model
Core Principle
When (or as) a performance obligation is satisfied, recognize as revenue the amount of
the transaction price that is allocated to that performance obligation.

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

Step B: Identify the separate performance obligations in the contract

Step C: Determine the transaction price

Step D: Allocate the transaction price to the separate performance obligations

Step E: Recognize revenue when (or as) the entity satisfies a performance obligation
Step A - IDENTIFY THE CONTRACT(S) WITH A CUSTOMER
• A contract is an agreement between two or more parties that creates enforceable
rights and obligations.

Features:
• Enforceability is a matter of law.
• Contracts can be written, oral or implied by an entity’s customary business
practices.
• The practices and processes for establishing contracts with customers vary across
legal jurisdictions, industries and entities. In addition, they may vary within an
entity.
• No contract if unilateral enforceable right of termination of wholly unperformed
contract without compensation exists.
Example
• Contractor P enters into a manufacturing contract to produce 100
specialised CCTV Cameras for Customer Q for a fixed price of Rs. 1,000 per
sensor. Customer Q can cancel the contract without a penalty after
receiving 10 CCTV Cameras. Specify the contract units.
Solution:
• P determines that because there is no substantive compensation amount
payable by Q on termination of the contract – i.e. no termination penalty in
the contract – it is akin to a contract to produce 10 CCTV Cameras that
gives Customer Q an option to purchase an additional 90 CCTV Cameras.
Hence, contract is for 10 units.
Conditions for Recognizing Contract
When Contract does not meet the Criteria
When a contract with a customer does not meet the criteria and an entity receives
consideration from the customer, the entity shall recognize the consideration
received as revenue only when either of the following events has occurred:

(a) The entity has no remaining obligations to transfer goods or services to the
customer and all, or substantially all, of the consideration promised by the customer
has been received by the entity and is non-refundable;

OR

(b) The contract has been terminated and the consideration received from the
customer is non-refundable.
Illustration – Oral Contract

X Ltd. provides IT support services to its customers from a distant location.

Customers call up the support team of X Ltd., who understand the client’s
requirement over the phone and provide necessary advice to the customer to
resolve their issue.
Before providing advice, the support team member will understand the client’s
problem and inform them about the price for the services to be provided. Once the
problem is resolved, the customer will make the agreed payment to X Ltd. through
online banking mode.
X Ltd. considers that collection is probable and the oral contract is enforceable as
per the laws applicable in the jurisdiction of X Ltd.
In such a case, whether there is a valid contract in accordance with Ind AS 115?
Illustration – Oral Contract- Analysis

• In this example, IT Support Co. and its customer are entering into an
oral agreement, which is legally enforceable in this jurisdiction, for IT
Support Co. for their services and for the customer to provide
consideration through online banking mode.
• Hence there is a valid contract in accordance with Ind AS 115 in the
above case.
Illustration – Probable Payment
• Company A has a customer P which is undergoing restructuring due to
issues related to liquidity. Company A has decided not to do any further
business with P. P has informed Company A that it will get a Letter of
Credit from a nationalized bank against which Company A can dispatch
goods. Company A has manufactured the goods exclusively for P, but the
Letter of Credit has not yet been arranged because it was in process. In
such a case, whether there is a valid contract in accordance with Ind AS
115?
Solution to Illustration – Probable Payment
• Std & Concept: Ind AS 115 requires that for revenue to be recognized, it should
be probable that the entity will collect the consideration to which it will be
entitled in exchange for the goods or services that will be transferred to the
customer.
• Conclusion: In the given case, as the customer has liquidity issues, the collection
is not considered to be probable.
• Accordingly, till the time the Letter of Credit is arranged from a nationalized bank
in favour of Company A, the criterion as mentioned is not met.
• However, in case Company A is able to demonstrate through any other
mechanism that the above criteria would be fulfilled in its favour, then it may
recognize the revenue in accordance with the principles of Ind AS 115 assuming
all other conditions as stated are met. Furthermore, an entity shall continue to
assess the contract to determine whether the criteria are subsequently met.
Illustration :
• An entity G Ltd. enters into a contract with a customer P Ltd. for the sale of a machinery for
Rs.20,00,000.
• P Ltd. intends to use the said machinery to start a food processing unit. The food processing
industry is highly competitive and P Ltd. has very little experience in the said industry.
• P Ltd. pays a non-refundable deposit of Rs.1,00,000 at inception of the contract and enters into
a long-term financing agreement with G Ltd. for the remaining 95 percent of the agreed
consideration which it intends to pay primarily from income derived from its food processing
unit as it lacks any other major source of income.
• The financing arrangement is provided on a nonrecourse basis, which means that if P Ltd.
defaults then G Ltd. can repossess the machinery but cannot seek further compensation from P
Ltd., even if the full value of the amount owed is not recovered from the machinery.
• The cost of the machinery for G Ltd. is Rs.12,00,000. P Ltd. obtains control of the machinery at
contract inception. When should G Ltd. recognize revenue from sale of machinery to P Ltd. in
accordance with Ind AS 115?
Solution
• For revenue to be recognized, it should be probable that the entity will collect the
consideration to which it will be entitled in exchange for the goods or services that will be
transferred to the customer.
• In the given case, it is not probable that G Ltd. will collect the consideration to which it is
entitled in exchange for the transfer of the machinery. P Ltd.’s ability to pay may be uncertain
due to the following reasons:
• (a) P Ltd. intends to pay the remaining consideration (which has a significant balance) primarily
from income derived from its food processing unit (which is a business involving significant risk
because of high competition in the said industry and P Ltd.'s little experience);
• (b) P Ltd. lacks sources of other income or assets that could be used to repay the balance
consideration; and
• (c) P Ltd.'s liability is limited because the financing arrangement is provided on a non-recourse
basis.
• In accordance with the above, the criteria in Ind AS 115 are not met.
• Non-refundable deposit is recognised as Revenue if contract is performed or terminated
• If not, it is recorded as liability.
In the given case G Ltd. should account for the non-refundable deposit of
Rs.1,00,000 payment as a deposit liability as neither the entity has received
substantially all of the consideration nor it has terminated the contract.
STEP B: PERFORMANCE OBLIGATION
• Entity’s promise to provide goods and services is distinct if

❖ Customer can benefit from the good or service either on its own or
together with other resources that are readily available to the Customer

AND

❖ Entity’s promise to transfer the good or service to the customer

is separately identifiable from other promises in the contract
Combination of Contracts

• An entity is required to combine two or more contracts and account for them as a
single contract if they are entered into with the same customer or with related
parties of the customer at or near the same time and meet any one of the
following criteria:
a) Contracts are negotiated as a package with one commercial objective.
b) The amount paid under one contract (Consideration) is dependent on the price
or performance under another contract
c) The goods or services to be transferred under the contracts constitute a single
performance obligation.
Contract Modifications

• A contract modification arises when the parties approve a change in the scope
and/or the price of a contract (e.g. a change order).
• The accounting for a contract modification depends on whether the modification
is deemed to be a separate contract or not.

• An entity accounts for a modification as a separate contract, if both:

(a) The scope increases due to the addition of ‘distinct’ goods or services &
(b) The price increase reflects the goods’ or services’ stand-alone selling prices
under the circumstances of the modified contract.
Example:
Manufacturer M enters into a contract to manufacture and sell a cyber security
system to Government-related Entity P.
One week later, in a separate contract, M enters into a contract to sell the same
system to Government-related Entity Q.
Both entities are controlled by the same Government Department.
During the negotiations, M agrees to sell the systems at a deep discount if both P
and Q purchase the security system.
M concludes that the said two contracts should be combined because, among
other things, P is a related party of Q, the contracts were entered into at nearly the
same time and the contracts were negotiated as a single commercial package,
which is clearly evident from the fact that discount is being offered if both the
parties purchases the security system, thereby also making the consideration in
one contract dependent on the other contract.
Example 1- PERFORMANCE OBLIGATION
Question
A property sale contract includes the following:
(a) Common areas
(b) Construction services and building material
(c) Property management services
(d) Golf Membership
(e) Car park
(f) Land entitlement
Analyze whether the above items can be considered as separate performance
obligations as per the requirements of Ind AS 115?
Example 1- Analysis
The following table discusses whether the common goods and services in property sale
contract should be considered as separate performance obligation or not:
Example 2- PERFORMANCE OBLIGATION
• A construction services company enters into a contract with a customer to build a
water purification plant.
• The company is responsible for all aspects of the plant including overall project
management, engineering and design services, site preparation, physical
construction of the plant, procurement of pumps and equipment for measuring
and testing flow volumes and water quality, and the integration of all
components.

• Determine whether the company has a single or multiple performance

obligations under the contract?
Solution

• Determining whether a good or service represents a performance obligation on

its own or is required to be aggregated with other goods or services can have a
significant impact on the timing of revenue recognition.
• While the customer may be able to benefit from each promised good or service
on its own (or together with other readily available resources), they do not
appear to be separately identifiable within the context of the contract.
• That is, the promised goods and services are subject to significant integration,
and as a result will be treated as a single performance obligation.
• This is consistent with a view that the customer is primarily interested in
acquiring a single asset (a water purification plant) rather than a collection of
related components and services.
Example 3- PERFORMANCE OBLIGATION

• An entity provides broadband services to its customers along with voice call
service. Customer buys modem from the entity. However, customer can also get
the connection from the entity and modem from any other vendor.

• The installation activity requires limited effort and the cost involved is almost
insignificant. It has various plans where it provides either broadband services or
voice call services or both.

• Are the performance obligations under the contract distinct?

Solution

• Broadband and voice services are separately identifiable from other promises as
company has various plans to provide the two services separately. These two
services are not dependent or interrelated. Also the customer can benefit on its
own from the services received.

• For sale of modem - Customer can either buy product from entity or third party.
No significant customization or modification is required for selling product.

• Based on the evaluation we can say that there are three separate performance
obligation for Broadband & Voice Call services and Modem.
Example 4- PERFORMANCE OBLIGATION

• An entity enters into a contract to build a power plant for a customer.

• The entity will be responsible for the overall management of the project including
services to be provided like engineering, site clearance, foundation, procurement,
construction of the structure, piping and wiring, installation of equipment and
finishing.

• Determine how many performance obligations does the entity have?

Solution

• The goods and services are not distinct within the context of the contract.
• That is, the entity's promise to transfer individual goods and services in the
contract are not separately identifiable from other promises in the contract.
• This is evidenced by the fact that the entity provides a significant service of
putting together the various inputs or goods and services into the power plant or
the output for which the customer has contracted.
• Since both the criteria has not met, the goods and services are not distinct.
• The entity accounts for all of the goods and services in the contract as a single
performance obligation.
Example 5 - PERFORMANCE OBLIGATION
• Entity A, a specialty construction firm, enters into a contract with Entity B to
design and construct a multilevel shopping center with a customer car parking
facility located in sub-levels underneath the shopping center.
• Entity B solicited bids from multiple firms on both phases of the project —
design and construction.
• The design and construction of the shopping center and parking facility involves
multiple goods and services from architectural consultation and engineering
through procurement and installation of all of the materials.
• Entity A may require to continually alter the design of the shopping center and
parking facility during construction as well as continually assess the propriety of
the materials initially selected for the project.
• Determine how many performance obligations does the entity A have?
Solution
• Entity A analyses that it will be required to continually alter the design of the
shopping center and parking facility during construction as well as continually
assess the propriety of the materials initially selected for the project.
• Therefore, the design and construction phases are highly dependent on one
another (i.e., the two phases are highly interrelated).
• Entity A also determines that significant customization and modification of the
design and construction services is required in order to fulfil the performance
obligation under the contract.
• As such, Entity A concludes that the design and construction services will be
bundled and accounted for as one performance obligation.
Example 6 - PERFORMANCE OBLIGATION

• An entity, a software developer, enters into a contract with a customer to transfer

a software license, perform an installation service and provide unspecified
software updates and technical support (online and telephone) for a two- year
period.
• The entity sells the license, installation service and technical support separately.
The installation service includes changing the web screen for each type of user
(for example, marketing, inventory management and information technology).
• The installation service can be routinely performed by other entities and does not
significantly modify the software.
• The software remains functional without the updates and the technical support.
• Determine how many performance obligations does the entity have?
Solution
• The promise to transfer each good and service to the customer is separately
identifiable from each of the other promises.
• In particular, the entity observes that the installation service does not
significantly modify or customize the software itself and, as such, the software
and the installation service are separate outputs promised by the entity instead
of inputs used to produce a combined output.
• On the basis of this assessment, the entity identifies four performance
obligations in the contract for the following goods or services:
➢The software license
➢An installation service
➢Software updates
➢Technical support
Example 7 - PERFORMANCE OBLIGATION
• The promised goods and services are the same as in the above Illustration,

• except that the contract specifies that, as part of the installation service, the
software is to be substantially customized to add significant new functionality to
enable the software to interface with other customized software applications
used by the customer.

• The customized installation service can be provided by other entities.

• Determine how many performance obligations does the entity have?

Solution
• The entity is using the license and the customized installation service as inputs to
produce the combined output (i.e. a functional and integrated software system)
specified in the contract.
• In addition, the software is significantly modified and customized by the service.
Although the customized installation service can be provided by other entities, the
entity determines that within the context of the contract, the promise to transfer the
license is not separately identifiable from the customized installation service and,
therefore, the criterion on the basis of the factors is not met.
• Thus, the software license and the customized installation service are not distinct.
• On the basis of this assessment, the entity identifies three performance obligations in
the contract for the following goods or services:
a) customized installation service (that includes the software license);
b) software updates; and
c) technical support.
Example 8 (a) - Combining of Contracts

• Manufacturer of airplanes for the air force negotiates a contract to design and
manufacture new fighter planes for a Kashmir air base. At the same meeting, the
manufacturer enters into a separate contract to supply parts for existing planes at
other bases. Would these contracts be combined?
Solution

• Contracts were negotiated at the same time, but they appear to have separate
commercial objectives.
• Manufacturing and supply contracts are not dependent on one another, and the
planes and the parts are not a single performance obligation.
• Therefore, contracts for supply of fighter planes and supply of parts shall not be
combined and instead, they shall be accounted separately.

• The contracts would have been combined only if the contracts were negotiated
as a single commercial package or that discount would have been offered, making
the consideration in one contract dependent on the other contract.
Example 8 (b) - Combining of Contracts
• Software Company S enters into a contract to license its customer relationship
management software to Customer B. Three days later, in a separate contract, S
agrees to provide consulting services to significantly customize the licensed
software to function in B’s IT environment. B is unable to use the software until
the customization services are complete. Would these contracts be combined?

• Answer:
• S determines that the two contracts should be combined because they were
entered into at nearly the same time with the same customer, and the goods or
services in the contracts are a single performance obligation.
Example 9 (a) – Calculation of No of PO

• Media Company P Ltd. offers magazine subscriptions to customers. When

customers subscribe, they receive a printed copy of the magazine each month
and access to the magazine’s online content.
• Determine how many performance obligations does the entity have?
Solution

• P evaluates whether the promises to provide printed copies and online access are
separate performance obligations.
• P determines that the arrangement includes two performance obligations for the
following reasons:
- The printed copies and online access are both capable of being distinct because
the customer could use them on their own.
- The printed copies and online access are distinct within the context of the
contract because they are different formats so they do not significantly customize
or modify each other, nor is there any transformative relationship into a single
output
- Hence though there is one contract, there are two performance obligations.
Implied performance obligation

• Carmaker N Ltd. has a historical practice of offering free maintenance services –

e.g. oil changes and tyre rotation – for two years to the end customers of dealers
who buy its vehicles.

• However, the two years’ free maintenance is not explicitly stated in the contract
with its dealers, but it is typically stated in N’s advertisements for the vehicles.

• Determine how many performance obligations does the entity have?

• Solution
• There is one contract but there will be two performance obligations
• The maintenance is treated as a separate performance obligation in
the sale of the vehicle to the dealer. Revenue from the sale of the
vehicle is recognized when control of the vehicle is transferred to the
dealer. Revenue from the maintenance services is recognized
separately as and when the maintenance services are provided to the
retail customer.
STEP C: TRANSACTION PRICE

• The ‘transaction price’ is defined as the amount of consideration an entity expects to be

entitled to in exchange for the goods or services promised under a contract to a
customer, excluding any amounts collected on behalf of third parties (for example, sales
taxes).

• A car manufacturer sells a car at Rs.1,28,000 which includes GST of Rs.28,000. What is
the amount to be recognized as revenue?
Ans:
Revenue excludes the amount due to the Third party.
• Hence Revenue to be recognized = Rs.1,28,000 - Rs.28,000 = Rs.1,00,000
Factors when determining the transaction price:

• An entity must consider the effects of all the following factors when
determining the transaction price:
a) Variable consideration
b) The constraint on variable consideration
c) Time value of money
d) Non-cash consideration
e) Consideration payable to the customer.
We discuss these in detail now-
Variable Consideration - Meaning
• Variable consideration exists if:
There is valid expectation arising from an entity’s customary business practices,
published policies or specific statements that the entity will accept an amount of
consideration that is less than the price stated in the contract.

• Examples : -
➢Performance bonuses
➢Incentive payments
➢Penalties (if inherent in the determination of transaction price)
➢Refunds
➢Money-back guarantees
➢Price concessions
➢Volume rebates
➢Success fees
Variable Consideration
• The amount of consideration received under a contract might vary due to
discounts, rebates, refunds, credits, price concessions, incentives, performance
bonuses and similar items.

• Variable consideration also applies if:

a) The amount of promised consideration under a contract is contingent on the
occurrence or non-occurrence of a future event (e.g. a fixed-price contract
would be variable if the contract included a return right)
b) The facts and circumstances at contract inception indicate that the entity
intends to offer a price concession.
Methods of variable Consideration
To estimate the transaction price in a contract that includes variable consideration,
an entity determines either:
a) The expected value (the sum of probability-weighted amounts) or
b) The most likely amount of consideration to be received, whichever better
predicts the amount of consideration to which the entity will be entitled.

The “Expected Value” might be the appropriate estimate of the amount of variable
consideration in situations where an entity has a large number of similar contracts.
The “Most Likely Amount” might be appropriate in situations where a contract has
only two possible outcomes.
An entity should use one method consistently to estimate the transaction price
throughout the life of a contract.
Time Value of Money

• Under Ind AS 115, an entity must reflect the time value of money in its estimate
of the transaction price if the contract includes a significant financing component.

• To determine whether a financing component is significant, an entity considers

several factors, including, but not limited to, the following:
a) The difference, if any, between the promised consideration and the cash selling
price
b) The combined effect of:
• the expected length of time between delivery of the goods or services and
receipt of payment
• the prevailing interest rates in the relevant market.
Significant financing component

• A contract may not have a significant financing component if:

a) Advance payments have been made but the transfer of the good or service is at
the customer’s discretion
b) The consideration is variable based on factors outside the vendor’s and
customer’s control (e.g. a sales-based royalty)
c) A difference between the promised consideration and the cash selling price
arises for reasons other than financing such as protecting one of the parties
from nonperformance by the other (e.g. retentions).

An entity presents the effects of financing separately from revenue as interest

expense or interest income in the statement of profit and loss.
Illustration : Financing component: significant or insignificant?
• A commercial airplane component supplier enters into a contract with a
customer for promised consideration of ₹ 70,00,000.
• Based on an evaluation of the facts and circumstances, the supplier concluded
that ₹ 1,40,000 represented an insignificant financing component because of an
advance payment received in excess of a year before the transfer of control of the
product.
• State whether company needs to make any adjustment in determining the
transaction price.
• What if the advance payment was larger and received further in advance, such
that the entity concluded that ₹ 14,00,000 represented the financing component
based on an analysis of the facts and circumstances.
Solution
• The entity may conclude that Rs. 1,40,000, or 2 percent of the contract price, is
not significant, and the entity may not need to adjust the consideration promised
in determining the transaction price.
• However, when the advance payment was larger and received further in advance,
such that the entity may conclude that Rs. 14,00,000 represents the financing
component based on an analysis of the facts and circumstances.
• In such a case, the entity may conclude that Rs. 14,00,000, or 20 percent of the
contract price, is significant, and the entity should adjust the consideration
promised in determining the transaction price.
• Note: In this illustration, the entity‘s conclusion that 2 percent of the transaction
price was not significant and 20 percent was significant is a judgment based on
the entity‘s facts and circumstances. An entity may reach a different conclusion
based on its facts and circumstances.
Illustration : Financing component

• X Ltd. is engaged in manufacturing and selling of designer furniture.

• It sells goods on extended credit. X Ltd. sold furniture for Rs. 40,00,000 to a
customer, the payment against which was receivable after 12 months with
interest at the rate of 3% per annum.
• The market interest rate on the date of transaction was 8% per annum.
• Calculate the revenue to be recognized by X Ltd. for the above transactions.
Solution
• X Ltd. should determine the fair value of revenue by calculating the present value
of the cash flows receivable.

• Total amount receivable = Rs. 40,00,000 x 1.03 = Rs. 41,20,000.

• Present Value of receivable (Revenue) = Rs. 41,20,000/1.08 = Rs. 38,14,815.

• Interest income = Rs. 41,20,000 - Rs. 38,14,815 = Rs. 3,05,185.

• Therefore, on the transaction date, Rs. 38,14,815 will be recognized as revenue

from the sale of goods, and Rs. 3,05,185 will be recognized as interest income
receivable for the period
Non-Cash Consideration

• If a customer promises consideration in a form other than cash, an entity

measures the non-cash consideration at fair value in determining the transaction
price.

• If an entity is unable to reasonably measure the fair value of non-cash

consideration, it indirectly measures the consideration by referring to the stand-
alone selling price of the goods or services promised under the contract.
Illustration : Non-Cash Consideration

• Production Company Y sells a television show to Television Company X. The

consideration under the arrangement is a fixed amount of Rs. 100 Lakhs and 60
advertising slots. Y determines that the stand-alone selling price of the show
would be Rs. 150 lakhs. Based on market rates, Y determines that the fair value of
the advertising slots is Rs. 60 Lakhs. Determine the transaction price.

• Answer:
• Y determines that the transaction price is Rs. 160 Lakhs comprising of Rs. 100
Lakhs fixed amount plus the fair value of the advertising slots i.e. Rs. 60 Lakhs.
• If the fair value of the advertising slots could not be reasonably estimated, then
the transaction price would be Rs. 150 Lakhs i.e. Y would use the stand-alone
selling price of the goods or services promised for the non-cash consideration.
Consideration payable to a customer

It Includes:
• Cash amounts that an entity pays/will pay for purchase goods or
services;
• Example: slotting fees, Advertising by retailer, Price protection etc.
Consideration payable to a customer

• Slotting fees – Manufacturers of consumer products commonly pay

retailers fees to have their goods displayed prominently on store
shelves. Those shelves can be physical (i.e. in a building where the
store is located) or virtual (i.e. they represent space on the
website/reseller’s online catalogue).
Generally, such fees do not provide a distinct good or service to the
manufacturer and are treated as a reduction of the transaction price.
Consideration payable to a customer
• Co-operative advertising arrangements – In some arrangements, a vendor
agrees to reimburse a reseller for a portion of costs incurred by the reseller to
advertise the vendor’s products. The determination of whether the payment
from the vendor is in exchange for a distinct good or service at fair value will
depend on a careful analysis of the facts and circumstances of the contract.

• Price protection – A vendor may agree to reimburse a retailer up to a specified

amount for shortfalls in the sales price received by the retailer for the vendor’s
products over a specified period of time. Normally such fees do not provide a
distinct good or service to the manufacturer and are treated as a reduction of
the transaction price.
STEP D: ALLOCATE THE TRANSACTION PRICE
• The objective when allocating the transaction price is for an entity to allocate the
transaction price to each performance obligation on a relative stand-alone selling price
basis.

• Allocation of Discount
• Discount exists if:
• Selling Price of Bundle of Goods/Services < Sum of standalone prices of individual prices
• Discount will be allocated proportionately to all of the separate performance
obligations.
• However, if an entity determines that a discount in a contract is not related to all of the
promised goods or services in the contract, the entity allocates the contract’s entire
discount only to the goods or services to which it relates if the entity regularly sells the
item on a stand-alone basis with discount.
Methods for estimating the stand-alone selling price of goods or services
Some of the methods for estimating the Stand-alone SP
(a) Adjusted Market Assessment Approach-
• Evaluate the market in which the entity sells goods or services and estimate the price
that a customer in that market would be willing to pay for those goods or services.
• This approach also includes referring to prices from the entity’s competitors for similar
goods or services and adjusting those prices as necessary to reflect the entity’s costs
and margins.
• Applying this approach will likely be convenient when an entity has sold the good or
service for a period of time (such that it has data about customer demand), or a
competitor offers similar goods or services that the entity can use as a basis for its
analysis.
• Applying this approach would be difficult when an entity is selling an entirely new good
or service because in that case it may be difficult to anticipate market demand.
Methods for estimating the stand-alone selling price of goods or services
(b) Expected Cost plus Margin Approach—
• An entity could forecast its expected costs of satisfying a performance obligation
and then add an appropriate margin for that good or service.
• When determining which costs to include in the selling price analysis, an entity
should develop and consistently apply a methodology that considers direct and
indirect costs and other relevant costs considered in its normal pricing practices.
• Determining the margin to use when applying a cost-plus-margin approach
requires significant judgment, particularly when the entity is not planning to
separately sell a product or service.
• An expected cost-plus-margin approach may not be appropriate when direct
fulfillment costs are not easily identifiable or when costs are not a significant
input in setting the price for the goods or services.
STEP E: SATISFACTION OF PERFORMANCE OBLIGATION
• An entity shall recognise revenue when (or as) the entity satisfies a performance
obligation by transferring a promised good or service (i.e. an asset) to a customer.
An asset is transferred when (or as) the customer obtains control of that asset.

• Satisfaction of Performance Obligation Indicators:

a) Entity has a present right to payment
b) Transfer of Legal Title
c) Physical Possession of Asset
d) Customer has significant Risk & Rewards
e) Customer Acceptance
Measuring progress towards performance obligation
The standard provides two methods for recognizing revenue on contracts involving
the transfer of goods and services over time:
• Output Method: Recognize revenue on the basis of direct measurements of the
value to the customer of the goods or services transferred to date relative to the
remaining goods or services promised under the contract.

• Input Method: Recognize revenue on the basis of the entity’s efforts or inputs
relative to the total expected inputs to the satisfaction of that performance
obligation.
E.g. Resources consumed, Labour hours expended, costs incurred, time elapsed or
machine hours used.
Costs such as administrative, Selling, Depreciation, Abnormal wastage and R&D not
considered.
Input Method
When a cost-based input method is used, an adjustment may be required in the
following cases –
(a) When any cost incurred does not contribute to an entity’s progress in
satisfying performance obligation – any excess costs incurred owing to entity’s
inefficiencies that were not reflected in the price of the contract must be ignored
for measuring progress of work.
For e.g.: cost of wasted materials, labour or other resources, etc.
(b) When cost incurred is not proportionate to entity’s progress in satisfying its
performance obligation. In such cases, the best reflection is to adjust the input
method to recognise revenue only to the extent of costs incurred.
Such recognition of revenue to the extent of costs incurred is appropriate, if at
contract inception, all the following conditions exist:
Input Method

(i) The goods do not represent a distinct performance obligation;

(ii) Customer is expected to obtain control of the goods significantly before
receiving the services;
(iii) Cost of such goods is significant relative to the total expected costs to complete
the performance obligation; and
(iv) The entity procures the goods from a third party and does not significantly
involved in designing/manufacturing the goods (even if the entity is a principal in
the arrangement between the entity and end customer).