Concept- Ind AS 115- Revenue from Contract with Customers

 

Ind AS 115- Revenue from Contract with Customers

Introduction:- 

• Ind AS 115, is applicable w.e.f 01.04.2018. 
• Ind AS 115- Supersede the earlier Ind AS 18- Revenue Recognition and Ind AS 11 Construction Contract. 

Definitions

Contracts- A contract is an agreement between two or more parties that creates enforceable rights and obligations. Enforceability of the rights and obligations in a contract is a matter of law. Contracts can be written, oral or implied by an entity’s customary business practices.

Some contract may have no fixed duration and can be terminated or modified either by the party any time. Other contract may automatically renew as per term of contract. 

An entity apply This standard to the duration of contract (i.e, contractual period) in which the parties to the contract have present enforceable rights and obligations.

For the purpose of applying this Standard, a contract does not exist if each party to the contract has the unilateral enforceable right to terminate a wholly unperformed contract without compensating the other party (or parties). 

A contract is wholly unperformed if both of the following criteria are met: 

(a) the entity has not yet transferred any promised goods or services to the customer; and 

(b) the entity has not yet received, and is not yet entitled to receive, any consideration in exchange for promised goods or services.

Recognition and measurement:-                                                                                                             

There are five steps model

1. Identifying the contracts with the customer 

2. Identifying the separate performance obligations 

3. Determine the Transactions price

4. Allocate the transaction price to the performance obligation;

5. Recognise revenue when performance obligation is satisfied. 

Step 1- Identifying the contracts with the customer (or in simple word When to apply Ind AS 115)

As per paragraph 9 of Ind AS 115, “An entity shall account for a contract with a customer that is within the scope of this Standard only when all of the following criteria are met:

(a) the parties to the contract have approved the contract (in writing, orally or in accordance with other customary business practices) and are committed to perform their respective obligations; 

(b) the entity can identify each party’s rights regarding the goods or services to be transferred;

(c) the entity can identify the payment terms for the goods or services to be transferred;

(d) the contract has commercial substance (i.e, the risk, timing or amount of the entity’s future cash flows is expected to change as a result of the contract); and

(e) it is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. 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. The amount of consideration to which the entity will be entitled may be less than the price stated in the contract if the consideration is variable because the entity may offer the customer a price concession”.

##  When should an entity test the above criteria? 

- At the contract inception

##  if the above conditions are not meet?

- Entity should not be recognized revenue. 

- can assess the same at subsequent due date

Combination of Contracts

An entity shall combine two or more contracts entered into at or near the same time with the same customer (or related parties of the customer) and account for the contracts as a single contract if one or more of the following criteria are met:

Contract Modification:-