Ind AS 115 is applicable from 1 April 2018, i.e., FY 2018–19. Ind AS 115 provides following guidance in respect of recognition of contract costs: � Incremental cost of obtaining contract with a customer: Entity should recognize as an asset if it expects to recover those costs. These promises may be may be explicit, implicit or based on past customary business practices. Under an effective financing transaction, the fair value of the consideration is determined by discounting all future receipts using an imputed rate of interest. However, it does not include administrative type tasks that do not result in transfer of good or service to customer. Yes, since it only permits membership and there is no significant collection uncertainty. Risks and rewards have been transferred from the seller to the buyer. Can B recognize sales revenue in its book as soon as goods are dispatched to A? On 28 March 2018, the MCA notified Ind AS 115, a new revenue recognition standard that replaces existing Ind AS 11 and Ind AS 18. Ind AS-115 provides single comprehensive framework to be used by entities to recognize revenue from their customers and report useful information about nature, amount, timing and uncertainty of cash flows arising from a customer. Customer pays (or due to pay) consideration an entity has an unconditional right to the consideration before the transfer of goods or, Entity should present the contract as a contract liability, Entity transfers the goods or services before the customer pay (or due to pay), Entity should present the contract as a contract asset, exclude any amount presented as. An entity shall present any unconditional rights to consideration separately as a receivable. Where the collections from customers are deferred the revenue will be lower than the contract price, and interestingly in case of advance collections, the effect will be opposite resulting is revenue exceeding the contract price with the difference accounted as a finance expense. ‘Revenue’ may more easily be understood to mean income arising from ordinary activities of an entity. Now, entities will have to adjust the transaction price for the time value of money. Atransfer' occurs when the customer obtains control of the good or service. damanoberoi@hotmail.com, Category To estimate the transaction price in a contract that includes variable consideration, entity may use any of two methods: An entity should use one method consistently to estimate the transaction price throughout the life of a contract. In addition, they must disclose the amount by which each financial statement line is impacted due to Ind AS 115 application in the current period for the year ended March 2018. Our experts suggest the best funds and you can get high returns by investing directly or through SIP. CAs, experts and businesses can get GST ready with ClearTax GST software & certification course. An additional annual fee of 20,000 is charged for using the club facilities. Transaction Price is not adjusted for customer's credit risk, but is adjusted if entity has created a valid expectation that it will enforce its rights for only a portion of contract price. This is variable consideration, a wide term and includes all types of negative and positive adjustments to the revenue. Fair Value (FV) is the amount for which an asset could be exchanged or the liability settled between knowledgeable, willing parties in an arm’s length transaction. This standard is expected to impact all companies, though the impact could be more pronounced for some depending on their industry sector, existing customer contracting practices and more importantly the accounting policies already adopted. Income is the increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases in the liabilities that result in an increase in equity, other than contributions from equity participants. Consideration payable to the customer includes cash amounts, credits or other items (voucher or coupon) and entity account it as a reduction of transaction price (revenue). But Rs. A enters into consignment sales agreement with B who is a supplier. ClearTax serves 2.5+ Million happy customers, 20000+ CAs & tax experts & 10000+ businesses across India. Revenue should be recognized by measuring progress of complete satisfaction at end of every reporting period. INDIAN ACCOUNTING STANDARDS (Ind AS) AS - 9 Revenue Recognition This is the best notes on accounting standard 9 revenue recognition with examples. There is no probable inflow of economic benefits. Damandeep Singh, You can also submit your article by sending to article@caclubindia.com, GST certification However, this does not imply that entities can ignore past revenue contracts. Variable consideration may be attributable to the entire contract or only to a specific part. Thus, revenue recognition emphasizes on the timing of recognition of revenue in the statement of profit and loss of an enterprise. v) Entity has present right to payment. IFRS 15 provides the 5 step framework on how and when to … Two or more contracts may be combined as single contract if they are entered into at or near same time and meet any of following criteria: i) Contracts were negotiated as a package with one commercial objective, ii) Amount paid under one contract is dependent on price or performance under other contract, iii) Goods or services to be transferred under the contracts constitute a single performance obligation. ii) Physical Possession This corroborates Ind AS-18 as it says: “revenue recognition is postponed if there is any uncertainty regarding its ultimate’s collection“. Ind AS 18 Revenue: 20. Few examples are warranty costs, claims, penalties or possible losses. Following disclosures are required under Ind AS 115: i) Revenue recognized from contracts with customers, separately from its other sources of revenue, ii) Impairment losses on receivables or contract assets, iii) Categories that depict the nature, amount, timing, and uncertainty of revenue and cash flows, iv) Sufficient information to enable users of financial statements to understand the relationship with revenue information disclosed for reportable segments under Ind AS 108Operating Segments', v) Opening and closing balances of contract assets, contract liabilities, and receivables (if not separately presented), vi) Revenue recognized in the period that was included in contract liabilities at the beginning of the period and revenue from performance obligations (wholly or partly) satisfied in prior periods, vii) Explanation of relationship between timing of satisfying performance obligations and payment, viii) Explanation of significant changes in the balances of contract assets and liabilities, ix) When the entity typically satisfies performance obligations, xii) Obligations for returns, refunds and similar obligations, xiii) Types of warranties and related obligations, xiv) Aggregate amount of transaction price allocated to remaining performance obligations at end of period*, xv) Judgments impacting the expected timing of satisfying performance obligations, xvi) Methods used to recognize revenue for performance satisfied over time, and explanation, xvii) The transaction price and amounts allocated to performance obligations (e.g. Ind AS 23 Borrowing Costs: 24. If remaining goods and services are combination of both scenarios, entity shall account for effect of modification on unsatisfied or partially satisfied performance obligations consistently. In this case, A Ltd would recognize sales of 1,00,000 and the present value of 50,000 should be recognized over the next 3 years as service income. This method is permitted only if the entity either: � Sells the same good/service to different customers (at or near the same time) for a broad range of amounts; or. Contract is defined as agreement between two or more parties that creates enforceable rights and obligations. As a practical expedient, an entity can ignore the impact of the time value of money on a contract if it expects, at contract inception, that the period between the delivery of goods or services and customer payment will be one year or less. Stand-alone selling price is price at which entity would sell a promised good or service separately to a customer. ii) Payment terms for goods and services to be transferred, � It is probable that entity will collect the consideration. Goods or Services can be said to be Distinct � Entity's experience has limited predictive value has a large range of possible consideration amounts etc. is the amount for which an asset could be exchanged or the liability settled between knowledgeable, willing parties in an arm’s length transaction. From the financial year 2018-19, the other two standards IND AS 18 and 11, which are related to revenue … Under Indian Accounting Standards (Ind AS), accounting for revenue and customer loyalty programmes would be governed by Ind AS 115, Revenue from Contracts with Customers1.Ind AS 115 provides a five-step model for revenue recognition, and also provides specific guidance for options provided to customers to purchase additional goods and services. However, this standard would not apply to: i) Lease Contracts (Ind AS-17) Under new standard, an entity is required to capitalize certain costs incurred in obtaining a contract if specified criteria are met. Performance Obligation is generally specified in contract, but could also include promises implied by entity's customary business practices, published policies or specific statement that create a valid customer expectation. Indian Accounting Standard (Ind AS) 101 First-time Adoption of Indian Accounting Standards: Indian Accounting Standard (Ind AS) 102 Share-based Payment: Indian Accounting Standard (Ind AS) 103 Business Combinations: Indian Accounting Standard (Ind AS) 104 Insurance Contracts 5. COVID-19 cover with monthly payments. A contract can be written, oral or implied by an entity's customary business practices. (E.g.- Sales Commission etc.). real estate infrastructure, EPC (Engineering, Procurement and Construction), IT services, etc. In the earlier post, we saw various differences between the Accounting Standards / Ind AS and GST Law. � Parties have approved the contract and are committed to perform their respective obligations, i) Each party's rights Other Articles by - The first step for revenue recognition is identifying a contract … A Ltd sells equipment to B Ltd for Rs. Contract modification arises when the parties approve a change in the scope and/or price of a contract, the accounting for same depends upon whether the modification is deemed to be a separate contract or not. Entities that elect themodified retrospective' method will not restate financial information for the comparative period. The consideration will then be allocated to multiple POs and revenue recognized when control over those distinct goods or services is transferred. � The entity's performance creates or enhances an asset that has no alternative use to the entity, and the entity has the right to receive payment for work performed to date. On the other hand, to understand the commercial effect of series of transactions, recognition criteria can be applied together on two or more transactions at the same time. ii) Insurance Contracts (Ind AS-104) Revenue is income that arises in the course of ordinary activities of an entity and if referred to by the variety of different names including sales, fees, interest, dividends, and royalties. The imputed rate of interest is the more clearly determinable of either: (a) Prevailing rate for a similar instrument of an issue with a similar credit rating, (b) Rate of interest that discounts the nominal amount of the instrument to the current cash sales price of the goods or services. To recognize revenue related to interest, royalties, and dividends, the below-mentioned conditions are to be met: Any contingent liabilities and contingent assets should be disclosed in accordance with IND AS 37. Under Indian Accounting Standards (Ind AS), revenue is measured at the fair value of the consideration received/receivable, taking into account any trade discounts and volume rebate. Ind AS compliant entities will have to now adopt the new Ind AS 115, Revenue from Contract with Customers from April 1, 2018. The timing of revenue recognition might change under Ind AS 115’s control-based model. 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