Voices on Reporting Ind AS 115 Sector Series 2 26 April 2018 KPMG.com/in
Welcome 01 Series of knowledge sharing calls 02 Covering current and emerging reporting issues 03 Scheduled towards the end of each month 04 Look out for our Accounting and Auditing Update, IFRS Notes and First Notes publications 2018 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 2
Speakers for the call Ruchi Rastogi Partner Assurance KPMG in India Ajit Viswanath Director Accounting Advisory Services KPMG in India Saurabh Mathur Director Accounting Advisory Services KPMG in India 2018 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 3
Ind AS 115 Quick recap 4
Ind AS 115 - Quick recap Core principle of Ind AS 115, Revenue from Contracts with Customers is that an entity recognises revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Customer is... a party that has contracted with an entity to obtain goods or services that are an output of the entity s ordinary activities in exchange for consideration. The new revenue standard is applicable to Indian companies following the Ind AS road map framework from 1 April 2018. 2018 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 5
Recap of the five-step model STEP 1 Identify the contract with the customer (One or multiple) STEP 2 Identify the performance obligations in the contract (One obligation or multiple) STEP 3 Determine the transaction price (Total consideration for contract) STEP 4 Allocate the transaction price to the performance obligation (Allocate to various performance obligations identified) STEP 5 Recognise revenue (At a point-in-time or over-time) 2018 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 6
Common industry issues Pharmaceutical and media sectors 7
Performance obligations Do your agreements include elements that meet the new distinct test to be accounted for separately? A good or service is distinct if it is Criterion 1: Capable of being distinct + Criterion 2: Distinct within the context of the contract Yes Distinct performance obligations No Not distinct combine with other goods and services Think about Pharmaceutical sector Licence for compound combined with R&D and manufacturing services Media sector Bundled media I Additional content I Promotional activities I Renewal options 2018 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 8
Licences of intellectual property How will you account for your licencing arrangements? Is the licence distinct? Yes No Use licence guidance Apply general guidance Does the customer have a right to use the entity s IP? Yes No Point-in-time recognition Over-time recognition Examples Pharmaceutical sector Licences of biological compounds and drug formulae. Media sector Movies, TV programmes, music. 2018 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 9
Variable consideration If the contract price contains variable consideration, have you decided on the Estimation method and applied the Constraint Expected value or Most likely amount Could there be a significant revenue reversal? Think about Pharmaceutical sector Milestone payments Volume discounts Bonuses Rights of return Media sector Rebates I Subscriber or viewer based fee I Bonuses I Fees based on ad revenue 2018 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 10
Significant financing components Do deferred or advance payment terms in your contracts give rise to a significant financing component? Interest expense Does not apply if consideration is entirely variable - e.g. royalty arrangements Advance payment Interest income Deferred payment Performance date Practical expedient No need to recognise if period between payment and performance is less than one year. 2018 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 11
Allocating the transaction price How will you determine the stand-alone selling prices of your performance obligations and allocate the transaction price? Is the price directly observable? Yes No Use observable price Estimate price Adjusted market assessment approach Expected cost plus margin approach Residual approach (only in limited circumstances) Think about Pharmaceutical sector Media sector Allocation of upfront fees I Performance obligations with variable pricing Advertising spots I Bonus spots 2018 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 12
Timing of revenue recognition Will there be any changes to the timing of your revenue recognition? Revenue is recognised At a point-in-time when the customer obtains control or Over-time if specific criteria are met 2018 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 13
Non-cash consideration Have you identified any non-cash consideration components in your contracts? Can you reasonably estimate the fair value of the non-cash consideration? Yes No Include fair value in transaction price Use the stand-alone selling price of the goods promised in exchange for the non-cash consideration 2018 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 14
Principal vs agent Have you reassessed whether you are acting as a principal or as an agent? Identify the good or service to be transferred to the customer Did you control that good or service before the transfer? Yes No Acting as principal gross revenue Acting as agent net revenue 2018 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 15
Common industry issues Contract manufacturing sector 16
Timing of revenue recognition Will there be any changes to the timing of your revenue recognition? Revenue is recognised At a point-in-time when the customer obtains control or Over-time if specific criteria are met Critical area Sr. no. Criteria Example 1. The customer simultaneously receives and consumes the benefits provided by the entity s performance as the entity performs. 2. The entity s performance creates or enhances an asset the customer controls as the asset is created or enhanced. 3. 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. Routine or recurring service. Building an asset on a customer s site. Building a specialised asset that only a customer can use, or building an asset as per customer order. 2018 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 17
Disclosure requirements 18
Disclosure Qualitative and quantitative disclosures Contract balances Performance obligations Significant judgements Disaggregation of revenue Understand nature, amount, timing and uncertainty of revenue and cash flows Costs to obtain or fulfil a contract 2018 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 19
Q&A
Links to previous recordings of VOR Month Topics Link August 2017 (special session) Special session on FAQs on computation of book profit for levy of MAT and proposed amendment to Section 115JB Click here October 2017 January 2018 Ind AS updates Updates on the 2013 Act Updates on SEBI regulations Companies (Amendment) Bill, 2017 SEBI Corporate Governance Committee Report ITFG clarification: Bulletin 12 Delhi HC decision on constitutional validity of ICDS Click here Click here January 2018 (special session) Ind AS 115, Revenue from Contract with Customers Click here March 2018 (special session) Ind AS 115 - Sector series 1 Click here April 2018 Ind AS 115, Revenue from Contracts with Customers New/revised Standards on Auditing (SAs) SEBI accepts some recommendations of the committee report on corporate governance Other regulatory updates Click here For other archives of VOR calls, visit www.kpmg.com/in 2018 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 21
KPMG in India s IFRS institute Visit KPMG in India s IFRS institute - a web-based platform, which seeks to act as a wide-ranging site for information and updates on IFRS implementation in India. The website provides information and resources to help board and audit committee members, executives, management, stakeholders and government representatives gain insight and access to thought leadership publications on the evolving global financial reporting framework. In addition to proprietary KPMG content, the website provides links to several other sources of information related to IFRS and its implementation. The site can be accessed by all interested parties at no cost. Additionally, the site provides the facility of registering as a member by providing certain minimal information. To download KPMG content, become registered members of the website by following a few easy steps. https://www.in.kpmg.com/ifrs You can reach us for feedback and questions at: in-fmkpmgifrsinst@kpmg.com 2018 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 22
IFRS Notes Ind AS Transition Facilitation Group (ITFG) issues Clarifications Bulletin 15 18 April 2018 The Ind AS Transition Facilitation Group (ITFG) in its meeting considered certain issues received from the members of the Institute of Chartered Accountants of India (ICAI), and issued its Clarifications Bulletin 15 on 5 April 2018 to provide clarifications on 10 application issues relating to Indian Accounting Standards (Ind AS). This issue of IFRS Notes provides an overview of the clarifications issued by ITFG through its Bulletin 15. 2018 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 23
Topics discussed in AAU and First Notes Accounting and Auditing Update (AAU) Issue no. 20 - March 2018 Ind AS 115 - Impact on the real estate sector and construction companies New auditor's report requirement - Communication of key audit matters Derecognition and consolidation requirements in a securitisation transaction Accounting for income taxes: Few practical considerations Regulatory updates. First Notes SEBI decisions regarding the Report of the Committee on Corporate Governance 20 April 2018 On 28 March 2018, the Securities and Exchange Board of India (SEBI) considered the recommendations of the Kotak Committee on Corporate Governance (the Committee) and the public comments thereon. Accordingly, they accepted certain recommendations without modifications, few with modifications and referred certain recommendations to various agencies (i.e. government, other regulators, professional bodies, etc.) since the matters involved those agencies. In this issue of First Notes, we have provided an overview of the decisions considered by SEBI. 2018 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 24
Others Missed an issue of Accounting and Auditing Update? Missed an issue of First Notes? Coming up next New issue of: Accounting and Auditing Update First Notes IFRS Notes Download from www.kpmg.com/in 2018 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 25
Thank you KPMG in India contacts: Ruchi Rastogi Partner Assurance E-mail: ruchirastogi@kpmg.com Ajit Viswanath Director Accounting Advisory Services E-mail: ajit@kpmg.com Saurabh Mathur Director Accounting Advisory Services E-mail: saurabhmathur1@kpmg.com Feedback/queries can be sent to: aaupdate@kpmg.com
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