IndAS 115 –Revenue from contracts with customersS(05k22m55zd4irx55miwvec55)X(1... · Core...

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 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….


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


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


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)


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


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


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


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.


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


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


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


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


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


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


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


Revenue Cycle

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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


Thank you!

IndAS 115 –Revenue from contracts with customersS(05k22m55zd4irx55miwvec55)X(1... · Core...

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