Ind AS · Key standards
What are the basics of revenue recognition under Ind AS 115?
Short answer
Ind AS 115 recognises revenue in five steps: identify the contract, identify each separate promise (performance obligation), work out the transaction price, allocate it to the promises, and recognise revenue when or as each promise is fulfilled, which is when control passes to the customer. Revenue may be recognised at a point in time or over time. Discounts, rebates, returns and financing must be estimated.
The five steps
| Step | Question | Example: software licence with one year of support for ₹12 lakh |
|---|---|---|
| 1. Contract | Is there an enforceable contract with commercial substance, and is payment probable? | Signed agreement |
| 2. Performance obligations | What separate goods or services have been promised? | (a) the licence; (b) one year of support |
| 3. Transaction price | How much will the entity be entitled to, after variable amounts and financing? | ₹12 lakh |
| 4. Allocate | Split the price by relative stand-alone selling prices | Licence ₹9 lakh; support ₹3 lakh |
| 5. Recognise | When, or as, control passes | Licence ₹9 lakh on delivery; support ₹25,000 a month over the year |
Point in time or over time
Revenue is recognised over time if any one of these applies:
- the customer receives and uses the benefit as the entity performs (for example, cleaning or support services);
- the entity's work creates or enhances an asset the customer controls (for example, building on the customer's land); or
- the work creates an asset with no alternative use to the entity, and the entity has an enforceable right to payment for work done to date.
Otherwise, revenue is recognised at the point in time control passes. Indicators include legal title, physical possession, the risks and rewards, acceptance, and a present right to payment.
Areas that need judgement
- Variable consideration: discounts, rebates, incentives, penalties and returns are estimated and included only to the extent a significant reversal is highly unlikely.
- Significant financing: if payment is far from delivery (usually more than a year), the price is adjusted for the time value of money.
- Principal or agent: an agent recognises only its commission.
- Contract costs: the costs of obtaining a contract, such as sales commission, may be capitalised and amortised.
- Warranties: a standard warranty is a provision; an extended warranty sold separately is a performance obligation.
Disclosures
Ind AS 115 needs a breakdown of revenue, contract asset and liability balances, the transaction price allocated to obligations not yet satisfied, and the judgements made. See our Ind AS guide.
Legal basis
- Ind AS 115, Revenue from Contracts with Customers, Companies (Indian Accounting Standards) Rules, 2015
Official sources
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