Indian Accounting Standard (Ind AS) 115 Revenue from Contracts with Customers
1 Background The Ministry of Corporate Affairs (MCA), Government of India vide notification GSR 111 (E) dated 16th Fe b r u a r y, 2 0 1 5 n o t i f i e d t h e Companies (India Accounting Standards) Rules, 2015. The applicability of these standards to various listed / unlisted companies (including their holding, subsidiary, joint venture or associate companies) was laid down in this notification. The notification also laid down the various standards commonly known as Ind AS. Ind AS standards are in broadly line with International Financial Reporting Standards (IFRS). IFRS 15 IFRS 15 Revenue from Contracts with Customers was issued in May 2014 and was made effective for an entity's IFRS financial statements for the periods b e g i n n i n g o n o r a f t e r 1 s t J a n u a r y, 2 0 1 7. Subsequently, in September, 2015 International Accounting Standard Board (IASB) deferred the effective date to 1st January, 2018. Ind AS 115 The MCA notification dated 16th February, 2015 had notified Ind AS 115. However, subsequent to the decision of IASB to defer the implementation of IFRS 15, the MCA vide Companies (Indian Accounting Standards) (Amendment) Rules, 2016 dated 30th March, 2016 omitted Ind AS 115 and inserted Ind AS 11 Construction Contracts and Ind AS 18 Revenue. Ind AS 115 is yet to be notified again. The following details are on the presumption that Ind AS 115 when introduced shall be in line with IFRS 15
Summary of Ind AS 115 Standards superseded Ind AS 115 provides a single comprehensive framework to be used by businesses to recognize revenue from customers. The following current revenue recognition standards & guidance will be superseded by Ind AS 115 Ind AS 11 Construction Contracts Appendix A & B Service Concession Arrangements (shall become Appendix C & D of Ind AS 115) Ind AS 18 Revenue Appendix A Barter transactions involving advertising services Appendix B Customer Loyalty Programmes Appendix C Transfer of Assets from Customers Objective The objective of this Standard is to establish the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer. 2
3 The 5 step model framework Ind AS 115 moves away from the transfer of risk and rewards approach and introduces a new transfer of control approach delivered through the new five-step model. Identify the contract with a customer Identify the separate performance obligations in the contract Determine the transaction price Allocate the transaction price to the separate performance obligations Recognise revenue when (or as) each performance obligation is satisfied
4 Brief comparison Ind AS 18 / 11 Separate models for: Construction contracts Goods Services Ind AS 115 Single model for performance obligations Satisfied over time Satisfied at a point in time Focus on risks and rewards Focus on control Limited guidance on More guidance on: Multiple element arrangements Variable considerations Licenses Separating elements Allocating the transaction price Variable consideration Licenses Options Repurchase arrangements
5 Key challenges for different industries The revenue and profit recognition will change for some entities and they will need to consider whether revenue should be recognised over time or at a point in time how shipping term will change the timing of recognition the extent to which distinct goods or services are supplied, which should be accounted for separately whether particular costs relating to obtaining a contract must be capitalised whether revenue must be adjusted for the effects of the time value of money how to account for contract modifications the impact of new guidance where pricing mechanisms include variable amounts whether accounting treatment will be changed for different types of licenses and royalties accounting for warranty covers given to customers
6 Major Considerations Contract Modification NOT a separate contract A separate contract ig l ina Or C o n t r a cnt io cat i dif Mo l ina rig O Cl o n t r a c t na i rig n tio O ca ifi od M Additional goods / services distinct Additional goods / services NOT distinct, OR Consideration for additional goods / services reflects their stand-alone selling price Consideration for additional goods / services DOES NOT reflect their stand-alone selling price
7 When to Recognize revenue? Customer simultaneously receives / consumes as the entity performs Entity creates / enhances an asset and customer controls it during this process Created asset has no alternative use to the entity + the entity had enforceable right to payment for performance up to date Yes No Revenue OVER time Revenue AT THE POINT OF time When control is transferred Based on progress
8 Some issues Revenues from manufactured goods may historically have been recognized on delivery to the customer. Now, if the contract meets the 'over time' test, then the revenue would be recognized as the manufacturing happens akin to current longterm contract accounting Free goods and services as well as options for additional goods and services for a discounted price might be separate performance obligations Cash incentives and incentives to provide free or discounted goods can be separate performance obligations rather than marketing incentives Non-performance penalties (e.g. for failure to meet service level agreements) will generally need to be deducted from revenue rather than charged as an expense The accounting for contract modifications is complex and differs significantly depending on whether a new performance obligation is created and on the pricing Extended payment terms might result in recognition of interest revenues Analysis of contracts for integrated solutions (more relevant in case of technology sector) to conclude whether one or multiple performance obligations exist and what revenue pattern is appropriate The determination of whether warranty is an assurance-type or service-type warranty will require professional judgement Cash received more than a year in advance is seen as a loan the related 'financing cost' is recorded as an interest expense.
9 Way Forward Contracts with Customers Existing contract reassessment New contract definition Payment terms Contract Performance Obligations Service commitment Product delivery Method of measuring progress Transaction Price Discounts Refunds Rebates Credits Incentives Bonus Allocate Transaction Price Standard Price Discounts Allocations Service and Product Delivery Commitment Recognize revenue when a Performance Obligation is met Direct Labour Allocation of Direct Overheads Explicitly Materials chargeable Cost
10 Disclosure Requirements Ind AS 115 significant disclosure requirements are in line with the new standard's objective of providing users of financial statements with information that will help them understand the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts with customers rm at con abou ion t tra c cus ts w tom ith ers Disclosures In abo forma ob ut co tion ta s the in or ts to c on fulfill tra ct tion rma Info bout on i a gat gre ue g a n s di eve of r Info tion rma Info out ab ance orm s perf gation obli Info rma tio reco about n n con ciliatio trac t rev n of enu e tion ma r o Inf bout ts a en gem d d u j use
Ahmedabad Bengaluru 308, Aaryan Workspaces, St. Xavier's College Corner, Umashankar Joshi Marg, Navrangpura, Ahmedabad 380 009, INDIA Phone: +91 79 40326400 19/4, 4th Main, Between 7th & 8th Cross, Malleshwaram, Bengaluru 560 003, INDIA Phone: +91 80 23561880 Mumbai Vadodara 101, Cosmos Court, Above Waman Hari Pethe, S.V. Road, Vile Parle (West), Mumbai 400 056, INDIA Phone: +91 22 26125834 Meghdhanush, Race Course, Vadodara 390 007, INDIA Phone: +91 265 2341626 / 2440400 website: www.kcmehta.com Independent Member