Ind AS 115 (IFRS 15): Revenue Recognition from Contracts with Customers | Explained with Steps & Examples

Ind AS 115: A Comprehensive Analysis of Revenue Recognition from Contracts with Customers in India

Ind AS 115 is the Indian Accounting Standard for Revenue Recognition from Contracts with Customers, aligned with IFRS 15. It introduces a comprehensive 5-step model to recognize revenue, improving consistency and transparency. This article provides a complete guide to Ind AS 115 with practical examples and simplified explanation.

Executive Summary

Indian Accounting Standard (Ind AS) 115, "Revenue from Contracts with Customers," provides a unified and comprehensive framework for how entities should recognize revenue. Its primary objective is to establish principles for the recognition, measurement, and disclosure of revenue, enabling users of financial statements to gain a clear understanding of the nature, amount, timing, and uncertainty of revenue and associated cash flows arising from customer contracts. This standard represents a significant shift from previous accounting practices, notably replacing Ind AS 11 on Construction Contracts and Ind AS 18 on Revenue. It is largely converged with International Financial Reporting Standard (IFRS) 15, aiming to enhance global comparability and transparency in financial reporting. The core principle of Ind AS 115 revolves around the transfer of control of goods or services to customers, moving away from the "risk and reward" model of prior standards. This foundational change has broad implications for financial reporting and business practices across various sectors in India, particularly impacting industries like real estate by altering the timing of revenue recognition.  

1. Introduction to Ind AS 115

1.1. Definition, Objective, and Core Principle

Ind AS 115, formally known as "Revenue from Contracts with Customers," establishes a comprehensive set of principles governing revenue recognition. Its fundamental purpose is to provide a robust framework for entities to recognize, measure, and disclose revenue derived from contracts with their customers. This framework is designed to furnish users of financial statements with crucial information, allowing them to accurately assess the nature, precise amount, timing, and inherent uncertainty of revenue streams and their corresponding cash flows that originate from customer contracts. The standard specifies the accounting treatment for both individual contracts and portfolios of contracts with similar characteristics, provided that applying the standard to a portfolio would not materially differ from applying it to individual contracts.  

At the heart of Ind AS 115 lies its core principle: an entity is required to recognize revenue in a manner that accurately depicts the transfer of promised goods or services to customers. The amount of revenue recognized must reflect the consideration to which the entity anticipates being entitled in exchange for those goods or services. This core principle introduces a pivotal change by emphasizing the transfer of  

control over goods or services to the customer, rather than the previous focus on the transfer of risks and rewards. This reorientation necessitates a thorough re-evaluation of existing revenue recognition processes within companies. Previously, revenue recognition might have been triggered by the transfer of significant risks and rewards of ownership. Under Ind AS 115, the focus shifts to when the customer gains the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset or service. This often requires a more granular analysis of contractual terms, operational processes, and the practical realities of when control truly passes to the customer. For instance, in some scenarios, a company might still bear certain risks (such as those related to product defects or returns) but could have transferred control, potentially leading to earlier revenue recognition under Ind AS 115 than under the superseded Ind AS 18. Conversely, for sectors like real estate, where revenue was traditionally recognized based on the percentage of completion, the control-based model often defers revenue recognition until the customer obtains significant control over the property, which can occur much later in the construction process. This fundamental change in the recognition trigger demands a deeper understanding of customer contractual rights and obligations.  

1.2. Relationship with IFRS 15

Ind AS 115 is largely a convergence of IFRS 15, "Revenue from Contracts with Customers," which was issued by the International Accounting Standards Board (IASB). This substantial alignment between the Indian and international accounting standards represents a deliberate strategic move to harmonize India's financial reporting practices with global benchmarks. The primary aim of this convergence is to enhance the comparability of financial statements across different entities and jurisdictions, thereby improving the overall quality and transparency of financial information presented to stakeholders worldwide.  

This strategic alignment offers significant advantages. It facilitates cross-border investments by making financial statements of Indian companies more understandable and attractive to foreign investors, as they are prepared under principles similar to those they are accustomed to. Furthermore, for multinational corporations operating in India, this convergence simplifies financial analysis and reduces the complexities associated with reconciling financial data prepared under disparate accounting frameworks. Global accounting firms and professionals can leverage their expertise in IFRS 15 directly within the Indian context, which can lead to reduced learning curves and potentially lower compliance costs for many entities.  

However, despite this broad convergence, it is crucial to recognize that Ind AS 115 is not an identical replica of IFRS 15. There exist subtle yet important differences that can significantly influence reported revenue figures and necessitate careful attention during implementation. For example, Ind AS 115 specifically mandates the separate presentation of excise duty within the statement of profit and loss, a requirement not explicitly found in IFRS 15. Additionally, the treatment of penalties as variable consideration can differ between the two standards; while IFRS 15 generally includes penalties as variable consideration, Ind AS 115 requires accounting for them based on the substance of the contract, only including them as variable consideration if they are inherent in the determination of the transaction price. These nuances, though seemingly minor on the surface, can lead to material variations in financial statements. Consequently, companies cannot merely adopt a "copy-paste" approach from IFRS 15 interpretations; they must be acutely aware of and specifically address these Indian-specific requirements. This situation underscores the ongoing need for specialized local accounting expertise and may, in certain instances, require entities with both IFRS and Ind AS reporting obligations to manage dual reporting considerations carefully.  

1.3. Standards Superseded by Ind AS 115

Ind AS 115 serves as a unifying standard for revenue recognition, effectively superseding and replacing several previous Indian accounting standards. This consolidation aims to streamline and simplify the revenue recognition process into a single, comprehensive model. Specifically, Ind AS 115 replaces:  

• Ind AS 11, 'Construction Contracts': This standard previously governed revenue recognition for long-term construction projects.  

• Ind AS 18, 'Revenue': This was the primary standard for general revenue recognition from the sale of goods, rendering of services, interest, royalties, and dividends.  

• All related annexes to these two superseded standards.  

A notable exception to this supersession is the treatment of service concession arrangements, which, instead of being replaced, have been integrated as an integral part of Ind AS 115, specifically as Annexure 'C'. This integration ensures that specific guidance for these complex arrangements remains within the new comprehensive revenue standard.  

The replacement of Ind AS 11 and Ind AS 18 by Ind AS 115 marks a significant paradigm shift in Indian accounting. The previous standards often relied on a "risks and rewards" approach to revenue recognition, where revenue was recognized when the significant risks and rewards of ownership were transferred to the buyer. Ind AS 115, however, adopts a "control" model, recognizing revenue when control of the promised goods or services is transferred to the customer. This change has profound implications, particularly for industries with long-term contracts or complex service arrangements. For instance, under Ind AS 11, construction contracts often recognized revenue using the percentage of completion method, which allowed for revenue recognition as work progressed. With Ind AS 115, real estate developers, for example, may find that revenue recognition is deferred until the customer obtains control of the completed unit, which can significantly alter the timing of reported revenue and profitability. This shift from a "risks and rewards" to a "control" model requires entities to critically re-evaluate their contractual terms and business practices to determine the appropriate timing of revenue recognition, leading to potentially material changes in financial statements and key performance indicators.  

Table 1: Key Differences: Ind AS 115 vs. Superseded Standards

Feature	Old Standards (Ind AS 11, Ind AS 18)	Ind AS 115
Core Principle	Transfer of Risks and Rewards	Transfer of Control
Scope	Separate standards for construction contracts (Ind AS 11) and general revenue (Ind AS 18)	Single, comprehensive model for all contracts with customers
Contract Identification	Less explicit guidance on contract criteria	Detailed criteria for identifying a valid contract
Performance Obligations	No explicit concept of distinct performance obligations	Requires identification of distinct performance obligations
Transaction Price	Often based on fair value or fixed price	Considers variable consideration, financing components, non-cash consideration
Allocation	Less emphasis on allocating price to individual components	Mandates allocation based on standalone selling prices
Revenue Recognition Timing	Based on completion percentage (Ind AS 11) or significant risks/rewards transfer (Ind AS 18)	Recognized when (or as) control is transferred, either over time or at a point in time
Contract Costs	Less detailed guidance on capitalization of costs to obtain/fulfill contracts	Specific criteria for capitalizing costs to obtain or fulfill a contract
Presentation	"Deferred Revenue," "Accrued Revenue"	"Contract Assets," "Contract Liabilities," "Receivables"
Disclosures	Less extensive	More comprehensive, including disaggregated revenue and contract balance reconciliations

Value of Table 1: This table provides a concise, side-by-side comparison that immediately highlights the fundamental differences between the old and new revenue recognition frameworks. For a financial professional, this visual representation quickly conveys the scope of changes required for compliance, enabling them to grasp the areas where their existing accounting policies and systems would need significant overhaul. It serves as a quick reference for understanding the conceptual shift and practical implications across key accounting elements.

1.4. Scope of Ind AS 115

Ind AS 115 applies broadly to all contracts with customers, aiming to provide a consistent and uniform approach to revenue recognition across various industries and sectors in India. This wide applicability ensures that financial statements are prepared using a standardized set of principles, which significantly enhances their comparability and understandability.  

However, the standard explicitly outlines several exceptions where its application is not required. These exclusions are typically governed by other specific Ind AS standards that address the unique characteristics of those transactions:  

• Lease contracts: These fall within the scope of Ind AS 116, Leases (previously Ind AS 17).  

• Insurance contracts: These are governed by Ind AS 117, Insurance Contracts (previously Ind AS 104). It is important to note that Ind AS 117 permits entities a choice of applying Ind AS 115 to certain fixed-fee service contracts that meet the definition of an insurance contract, provided specific conditions are met, such as not reflecting an assessment of risk.  

• Financial instruments and other contractual rights or obligations: These are covered by standards such as 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: These exchanges, typically undertaken to facilitate sales to customers or potential customers, are excluded from the scope of Ind AS 115. For example, an exchange of oil between two oil companies to meet demand in different locations would not fall under Ind AS 115.  

A critical aspect of the scope determination is the identification of a "customer." Ind AS 115 applies only if the counterparty to the contract is a customer. A customer is defined as a party that has contracted with an entity to obtain goods or services that are the  

output of the entity's ordinary activities in exchange for consideration. If the counterparty is involved in a collaborative arrangement where risks and benefits are shared (e.g., developing an asset together), rather than primarily obtaining the entity's ordinary output, then that counterparty would not be considered a customer for the purpose of applying Ind AS 115. This distinction is vital for proper classification and application of the standard.  

2. The Five-Step Model for Revenue Recognition

Ind AS 115 prescribes a comprehensive five-step model that entities must apply to recognize revenue from contracts with customers. This model provides a structured approach to ensure consistent and accurate revenue recognition, reflecting the core principle of transferring control of goods or services. The five steps are:  

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.  

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

Each step requires careful judgment and analysis, as detailed below.

2.1. Step 1: Identify the Contract(s) with a Customer

The initial step in the revenue recognition process under Ind AS 115 is to identify the contract(s) with a customer. A "contract" is broadly defined as an agreement between two or more parties that creates enforceable rights and obligations. This agreement can take various forms, including written, oral, or even implied through an entity's customary business practices.  

For a contract to be accounted for under the general Ind AS 115 model, it must meet all of the following five criteria :  

• Approval and Commitment: The parties to the contract must have approved the contract and be committed to performing their respective obligations.  

• Identifiable Rights: The entity must be able to clearly identify each party's rights regarding the goods or services to be transferred.  

• Identifiable Payment Terms: The payment terms for the goods or services to be transferred must be clearly identifiable.  

• Commercial Substance: The contract must have commercial substance, meaning it is expected to change the entity's future cash flows.  

• Probable Collection of Consideration: 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. This criterion focuses on the customer's ability and intention to pay, not merely the entity's ability to enforce its rights.  

If a contract with a customer does not meet all of these criteria, and the entity receives consideration, revenue recognition is deferred until either :  

• The entity's performance is complete, and substantially all of the consideration received is non-refundable.  

• The contract has been terminated, and the consideration received is non-refundable.  

It is important to note that a contract does not exist for Ind AS 115 purposes if each party possesses a unilateral enforceable right to terminate a wholly unperformed contract without compensating the other party. This emphasizes that genuine, binding obligations must be present for the standard to apply.  

Combining Contracts: In certain situations, entities are required to combine two or more contracts and account for them as a single contract. This is mandated if the contracts are entered into at or near the same time with the same customer (or related parties) and meet any of the following conditions :  

• The contracts are negotiated as a package with a single commercial objective.  

• The amount of consideration to be paid in one contract depends on the price or performance under another contract.  

• The goods or services to be transferred under the contracts constitute a single performance obligation.  

This combination rule prevents entities from artificially separating economically linked transactions to achieve a desired revenue recognition outcome.

Contract Modifications: A contract modification occurs when the parties agree to a change in the scope and/or price of an existing contract. Such modifications can be approved in writing, orally, or implied by customary business practices. The accounting treatment for a modification depends on whether it is considered a separate contract. A modification is accounted for as a separate contract if both of the following conditions are met :  

• The scope of the contract increases due to the addition of promised goods or services that are distinct.  

• The price of the contract increases by an amount of consideration that reflects the entity's stand-alone selling price of the additional goods or services, with appropriate adjustments for the circumstances of the modified contract.  

When a modification is treated as a separate contract, only future revenue is impacted, and the original, pre-modification contract continues to be accounted for as before. If these conditions are not met, the modification is typically accounted for as a change to the existing contract, which can affect the transaction price and performance obligations retrospectively or prospectively, depending on the nature of the change. In some cases, a modification may even be accounted for as the termination of an existing contract and the creation of a new one, particularly if the remaining goods or services are distinct from those transferred previously. This requires careful judgment to determine the appropriate accounting approach for each modification.  

2.2. Step 2: Identify Performance Obligations

Once a contract with a customer has been identified, the second step requires the entity to assess the goods or services promised within that contract and identify each promise to transfer a distinct good or service (or a series of distinct goods or services that are substantially the same and have the same pattern of transfer) as a performance obligation. A performance obligation is essentially a "promise" to deliver goods or services to a customer in exchange for consideration.  

A good or service is considered distinct if both of the following criteria are met :  

1. Capable of being distinct: The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer. This means the good or service has a functional value independent of other items in the contract.  

2. Distinct within the context of the contract: The entity's promise to transfer the good or service to the customer is separately identifiable from other promises in the contract. This criterion prevents an entity from treating highly integrated or interdependent goods/services as separate obligations.  

If a promised good or service does not meet both of these criteria, it should be combined with other promised goods or services until the combined bundle becomes distinct, forming a single performance obligation.  

To determine if a performance obligation is distinct, the standard provides guidance by considering factors such as :  

• Whether the entity provides significant integration services for the goods or services. If significant integration is provided, the items might not be distinct.

• Whether the goods or services are significantly customized or modified for the customer. If so, they might not be distinct.

• Whether the goods or services are highly interdependent or inter-related. If they are, they likely form a single performance obligation.

• Whether the good or service is sold separately or the customer has already obtained it, indicating it is a readily available resource.

Examples illustrating distinct performance obligations :  

• Telecommunication Company: A telecom company offering a free smartphone with a premium service subscription has two distinct performance obligations: the smartphone (a distinct good) and the premium service. However, a one-off connection fee might not be a distinct service if it doesn't transfer a good or service to the customer.

• Fence Building: If an entity agrees to build a fence, even if it involves purchasing supplies, delivering them, and construction, the customer's perspective is a completed fence. Since the entity integrates materials and services, making them highly interrelated, there is typically only one performance obligation: the provision of the completed fence.

• Software Company (Scenario 1): A software company providing a license, installation, and three years of customer support. If the installation merely configures the software without significant modification, and the software functions independently without upgrades or technical support, then the license, installation service, and customer support are three distinct performance obligations.

• Software Company (Scenario 2): If the installation service requires substantial customization of the software to integrate with the customer's existing systems, making the license and installation highly interdependent, then they would be combined into one performance obligation, with customer support as a separate one.

This step requires significant judgment, particularly for contracts involving multiple deliverables, as it directly impacts how the transaction price will be allocated and when revenue will be recognized.

2.3. Step 3: Determine the Transaction Price

The third step involves determining the transaction price, which is defined as the amount of consideration an entity expects to be entitled to in exchange for transferring the promised goods or services to a customer. This amount excludes any sums collected on behalf of third parties, such as Goods and Services Tax (GST). The transaction price is not adjusted for the customer's credit risk, but it may be adjusted if the entity has created a valid expectation (e.g., based on customary business practices) that it will enforce its rights for only a portion of the contract price.  

Several factors can influence the determination of the transaction price, requiring careful estimation and judgment :  

• Variable Consideration: If the consideration includes a variable amount, the entity must estimate the amount of consideration it expects to be entitled to. This can include discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, or penalties. Two methods are available for estimation :  

  • Expected Value: The sum of probability-weighted amounts in a range of possible consideration outcomes. This method is appropriate when there are many possible outcomes.

  • Most Likely Amount: The single most likely outcome of the contract. This method is suitable when there are only two possible outcomes (e.g., a bonus is either received or not). The estimate of variable consideration is subject to a "constraint," meaning it should only be recognized to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. This constraint requires considering factors outside the entity's control, the length of time until resolution, the entity's experience with similar contracts, and the range of possible outcomes.  

• Significant Financing Components: If a contract contains a significant financing component, the promised amount of consideration must be adjusted for the time value of money. This adjustment is necessary when the timing of payments provides the customer or the entity with a significant benefit of financing the transfer of goods or services. Factors to consider include the difference between the promised consideration and the cash selling price, and the expected length of time between the transfer of goods/services and payment. A practical expedient allows entities not to adjust for a significant financing component if the period between transfer and payment is expected to be one year or less.  

• Non-Cash Consideration: When a customer promises consideration in a form other than cash, the entity should measure it at its fair value. If the fair value cannot be reliably measured, the entity should measure the consideration indirectly by reference to the stand-alone selling price of the goods or services exchanged.  

• Consideration Payable to the Customer: This includes cash amounts, credits, vouchers, or coupons that an entity pays or promises to pay to a customer. Such consideration is generally accounted for as a reduction of the transaction price (and thus revenue) unless it is in exchange for a distinct good or service received from the customer. The reduction of revenue is recognized when (or as) the entity recognizes revenue for the related goods or services, or when it pays or promises to pay the consideration.  

Determining the transaction price is a critical step, as it forms the basis for allocating revenue to the identified performance obligations. The complexities introduced by variable consideration and financing components require robust estimation techniques and significant judgment, impacting the reported revenue amount.

2.4. Step 4: Allocate the Transaction Price to Performance Obligations

The fourth step involves allocating the total transaction price to each distinct performance obligation identified in the contract. The fundamental objective of this allocation is to ensure that revenue recognized for each performance obligation accurately reflects the amount of consideration to which the entity expects to be entitled in exchange for satisfying that specific obligation. This allocation is primarily based on the  

relative standalone selling prices of each distinct good or service promised in the contract. The standalone selling price is defined as the price at which an entity would sell a promised good or service separately to a customer.  

If the standalone selling prices are directly observable (i.e., the entity sells the good or service separately), these prices should be used for allocation. However, if standalone selling prices are not readily observable, the entity must estimate them. Ind AS 115 provides three primary approaches for estimating standalone selling prices :  

• Adjusted Market Assessment Approach: This method involves evaluating the market in which the entity sells its goods or services and estimating the price that a customer in that market would be willing to pay. This may include considering prices charged by competitors for similar goods or services and the entity's pricing strategies.  

• Expected Cost Plus Margin Approach: Under this approach, the entity forecasts the expected costs of satisfying a performance obligation and then adds an appropriate margin for that specific good or service. This method is often used when a market price is not available, but the costs are reliably estimable.  

• Residual Approach: This approach is generally applied only in limited circumstances, specifically when the standalone selling price of a good or service is highly variable or uncertain, or when the entity has not yet established a price for that good or service. Under this method, the entity estimates the standalone selling price by subtracting the sum of the observable standalone selling prices of other goods or services promised in the contract from the total transaction price.  

Example of Allocation :  

Consider an entity selling a television (TV) with a three-year maintenance contract for a total bundled price of Rs. 100,000. In this scenario, there are two distinct performance obligations: the sale of the TV and the provision of maintenance services for three years. If the standalone selling price of the TV without the maintenance service is Rs. 85,000, and the maintenance service does not have an observable standalone selling price, the entity can use the residual approach to estimate the standalone selling price of the maintenance service. Estimated Standalone Selling Price of Maintenance Service = Total Transaction Price - Standalone Selling Price of TV = Rs. 100,000 - Rs. 85,000 = Rs. 15,000.

Based on this allocation, the revenue related to the sale of the TV (Rs. 85,000) would be recognized at the point in time when control of the TV is transferred to the customer (e.g., upon delivery). The revenue for the maintenance service (Rs. 15,000) would be deferred and recognized systematically over the three-year service period. This would typically mean recognizing Rs. 5,000 (Rs. 15,000 / 3 years) at the end of each year, assuming a straight-line recognition pattern. Furthermore, if there is a significant time difference between the TV sale and the recognition of maintenance revenue, the present value concept would be applied to unwind any embedded financing component for the deferred revenue, as discussed in Step 3. This detailed allocation ensures that revenue is recognized in a manner that accurately reflects the value of each distinct promise delivered to the customer.  

2.5. Step 5: Recognize Revenue When (or As) Performance Obligations are Satisfied

The final and crucial step in the Ind AS 115 model is to recognize revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service to a customer. The core concept here is the transfer of  

control of the asset to the customer. Control over an asset is defined as the ability to direct its use and obtain substantially all of its remaining benefits. This also implies the ability to prevent other entities from directing the use of and receiving benefits from the asset. The benefits of an asset include potential cash flows (inflows or savings in outflows) that can be obtained through various means, such as using the asset to produce goods or services, enhancing the value of other assets, settling liabilities, or selling/exchanging/pledging the asset.  

An entity must determine for each performance obligation whether it is satisfied over time or at a point in time. This distinction is critical for the timing of revenue recognition.  

Revenue Recognized Over Time: A performance obligation is satisfied over time if any of the following three criteria are met :  

1. Customer simultaneously receives and consumes benefits: The customer simultaneously receives and consumes the benefits provided by the entity's performance as the entity performs. This is typical for services that are consumed as they are rendered, such as cleaning services.  

2. Customer controls asset as it is created or enhanced: The entity's performance creates or enhances an asset (e.g., work-in-progress) that the customer controls as the asset is created or enhanced. This applies when the customer has legal title or a contractual right to the asset being built or improved.  

3. No alternative use and enforceable right to payment: 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. An asset has no alternative use if the entity is contractually or practically restricted from redirecting it to another customer. The right to payment must be present even if the customer can terminate the contract for reasons other than the entity's failure to perform. This criterion is particularly relevant for long-term service contracts or custom-built assets.  

If a performance obligation is satisfied over time, the entity recognizes revenue by measuring the progress toward complete satisfaction of that obligation at the end of each reporting period. This measurement should use a single, consistent method that faithfully depicts the entity's performance in transferring control of goods or services to the customer. Two common methods for measuring progress are :  

• Input Methods: Based on the entity's efforts or inputs to satisfy the performance obligation (e.g., costs incurred relative to total expected costs, labor hours expended).  

• Output Methods: Based on the value of goods or services transferred to the customer (e.g., units produced or delivered, milestones achieved, appraisals of results).  

When applying these methods, goods or services for which control has not yet been transferred should be excluded, and the measure of progress should be updated to reflect any changes in the performance obligation outcome. Revenue is recognized only if the entity can reasonably measure its progress; otherwise, only the costs incurred are recognized until reliable measurement is possible.  

Revenue Recognized at a Point in Time: If none of the criteria for revenue recognition over time are met, the performance obligation is considered to be satisfied at a specific point in time. This typically occurs when control of the promised good or service is transferred to the customer at a single moment. Indicators that control has transferred at a point in time include :   

• The entity has a present right to payment for the asset.

• The customer has legal title to the asset.

• The customer has physical possession of the asset.

• The customer has the significant risks and rewards of ownership of the asset.

• The customer has accepted the asset.

Example of Point-in-Time Recognition :  

A furniture store enters into a contract to sell a couch for Rs. 100,000, with delivery to the customer's home in two weeks. The furniture store recognizes revenue when the couch is delivered to the customer's home, as this is the point at which control of the good is transferred to the customer.  

The shift from the "risk and rewards" approach of Ind AS 18 to the "control" approach under Ind AS 115 is a fundamental change that requires entities to carefully assess when control transfers for each distinct performance obligation. This assessment is crucial for determining the appropriate timing of revenue recognition and can significantly impact financial statements, especially for industries like real estate that previously relied heavily on the percentage of completion method.  

3. Specific Accounting Considerations

Beyond the five-step model, Ind AS 115 provides specific guidance for various complex transaction types and scenarios that frequently arise in business.

3.1. Accounting for Contract Costs

Ind AS 115 provides specific guidance on the accounting treatment of costs incurred in relation to contracts with customers. These costs are generally categorized into two types:

• Incremental Costs of Obtaining a Contract: These are costs that an entity would not have incurred if the contract had not been obtained. Examples include sales commissions paid to employees for securing a contract. Such costs are recognized as an asset if the entity expects to recover them. This means that if the commission is directly attributable to a successful contract and is expected to be recouped through the revenue generated from that contract, it should be capitalized rather than expensed immediately. This capitalization provides a more accurate matching of expenses with the revenue they help generate over the contract's life.  

• Costs to Fulfill a Contract: These are costs incurred in performing the activities required to satisfy a performance obligation. An entity should recognize an asset from such costs if they meet all of the following criteria :  

  • They relate directly to a contract that an entity can specifically identify.  

  • They generate or enhance resources of the entity that will be used in satisfying performance obligations in the future. This implies that the costs create or improve an asset that contributes to the entity's ability to fulfill its promises.  

  • They are expected to be recovered. This ensures that only economically viable costs are capitalized.  

    Examples of such costs could include direct labor, direct materials, and an allocation of costs that relate directly to the contract or to contract activities (e.g., costs of contract management and supervision, and depreciation of tools and equipment used on a contract). If costs do not meet these criteria, they are expensed as incurred. This guidance aims to provide a more consistent and economically representative accounting for the costs associated with generating and fulfilling revenue-generating contracts.

3.2. Principal versus Agent Considerations

A crucial determination under Ind AS 115, particularly in arrangements involving a third party, is whether the entity is acting as a principal or an agent. This distinction directly impacts how revenue is recognized:  

• Principal: If an entity is a principal, it recognizes revenue on a gross basis, reflecting the total consideration to which it is entitled for the goods or services transferred to the customer.  

• Agent: If an entity is an agent, its performance obligation is to arrange for the provision of the specified good or service by another party. In this case, the entity recognizes revenue in the amount of any fee or commission to which it expects to be entitled, effectively on a net basis.  

The determination hinges on whether the entity controls the specified good or service before it is transferred to the customer. Control, in this context, means the ability to direct the use of, and obtain substantially all of the remaining benefits from, the specified good or service.  

Indicators of a Principal (entity controls the good/service) :  

• Primary Responsibility: The entity is primarily responsible for fulfilling the promise to provide the specified good or service. This includes responsibilities like accepting or rejecting orders, developing sales strategy, and handling customer complaints.  

• Inventory Risk: The entity has inventory risk before the good or service is transferred to the customer or after transfer of control to the customer (e.g., if the customer has a right of return).  

• Discretion in Pricing: The entity has discretion in establishing the price that the customer pays for the specified good or service. While an agent can also have pricing discretion, this indicator is stronger for a principal.  

• Other qualitative factors: The entity's ability to direct the use of the good or service, obtain benefits from it, or prevent others from doing so.

Indicators of an Agent (entity does not control the good/service) :  

• The entity's performance obligation is to arrange for another party to provide the specified good or service.  

• The entity does not control the specified good or service before it is transferred to the customer.  

The shift from a "risks-and-rewards" model to a "control" model under Ind AS 115 has changed how principal versus agent considerations are evaluated. The indicators now serve to support the conclusion of whether control is obtained, rather than merely assessing risks and rewards. For example, in a case study, a reporting entity building customized products might be considered an agent if components are procured from suppliers nominated by the end customer without the entity taking on significant risks. In such a scenario, the company would recognize only the service fee as revenue, netting the cost of components from cost of sales. This detailed evaluation is crucial for accurate revenue presentation, particularly for companies operating as intermediaries or in supply chain arrangements.  

3.3. Revenue Recognition for Licenses

Ind AS 115 provides specific guidance for revenue recognition from licenses of intellectual property (IP). The accounting treatment depends on the nature of the license and whether it is distinct from other goods or services promised in the contract.  

If a license is distinct, the entity must assess its nature to determine whether revenue allocated to the license should be recognized at a point in time or over time. This assessment hinges on whether the license provides a "right to use" or a "right to access" the entity's intellectual property:  

• Right to Use: If the license grants the customer a right to use the entity's IP as it exists at the point in time the license is granted, revenue is typically recognized at a point in time. This applies to licenses for static IP, where the entity's ongoing activities do not significantly affect the customer's ability to benefit from the IP.

• Right to Access: If the license grants the customer a right to access the entity's IP as it exists throughout the license period, and the entity's ongoing activities (e.g., maintenance, updates that significantly change the IP) affect the customer's ability to benefit from the IP, revenue is typically recognized over time. This often applies to dynamic IP, such as software-as-a-service (SaaS) or online content platforms, where the customer benefits from the entity's continuous efforts to maintain or update the IP.  

Example :  

Consider Company X entering into a five-year patent license agreement with Customer Z for a fixed fee, while also providing essential consulting services for two years.

• Initially, Company X identifies two promises: the patent license and the consulting services.

• However, if the license is not distinct from the service component because the services are essential and highly interrelated (e.g., the patent is being created specifically for Z and has no alternative use to X, and X has an enforceable right to payment for performance completed to date), then the license and services are combined into a single performance obligation.

• Company X then considers the nature of the license to determine the period over which this combined performance obligation will be satisfied and the appropriate measure of progress.

  • If the license provides a right to use the IP (i.e., the patent is static and the consulting services are for initial implementation), the combined performance obligation might be satisfied over the two-year consulting service period, as the customer gains full utility of the IP through the services.

  • Conversely, if the license provides a right to access Company X’s IP (implying ongoing updates or support integrated with the patent's utility), the performance obligation would not be completely satisfied until the end of the five-year license term, and revenue would be recognized over that five-year period. In both scenarios, Company X must determine an appropriate measure of progress (e.g., time elapsed, costs incurred) to apply over the relevant performance period. This nuanced approach ensures that revenue from licenses accurately reflects the transfer of control and the nature of the entity's ongoing obligations.  

3.4. Accounting for Warranties

The accounting treatment of warranties under Ind AS 115 depends significantly on whether the customer has the option to purchase the warranty separately.  

If a customer has the option to purchase a warranty separately: If a warranty can be purchased independently (e.g., it is priced or negotiated as a distinct item), it is considered a distinct service. This is because the entity is promising an additional service to the customer beyond merely assuring that the product complies with agreed-upon specifications. In such cases, the promised warranty is treated as a separate performance obligation, and a portion of the total transaction price must be allocated to it.  

When assessing whether a warranty provides an additional service, entities should consider factors such as :  

• Legal Requirement: If the warranty is mandated by law, it typically does not constitute a performance obligation under Ind AS 115. Such legal requirements usually exist to protect customers from defective products, not to provide an additional service.  

• Coverage Period Length: A longer warranty coverage period suggests a higher likelihood that the warranty provides a service in addition to product assurance, making it more likely to be a performance obligation.  

• Nature of Tasks: If the entity's tasks under the warranty are solely to ensure the product functions as specified (e.g., returning a defective product for repair), these tasks likely do not create a separate performance obligation.  

If a warranty, or any part of it, provides an additional service beyond product assurance, it is a performance obligation, and the transaction price must be allocated between the product and the service component. It is important to distinguish this from obligations arising from laws requiring compensation for product harm or intellectual property infringement, which do not create performance obligations under Ind AS 115 but are typically accounted for under Ind AS 37, "Provisions, Contingent Liabilities and Contingent Assets".  

If a customer does not have the option to purchase a warranty separately: If a customer cannot purchase a warranty separately, the entity should account for it in accordance with Ind AS 37, "Provisions, Contingent Liabilities and Contingent Assets". This applies unless the warranty, or a part of it, clearly provides the customer with a service in addition to the assurance that the product complies with specifications. In essence, if the warranty is merely an assurance that the product is free from defects at the time of sale, it is a provision. If it offers an extended service, it becomes a performance obligation.  

In situations where an entity promises both an assurance-type warranty and a service-type warranty but cannot reasonably account for them separately, both warranties should be combined and accounted for as a single performance obligation. This detailed guidance ensures that the economic substance of the warranty arrangement is appropriately reflected in the financial statements.  

4. Impact and Significance of Ind AS 115 for Indian Companies

The implementation of Ind AS 115 in India, effective from April 1, 2018, has brought about a profound transformation in financial reporting and business practices across various sectors. This new standard, based on the global IFRS 15, aims to enhance the quality, transparency, and comparability of financial statements in India.  

4.1. Overall Impact on Financial Reporting and Business Practices

The shift to Ind AS 115 necessitates a more detailed and rigorous process for revenue recognition for Indian companies. By introducing a singular underlying principle—the transfer of control over goods or services—the standard significantly reduces the scope for varied interpretations that existed under previous standards. This clarity is particularly beneficial in complex areas such as contracts involving multiple elements or bundled products, licensing arrangements, royalties for intellectual properties, contracts with significant financing components, and those with variable consideration.  

The emphasis on transparency and user-friendliness in financial statement preparation is a cornerstone of Ind AS 115. Its disclosure requirements are designed to provide users with a clear and comprehensive picture of an entity's revenue and cash flows. These disclosures, while more detailed than those under previous regulations, focus on presenting both quantitative and qualitative information regarding :  

• Nature of Revenue: This includes information about the types of revenue a company generates and their relative importance to the business.  

• Recognition and Timing: Details on how much revenue is recognized and precisely when this recognition occurs for each revenue stream.  

• Uncertainties: Any significant uncertainties surrounding the recognized revenue and its related cash flows, providing a more complete risk profile.  

By effectively implementing and disclosing revenue information in accordance with Ind AS 115, companies can achieve several strategic advantages :  

• Enhanced Trust and Credibility: Adherence to the standardized framework builds greater trust and credibility with investors, creditors, and other stakeholders, as financial statements become more reliable and consistent.  

• Improved Benchmarking: Companies can benchmark their performance more effectively against competitors who have also adopted the standard, leading to more meaningful industry comparisons.  

• Achievement of Corporate Governance Goals: Compliance with Ind AS 115 contributes to stronger corporate governance by promoting greater accountability and transparency in financial reporting.  

The shift from the old Accounting Standards (AS) to Ind AS represents a significant change for Indian companies, impacting not only financial reporting but also necessitating adjustments to internal processes, systems, and controls. This transformation encourages a deeper understanding of contractual terms and a more robust approach to revenue management.  

4.2. Industry-Specific Implications

Ind AS 115 has had varied impacts across different industries in India, with some sectors experiencing more profound changes than others due to their specific business models and revenue recognition practices.

Real Estate Sector: The real estate sector in India has been particularly affected by the transition to Ind AS 115. Previously, real estate developers largely relied on the  

Percentage of Completion (POC) method for revenue recognition, particularly for residential projects. This method allowed revenue and profits to be recognized progressively as construction work advanced, based on the proportion of completion.  

Under Ind AS 115, the revenue recognition model for real estate has largely shifted towards the Project Completion Method. This is because, for many residential real estate contracts, the criteria for recognizing revenue "over time" are not met. Specifically, in many common scenarios:  

• The customer does not simultaneously receive and consume the benefits as the entity performs (e.g., a customer cannot live in a partially built apartment).  

• The customer often does not control the asset as it is created or enhanced during construction, as the developer typically controls the construction process and the asset until completion.  

• The asset (the under-construction unit) often has an alternative use to the developer (e.g., it could be sold to another customer if the original contract defaults), and the developer may not have an unconditional enforceable right to payment for performance completed to date if the customer defaults early in the contract. For instance, if a customer defaults and the deposit is the only non-refundable amount, the developer may not have a right to full compensation for work done.  

Consequently, for many residential projects, revenue and profits are now recognized primarily when control of the completed unit is transferred to the customer, typically upon delivery and obtaining of the Occupancy Certificate (OC). This means that payments received from home buyers for under-construction projects are no longer treated as turnover or profit from sales but are instead classified as advances or contract liabilities until control transfers. This change has a significant impact on reported revenue numbers, profitability, and earnings per share (EPS) for real estate companies, often leading to a deferral of revenue recognition compared to the POC method. While underlying cash flows are not directly impacted, the timing of reported revenue and profits changes materially, affecting financial ratios and investor perceptions.  

Technology and Software-as-a-Service (SaaS): Ind AS 115 provides specific guidance for the technology sector, particularly for SaaS contracts and licenses. Revenue recognition for SaaS companies, with their custom and mixed pricing plans, can be complex. The standard's five-step model helps navigate these complexities, focusing on identifying distinct performance obligations (e.g., software license vs. hosting vs. support) and determining whether revenue should be recognized over time (for access to dynamic IP or ongoing services) or at a point in time (for static licenses). This requires a careful analysis of the nature of the software and services provided.  

Other Sectors: Industries such as mining and metals, engineering-procurement-construction (EPC), and telecom are also significantly impacted. EPC contracts, similar to construction, require a detailed assessment of control transfer to determine if revenue can be recognized over time. Telecom companies, with their bundled offerings (e.g., phone and service plans), must meticulously allocate transaction prices to distinct performance obligations. The standard's clarity on multiple-element contracts, variable consideration (e.g., performance bonuses, penalties), and financing components is particularly relevant across these diverse sectors.  

4.3. Challenges in Implementation

Despite the benefits of enhanced transparency and global comparability, the implementation of Ind AS 115 has presented several challenges for Indian companies. The transition requires significant effort and adjustments across various organizational functions.  

One of the primary challenges stems from the fundamental shift from a "risks and rewards" to a "control" model. This change necessitates a deep understanding of the new control criteria and how they apply to diverse contractual arrangements. Companies must re-evaluate their existing contracts, identify distinct performance obligations, and determine the appropriate timing of revenue recognition based on when control transfers, which often requires significant judgment. This re-evaluation can be particularly complex for long-term contracts or those with multiple deliverables.  

Another challenge arises from the differences between Ind AS 115 and IFRS 15, despite their general convergence. As noted earlier, Ind AS 115 has specific requirements, such as the separate presentation of excise duty in the profit and loss statement. This means Indian entities cannot simply adopt IFRS 15 interpretations wholesale; they must be mindful of and adapt to these local nuances. The treatment of penalties as variable consideration also presents a distinct challenge, requiring careful assessment of whether a penalty is "inherent in the determination of the transaction price". Such differences demand specialized local expertise and may complicate reporting for companies that operate under both frameworks.  

Furthermore, Ind AS 115 mandates additional and more detailed disclosures compared to previous Indian standards and even IFRS 15. For instance, entities are required to provide a reconciliation of revenue recognized with the contracted price, detailing adjustments for discounts, rebates, and other variable considerations. This increased level of disclosure demands robust data collection, analysis, and reporting systems, which may require significant investment in IT infrastructure and personnel training. Companies need to ensure their internal controls and processes are adequate to capture and present this granular information accurately.  

The transition itself posed a significant challenge. Entities had two primary transition options: full retrospective application or modified retrospective application. The full retrospective approach required restating comparative information and recording the cumulative impact as of the earliest period presented (e.g., April 1, 2017, for a March 31, 2019 year-end), potentially requiring a third balance sheet. The modified retrospective approach, while simpler as it did not require restating comparatives, still necessitated recognizing the cumulative effect as an adjustment to the opening balance of equity at the date of initial application (e.g., April 1, 2018) and came with additional disclosure requirements in the year of adoption. For first-time adopters of Ind AS, the simplified transition method was not available, adding another layer of complexity.  

Overall, the implementation of Ind AS 115 has required companies to undertake comprehensive assessments of their contracts, revise accounting policies and procedures, update IT systems, and provide extensive training to finance and accounting teams. The standard's industry-agnostic nature means that management must apply significant professional judgment based on the specific facts and circumstances of their contracts.  

5. Presentation and Disclosure Requirements

Ind AS 115 places a strong emphasis on transparent and comprehensive presentation and disclosure in financial statements, aiming to provide users with a clear and detailed understanding of an entity's revenue and cash flows.  

5.1. Presentation in Financial Statements

When either party to a contract has performed, the entity is required to present the contract in the balance sheet as either a contract asset or a contract liability, depending on the relationship between the entity's performance and the customer's payment. Unconditional rights to consideration are presented separately as a  

receivable.  

• Contract Liability: An entity presents a contract as a contract liability if the customer pays consideration, or is due to pay consideration, before the entity transfers the goods or services to the customer. This represents the entity's obligation to transfer goods or services for which it has already received payment. Previously, this might have been termed "deferred revenue".  

• Contract Asset: An entity presents a contract as a contract asset if the entity transfers goods or services to the customer before the customer pays consideration or before the consideration is due. This represents the entity's right to consideration in exchange for goods or services that the entity has already transferred. This excludes any amount already presented as a receivable. Previously, this might have been termed "accrued revenue".  

• Receivable: An unconditional right to consideration is presented as a receivable. A right to consideration is unconditional if only the passage of time is required before payment is due.  

The standard allows entities to use alternative descriptions for 'contract assets' and 'contract liabilities' in the balance sheet, provided they convey the same meaning.  

5.2. Disclosure Requirements

Ind AS 115 mandates extensive qualitative and quantitative disclosures to provide users with comprehensive information about an entity's contracts with customers. These disclosures aim to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from these contracts. Key disclosure requirements include :  

• Disaggregation of Revenue: Entities must disaggregate revenue from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. This helps users understand the different sources and types of revenue.  

• Contract Balances: Information about contract balances, including opening and closing balances of contract assets, contract liabilities, and receivables from contracts with customers. Entities are also required to provide an explanation of significant changes in these balances during the reporting period, effectively a reconciliation.  

• Performance Obligations: Qualitative information about performance obligations, including a description of when the entity typically satisfies its performance obligations, the significant payment terms, the nature of goods or services promised, and any significant judgments made in determining the timing of satisfaction.  

• Transaction Price Allocated to Remaining Performance Obligations: Information about the transaction price allocated to unsatisfied or partially unsatisfied performance obligations, and when the entity expects to recognize that amount as revenue.  

• Significant Judgments and Changes in Judgments: Disclosure of significant judgments made in applying the revenue recognition model, particularly in identifying performance obligations, determining the transaction price (including estimates of variable consideration), and allocating the transaction price.  

• Contract Costs: Information about capitalized contract costs, including the judgments made in determining the amount of costs incurred to obtain or fulfill a contract that are capitalized, the method used to amortize those assets, and their carrying amount.  

The detailed nature of these disclosures, particularly the reconciliation of revenue with contracted price and the breakdown of adjustments (e.g., discounts, rebates), provides a deeper level of transparency than was previously available. This allows stakeholders to gain a more granular understanding of the drivers of an entity's revenue and the associated risks and uncertainties.  

6. Conclusions

Ind AS 115 represents a pivotal advancement in Indian financial reporting, aligning domestic practices with global standards and significantly enhancing the transparency and comparability of financial statements. Its core principle, centered on the transfer of control, fundamentally alters how and when entities recognize revenue, moving away from the more traditional "risks and rewards" model. This shift demands a rigorous, five-step analytical process, requiring entities to meticulously identify contracts, delineate distinct performance obligations, accurately determine and allocate transaction prices, and precisely time revenue recognition based on control transfer.

The standard's comprehensive guidance on complex areas such as variable consideration, financing components, non-cash consideration, contract costs, principal-versus-agent relationships, and specific revenue streams like licenses and warranties, provides a robust framework for diverse business scenarios. While its convergence with IFRS 15 offers strategic benefits for global comparability and investment, the subtle differences specific to the Indian context, such as excise duty presentation and penalty treatment, necessitate careful attention and specialized local expertise.

The implementation of Ind AS 115 has presented significant challenges, particularly for industries like real estate, where the shift from the Percentage of Completion method to the Project Completion method has resulted in substantial changes to reported revenue timing and profitability. These challenges underscore the need for robust internal controls, updated IT systems, and continuous training for finance professionals.

Ultimately, Ind AS 115 aims to provide users of financial statements with more useful and reliable information about an entity's revenue and cash flows. By embracing its principles and diligently adhering to its detailed presentation and disclosure requirements, Indian companies can build greater trust with stakeholders, improve benchmarking capabilities, and strengthen their corporate governance frameworks, thereby contributing to a more transparent and credible financial ecosystem.