Ind AS 115 – Revenue from contracts with customers
March 2015
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Presented by:Shrenik Baid
Ind AS 115 - Standard objective
One ModelA single, joint revenue standard to be applied across all industries and
capital markets
Early adoption compared to IFRS 15
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Clear principles
Robust framework
Comparability across
industries
Simplified guidance
capital markets
Enhanced disclosures
Ind AS 115, Revenue recognition
A change in mindset
• Reassessment of contracts will be time consuming
• Greatest impact for those that use industry based models
• Transaction price allocated on a relative selling price basis
• Change to model for variable consideration
• Full retrospective application may require running dual systems and
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• Full retrospective application may require running dual systems and gathering of historic data
• More extensive disclosure requirements
• Potential impact on compensation arrangements
Awareness is essential!
Ind AS 115, Revenue recognition
Ind AS 115 – Revenue recognition model
AS 9 /AS 7
Separate models for:
• Construction contracts• Goods• Services
Ind AS 115
Single model for performance obligations:
• Satisfied over time• Satisfied at a point in time
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• Services
Focus on risk and rewards
No guidance on:
• Multiple element arrangements
• Variable consideration• Licences
• Satisfied at a point in time
Focus on control
More guidance:
Separating elements, allocating the transaction price, variable
consideration, licences, options, repurchase arrangements
and so on….
Ind AS 115, Revenue recognition
Scope
• Scope exclusions
Revenue is income from ‘ordinary activities’.
A contract has rights and obligations between two or more parties.
A customer receives a good or service.
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- Leases, insurance, financial instruments, certain guarantee contracts and certain nonmonetary exchanges
• Contracts with elements in multiple standards
- Evaluate under other standards first
5
Ind AS 115, Revenue recognition
Identify the contract with the customer
Identify the performance obligations in the contract
Revenue – the five step approach
Core principle
Revenue
1
2
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Determine the transaction price
Allocate the transaction price
Recognise revenue when (or as) a performance obligation is satisfied
Ind AS 115, Revenue recognition
Revenue
recognised to
depict transfer of
goods or
services
3
4
5
Step 1 – Identify the contract
• Basic criteria
- Enforceable rights and obligations
- Commercial substance
- Approved
- Payment terms
- Collection is probable
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- Collection is probable
• Combine two or more contracts with the same customer when:
- negotiated as a package with a single commercial objective;
- amount of consideration to be paid in one contract depends on the price or performance of the other contract; or
- goods or services promised in the contracts are a single performance obligation (see step 2)
Ind AS 115, Revenue recognition
Contract modifications
• Modification accounted for when it creates or changes enforceable rights and obligations
• Accounting depends on whether distinct goods or services added
Distinct goods/services added at price that reflects stand-alone selling price
New separate contract: Prospective accounting only
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Remaining goods or services distinct from existing contract, but not at stand-alone selling price
Treated as new contract: Prospective accounting but ‘carry forward’ existing position (e.g. contract liabilities)
Goods / services not distinct from existing contract
Continuation of contract:Cumulative catch up
If combination of above Apply the ‘principles’ above
Ind AS 115, Revenue recognition
Step 2 – Identify the performance obligations
Performance obligations are promises to transfer goods or services to a customer that are:
• explicit,
• implicit, or
• arise from customary business practices
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Identifying performance obligations is critical to measurement and timing of recognition
Ind AS 115, Revenue recognition
Separate performance obligations
Separate performance obligation if:
• Distinct good or service:
- customer benefits from good/service on its own or with other resources; and
- Promise is separate from other promises and not highly dependent
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- Promise is separate from other promises and not highly dependent on/interrelated with other items in the contract
E.g., consumer goods
E.g., a building, not the individual ‘bricks’
• Series of goods/services that are homogeneous, if consistent pattern of transfer to customer over time
E.g., a daily cleaning service
Ind AS 115, Revenue recognition
Step 3 – Estimating the transaction price
• Probability weighted or best estimate
• More specific guidance covering:
- time value of money
- constraint on variable consideration
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- constraint on variable consideration
- non-cash consideration
- consideration payable to customers: reduction to transaction price unless for a distinct good or service.
Ind AS 115, Revenue recognition
Variable consideration
Included in the transaction price only if it is highly probable that there will not be a significant revenue reversal
Uncertainty over long period of
time
Limited experience with similar contracts
Susceptible to factors outside
control
Broad range of outcomes
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time similar contracts control
Key effects
• Must recognise ‘minimum amount’ that is highly probable of not reversing
• Reassessed at the end of each reporting period
Ind AS 115, Revenue recognition
Step 4 – Allocating the transaction price
• Allocate transaction price to separate performance obligations based on relative standalone selling price:
- Actual or estimated
- Residual ‘approach’ if selling price is highly variable or uncertain (change from current practice)
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(change from current practice)
• Initial allocation and changes to variable consideration might be allocated to a single performance obligation if:
- Contingent payment relates only to satisfaction of that performance obligation, and
- Allocation is consistent with the amount the entity expects to be entitled to for that performance obligation
Ind AS 115, Revenue recognition
Step 5 – Recognition of revenue
Key question: Point in time or over time
• Guidance applies to each separate performance obligation
• First, evaluate if performance obligation satisfied ‘over time’
- recognise revenue based on the pattern of transfer to the customer
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• If not point in time
- recognise revenue when control transfers
Ind AS 115, Revenue recognition
When does control transfer over time?
Customer receive benefits as performed/ another would not need to re-performe.g. cleaning service, shipping
Create/enhance an asset customer controls
No
Over time
Point in tim
e
Yes
Yes
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Create/enhance an asset customer controlse.g. house on customer land
Does not create asset w/alternative use AND
Right to payment for work to datee.g. an ‘audit’ report
No
Over time
Point in tim
e
Yes
Yes No
Ind AS 115, Revenue recognition
Indicators of control transfer – point in time
If not over time, then point in time….
Recognise revenue when control transfers
Indicators that customer has obtained control of a good or service:
Right to payment for assetCustomer has accepted
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Right to payment for asset
Legal title to asset
Physical possession of asset
Customer has significant risk and rewards
the asset
Ind AS 115, Revenue recognition
Contract costs
• Incremental costs of obtaining a contract required to be capitalisedif expected to be recovered (e.g. sales commissions)
- May be expensed if expected contract period less than 1 year
• Contract fulfilment costs
- Look to other guidance first (inventory, PPE)
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- If out of scope of other standards, required to be capitalised if:
◦ Relate directly to a contract and
◦ Relate to future performance and
◦ Expected to be recovered
• Amortise capitalised costs as control transfers
• Impairment reversals required
17
Ind AS 115, Revenue recognition
Disclosure
Both qualitative and quantitative information including;
• Disaggregated information
• Contract balances and a description of significant changes
• Amount of revenue related to remaining performance obligations and an explanation of when revenue is expected to be recognised
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and an explanation of when revenue is expected to be recognised
• Significant judgments and changes in judgments
More disclosures
Ind AS 115, Revenue recognition
Revenue Cycle
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Ind AS 115, Revenue recognition
What else haven’t we covered?
• Customer options
• Warranties
• Breakage
• Non-cash consideration
• Consideration payable to the customer
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• Returns
• Repurchase options
• Principal or agent
Ind AS 115, Revenue recognition
Thank you!