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Webinar Series on Ind AS
By CMA Milind Date
M Com, FCMA, CMA (USA), Dip IFRS (ACCA UK)
01-07-2020 CMA Milind Date 1
Ind AS 115 Revenue from
contracts with customers
01-07-2020 CMA Milind Date 2
Ind AS 115 in India
Effective date 1st April 2018
• Ind AS 11 construction contracts
• Ind AS 18 revenue
• Guidance notes on barter exchanges, customer loyalty programs, agreements for sale of real estate & transfer of assets from customer
The standard replaced
Major change had already occurred when entities transited to Ind AS during 2017-18
Not many companies are significantly affected in the post Ind AS 115 scenario
01-07-2020 CMA Milind Date 3
Transition provisions for 1st time adoption of Ind AS 115
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Approach Application Comparatives Practical expedients
Full retrospective The FS are presented as
if Ind AS 115 had always
been applied (Ind AS 8)
Comparatives (including
opening BS) are restated
All years – apply Ind AS
115, except contracts
1. That begin & end
within the same
period &
2. Are completed at the
beginning of the
earliest period
Modified retrospective Entities will recognise
cumulative effect of
initially applying Ind AS
115 as an adjustment to
the opening balance of
RE at 1st April 2018
Comparatives are not
restated
Date of equity
adjustment (RE) – 1st Apr
2018
Apply Ind AS from 1st Apr
2018
Objective
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• Establish principles that entity applies to report useful information about nature, amount, timing & uncertainty of revenue and cash flows arising from contracts with customer
Objective
• Entity will recognise revenue to depict the transfer of goods or services to customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services
• An entity shall consider the terms & conditions of the contract and all relevant facts & circumstances
• Entity will apply practical expedients consistently to all contracts of similar nature & in similar circumstances
• Though a/c is specified for individual contract, the entity may apply it to a portfolio of contracts with similar characteristics, if it expects that the impact on the FS won’t materially differ
Meeting the objective
Scope exclusions
Lease contracts within the scope of Ind AS 116
Insurance contracts within the scope of Ind AS 104
Financial contracts (Ind AS 109) and other contractual rights & obligations (Ind AS 110, 111, Ind AS 27 & Ind AS 28)
Non-monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers e.g. contract between two oil companies that agree to exchange oil to fulfil the demand in different specified locations on a timely basis
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Contract must be with ‘customer’
• A party that is contracted with the entity to obtain goods or services that are output of entity’s ordinary activities in exchange for consideration
• So if two entities perform a work in collaboration, it will not be covered under this standard
The standard is applied only when the counterparty is a ‘customer’
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Example
Cybernet Ltd. provides internet-based advertising services to publishing companies. It purchases advertisement space on various websites from a selection of publishers as per the following scenarios:
(i) It pre-purchases the advertisement space from the publishers before it finds advertisers for that space.
(ii) It provides the service of matching the advertisers with the publishers.
In each of the above cases, which party will be identified as the customer?
In Scenario 1, where Cybernet Ltd. pre-purchases advertisement space on various websites from a selection of publishers, the companies (i.e. advertiser) to whom it will provide the advertising space will be identified as its customers
In Scenario 2, Cybernet Ltd., does not provide any ad-targeting services or purchase the advertising space from the publishers before it finds advertisers for that space. It only provides the service of matching the ad placement for advertisers with the publishers. Accordingly, the publisher to whom Cybernet Ltd. is providing services will be identified as its customer
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Recognition – a five step process
Identify a contract with customer –single or composite
Identify performance obligations –single or multiple
Determine transaction price –consideration –fixed, variable or both
Allocating transaction price to performance obligations –allocation basis –stand alone prices
Recognise revenue when (or as) the performance obligations are fulfilled
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Step 1 – identifying the contract (enforceable rights & obligations)
Parties have approved the contract & are committed to
perform – written/oral
Each party’s rights to goods/services can be
identified
The payment terms of goods/services can be
identified
The contract has commercial substance
It’s probable that the entity will collect the consideration (i.e. evaluate customer’s ability &
intention to pay)
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Step 1 – identifying the contract (enforceable rights & obligations)
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• Negotiated as a package, a single commercial objectives
• Consideration in one depends upon price or performance of other
• Goods/services promised are a single performance obligation
Combination of contracts
• Change in scope, price or both approved by parties
• May be treated as separate contract is scope & price increases
• Or may be treated as termination of earlier contract & creation of new contract for goods/services not yet transferred
Contract modification
Step 2 – identifying performance obligations
A promise (explicit or implicit) to transfer to customer either
Goods/service (or a bundle) that is distinct
May be treated as separate PO
Series of distinct goods/services that are substantially the same & have
same pattern of transfer
May be treated as a single PO satisfied over time
G/S are distinct if
1. Customer can benefit from them either on its own to together with others
2. entity’s promise to transfer is separately identifiable
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Example
NJ Ltd. enters into a contract to build a house for a customer.
NJ Ltd. Is responsible for the overall management of the project and identifies various goods and services that are provided, including architectural design, site preparation, construction of the house, plumbing and electrical services and finish carpentry.
NJ Ltd. regularly enters into such contracts with customers to sell these goods and services individually to them.
How many performance obligations are in the contract?
Promised goods are capable of being distinct as
- Customer could benefit from it
- NJ regularly sells the g/s separately to customers
The nature of promise
- Whether to transfer the g/s separately or as combined items
Here, g/s can’t be separately identified as the customer will get a house
So there’s only a single performance obligation
01-07-2020 CMA Milind Date 13
Example
A software developer enters into a
contract with a customer to transfer
a software license, perform
installation, and provide upgrades
and technical support for 5 years
It sales the license, installation,
updates & support separately. The
installation does not modify the
software and it is functional even
without upgrades & support
• Each can be separately
identifiable
• Customer can benefit from each
good or service on its own
• There are 4 performance
obligations
– License
– Installation
– Upgrades
– Technical support
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Step 3 – Determining transaction price
It’s the amount of consideration the entity expects to be entitled to
Excludes amount s collected on behalf of third parties e.g. GST
It is affected by nature, timing & amount of consideration
• significant financing component (e.g. interest charged on instalment sales i.e. time value),
• variable component (e.g. penalties, bonuses),
• Non-cash consideration (fair value)
• amounts payable to the customer (e.g. discounts, rebates)
Includes consideration of
01-07-2020 CMA Milind Date 15
Step 4 – Allocating transaction price
Total transaction price should be allocated to all separate performance obligations in proportion to the stand-alone selling price
The best evidence of a stand-alone price is the observable price of a good or service when the entity sells that separately in similar circumstances & to similar customers
If such price is not directly observable, the entity should estimate it
Allocation is made at the beginning of the contract & is not adjusted for any subsequent changes in the stand-alone price
In relation to a bundled sale, any discount should be allocated across each component in the transaction
Discount should be specifically allocated to a component, only if the component is regularly sold separately at a discount
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Example
A company sells a machine for Rs 100,000 & one year support.
It usually sells the machine for Rs 95000, but it does not sell support separately as a stand-alone product.
Other support services offered by the company attract a mark up of 50%.
It is expected that the support will cost Rs 20,000
• The transaction price of Rs 100,000 will be allocated between the machine & support as follows:– Separately observable price for machine
= Rs 95,000
– Stand alone price for support is not observable & thus to be estimated as = 20000+(50%*20000) = Rs 30,000
– Thus total price for the bundled sale = 95 + 30 = Rs 125000
– However, the transaction price is Rs 100,000
– Hence, the customer is getting a discount of 20% (25/125)
– The allocation of price for machine = 95000*0.80 = Rs 76000
– The allocation of price for support = 30000*0.80 = Rs 24000
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Step 5 – Recognise revenue when (or as) POs are satisfied
• Customer receives & consumes the benefits of the entity’s performance as the entity performs e.g. service contracts for cleaning
• The entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced e.g. contract work in progress
• Entity’s performance does not create an asset with an alternative use to the entity & the entity has an enforceable right to payment for performance completed to date
PO satisfied over time (% completion method)
• If it is not satisfied over time
• Indicators of PO satisfied at a time:
• Customer has an obligation to pay for asset
• Customer has legal title to the asset
• Entity has transferred physical possession of the asset
• Customer has significant risks & rewards of ownership
• Customer has accepted the asset
PO satisfied at a time
01-07-2020 CMA Milind Date 18
Example
A company is building a residential complex. It enters into a contract with customer for a specific unit under construction.
• Customer to pay non-refundable deposit
• Customer to pay progress payments
• If customer fails to pay progress payment, the company has the right to all contract consideration if it completes the unit
• The entity cannot direct the unit to other party
The contract provides for the following:
• Entity doesn’t have alternative use of the unit
• Entity has the right to all consideration
Obligation is satisfied over time because
01-07-2020 CMA Milind Date 19
Example
• Deposit is refundable if the entity can’t construct the unit by a certain time
• Remainder of the consideration is due upon completion of the unit
• If customer defaults on contract before completion, the entity has the right only to retain deposit
If the above contract was made on following terms
• It’s not a service contract
• Customer does not control the unit as it is created
• Entity does not have enforceable right to payment for performance obligation completed to date
Performance obligation is satisfied at a time because
01-07-2020 CMA Milind Date 20
Measuring progress towards completion
• Revenue is recognised on the basis of the value to the customer of the goods or services transferred to date relative to the remaining goods or services
• E.g. surveys of performance completed to date, work certified, appraisals of results achieved, milestones achieved, time elapsed, units produced or delivered
Output methods
Output method should is useful only when the output is observable
01-07-2020 CMA Milind Date 21
Measuring progress towards completion
• Revenue is recognised on the basis of entity’s efforts or inputs to the satisfaction of performance obligation relative to the total expected input
• E.g. resources consumed, labour hours worked, costs incurred, time elapsed etc.
Input methods
The method may not be useful if there’s no direct relationship between entity’s inputs and the transfer of control of goods & services to customer
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Disclosures – Bajaj Auto
01-07-2020 CMA Milind Date 23
Ind AS 115 Revenue from Contracts with CustomersThe Company adopted Ind AS 115 using the modified retrospective method of adoption with the date of
initial application of 1 April 2018. Under this method, the standard can be applied either to all contracts at
the date of initial application or only to contracts that are not completed at this date. The Company elected
to apply the standard to all contracts as at 1 April 2018.
The cumulative effect of initially applying Ind AS 115 as at the date of initial application of 1 April 2018
amounts to H Nil. Therefore, the comparative information was not restated and continues to be reported
under Ind AS 18.
Disclosures – L & T
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Disclosures – L & T
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Disclosures DLF
Application of Ind AS 115 has impacted the accounting for recognition of revenue from real estate projects.
For certain contracts where, DLF was using the % completion method, now the revenue is recognised “at the point” under Ind AS 115
The cumulative effect of initially applying Ind AS 115 is shown as an adjustment to the opening balance of retained earnings as on 1st April 2018 & hence no comparatives of PY are adjusted
The company has applied modified retrospective approach to contracts that were not completed by 01-04-2018 and has given the impact by debiting the RE by Rs 3964 Cr
Due to application of Ind AS 115, the revenue for the year ended 31st
Mar 2019 is higher by Rs 1797 Cr and the net profit is higher by Rs 805 Cr for the said period
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