Objective:

Lay down the rules for an entity to be followed while reporting about the nature, amount, timing and uncertainty of
revenue and cash flows arising out of contracts with customer.
Meeting the objective:
An entity can recognize revenue for the transfer of promised goods or services to customers equivalent to which it expects
it has its entitlement over the goods or services.
Although the standard specifies the accounting for a single contract it can be applied to a group of similar contracts given
that the materiality of the holistic approach does not produce any significant variations. Also the entity can use estimates
and assumptions as per the size and composition of portfolio.

Scope:
An entity can apply this standard to all contract types excluding the following:
 Leases, Insurance contracts, Financial Instruments, Consolidated Financial Statements, Joint Arrangements, Separate
Financial Statements and Investments in Associates and Joint Ventures
 Non-Monetary exchanges between entities in similar line of business
 Applicable only for a customer, who is to obtain the goods and services which are output of entity’s ordinary activities
 In case of contracts whose scope is applicable in one or more standards other than Ind As115 then they must be used
to separate and measure the contract initially and then subsequently use this standard to arrive at transaction price,
in case if the other standard lacks the clarity on the separation and measurement metrics this standard must be
utilized to arrive at the same.
 Can be used for accounting the incremental costs of obtaining the contracts from customer

Recognition
Identifying the contract
Parties must approve and be committed to meet their obligations, Entity must clearly identify the rights against the goods
or services to be transferred and also their payment terms, contract must possess commercial substance and
Entity will be collecting its entitlement for the exchange of goods and/or services as per the considerations in the contract
Contract must be bilaterally enforceable by both the parties. There will not be any assessment in the contract apart from
the time of inception unless there are significant changes.
When the contract is not binding as per the standard, the entity shall recognize revenue only if a) all bilateral obligations
are met b) upon terminating the contract and the fee is nonrefundable. If the points stated before does not happen then
the entity must recognize the considerations as liability until the points are met
Combination of contracts
Contracts can be combined if a) they are negotiated as a package with single objective b) they are interrelated c) they are
single performance obligations
Contract Modifications
Change in scope and/or price of a contract approved by parties. A separate contract will be made in case of modifications
if the following criteria are met a) Increase in scope due to addition in distinct goods or services b)Increase in contract
price reflecting the standalone price of entity.
In case of not drafting a separate contract as stated above, the promised goods and services at the date of modification
shall be accounted as follows a) as a termination of old contract and a creation of a new one if the remaining goods and
services are distinct from the ones transferred on or before modification. The amount is to be calculated based on the
promised amount as per contract and which has not been recognized yet or based on the modified terms of contract b)
If the remaining goods and services are not distinct then they are accounted under the same contract as an adjustment
in revenue. C) In case of the remaining goods being a combination of the above two they are recorded consistently as
unfulfilled performance obligations in the modified contract.
Identifying Performance obligations
At the contract inception the entity should identify the goods or services promised in a contract and identify as a
performance obligation each promise to transfer either:

 Good or service or
 A list of distinct goods or service which are similar and have common pattern of transfer
 Contract with the customer need not to limit itself to the explicitly stated obligations and can also imply policies of the
entity’s business practice. Performance obligation need not to include activities that are undertaken by an entity to
execute the contract which does not ultimately result in a transfer of goods or services.

Distinct Goods or Services

Goods or services are distinct if both the conditions are satisfied:

 Benefits the customer on its own or along with other resources
 Entity’s assurance to transfer of goods or services are uniquely identifiable

Distinct goods or services comprise of,

 Sale and resale of goods produced by an entity

 Performing tasks which are as per the contract
 Selling of rights to goods or services previously purchased by the entity
 On behalf of customer Constructing, manufacturing or developing an asset

Non distinct goods or services will not be combined. An entity can also account for all the goods or services in a contract
as a single performance obligation.

Satisfaction of performance Obligations

An Entity can recognize revenue when it satisfies a performance obligation by transferring goods or services to a customer.
Performance obligations are either fulfilled over a period of time or at a single point in time. Goods and services are
considered to be asset even if they are held momentarily.

When control of a good or service is transferred over time, it will satisfy performance obligation and revenue is recognized
over time, if one of the following criteria is met:

Performance Recognition

Revenue recognition of goods and services are done under following conditions

 Once the customer enjoys the benefit of service provider’s performance and for services which are not readily
recognized – It is recognized over a period of time.
 For revenue recognition for an asset which is work in progress – the assets need to compared over Tangible and in
tangible assets
 Assets by entity does not have any alternative usage if restricted contractually.

Right to Payment

 For obligations of payment, It need not be for a fixed amount as agreed contractually and can be based on the
percentage of completion provide the contract is terminated or cancelled due to unsatisfactory performance
 For profit margins as per performance, an agreed reimbursement of cost of capital if and right to payment is applicable
only for mutually agreed upon milestone of complete of asset and non-payment can be considered or not as per
contract. But entity can be paid for the services provided and make it obligatory on both service provider and customer
to stick to the contractual terms.

Performance Obligations satisfied at a point in time

The following are the points to consider as indicators to determine point in time when there is a transfer of control of asset
to the customer due to performance obligations.
 If the asset is ready to be used by customer, then the entity has the right to be paid.
 If the customer is legally entitled to the asset and its benefits, then even if the legal right are retained by entity for
security purpose – the customer still retains right to control the asset.
 Physical possession does not mean that the control of asset has been attained.
 When customer inherits benefits of the assets- risk is also attained, but for the sake of evaluating the risk and rewards
of ownership, any risk that may involve separate performance obligation should be excluded.
 Once the customer has accepted, the customer is entitled to enjoy benefits of the assets.
Terms of contractual agreement.
 Right to reject or seek remedial action if good/service does not meet agreed specifications.
 If a product is given on trial basis, customer is not committed to pay until the product is accepted or trial is elapsed.
 If the entity is not sure if the good or services provided meet customers expectation/ specification, then entity cannot
assume transfer of control till customer acceptance is received.

Measuring progress of performance obligation: A single method of progress measurement for each performance obligation
consistently.

Methods for measuring progress

 Input methods: Factors like resources, labor costs etc. are measured relative to total expected inputs. When cost
incurred is not proportional entity’s progress in performance obligation, then revenue is recognized only to the extent
of performance to specification.
 Output Methods: based on surveys of completion, time lapse, units produced etc.

Determination of transaction price

 Contracts terms and customary business practices are used to determine transaction price which includes fixed or
variable amount or both. The following effects are also taken in account to determine transaction price:
o Variable consideration
 Variable amount will be taken into estimation and will vary based on discount, refunds, credits, price concessions and
penalties to be taken in consideration with the payable amount
 Calculation: expected value = sum of probability weighted amount.
 Refund Liabilities: Refund is to be done based on contract requirement and on consideration to the customer.

Financing component in the contract

 Benefit of financing to be considered for the effects of time value of money agreed by both parties to the contract. If
there is difference between amount of consideration and cash selling price of goods and services then the expected
time between transfer of goods or services and payment of the same along with the interest rates in prevailing market
are to be considered.
 Financing component need not be evaluated if
 Payment is done in advance and timing of transfer is at discretion with customer.
 Payable amount is variable and time is based on occurrence of certain events.
 The effect of transfer of goods or services and payment received is within one year or less
 Rate of consideration has to be accounted as discount component as a separate financing transaction as credit which
after contract inception cannot be done. Changes in interest rates should be shown in profit and loss statement as
interest revenue or interest expense.
 NON CASH (Credit/ voucher etc.) consideration should evaluated in fair value, which if not possible to evaluate should
refer indirectly to stand alone selling price.
 If customer contributes to facilitate entity’s fulfilment of goods or services, then it should be accounted as non-cash
consideration received from customer.
 If consideration amount exceeds fair value then excess should be accounted as reduction in transaction price by entity
during which the revenue has to be recognized and the consideration amount has to be paid.

Allocating the transaction price to performance obligations

Objective:

This is to allocate the transaction price to every single performance obligation in the contract at an amount that is considered
by the entity in transferring the goods and services.

To achieve this objective, we will have the following three conditions;

1. Allocating each and every obligation in the contract on a standalone selling price.
2. Allocation of discounts with respect to standalone selling price.
3. Allocation consideration price which includes variable amounts.
1. Allocation based on standalone selling price

The standalone selling price is the price which is defined by an entity to sell a good or service to a particular customer. This is
a contract price observed based on the contracts outlining to a set of similar customers and situations. This is estimated based
on factors such as market, information specific to an entity and class of a customer ensuring the appropriate methods are
applied.

The following methods used to estimate standalone selling price are:

 Adjust market assessment approach – The price is evaluated in the market in accordance with entity’s competitor to
arrive with a final estimation.
 Expected cost plus a margin approach – The price is forecasted with a marginal cost based on the level of satisfaction in
performance obligation.
 Residual approach – The price is based on the transaction cost set by the entity for the goods and services by estimating
the uncertainty or variance in the set of cost values defined.

These methods are used separately or combined based on the situation.

2. Allocation of discounts with respect to standalone selling price

A discount is given to customer in the purchase of multiple goods if the total standalone selling prices are more than the
consideration amount promised during the contract. This is applicable only if;

 It is standalone contract for each obligation.

 The entity does for it for distinct goods on.
 The discount described in b) equals the discount agreed in the contract.

3. Allocation of variable consideration

A variable amount is allocated by the entity for single obligation or distinct good if the following are met;

 The amount relates that performance obligation is satisfied or the goods are transferred.
 The amount is related only based on the performance obligation satisfactory level.

Changes in the transaction price:

The transaction price changes can be from the following reasons;

 uncertain events during the exchange of goods

 standalone selling price to satisfy obligation
 variable considerations
 contract modifications

CONTRACT COSTS

 Incremental costs of obtaining a contract – This cost occurs when an entity obtains a contract and will not be incurred
if no contracts are obtained.
 Cost to fulfil a contract – These are costs that are: related to present or future contracts, incurred to satisfy the
performance obligations and those are expected to be recoverable.
 Amortization and Impairment – A cost allocated by an entity is considered as amortized if the goods are expected to be
transferred over a period of time. An impairment loss is considered if the Incremental Cost or Cost to fulfil a contract is
more than the original consideration during the exchange of goods or the cost related to contracts are not expensed.

PRESENTATION

An entity will account the contract as an asset or a liability in the Balance Sheet depending on the relationship of entity’s
performance and customer’s payment.

The rights that are not in the condition of consideration will be accounted as receivable. A contract asset as receivable if an
amount of consideration is due from the customer after the transfer of goods. A contract liability if the goods are transferred
after the customer pays consideration.
The Standard allows an entity to use alternatives of the terms contract asset and contract liability with sufficient information
for better identification and classification. It also allows to present excise duty charged during the transfer or exchange of
goods in the income statement as part of revenue recognition.