Article on Ind AS 115

Revenue from contract with customers

(Analysis of Step 5 of Ind AS 115)
By: CA. Kapileshwar Bhalla

Note:

Ind AS 115 is a very comprehensive standard. Keeping in view the complexities involved, I am writing
an article which elaborates on the conceptual clarity on Step 5 out of the 5-step model of Ind AS 115.

As we are all aware that Ind AS 115 is based on a 5-step model; the 5th step involves –

‘Recognition of revenue as and when the performance obligations are satisfied’.

At the first instance we need to keep 3 important aspects in mind:

1. Revenue recognition in Ind AS 115 is based on ‘control test’ being met and not merely ‘risk
and reward test’ (unlike the position in the erstwhile Ind AS 18).
2. Revenue recognition will take place either ‘over a period of time’ or ‘at a point in time’.
3. Once we decide to recognise revenue ‘over a period of time’ we need do decide the ‘method
for measuring the progress’ for recognition of revenue.

Let’s understand the flow of concept;

 Sub-steps involved in
Step 5 of Ind AS 115

Sub-step 1:
Does the 'control' stands transferred?
(Apply Para 33 and 38)

Yes No

Sub-step 2:
Revenue recognition
Are the performance obligations satisfied 'over a period of cannot take place
time' or 'at a point in time'?
(Apply Para 35)

Sub-step 3:
If the performance obligations are satisfied 'over a
period of time' - What methods do we use to measure
progress?
(Apply Para 41, 42, 44 and 45)

Let’s us take up each sub-step one by one;

Sub-step 1:
Does the 'control' stands transferred?
(Apply Para 33 and 38)
Para 33: [What is control?]

Control of an asset refers to the ability to direct the use of, and obtain substantially all of the
remaining benefits from, the asset.
In other words,

Control includes the ability to prevent other entities from directing the use of, and obtaining the
benefits from, an asset.

Para 38: [Indicators of Control]

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

2. The customer has legal title to the asset.
3. The entity has transferred physical possession of the asset.
4. The customer has the significant risks and rewards of ownership of the asset.
5. The customer has accepted the asset.

Note: The list above is illustrative in nature. Thus, it can be a subjective assessment in a practical
life.

Sub-step 2:
Are the performance obligations satisfied 'over a period of time' or 'at a point
in time'?
(Apply Para 35)
Para 35:

An entity transfers control of a good or service over time and, therefore, satisfies a performance
obligation and recognises revenue over time, if one of the following criteria is met:

(a) the customer simultaneously receives and consumes the benefits provided by the entity’s
performance as the entity performs (see paragraphs B3–B4);
(b) the entity’s performance creates or enhances an asset (for example, work in progress)
that the customer controls as the asset is created or enhanced (see paragraph B5); or
(c) the entity’s performance does not create an asset with an alternative use to the entity
(see paragraph 36) and the entity has an enforceable right to payment for performance
completed to date (see paragraph 37).

Let me create a flow chart to elaborate the entire understanding of Para 35;
 Step (i):
Does the customer simultaneously receives and consumes the
benefits?
(Evaluation from customers point of view)

Yes No

Performance Step (ii):

obligations are Does the customer obtain control over the asset as
satisfied over time it is being created?
(Evaluation from customers point of view)

Yes No

Performance Step (iii):

obligations are
satisfied over time
Entity's performance does
not create an asset with an
alternative use + entity has
enforceable right to receive
payment for work
completed?
(Evaluation from entity's
point of view)

Yes No

Performance obligations
Performance obligations are satisfied at a point in
are satisfied over time time
 Sub-step 3:
If the performance obligations are satisfied 'over a period of time' –
What methods do we use to measure progress?
(Apply Para 41, 42, 44 and 45)
Methods for measuring progress:

Appropriate methods of measuring progress include output methods and input methods.

Note:

In determining the appropriate method for measuring progress, an entity shall consider the nature of
the good or service that the entity promised to transfer to the customer.

Caution in applying Input Method:

When applying a method for measuring progress, an entity shall exclude from the measure of
progress any goods or services for which the entity does not transfer control to a customer.

In other words,

Cost incurred should exclude cost incurred on those goods/services for which control has not been
transferred.

Once the method has been selected, we proceed as under;

Revenue Recognition

Case I: Case II:

Entity can measure the Entity cannot measure the
progress progress

Revenue =
Revenue = Cost
Transaction price X % incurred
completion

Note:

One may refer to the text of Ind AS 115 for the relevant paragraph numbers.