IND AS 115: REVENUE FROM CONTRACTS WITH CUSTOMERS

IND 115, Revenue from Contracts with Customers, provides a clear framework for recognizing revenue
in businesses. Here’s a simple explanation:

What is it about?

Revenue is the money a company earns from its regular business activities (like selling products or
providing services).

IND AS 115 explains when and how to recognize revenue, ensuring consistency and transparency in
financial reporting.

5 Steps of IND AS 115

Step 1: Identify the Contract

A contract is an agreement between two parties that creates rights and obligations. To be valid, the
contract must meet these criteria:

1. Both parties approve the contract.

2. The rights and payment terms are clear.

3. The contract has commercial substance.

4. Collection of payment is probable.

Example:

A company agrees to sell 100 laptops to a customer for ₹50,000 each, with payment due on delivery.
This is a valid contract because both parties agree, the terms are clear, and payment is expected.

Step 2: Identify Performance Obligations

Performance obligations are the specific promises in a contract to deliver goods or services.

Each distinct good or service is a separate performance obligation.

Example:

A car dealership sells a car with a 2-year free maintenance plan.

Performance obligations:

1. Deliver the car.

2. Provide 2 years of maintenance.

Step 3: Determine the Transaction Price

The transaction price is the amount the company expects to receive for fulfilling the contract. It may
include:

Fixed amounts.

Variable amounts (e.g., discounts, bonuses, penalties).

Consideration in non-cash form.

Example:

A construction company agrees to build a house for ₹10,00,000. If completed within 6 months, the
customer will pay a bonus of ₹50,000. The transaction price is ₹10,00,000 + bonus (₹50,000 if likely to
achieve).

Step 4: Allocate the Transaction Price

If the contract has multiple performance obligations, the transaction price must be split between them
based on their standalone selling prices.

Example:

A software company sells software (₹1,00,000) and a 1-year support plan (₹20,000) as a bundle for
₹1,10,000.

Allocation:

1. Software: ₹91,667 (₹1,00,000 / ₹1,20,000 × ₹1,10,000).

2. Support: ₹18,333 (₹20,000 / ₹1,20,000 × ₹1,10,000).

Step 5: Recognize Revenue

Revenue is recognized when the performance obligation is satisfied. This can be:

At a point in time (e.g., delivery of goods).

Over time (e.g., services provided over months).

Example 1 (Point in Time):

A furniture store sells a sofa for ₹30,000. Revenue is recognized when the sofa is delivered to the
customer.

Example 2 (Over Time):

A construction company builds a bridge for ₹50,00,000. Revenue is recognized as the work progresses
(e.g., 30% completion = ₹15,00,000 revenue recognized).

This framework ensures revenue is recognized accurately and consistently.

Why is it Important?

It ensures that companies recognize revenue only when it is earned and realizable, avoiding early or
misleading income reporting.

Helps in comparing businesses across industries by following consistent principles.

Example:

Imagine a software company sells a product with installation and 1-year support:

Contract: The customer agrees to pay ₹1,00,000.

Performance Obligations: Deliver the software, install it, and provide support.

Transaction Price: ₹1,00,000.

Allocate Price: ₹80,000 for software, ₹10,000 for installation, ₹10,000 for support.

Recognize Revenue:

₹80,000 when the software is delivered.

₹10,000 after installation.

₹10,000 over the year as support is provided.

This ensures the company records income as it completes its work.

Revenue & Gain

In case of Manufacturer of cement, the income from sale of cement is revenue. If such concern, sells
surplus land, profit on sale of land is a gain and not revenue. (as not earned in the ordinary course of
business)

Total Income = Revenue + Gain

CASELET 1:

A car dealership has cars available that can be used by potential customers for test drives
(“demonstration cars”). The cars are used for more than one year and then sold as used cars. The
dealership sells both new and used cars.

Is the sale of a demonstration car accounted for as revenue or as a gain?

Answer:

The car dealership is in the business of selling new and used cars. The sale of demonstration cars is
therefore revenue, since selling used cars is part of the dealership's ordinary activities.

CASELET 2:

A Company is registered as an Export Oriented Unit and exports all its manufactured products. As per
the Foreign Trade Policy in India, the Company is eligible to claim 3% of its FOB value of exports as
export incentives in the form of scrips with effect from 1 April, 2018 which could be used for payment of
custom duty against imports or could be sold in open market. Can the export incentive be treated as
revenue?

Answer:

Export incentive is in the nature of government grant and does not fall within the scope of Ind AS 115,
as it is not revenue arising from contract with customer. Such export incentives are benefits given by
the government to incentivise companies to export more products.

Thus, the Company should apply the provisions of Ind AS 20 and not Ind AS 115.

CASELET 3:
Entity A signs an agreement with entity B to share equally in the development of a specific drug. Is the
arrangement within the scope of Ind AS 115?

Answer:

It depends on the facts and circumstances of the case.

Situation I:

If the entities will simply work together to develop the drug:

● The arrangement is unlikely to be in the scope of Ind AS 115

Situation II:

If the substance of the arrangement is that entity A is selling its compound to entity B and/or providing
research and development services to entity B:

(If those activities are part of entity A's ordinary activities)

● It is likely to be in the scope of Ind AS 115.

CASELET 4:

ABC 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:

1. ABC Ltd. pre-purchases the advertisement space from the publishers before it finds advertisers
for that space.
2. ABC Ltd. provides the service of matching the advertisers with the publishers.

In each of the above cases, which party will be identified as the customer?

Answer:

In transactions involving multiple parties, it requires judgment to identify which counterparties are
customers of the entity as it depends on specific terms and conditions of the underlying contracts. An
entity is required to consider all relevant facts and circumstances, such as the purpose of the activities
undertaken by the counterparty, to determine whether the counterparty is a customer. The identification
of the performance obligations in a contract can also have a significant effect on the determination of
which party is the entity's customer.

1. It is assumed that ABC Ltd. is acting as a principal in accordance with Ind AS 115. ABC 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.
2. It is assumed that ABC Ltd. is acting as an agent of the publisher in accordance with Ind AS
115. ABC 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 ABC Ltd. is providing services will be identified as its customer.

CASELET 5:

Exchange - Where Entities are in same line of business (No Commercial Substance):

A Ltd. and B Ltd. both are engaged in manufacturing of homogenous bottles. A Ltd. operates in northern,
eastern and central parts of India. B Ltd. operates in western and southern parts of India. A Ltd. fulfils
the demands of its customers based on western and southern India by using the bottles manufactured
by B Ltd. Similarly, B Ltd. fulfils the demands of customer based on northern, eastern and central parts
of India by delivering bottles manufactured by A Ltd.

How A Ltd. and B Ltd. should recognise the revenue?

Answer:

In industries with homogenous products, it is common for entities in the same line of business to
exchange products in order to sell them to customers or potential customers other than parties to
exchange. It is to be noted that all contracts (including contract for non-monetary exchanges) should
have commercial substance before an entity can apply the other requirements in the revenue
recognition model prescribed in Ind AS 115.

In this case, the exchange of bottles qualifies as a non-monetary exchange between customers in the
same line of business.

Accordingly, A Ltd. and B Ltd. should not recognise any revenue on account of exchange of goods
as Ind AS 115 will not apply to the contract.

CASELET 6:

Exchange - Where Entities are in same line of business (Commercial Substance is present):

A Ltd. and B Ltd. are both engaged in the extraction and supply of natural gas to different parts of India.
A Ltd. is located in western India while B Ltd. is located in Southern part of India. A Ltd. contracts to
supply natural gas to a large corporate customer, X Ltd., located in the South-eastern region of India,
who is engaged in supply of natural gas to homes. B Ltd. on the other hand contracts to supply natural
gas to Y Ltd. which is located closer to A Ltd. Consequently, A Ltd. purchases from B Ltd. to supply gas
to Y Ltd. and B Ltd. purchases from A Ltd. to supply natural gas to X Ltd. The price of natural gas for
this transaction would be based on actual delivery date of gas by either party. Further, the parties would
do a monthly calculation of supplies and receipts of gas and do a net settlement based on the prices
calculated as above. In the said industry, price varies based on different product categories and also
varies based on point of sale.

How will this situation be treated under Ind AS 115?

Answer:

All contracts (including contract for non-monetary exchanges) should have commercial substance
before an entity can apply the other requirements in the revenue recognition model prescribed in Ind
AS 115.

In the above case, entities A Ltd. & B Ltd. operate in the same line of business and agree to supply the
same units of natural gas to each other's customers due to ease of supplying in geographically closer
areas. However, they calculate the price based on date of delivery and do a net settlement every
month and hence, the contracts have commercial substance. Thus, the above case falls within the
scope of Ind AS 115, even though the timing of transfer of goods or services may be different.

Hence, A Ltd. will book revenue from sale of goods to B Ltd. and also book revenue from sale of goods
to X Ltd. A Ltd. will also recognise purchase of goods from B Ltd.

Similarly, B Ltd. will also record relevant corresponding accounting entries.

CASELET 7:

Exchange - Where Entities are in different line of business:

Mubu TV released an advertisement in ET, a vernacular daily. Instead of paying for the same, Mubu
TV allowed ET a free advertisement spot, which was duly utilised by ET.
How revenue for these non-monetary transactions in the area of advertising will be recognised and
measured?

Answer:

The above case, on the contrary, will be covered under Ind AS 115 since the same is exchange of
dissimilar goods or services because both of the entities deal in different mode of media, i.e.,
one is print media and another is electronic media and both parties are acting as customers and
suppliers for each other.

Further, it seems it is for consumption by the said parties.

Even if it was to facilitate sales to customers or potential customers, it would not be scoped out
since the parties are not in the same line of business.

Ind AS 115 provides that to determine the transaction price for contracts in which a customer promises
consideration in a form other than cash, an entity shall measure the non-cash consideration (or promise
of non-cash consideration) at fair value.

Therefore, Mubu TV and ET should measure the revenue promised in the form of non-cash
consideration as per the above referred principles of Ind AS 115.

CASELET 8:

Exchange - Where Entities are in different line of business:

A Ltd. a telecommunication company, entered into an agreement with B Ltd. which is engaged in
generation and supply of power. The agreement provided that A Ltd. will provide 1,00,000 minutes of
talk time to employees of B Ltd. in exchange for getting power equivalent to 20,000 units. A Ltd. normally
charges Re. 0.50 per minute and B Ltd. charges Rs. 2.5 per unit.

How should revenue be measured in this case?

Answer:

The above case will be covered under Ind AS 115 since the same is exchange of dissimilar goods or
services.

Revenue recognised by A Ltd.:

Consideration in the form of power units that it expects to be entitled for talk-time sold, i.e. Rs. 50,000
(20,000 units Rs. 2.5).

Revenue recognised by B Ltd.:

Consideration in the form of talk time that it expects to be entitled for the power units sold, i.e., Rs.
50,000 (1,00,000 minutes Re. 0.50).

CASELET 9:

A bank takes a time deposit for a period of 5 years from customers amounting to ₹10,00,000 for
allotment of locker for a period of 5 years. It does not separately charge any fee for the locker. The time
deposit is financial liability to which Ind AS 109 applies.

Assume that the bank pays 8% interest on the deposit whereas market rate is 8.5%.

Pass the necessary entries.

Answer:
 (Amount in Rs.)

Year Interest on Time Deposit Market Interest

0
1 80,000 85,000
2 80,000 85,000
3 80,000 85,000
4 80,000 85,000
5 80,000 85,000
PV of interest @ 8.5% (A) 3,15,280 3,34,985
(80,000 x 3.941) (85,000 x 3.941)
Difference in PV of interest = 19,705
Deferred locker rent
PV of principal repayment (B) 6,65,000
(10,00,000 x 0.665)
Fair value of deposit (C) = 9,80,280
(A)+(B)

Deposit Account Chart

1 2 1–2
Year Cash flows Interest @ 8.5% Cash interest Adjustment
(Opening
balance +
Adjustment)
0 9,80,280
1 9,83,604 83,324 80,000 3,324
2 9,87,210 83,606 80,000 3,606
3 9,91,123 83,913 80,000 3,913
4 9,95,368 84,245 80,000 4,245
5 10,00,000 84,632(b/f) 80,000 4,632

Journal Entries (Amount in Rs.)

Sr. No. Particulars Dr. Cr.

0 Bank A/c Dr. 10,00,000
To Deposit A/c 9,80,280
To Deferred locker rent A/c 19,705
1 Interest A/c Dr. 83,324
To Bank A/c 80,000
To Deposit A/c 3,324
Deferred Locker rent A/c Dr. 3,941
Locker rent A/c 3,941
(Deferred locker rent is recognized in Profit or Loss on
straight line basis over 5 years)
2 Interest A/c Dr. 83,606
To Bank A/c 80,000
To Deposit A/c 3,606
Deferred Locker rent A/c Dr. 3,941
To Locker rent A/c 3,941
 3 Interest A/c Dr. 83,913
To Bank A/c 80,000
To Deposit A/c 3,913
Deferred Locker rent A/c Dr. 3,941
To Locker rent A/c 3,941
4 Interest A/c Dr. 84,245
To Bank A/c 80,000
To Deposit A/c 4,245
Deferred Locker rent A/c Dr. 3,941
To Locker rent A/c 3,941
5 Interest A/c Dr. 84,632
To Bank A/c 80,000
To Deposit A/c 4,632
Deferred Locker rent A/c Dr. 3,941
To Locker rent A/c 3,941

CLARIFICATION ON SCOPE:

CASELET 10:

Assets within the scope of Ind AS 16 (Property, Plant and Equipment) or Ind AS 38 (Intangible Assets).

Answer:

An entity is required to apply the control model in Ind AS 115 to determine when to derecognize the
non-financial assets (i.e., when control is transferred).

The entity will also estimate consideration to measure the gain or loss applying the requirements of Ind
AS 115 for determining the transaction price.

CASELET 11:

Company X is in the business of buying and selling commercial property. It sells a property to Purchaser
Y. This transaction is in the scope of Ind AS 115 because Purchaser Y has entered into a contract to
purchase an output of Company X's ordinary activities and is therefore considered a customer of
Company X.

Alternatively,

If Company X was a manufacturing entity selling its corporate headquarters to Purchaser Y, then the
transaction would not be contract with a customer and not in scope of Ind AS 115 because selling real
estate is not an ordinary activity of Company X.

However, the recognition and measurement requirements in Ind AS 115 will apply to Company X when
recognizing and measuring any gains or losses on disposal of non-financial assets.

However, the income from selling the corporate headquarters is not a revenue under Ind AS 115.

Clarification on fees received for providing loan commitment:

Entity A has entered into contract with Entity B to provide it a commitment regarding a term loan, which
may be availed during the period of five years. A specified fee as per the contract is received by Entity
A to provide the loan commitment to Entity B.

How should Entity A account for such fees received to provide a loan commitment?

Answer:
Loan commitments are primarily covered by Ind AS 109, Financial Instruments. For loan commitments
not covered by Ind AS 109, revenue recognition will be as per Ind AS 115.

In case, it is probable that the Entity B will enter into a specific lending arrangement and the loan
commitment is not within the scope of Ind AS 109, the commitment fee received is regarded as
compensation for an ongoing involvement with the acquisition of a financial instrument and, together
with the related transaction costs (as defined in Ind AS 109), is deferred and recognised as an
adjustment to the effective interest rate.

If the commitment expires without the entity making the loan, the fee is recognised as revenue on
expiry. If it is unlikely that a specific lending arrangement will be entered into and the loan
commitment is outside the scope of Ind AS 109, the commitment fee is recognised as revenue on a
time proportion basis over the commitment period.

In cases, where a term loan is disbursed in tranches, to the extent there is evidence that it is
probable that the undisbursed term loan will be drawn down in the future, the commitment fee is
accounted for as a transaction cost under Ind AS 109, i.e., the fee is deferred and adjusted from the
carrying value of the financial instrument when the draw down occurs and considered in the effective
interest rate calculations.

5 Step Model:

CASELET 12:

On March 1st, 2017, P Ltd. agrees to sell 1,000 bath fittings to X Ltd. which are manufactured by using
customized screws supplied by a specific vendor. The payment terms between P Ltd, and X Ltd. have
not been decided as they are dependent on the price of the customized screws which is yet to be
finalized. As a token of confirmation, P Ltd. received a non-refundable amount of Rs.1,000. How will
this arrangement be treated under Ind AS 115 in the books of P Ltd., if P Ltd. is a principal in this
transaction?

Answer:

(In the given case, since the payment terms are not identified yet, the said contract does not meet all
of the criteria of paragraph 9.)

P Ltd. shall account for the non-refundable amount of Rs.1,000 as a liability as none of the events
described have occurred - that is, neither the entity has received substantially all of the consideration
nor it has terminated the contract. Accordingly, P Ltd. will continue to account for the non-refundable
amount as well as any future payments as a liability until the criteria are met (i.e. the payment terms
are identified) or one of the events in paragraph 15 has occurred.

Note:

P Ltd. will continue to assess the contract in accordance with paragraph 14 to determine whether the
criteria in paragraph 9 are subsequently met or whether the events in paragraph 15 of Ind AS 115 have
occurred.

CASELET 13:

A parent company sells a building to its 100% subsidiary at no consideration. Appropriate approvals
under the Companies Act with respect to related party transaction have been obtained. The stamp duty
has been paid and the building is transferred in the name of the subsidiary. The subsidiary will lease
the building to third-party customers and earn lease income. There is no repurchase agreement
between the parent and the subsidiary.
The parent will account for the sale at its market price, with a corresponding debit to investment in the
subsidiary. The subsidiary will account for the purchase at the market price, with a corresponding credit
to capital contribution of the parent.

Does the transaction have commercial substance?

Answer:

The transaction has commercial substance because the building is legally transferred to the
subsidiary. The subsidiary will own such building, and earn income by leasing to third parties. There is
no repurchase agreement between the parent and the subsidiary.

Note:

The fact that the subsidiary does not pay any consideration, is not relevant, because it is an investment
that the parent has made in its 100% subsidiary.

CASELET 14:

Company A has a customer X which is undergoing restructuring due to issues related to liquidity.
Company A has decided not to do any further business with X. X has informed Company A that it will
get Letter of Credit from a nationalized bank against which the Company A can dispatch goods.
Company A has manufactured the goods exclusively for X, but the Letter of Credit has not yet been
arranged because it is in process.

When should Company A recognize the revenue?

Answer:

As the customer has liquidity issues, the collection is not considered to be probable. Accordingly, till
the time the Letter of Credit is arranged from a nationalized bank in favour of Company A, criterion as
mentioned in Condition (e) is not met.

However, in case the Company A is able to demonstrate by any other mechanism that the above criteria
would be fulfilled in its favour, then it may recognize the revenue in accordance with the principles of
Ind AS 115 assuming all other conditions as stated above are met.

Note:

Furthermore, an entity shall continue to assess the contract to determine whether all the 5 criteria of
paragraph 9 are subsequently met.

CASELET 15:

An entity G Ltd. enters into a contract with a customer P Ltd. for the sale of a machinery for Rs.
20,00,000 P Ltd. intends to use the said machinery to start a food processing unit. The food processing
industry is highly competitive and P Ltd. has very little experience in the said industry. P Ltd. pays a
non-refundable deposit of Rs. 1,00,000 at inception of the contract and enters into a long-term financing
agreement with G Ltd. for the remaining 95 per cent of the agreed consideration which it intends to pay
primarily from income derived from its food processing unit as it lacks any other major source of income.
The financing arrangement is provided on a non-recourse basis, which means that if P Ltd, defaults
then G Ltd. can repossess the machinery but cannot seek further compensation from P Ltd., even if the
full value of the amount owed is not recovered from the machinery. The cost of the machinery for G Ltd.
is Rs. 12,00,000, P Ltd. obtains control of the machinery at contract inception.
When should G Ltd. recognize revenue from sale of machinery to P Ltd. in accordance with paragraph
9 of Ind AS 115?

Answer:

In the above case, it is not probable that G Ltd. will collect the consideration to which it is entitled in
exchange for the transfer of the machinery. P Ltd.'s ability to pay may be uncertain due to the following
reasons:

a) P Ltd. intends to pay the remaining consideration (which has a significant balance) primarily
from income derived from its food processing unit (which is a business involving significant risk
because of high competition in the said industry and P Ltd.'s little experience);
b) P Ltd. lacks other income or assets that could be used to repay the balance consideration; and
c) P Ltd.'s liability is limited because the financing arrangement is provided on a non-recourse
basis. In accordance with the above, the criteria in paragraph 9 of Ind AS 115 are not met.

Read this after understanding Paras 15 and 16:

Further, G Ltd. should account for the non-refundable deposit of Rs.1,00,000 payment as a deposit
liability as none of the events described in paragraph 15 have occurred-that is, neither the entity has
received substantially all of the consideration nor it has terminated the contract.

Accordingly, as per paragraph 16, G Ltd. will continue to account for the initial deposit as well as any
future payments of principal and interest as a deposit liability until the criteria in paragraph 9 are met
(i.e., the entity is able to conclude that it is probable that the entity will collect the consideration) or one
of the events in paragraph 15 has occurred.

Note:

G Ltd. will continue to assess the contract in accordance with paragraph 14 to determine whether the
criteria in paragraph 9 are subsequently met or whether the events in paragraph 15 of Ind AS 115 have
occurred.

CASELET 16:

(Comprehensive Case Study on Paragraph 9 - Evaluation of all 5 conditions)

X Ltd. provides IT support services to its customers from a distant location. Customers call up the
support team of X Ltd., who understand the client's requirement over the phone and provide necessary
advice to the customer to resolve their issue. Before providing advice, the support team member will
understand the client's problem and inform them about the price for the services to be provided. Once
the problem is resolved, the customer will make the agreed payment to X Ltd. through online banking
mode. X Ltd. considers that collection is probable and the oral contract is enforceable as per the laws
applicable in the

jurisdiction of X Ltd.

In such a case, whether there is a valid contract in accordance with Ind AS 115?

Answer:

Assessment of 5 conditions:

Condition (a):
The contract has been approved orally and X Ltd. will work to resolve the customer's problem and in
return it will be eligible to receive the agreed price.

Conclusion - Condition met.

Condition (b):

Each party's rights can be clearly identified.

Reason:

The right of the customer is to receive the agreed service to resolve his problem while X Ltd. is eligible
to receive the agreed price in case the problem is successfully resolved.

Conclusion - Condition met.

Condition (c):

Payment terms are identified.

Reason:

The customer has understanding that he will be required to pay the agreed amount through online
banking mode, the payment amount and the method of payment are clearly identified.

Conclusion - Condition met.

Condition (d):

Contract has commercial substance.

Reason:

It involves efforts and time of the support team of X Ltd. to resolve the customer's problem and in return
they will become eligible to receive the agreed price which will impact the risk and timing of the expected
cash flow, it can be said that there is commercial substance in the contract.

Conclusion - Condition met.

Condition (e):

Collection is probable.

Reason:

It is given in the facts that X Ltd. considers collection is probable.

Conclusion - Condition met.

Overall Conclusion:

Based on the above assessment and since in the given case, the oral contract is enforceable as per
the laws applicable in the jurisdiction, the contract satisfies all the criteria of paragraph 9, even though
it is an oral contract.

Accordingly, in the given case, there is a contract in accordance with Ind AS 115.

CASELET 17:

If a customer's ability to pay the consideration deteriorates significantly, an entity would reassess
whether it is probable that the entity will collect the consideration to which the entity will be entitled in
exchange for the remaining goods or services that will be transferred to the customer.
Answer:

The entity will account for the remainder of the contract as if the criteria to be a contract had not been
met if it is not probable that the entity will collect the consideration for future goods or services. This
assessment does not affect assets and revenue recorded relating to performance obligations already
satisfied. Such assets are assessed for impairment as per Ind AS 109.

CASELET 18:

(Case Study on Paragraph 13)

Entity A licenses patent to entity B for three years. Entity B will pay usage-based royalty to entity A.

Entity B makes timely payment in the first year. Credit worthiness of entity B declines in second year.
Entity B makes full payment for quarter 1 and nominal payment for quarters 2 to 4 in second year.
During the third year of the contract, entity B continues to use the entity's patent. However, entity B has
lost access to credit and major customer in third year. Entity A concludes that it is unlikely that entity B
will be able to make any further royalty payments for ongoing usage. In Year 4 entity B wins major new
customers, and is now financially strong.

What will be the revenue recognized in Years 1, 2, 3 and 4?

Answer:

Year 1:

Entity A will recognize revenue when the customer usage occurs.

Year 2:

Considering the decline in financial condition of entity B, entity A reassesses the definition of contract
under Ind AS 115 and concludes that the arrangement continues to meet the definition of contract since
collection of consideration is probable.

Accordingly, entity A continues to recognize revenue when the customer usage occurs. However, entity
A will make provision for receivable based on expected credit loss (ECL) as per Ind AS 109.

Year 3:

Considering significantly deterioration in the customer's ability to pay, entity A reassesses the definition
of contract under Ind AS 115 and concludes that it is no longer probable that it will collect the
consideration to which it is entitled.

Accordingly, no revenue is recognized by entity A. Entity A accounts for impairment of the existing
receivable based on ECL as per Ind AS 109.

Year 4:

Entity A will recognize cumulative unrecognized revenue and will also reverse impairment on
receivables recognized as per Ind AS 109 earlier in Years 2 and 3.

CASELET 19:

(Example on Paragraphs 14, 15 and 16)

An entity, a real estate developer, enters into a contract with a customer for the sale of a flat in a building
under construction. The customer pays 15% on booking and will pay 85% on delivery of the flat. The
contract is non-cancellable and requires the customer to pay 85% on delivery. However, as per
regulations, irrespective of the contract, the customer can renege on the deal and not take delivery.
However, in such situations, the 15% booking amount will be forfeited by the developer.
Analysis:

If the real estate prices fall, the customer will not honour the deal.

The developer concludes that under law of the land the contract is not enforceable. Consequently, the
estate developer accounts for the 15% booking amount as a liability, until such time it is able to conclude
that it is probable that it will collect the consideration or the contract has become explicitly or implicitly
enforceable. This assessment will be a continuous process. The developer shall recognize the 15%
booking amount as revenue, when the customer does not take delivery and the amount has become
non-refundable under the contract and the local regulations.

CASELET 20:

[Special reference to real estate developer - Evaluation of paragraph 9(e)]

A Developer enters into a contract for sale of a building to BB for Rs. 900 lacs. BB pays a non-refundable
deposit of Rs. 4.5 lacs and enters into a long-term, non-recourse financing agreement with the
Developer (i.e., if BB defaults, developer can repossess the property but cannot seek further
compensation even if the property does not cover the full value of the amount owed) for the remaining
95% of the sales price.

BB intends to open a restaurant in the building and expects to repay the loan using income derived from
its restaurant business. BB business faces significant risks due to high competition in the area where
the building is located and it also has only limited experience in the restaurant industry. It does not have
any other income or assets that could be used to repay the loan. BB obtains control of the building at
contract inception.

Considering the above facts, whether a contract exists as per the requirements of Ind AS 115?

Answer:

A contract exists for the purposes of applying the standard only if all 5 conditions of paragraph 9
(Discussed above in detail) are met.

Note:

If any of the criteria are not met, a contract does not exist and, generally, no revenue is recognized until
the criteria of paragraph 9 are met (or when either of the events specified in paragraph 15 of Ind AS
115 have occurred).

Generally, one of the most important questions in assessment for real estate developers is collectability
of consideration considering the uncertainty inherent in real estate developments and that such
contracts can be subject to conditions outside the developer's control, both during the construction
phase and subsequently - e.g., economic conditions that result in increases or decreases in property
prices.

The entity needs to assess the collectability of the consideration at the initial stage and evaluate whether
it is probable that the economic benefits associated with the transaction will flow to the entity. In making
the collectability assessment, an entity considers the customer's ability and intention (which includes
assessing its credit worthiness) to pay the consideration when it falls due.

All relevant facts and circumstances are considered.

For example:

a) Buyer's rights to cancel the contract for no penalty

b) Any prior experience with the buyer
c) Historical data on buyers with similar characteristics
d) Importance of the property to the buyer's operations
 e) Contractual terms (e.g., small down payment without sufficient collateral)
f) Funding arrangements of buyer; and
g) Whether the seller is providing non-recourse finance (i.e., seller only has a right to the property
in the event of default) to the buyer.

Based on the facts and circumstances, it appears that it may not be probable that Developer will collect
the consideration to which it is entitled in exchange for the transfer of the building.

This is because the customer's ability and intention to pay may be in doubt because of the following
factors:

a) The liability of BB under the loan is limited because the loan by Developer is on a non-recourse
basis
b) BB lacks other sources of income or assets that could be used to repay the loan; and
c) The repayment of loan (representing a significant balance) is intended to be met primarily from
the income derived from the restaurant business but the business is one which faces significant
risk because of high competition and lack of prior experience of BB.

Thus, the requirements of paragraph 9 of Ind AS 115 are not satisfied. Accordingly, a contract does not
exist

Note:

Collectability is a continuous assessment and thus, if there are any changes in the facts and the
circumstances leading to significant changes in the ability of the customer to honour its obligations
under the contract, the entity needs to re-assess the appropriateness of revenue recognition.

Since the criteria in paragraph 9 of Ind AS 115 are not met, the entity applies paragraphs 15-16 of Ind
AS 115 to determine the accounting for the non-refundable deposit of Rs. 4.5 lacs. The entity observes
that none of the events described in paragraph 15 have occurred-that is, the entity has neither received
substantially all of the consideration nor it has terminated the contract. Consequently, in accordance
with paragraph 16, the entity accounts for the non-refundable payment of Rs. 4.5 lacs as a deposit
liability. The entity continues to account for the initial deposit, as well as any future payments of principal
and interest, as a deposit liability, until such time that the entity concludes that the criteria in paragraph
9 are met (i.e., the entity is able to conclude that it is probable that the entity will collect the
consideration) or one of the events in paragraph 15 has occurred. The entity continues to assess the
contract in accordance with paragraph 14 to determine whether the criteria in paragraph 9 are
subsequently met or whether the events in paragraph 15 of Ind AS 115 have occurred.

CASELET 21:

A telecommunication company A Ltd. enters into contracts with a customer for providing broadband
data services. These contracts are generally for one year and are renewed automatically after one year.
These contracts are cancellable by any party at any point in time without any penalty for future
unperformed services/obligations.

Revenue be recognized over what period?

Answer:

Since there are no contractual terms, the telecommunication company A Ltd. shall recognize revenue
as and when services are provided, i.e., only for satisfied performance obligations.

CASELET 22:

A software developer and consultant, licensed its project management software to X Ltd. After 5 days,
it enters into another contract to customize the software. X Ltd. cannot use the software unless it is
customized.
Should the software developer combine the contracts?

What is the implication of combining the contracts?

Would the answer change if the other contract was entered into by the software dealer with the
subsidiary of X Ltd. instead of X Ltd. itself?

Answer:

It appears that contracts negotiated as a package with single commercial objective. The implication
of combining the contracts is that revenue cannot be recognized unless the performance obligation of
the combined contracts is satisfied.

Note:

Collectability of the consideration shall also be evaluated on the basis of the combined contracts. Since
the subsidiary is a related party, the contracts shall be combined. Other implications would be same as
discussed above.

CASELET 23:

Company A, a manufacturer of specialized construction equipment enters into a contract with Customer
B to manufacture and deliver a customized lift for Rs. 95,000. The total cost to Company A of designing,
manufacturing and delivering the lift is estimated to be Rs. 70,000. Two days later, Company A enters
into another contract with Customer B to deliver four lift tyres that Customer B will use on the customized
lift in the future after the original tyres deteriorate. The contract price per tyre is Rs. 800, however, the
cost of each tyre is estimated at Rs. 900.

Whether these two contracts should be treated as a single contract?

Answer:

In the given case, Company A enters into two contracts with the same party at about the same time,
i.e., within two days.

In addition, the contracts should satisfy one or more of the criteria in paragraph 17 of Ind AS 115 for the
contracts to be combined.

In the given case, criterion (a) of paragraph 17 for combining contracts is met because the two contracts
are negotiated as a bundle with one business objective.

The relationship between the consideration in the contracts (i.e., the price interdependence) is such
that if those contracts were not combined, the amount of consideration allocated to the performance
obligations in each contract might not faithfully depict the value of the goods or services transferred to
the customer.

In other words, Company A would have incurred a loss of Rs. 400 [(Rs. 900 - Rs. 800) x 4 = Rs. 400]
on the second contract, if it was not combined with the first contract.

Thus, considering that the contracts were entered into at about the same time, it seems that two
contracts are negotiated as a package with a single commercial objective, i.e., the tyres have not been
sold at a loss instead the consideration of Rs. 95,000 stated for the lift includes a part of consideration
for the tyres as well. Therefore, Company A should combine the two contracts for revenue recognition.

CASELET 24:
(Contract modification is a separate contract.)

Seller enters into contract with a customer to sell 100 units @ 10 per unit. The goods are distinct and
are transferred to the customer after a three-month period. The parties modify the contract at the end
of one month to sell an additional 100 units @9 per unit to be delivered after four months. The market
price at the date of modification is INR 9.

Answer:

The modification to sell an additional 100 goods is accounted for as a separate contract because the
additional goods are distinct, and the price reflects their stand-alone market price.

Note:

Existing contract would not be affected by the modification.

CASELET 25:

(Contract modification accounted prospectively)

Entity A Ltd. enters into a three-year service contract with a customer C Ltd. for Rs. 4,50,000
(Rs.1,50,000 per year). The standalone selling price for one year of service at inception of the contract
is Rs.1,50,000 per year. A Ltd. accounts for the contract as a series of distinct services.

At the beginning of the third year, the parties agree to modify the contract as follows:

- Fee for the third year is reduced to Rs. 1,20,000; and

- C Ltd. agrees to extend the contract for another three years for Rs. 3,00,000 (Rs.1,00,000 per
year).

The standalone selling price for one year of service at the time of modification is Rs. 1,20,000.

How should A Ltd. account for the modification?

Answer:

In the given case, even though the remaining services to be provided are distinct, the modification
should not be accounted for as a separate contract because the price of the contract did not increase
by an amount of consideration that reflects the standalone selling price of the additional
services. The modification would be accounted for, from the date of the modification, as if the existing
arrangement was terminated and a new contract created (i.e. on a prospective basis) because the
remaining services to be provided are distinct.

A Ltd. should reallocate the remaining consideration to all of the remaining services to be provided (i.e.
the obligations remaining from the original contract and the new obligations). A Ltd. will recognize a
total of Rs.4,20,000 (Rs.1,20,000+ Rs.3,00,000) over the remaining four-year service period (one year
remaining under the original contract plus three additional years) or Rs.1,05,000 per year.

CASELET 26:

(Contract modification requiring cumulative catch-up adjustment)

A Ltd. provides accounting services - maintains books of account and prepares financial statements. It
enters into a 2-year service contract with Customer for INR 9,00,000 (INR 4,50,000 per year); the stand-
alone selling price for the service at inception.
After the end of the 1st year, A Ltd. and Customer agree that the fees should be INR 5,00,000 per year
for both the years because the efforts were much larger than expected because of new standards and
regulations.

Answer:

The modification only impacts the transaction price and the remaining services are not distinct. A Ltd.
will recognize an additional revenue of INR 50,000 as a cumulative catch up adjustment, as soon as
the modification is approved by the Customer.

A revenue of INR 5,00,000 will be recognized for the 2nd year.

CASELET 27:

Contractor enters into a contract with Customer to build a road. During the construction of the road,
Customer requests that a section of the road be widened to include two additional lanes.

Answer:

In evaluating how to account for the contract modification, Contractor first needs to determine whether
the modification adds distinct goods or services?

Situation I:

If the road widening is not distinct from the construction of the road, then it becomes part of a single
performance obligation that is partially satisfied at the date of the contract modification, and the measure
of progress is updated using a cumulative catch-up method.

Situation II:

If the road widening is distinct, then Contractor needs to determine whether the transaction price for
road widening is commensurate with the stand-alone selling price of the distinct goods.

Case (a):

If it reflects its stand-alone selling price, then construction of the additional two lanes is accounted
for separately from the original contract for construction of the road.

Case (b):

If it does not reflect its stand-alone selling price, then the agreement to construct the additional two
lanes is combined with the original agreement to build the road and the unrecognized consideration is
allocated to the remaining performance obligations. Revenue is recognized when or as the remaining
performance obligations are satisfied - i.e. prospectively.

CASELET 28:

(Where the change in scope and price is not yet approved)

An entity enters into a contract with a customer to construct a building on customer-owned land. The
contract states that the customer will provide the entity with access to the land within 50 days. However,
the entity was not provided access until 120 days after contract inception because of storm damage.
The contract specifically entitles the entity to compensation that is equal to actual costs incurred as a
direct result of the delay. The entity is able to demonstrate that the specific direct costs were incurred
as a result of the delay. The customer has not yet approved the entity's claim.

Analysis:
The entity assesses the legal basis and accounts for the claim as a contract modification that does not
result in any additional goods and services being provided to the customer.

In addition, all of the remaining goods and services after the modification are not distinct and form part
of a single performance obligation. Consequently, the entity accounts for the modification by updating,
the transaction price and the measure of progress towards complete satisfaction of the performance
obligation (cumulative catch-up adjustment).

The entity considers the constraint on estimates of variable consideration when estimating the
transaction price.

CASELET 29:

(Where change in scope is approved, but price has not yet been determined)

An entity enters into a contract with a customer to construct a building on customer-owned land.

After construction commences, the customer wants an additional floor added to the building. The
customer approves the change in scope.

However, the price is under negotiation and not yet approved.

The original contract value is INR 200,000, and estimated contract cost is INR 1,60,000.

The cost is expected to increase by INR 20,000 as a result of an additional floor. The entity estimates
that it will receive INR 30,000 for the additional floor. However, it applies the constraint to the variable
consideration and estimates that the additional consideration is INR 20,000.

Prior to the change in scope the entity had incurred a cost of INR 80,000.

Analysis:

The additional scope does not add distinct goods or services, and forms part of a single performance
obligation.

Consequently, the entity accounts for the modification by updating the transaction price and the
measure of progress towards complete satisfaction of the performance obligation (cumulative catch-up
adjustment). The entity considers the constraint on estimates of variable consideration when estimating
the transaction price.

Accounting (Prior to change in scope):

The entity uses the cost completion method to estimate percentage completion. Accordingly, the entity
estimates percentage completion to be 50% (80,000/1,60,000).

The entity recognizes revenue of INR 1,00,000 (50% of 200,000) and cost of INR 80,000.

Accounting (After change in scope):

The entity estimates the percentage completion, by revising its estimates of cost and revenue.

The revised cost is INR 1,80,000 (1,60,000+20,000) and the revised revenue after applying constraint
on variable consideration is INR 2,20,000 (2,00,000+20,000).

The revised percentage completion is 44.44% (80,000/1,80,000).

The revenue to be recognized is INR 97,768 (44.44% x 2,20,000) and cost is INR 80,000.
Consequently, the entity will reverse revenue already recognized of INR 2,232 (1,00,000-97,768).

CASELET 30:
A Ltd., a passenger car manufacturer, promises in the contract with its distributor to provide three free
maintenance services. The maintenance services are done by the distributor and reimbursed by A Ltd.
Usually free service coupons are given to the customer at the time of sale of the car.

Should A Ltd. treat the maintenance service as performance obligation?

Answer:

Because the promise of maintenance services is a promise to transfer goods or services in the future
and is part of the negotiated exchange between the entity and the distributor, the entity determines that
the promise to provide maintenance services is a performance obligation.

A Ltd. shall allocate a portion of the transaction price (as per agreement of reimbursement) to the
promise to provide maintenance services.

CASELET 31:

X Ltd., a hotel, does not explicitly mention at the time of booking that there is free breakfast and free
airport pick up and drop off facility. Neither the booking receipts confirm those services. However, these
facilities are mentioned on the website of the company. The company has outsourced these services
and reimburse the service rendered on the basis of coupons.

Should X Ltd. treat these ancillary services as performance obligation?

Answer:

These ancillary services are performance obligations by virtue of published policies of the company. X
Ltd. shall allocate a portion of the transaction price (as per agreement of reimbursement per coupon)
for ancillary services.

CASELET 32:

A manufacturer enters into a contract with a customer to provide a series of similar customized goods
in a large quantity that will be delivered consecutively over time. Based on the contract, the customer
has legal title and controls the work in progress as the products are being manufactured. The
manufacturer has determined an expected average cost for manufacturing the product and has also
determined that using an input method based on costs (for this particular contract) is an appropriate
method because it represents the manufacturer's performance when transferring control of the goods.

Whether this contract of a series of distinct goods can be considered as a single performance
obligation?

Answer:

The contract is determined to be for a series of distinct goods that are effectively one performance
obligation because of the following:

a) The goods are similar in nature and are transferred consecutively over time.
b) The contract is satisfied over time because the customer has title to and controls the work in
progress while the products are being manufactured and therefore meets the criterion for
performance obligation satisfied over time.
c) The same method (i.e., cost to cost) is used to measure progress toward the satisfaction of the
performance obligation of each individual product.

CASELET 33:

X agrees to produce 2,000 customized engines for use by Customer A in its products.
X concludes that the engines will be transferred to A, overtime because:

- They have no alternative use to X; and

- A is contractually obligated to pay X for any finished or in-process engines, including a
reasonable margin, if A terminates the contract even when no fault of X.

X already has the process in place to produce the engines and is given the design by A, such that X
does not expect to incur any significant learning curve or design and development costs. X uses a
method of measuring progress toward complete satisfaction of its manufacturing contracts that takes
into account work in progress and finished goods controlled by A.

X concludes that each of the 2,000 engines is distinct, because:

- A can use each engine on its own; and

- Each engine is separately identifiable from others, because one does not significantly affect,
modify, or customize another.

Despite the fact that each engine is distinct, X concludes that the 2,000 units are a single
performance obligation because:

- Each engine will transfer to A, overtime; and

- X uses the same method to measure progress toward complete satisfaction of the obligation to
transfer each engine to A.

Consequently, the transaction price for all 2,000 engines is recognized over time using an appropriate
measure of progress. This outcome may be different from the outcome of allocating a fixed amount to
each engine if each one was a performance obligation.

CASELET 34:

(Example on Paragraph 27(a))

A Ltd. enters in contact with customer X Ltd. to sell custom tool and replacement part. No other entity
sells either of the above product, individually or together. X Ltd. also can use the tool without
replacement part.

However, it cannot use replacement part without the tool.

How many performance obligations are in the above contract?

Answer:

Situation 1:

If A Ltd. transfers the custom tool first:

There are two performance obligations as the X Ltd. can benefit from it on its own without the
replacement part which is readily available to the XYZ readily.

Situation 2:

If the replacement part is delivered first:

Then there would be only single performance obligation as it cannot be used without the custom tool
(no standalone value).

CASELET 35:
A contract to construct a wall could include promises to provide labour, lumber, and sheetrock. The
individual inputs (the labour, lumber, and sheetrock) are being used to create a combined item (the
wall) that is substantially different from the sum of the individual inputs.

The promise to construct a wall is therefore a single performance obligation in this example.

■ The level of integration, interrelation, and interdependence among the promises to transfer goods or
services. The goods and services in a contract should not be combined solely because one of the goods
or services would not have been purchased without the others.

Example:

A contract that includes delivery of equipment and routine installation is not necessarily a single
performance obligation even though the customer would not purchase the installation if it had not
purchased the equipment.

CASELET 36:

[Conditions 1 and 2 both are met (i.e. Paragraph 27 (a) and (b)}]

B Ltd. provides a hosted software solution to customers for which customers pays a fixed monthly fee.

Customer enters into a contract to use the software on 'software-as-a-service' model for three years.
Customers are not permitted to take possession of the software. As part of the contract, B Ltd. agrees
to provide a variety of services to the customer prior to using the software. These services include
training Customer's personnel, converting and migrating Customer's data from its current on-premise
solution to B Ltd.'s hosted environment, and building an interface to permit the hosted application to
supply data to Customer's on-premise general ledger system.

Each of these services has value to the customer on standalone basis.

Most of these services need not be re-performed if, the hosting provider is changed. B Ltd. regularly
sells software separately without the additional services.

There are third party consultants that provide each of the services requested by Customer.

Whether the software and the other services are distinct performance obligations?

Answer:

Paragraph 27(a):

B Ltd. concludes that the criterion in paragraph 27(a) of Ind AS 115 is met because the customer can
benefit from the software together with readily available resources other than the Entity B's additional
other services (because there are other entities that can provide such services), and can benefit from
the additional service together with the software.

Paragraph 27(b):

B Ltd. also concludes that its promises for software and to provide the additional services are
separately identifiable (i.e., the criterion in paragraph 27(b) of Ind AS 115 is met).

The entity concludes that the software and additional services are not inputs to a combined item in this
contract on the basis of the principle and the factors in paragraph 29 of Ind AS 115. In reaching this
conclusion, B Ltd. considers that the customer could separately avail the additional services without
significantly affecting its ability to benefit from the software. As in the current scenario, the services
performed by B Ltd. are not essential for the performance of the software solution as B Ltd. sells
software separately to other customer and there are other consultants who could provide these services
to the customer.
In accordance with the above, as the services have standalone value to the customer and need not be
re performed, if the hosting vendor is changed, B Ltd. concludes that its promises to provide each of
the services and the software are distinct performance obligations.

Conclusion:

B Ltd. assesses the goods and services promised to the customer and it concludes that the criteria in
paragraph 27 of Ind AS 115 are met for each of the software and the implementation service.

Further analysis:

In this case B Ltd. applies paragraphs 31-38 of Ind AS 115 to assess whether the performance
obligation is a performance obligation satisfied at a point in time or over time. In accordance with the
requirements of these paragraphs, the revenue from the software is taken over the initial hosting period
once the customer's access is enabled to the software environment. Revenue for the other services
shall be recognised over time by selecting an appropriate measure of progress towards satisfaction of
the performance obligation.

CASELET 37:

[Condition 1 not met (Paragraph 27 (a)}]

A car company C Ltd. grants company X a license to use its name in a new car with solar technology
and also promises to manufacture the car for X.

Whether the license to use company's name a separate performance obligation?

Answer:

C Ltd. assesses that no other company can manufacture the car due to highly specialized nature of the
solar car manufacturing process. As a result, the license cannot be separately purchased from the
company. C Ltd. also determines that Company X cannot be benefitted from the license without the
manufacturing service, therefore, the criterion in paragraph 27(a) of Ind AS 115 is not met.

Conclusion:

The license and the manufacturing service are not distinct and C Ltd. accounts for the license and the
manufacturing service as a single performance obligation.

Alternatively:

If C Ltd. is able to determine that the manufacturing process used for the car is not unique or specialized
and other companies could also manufacture the car for Company X, then the criterion in paragraph
27(a) of Ind AS 115 is met because Company X can be benefitted from the license together with readily
available resources other than C Ltd.'s manufacturing service (because there are other entities that can
provide the manufacturing service), and can benefit from the manufacturing service together with the
license transferred to it (Company X) at the start of the contract.

Company X would also consider whether it will be able to purchase the license separately without
significantly affecting its ability to benefit from the license and that neither the license nor the
manufacturing service is significantly modified by the other and C Ltd. is not providing services to
integrate those items. [i.e. evaluation of Paragraph 27(b) - Parameter 1, 2 or 3].

In such case, C Ltd. shall conclude that its promise to grant the license and to provide the manufacturing
service are distinct and there are two performance obligations:

(i) License to use name (ii) Manufacturing of car

CASELET 38:

[Condition 2 not met (Paragraph 27 (b)}]

A Ltd. is a software-as-a-service provider of tax preparation software, i.e., A Ltd. provides software-as-
a service, and does not license its software. The customers do not have an option to take the software
on premise. A Ltd. charges a one-time set up fee of Rs.1,00,000 which is non-refundable and a monthly
access charge of Rs. 25,000. The initial hosting period is 3 years. The basic configuration takes 3
months and the customer can access the system once the configuration is completed.

How would A Ltd. account for the revenue?

Answer:

A Ltd. assesses the goods and services promised to the customer to determine which goods and
services are distinct in accordance with paragraph 27 of Ind AS 115.

A Ltd. determines that the criterion in paragraph 27(b) of Ind AS 115 is not met as in this case as A Ltd.
provides set up services which do not provide any separately identifiable benefit to the customer. Thus,
the set-up services and the initial hosting services is considered as one single performance obligation.

Therefore, in accordance with paragraph 27, the software is not a distinct performance obligation in the
context of the contract. A Ltd. would account for the set up service and initial hosting services together
as one performance obligation.

Further analysis

A Ltd. applies paragraphs 31-36 of Ind AS 115 to assess whether the performance obligation (i.e. the
bundle of the set-up services and the hosting services) is a performance obligation satisfied at a point
in time or over time.

In accordance with the requirements of these paragraphs, the revenue for such hosting arrangements
should be recognised from the time the customer can access the system. The set-up fees which is paid
upfront should be taken over a straight-line basis over the initial hosting period of 3 years and the
monthly access charge of Rs. 25,000 will be recognised per month.

CASELET 39:

[Condition 1 met [Paragraph 27(a)] + Condition 2 not met [Paragraph 27(b)] – Parameter 1]

A contractor enters a contract to design and build a house for a new customer. Contractor is responsible
for the following activities – (a) Architectural design (b) Site preparation and construction (c) Plumbing
(d) Electrical services (e) Carpentry.

Contractor regularly sells these goods and services individually to customers.

How many performance obligations are in the above contract?

Answer:

Condition 1:

The promised goods and services are capable of being distinct because the customer could benefit
from the goods or services either on their own or together with other readily available resources.
Reason:

Contractor regularly sells the goods or services separately to other customers and the customer could
generate economic benefit from the individual goods and services.

Condition 2:

Goods and services are not distinct within the context of the contract because they are not separately
identifiable from other promises in the contract.

Reason:

Contractor provides a significant service of integrating the various goods and services into the house
that the customer has contracted to purchase.

Overall Conclusion:

Entire contract to build the house is treated as a single performance obligation.

CASELET 40:

[Condition 1 met (Paragraph 27 (a)) + Condition 2 not met (Paragraph 27(b))- Parameter 2]

P Ltd. enters a contract with a customer to provide a perpetual software licence, installation services,
and three years of post-contract customer support (unspecified future upgrades and telephone support).
The installation services require the entity to configure certain aspects of the software, but do not
significantly modify the software. These services do not require specialised knowledge, and other
sophisticated software technicians could perform similar services. The software does not require the
upgrades and telephone support in order for it to remain functional.

How many performance obligations are in the contract?

Assume the same facts as above, but the installation services require P Ltd. to substantially customise
the software by adding significant new functionality, thereby enabling the software to function with other
computer systems owned by the customer.

How many performance obligations are in the contract?

Answer:

There are four performance obligations:

(1) Software licence

(2) Installation services

(3) Unspecified future upgrades

(4) Telephone support

The customer can benefit from the software (delivered first), because it is functional without the
installation services, unspecified future upgrades or telephone support. The customer can benefit from
the subsequent installation services, unspecified future upgrades and telephone support together with
the software, which it has already obtained.

P Ltd. concludes that each goods and service is separately identifiable, because the installation
services, unspecified future upgrades and telephone support do not significantly modify or customise
the software. Additionally, the software and services are not being integrated into the output that the
customer has contracted to receive.
In the other situation:

There are three performance obligations:

(1) licence to customised software; (2) unspecified future upgrades; and

(3) telephone support.

P Ltd. determines that the contractual obligation to provide a customised software solution results in a
significant service of integrating the licensed software with the customer's other computer systems. The
customer has contracted with P Ltd. to receive customised software, and P Ltd. is utilising the licence
and installation services as inputs to produce the customised software. The nature of the installation
services also results in the software being significantly modified and customised by the service.

P Ltd. concludes, based on these considerations, that the customised software licence and installation
services are not distinct in the context of the contract, and it bundles the software licence with the
installation services as a single performance obligation. The unspecified future upgrades and telephone
support are separately identifiable, and therefore separate performance obligations, because they do
not significantly modify or customise the software.

CASELET 41:

[Condition 1 met (Paragraph 27 (a)) + Condition 2 not met (Paragraph 27(b))- Parameter 3]

Company A is an auto component supplier and supplies auto parts to Original Equipment Manufacturer.
It has received a contract to make a tooling for a total consideration of Rs. 5,00,000. This tooling requires
a design to be created and approved from the customer and then the process of manufacture of the
tooling will begin. This process is completed in a short period of time, i.e., around one month.

Whether designing and tooling are separate performance obligations?

Answer:

Case I:

If the design activity and the tooling activity are satisfying Paragraph 27(b) indicators:

E.g., designing is highly interrelated with the tooling activity, i.e., the designing is complex and
specialised such that the customer cannot derive any benefit from it independent of the tooling activity
then both the activities would be considered as a single performance obligation.

Case II:

If the design activity and the tooling activity are not highly interrelated:

E.g., the design activity is not complex and specialised, the company provides the designing services
on a stand-alone basis and the customer can use the design to get the tooling manufactured by another
vendor, the two can be treated as separate components.