When is revenue recognised under Ind AS 115?
Revenue is recognised under Ind AS 115 when the entity satisfies a performance obligation by transferring a promised good or service to the customer. Transfer is the passing of control. The amount recognised is the transaction price allocated to that obligation.
When is the revenue recognised?
Control is the ability to direct the use of the asset and to obtain substantially all of the remaining benefits from it. It can transfer at a point in time, or over time where the customer simultaneously receives and consumes the benefit, or the entity creates or enhances an asset the customer controls, or the entity has no alternative use for the asset and has an enforceable right to payment for performance completed. Raising an invoice, or the passing of risks and rewards alone, does not decide the date.
What are the five steps?
- Identify the contract with the customer.
- Identify the performance obligations, which are the distinct goods or services promised.
- Determine the transaction price.
- Allocate that price to the performance obligations, generally by relative standalone selling prices.
- Recognise revenue when, or as, each obligation is satisfied.
A contract exists when the parties have approved it, the rights and the payment terms can be identified, it has commercial substance, and collection of the consideration is probable. A lease, an insurance contract, and a financial instrument are not accounted for under this standard.
How is a variable price limited?
The transaction price includes variable consideration, such as a discount, a rebate, or a performance bonus, estimated by the expected value or by the most likely amount. The entity includes that estimate only to the extent it is highly probable that a significant reversal of cumulative revenue will not occur when the uncertainty is later resolved. A financing component that is significant is separated from the revenue.
When is a contract change a new contract?
A modification is accounted for as a separate contract only when the added goods or services are distinct and the price of the addition reflects their standalone selling price. If that test is not met, the change is accounted for as part of the existing contract, either by a cumulative catch-up or prospectively, as the standard directs for that case. It is not automatically a new contract because the parties signed a variation.
Frequently asked questions
Four questions cover the invoice, the older test, a bonus, and a lease.
Is an invoice the moment of recognition?
No. Revenue is recognised when control transfers. An invoice can be earlier or later than that transfer.
Does the older risks-and-rewards test still decide?
No. Ind AS 115 uses transfer of control. The risks-and-rewards test was the earlier revenue standard.
Is every bonus included in the price?
No. Variable consideration is included only to the extent that it is highly probable a significant reversal will not occur when the uncertainty is resolved.
Does Ind AS 115 cover a lease?
No. A lease is Ind AS 116. Insurance contracts and financial instruments are also outside Ind AS 115. The standard applies to a contract with a customer.
Sources
Ind AS 115 recognises revenue from contracts with customers when control of a good or service transfers.