27th October, Mr. Hans Hoogervorst International Accounting Standards Board 11st Floor, 30 Cannon Street, London, EC4M6XH. Dear Mr.

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1 27th October, 2015 Mr. Hans Hoogervorst International Accounting Standards Board 11st Floor, 30 Cannon Street, London, EC4M6XH Dear Mr. Hoogervorst, Re: Comment on ED/2015/6 Clarifications to IFRS 15. We thank the International Accounting Standards Board for giving us the opportunity to comment on the Board s Exposure Draft - Clarifications to IFRS 15. We are sending our comments on the ED. In this connection, we would like to make the following points: 1. We appreciate the fact that there have been minimum changes in the standard itself. Explaining the principle through examples has its own limitations, but the solution does not lie in making the standards excessively rule based. It is true that few examples cannot cover all situations in all industries, but principle based analysis of examples involving a specific situation should enable users of the standards in various industries to reach appropriate conclusions. It is heartening to note that IASB has done it aptly. 2. The consultative process followed through formation of TRG has proved to be successful. Many of the suggestions emanated from the TRG have been given due consideration by the Boards as reflected in the Exposure Draft. We appreciate this development. We agree with IASB s view that IFRS 15 henceforth should have minimum changes. However, we believe that a new standard of such far reaching impact may give rise to new implementation issues which have not yet been envisaged. We suggest that the TRG should continue deliberating implementation issues faced by stakeholders and place before IASB relevant recommendations.

2 3. We agree with IASB s view that further issues may be addressed through the post implementation review. However, we believe that the Board should balance flexibility with stability and if required, incorporate amendments in the standard if it significantly helps the implementation process. Yours faithfully, Barindra Sanyal Vice President - Finance

3 Question 1 Identifying performance obligations Comments We had submitted the need for IFRS 15 to acknowledge the difference between modifying software and building an IT solution around existing software. We requested you to include in the Illustrated Examples (IE), a situation where even though the development of IT solution or the installation service is sizeable and complex, as long as it does not involve changing or modifying or creating additional functionality of the third party software; the supply of software product and development of IT solution are separate distinct performance obligations. We believe that the inserted texts at multiple places would address the issues raised by us. The basis of our conclusion is given below: The inserted text in para IE51 makes clear that integrating software into the customer s system, per se does not mean that the process involves significant modification/customization of the software. The insertions in the para IE51 brings out that although the entity integrates the software into customer s system, (a) the entity could transfer the software license independent of the installation service, (b) the customer could benefit from the license if such transfer would have been made and (c) the customer could acquire the software license separately without affecting other promises in the contract. Therefore the conclusion is that the promises in the contract are not highly dependent on or interrelated with each other. The insertion in para IE58C concludes, Even though the installation depends on the successful transfer of the equipment to the customer, the entity could fulfil its promise to deliver the equipment without having to install it. Similarly, the entity could fulfill the installation service if the customer had acquired the equipment from another entity. Accordingly, the entity s promise to deliver the equipment and its promise to provide installation services are not highly dependent on, or interrelated with each other. This insertion has clearly brought out that the entity might have made multiple promises within a contract, but it is to be seen whether the promises could have been fulfilled independently by the entity or by another party. This is an important test to be performed even in the case of supply of software license and installation thereof. Insertion in para IE 58G states clearly that contractual requirements will not affect the entity s decision regarding distinct performance obligations. This is an important clarification, because it brings out that it is not the intent of the contracting parties, but the nature of good/service promised in the contract which would determine the distinctiveness of the performance obligations in a contract. Insertion in para IE 58J brings out the principle that if the promise is not to provide a significant integration service that transforms the equipment and consumables into a different combined output

4 and the equipment and consumables are not significantly customized or modified from the form in which each is sold separately, the two promises are distinct. The concept of transformative relationship and functional relationship, discussed in the Staff Paper on the subject, has been brought up here. We have particularly taken note of the fact that BC11 has recorded that The IASB observed that an entity should not merely evaluate whether one item, by its nature, depends on the other (i.e. whether two items have a functional relationship). Instead, an entity should evaluate whether there is a transformative relationship between the two items in the process of fulfilling the contract. The concept is now very clear. We take note of the fact that there has been no insertion in Case B in Example 11. Para IE54 talks of a contract where 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. Question still remains, (a) what is the meaning of the words substantially customized and (b) what is meant by add significant new functionality to enable the software to interface.? Answer to the first question lies in searching for the relationship - functional or transformative. For example, in the case of installation of third party software, if the relationship is functional, the two promises have to be distinct. Answer to the second question is still not clear. However, the modified Example 54 has given us a clue. Insertion in para IE277 of Example 54, in the context of right to use (as opposed to right to access) intellectual property, brings out a case where the software supplier does not have any contractual or implied obligation (independent of updates and technical support) to undertake activities that will change the functionality of the software during the license period. The entity observes that the software has significant stand-alone functionality and therefore the ability of the customer to obtain the benefit of the software is not substantially derived from the entity s ongoing activities. The entity therefore determines that the contract does not require and the customer does not reasonably expect the entity to undertake activities that significantly affect the software (independent of the updates and technical support). A combined reading of par IE54 and para IE277 leads to the logical conclusion that (a) updates/technical support/integration with customer s existing system do not add significant new functionality in a software, (b) in order to add significant functionality, the software has to undergo a transformative change and (c) job done to effect the said transformative change cannot be considered distinct. Para IE 55 states 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 in

5 paragraph 27(b) of IFRS 15 (on the basis of the factors in paragraph 29 of IFRS 15) is not met. Thus, the software license and the customized installation service are not distinct. The expression the customized installation service can be provided by other entities used in para IE54 and para IE55 gives an impression that any entity can add new functionality to software. This is factually incorrect, because, if the software code is with an entity, other entities will not be able to add new functionalities to the software. Similarly, if the entity, while executing the contract, installs a third party software, it would not be possible for the entity to add new functionality to the software. Case B is meant to cover a situation where the entity is delivering software owned by the entity itself and in order to meet the requirement of the contract, the entity transforms the software in order to add new functionality to the software. In this case, the customer will not be able to sell the software in the market or call some other entity to execute the contract. In such situation, the expression although the customized installation service can be provided by other entities, is misplaced and therefore should be deleted. Question 2 Principal versus agent considerations Comments Assessment of whether an entity is a principal or agent depends upon who controls the goods and services before they are transferred to the customer. The very first TRG meeting in July 2014, indicated that members felt that the control principle complicated the principal- agent assessment, especially in transactions involving services and intangible goods. The inserted text in B34, clarifies that the assessment of principal agent relationship is for each distinct good or service to be provided to the customer. This text brings in focus that the assessment is for specified good or service rather than the performance obligation. Even an agent would have its performance obligation vis-à-vis the customer to arrange for good or service. The performance obligation will always be controlled by the entity - whether entity is a principal or an agent. The inserted B 34A articulates this principle clearly. The inserted paragraph B35A explains what the principal controls, in transactions involving intermediaries. The insertions in paragraph B37 brings out indicators for identification of controls before the specified good or service is transferred to the customer. Read with BC 35, it is very clear that the indicators (a) do not override the assessment of control; (b) should not be viewed in isolation; (c) do not constitute a separate or additional evaluation; and (d) should not be considered a checklist of criteria to be met, or factors to be considered, in all scenarios.

6 We note that the Example 45, 46, 46A, 47, 48 and 48A have been modified/inserted have brought out the principles laid down in the standard quite exhaustively and clearly. The examples have covered multiple situations, which would be helpful to the users of the standard. Question 3 Licensing Comments TRG discussions in October 2014, brought out that the members were looking for clarification on the following issues: How to treat a license when it is not distinct and instead would be bundled with non-license elements in a combined performance obligations. When a license of IP is a dominant component in a combined performance obligation, an entity would apply license-specific guidance, but additional guidance is required on situations in which the license component is part of bundled performance obligation and is less than dominant. In determining whether a customer has right-to-use or right-to-access license, the nature of licensor s activities would play important role. Three interpretations emerged, namely, (a) changes are limited to those that affect the form or functionality of the IP, (b) only the value of the IP needs to be affected and (c) same as (b) with high threshold of significant changes. In response to the discussions and feedback, the board decided to (a) make few changes in the standard, (b) provide clarifications relating to principles in basis for conclusions and (c) provide clarifications through additional/modified illustrated examples. BC62 notes that the board did not intend to suggest that the nature of a license is a right to access intellectual property only if the entity s activities significantly affect the form or functionality of the intellectual property to which the customer has rights. Determining the nature of a license is defined by the criteria in paragraph B58, which do not refer to form or functionality. The inserted paragraph B59A makes clear that the assessment of whether the entity s activities change the IP to which the customer has rights is based on the utility of the intellectual property. In some cases, the utility of intellectual property is derived from the form or functionality of the intellectual property to which the customer has rights and in other cases, from the value of that intellectual property. The paragraph also makes it clear that in some cases an IP derives its value from its standalone functionality. We welcome the explanatory paragraph B59A in the body of the standard. The term significant stand alone functionality has not been defined in the standard but the examples illustrate it. Modified example 54, which is based on the same facts as Example 11, Case A, explains that the customer does not expect the entity to undertake activities that significantly affect the software (other than the updates and technical support) and therefore the ability of customer to obtain the

7 benefits of the software is not substantially derived from the entity s ongoing activities. Consequently, the license is accounted at a point in time. Example 55, explains a case where the IP does not have significant standalone functionality. This example has been modified, inserting clear analysis like A customer generally would not separately acquire the initial license because the updates are integral to its ability to use the entity s constantly evolving technology. This indicates that the license is significantly affected by the promise to provide updates. Conclusion is that the performance obligation is satisfied over time. Example 56 relates to a case where a pharma company licenses to a customer its patent rights to a drug and also promises to manufacture the drug for the customer. Case B relates to a situation where the manufacturing process is not unique and several other entities can carry out the manufacturing process. The analysis has been modified to bring home the concept that (a) neither the license nor the manufacturing service, is significantly modified or customized by the other and the entity has not promised to provide a significant integration service that transforms the license and the manufacturing service into a combined output, (b) the customer could acquire the license separately without significantly affecting the entity s promise to manufacture the drug and (c) the drug formula has significant stand-alone functionality and therefore the ability of the customer to obtain the benefit of the drug formula is not substantially derived from the entity s on-going activities. Conclusions are, (a) license and the manufacturing service are DPO and (b) transfer of license is in the nature of right-to-use the entity s IP and (c) license is to be accounted at a point in time. The clarifications provided are significant and very clear. In a contract for providing multi-component goods and services, the concept of components transforming each other, giving rise to a combined output has been brought in this would help the users of standards to apply the principle to their situations. Example 57 deals with a case where an entity provides franchise license, receives sales based royalty and provides equipment at separate consideration. Here also, the inserted clarification in para IE291 states, The entity has not promised to provide a significant integration service that transforms the license and equipment into a combined output and neither the license nor the equipment, is significantly modified or customized by the other. Here again the difference between the functional relationship and transformative relationship between components of a contract has been aptly brought in. It would help industries in applying the principles. 58 and 59 bring out the differences between standalone functionality of a license and entity s activities which change the form of IP. The inserted texts in both examples link the assessment of the nature of the IP to the existence of standalone functionality. Discussions in TRG meeting held in July 2014, had indicated that constituents had doubts about the applicability of the royalties constraint for sales based or usage based royalties in exchanges of IP. We

8 welcome the initiative of adding paragraph B63A and B63B in the body of the standard itself, explaining that the royalties constraint applies when the royalty relates to license of predominantly IP. We note that examples 60 and 61 have been suitably modified to clearly link the application of this principle to the illustrated situations. Question 4 Practical expedients on transition Comments TRG discussions in January 2015, indicated that members considered that assessing contract modifications for transition would be onerous and perhaps impracticable. TRG members supported simplification of the accounting treatment relating to contract modifications. We note the board s intention of reducing the effort and cost of transition by allowing entities who are adopting a full retrospective method, of not applying IFRS 15 to completed contracts before the transition date. Paragraph C5 (c), allows an entity to use hindsight for accounting for contract modifications that occurred before transition. The aggregate effect of all of the modifications that occurred between contract inception and the transition date is accounted on transition rather than accounting for the effects of each modification separately. When applied, the above principle could give rise to situations where significant amounts of sales and related profits which otherwise would have been routed through the profit & loss account will find place in the shareholders fund directly. It could happen the other way, namely, sales already routed through profit & loss account may be finding place in profit & loss account again. These fallacies are unwelcome, but possibly in the given circumstances, there is no alternative.

9 Question 5 - Other topics Collectability (para 9(e)) Comments IFRS 15 requires an entity to assess collectability at contract inception. One of the essential criteria of identifying a contract for revenue recognition is probable collectability of the consideration to which the entity is entitled. In the January 2015, TRG meeting, some stakeholders felt that certain contracts with customers that have poor credit quality would not meet the collectability threshold, even though they are otherwise valid and genuine contracts. Other stakeholders felt that those contracts would be valid and genuine if the entity had the ability to protect itself from credit risk. BC 90 explains that the assessment of collectability requires considering the relative position of the entity s rights to consideration and its performance obligations. It goes on to state that assessment considers the entity s exposure to the customer s credit risk and the business practices available to the entity to manage its exposure to credit risk throughout the contract. BC 46 of IFRS15 clearly states the boards specified in paragraph 9(e) of IFRS 15 that an entity should assess only the consideration to which it will be entitled in exchange for the goods or services that will be transferred to a customer. Therefore, if the customer was to fail to perform as promised and consequently the entity would respond to the customer s actions by not transferring any further goods or services to the customer, the entity would not consider the likelihood of payment for those goods or services that would not be transferred. Consequently, para 9 (e) itself notes, in evaluating whether collectability of an amount of consideration is probable, an entity shall consider only the customer s ability and intention to pay that amount of consideration when it is due. This adequately covers the situation captured in proposed para c of BC 92 notes that entities generally do not enter into contracts if it does not feel that the consideration it is entitled to is probable to be collected. This has been recorded in BC 43 of IFRS 15 - entities generally only enter into contracts in which it is probable that the entity will collect the amount to which it will be entitled. Also, as BC 44 of IFRS 15 notes, only few contracts are likely to fail the collectability criterion - the boards decided that there would not be a significant practical effect of the different meaning of the same term because the population of transactions that would fail to meet the criterion in paragraph 9(e) of IFRS 15 would be small. We agree with the board s view that no further guidance is required. We note that FASB proposes to amend the standard and add new examples to clarify the objective of the collectability threshold. Some stakeholders felt that (e)/ para 9(e) requires an entity to

10 always assess the probability of collecting all of the consideration promised in the contract instead of assessing only the consideration for the goods/services that will actually be transferred. This led to interpretation issues. In addition, the term probable has different connotations in IFRS and USGAAP. While it means more likely than not under IFRS, it means likely to occur under USGAAP which has a higher threshold. Since in para 9 (e), IFRS & USGAAP both mean the same thing by probable, it is quite possible that US stakeholders have faced interpretation issues. FASB has, therefore, decided to amend the standard and add new examples to clarify the objective of the collectability threshold. As stated earlier, we do not feel any need of amending the standard or adding new examples to explain the concept. IFRS should retain its principle oriented characteristics rather than being rule based. Non-cash consideration IFRS 15 indicates that when consideration is in a non-cash form, the entity needs to determine the transaction price by taking the fair value of the non-cash consideration. In the January 2015, TRG meeting, members discussed that there could be different interpretations regarding the date on which the non-cash consideration needs to be measured. For example, the measurement date for noncash consideration could be (1) contract inception date, (2) date on which the non-cash consideration is received or (3) the earlier of when the noncash consideration is received or when the related performance obligation is satisfied. BC 100 notes that this issue has important interactions with other Standards (including IFRS 2 Sharebased Payment and IAS 21 Effects of Changes in Foreign Exchange Rates) and, thus, any decisions made would create a risk of potential unintended consequences. The board intends to take this up as a separate project, if needed. Moreover, the current revenue guidance under IFRS also does not have any specific requirement about the measurement date, unlike US GAAP. Application of IFRS 15 is not likely to add any diversity of accounting in this respect. We note that FASB has proposed that non-cash consideration be measured on contract inception by amending and 23. BC 33 of FASB ASU notes, that the Board concluded that the measurement date of the transaction price should not vary on the basis of the nature of the promised consideration. The Board indicated that measuring noncash consideration at contract inception is consistent with the guidance in Topic 606 for determining the transaction price and for allocating the transaction price to performance obligations. This thought process has come out in the body of the standard itself in as changes in the fair value of noncash consideration after contract inception that are due to the form of the consideration are not included in the transaction price.

11 While we agree with FASB s reasoning, we also agree with the IASB s decision that such issues which have impact across standards should be taken up comprehensively as a separate project. The need for modifying the standard, therefore, at this stage, is not felt. The January 2015, TRG meeting, members also indicated that it is unclear from IFRS 15 how to apply the variable consideration constraint to transactions in which the fair value of noncash consideration might vary due to both (1) the form of consideration and (2) reasons other than the form of consideration. In line with the existing US GAAP, FASB has amended the standard to clarify that only the variability arising from reasons other than form of consideration (for example - the exercise price of a share option changes because of an entity s performance), should be considered while applying the variable consideration guidance. Here also, we agree with IASB s reasoning stated earlier that since current IFRS does not have guidance on variability of non-cash consideration, it is better to have a detailed impact analysis and then lay out appropriate guidance which would not create any conflict with other standards. Presentation of sales tax Para 47 states that 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). Discussions in TRG meeting noted that an entity should apply the principal versus agent guidance to find out whether an entity was acting as an agent for tax collected (hence tax not included in revenue) or was primarily responsible for payment of tax (hence tax included in revenue and cost). This would mean assessing tax laws in each jurisdiction where the entity operates. Concern was raised mainly from US stakeholders, that assessing tax laws in different jurisdictions would involve huge cost and could be complex. They requested for a practical expedient to reduce the cost. Current US GAAP has a similar expedient. Consequently, FASB has proposed to allow entities to elect to exclude from the measurement of transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer. BC 108 of the ED correctly notes that allowing entities to elect an accounting policy for sales tax and other similar taxes will reduce comparability, since companies may elect different policies, though operating in the same jurisdiction. Revenue standards under IFRS always required assessing of tax laws in various jurisdictions and accordingly account for the sales tax; this is not a new requirement under IFRS 15.

12 We note that comparability between entities is very important for stakeholders for investing and other decisions. We, therefore, agree with IASB s decision of not modifying the standard on this aspect.