Identify what the customer obtains from the first contract
Ind AS 115 B39–B43 treats an option to acquire additional goods or services as a performance obligation only if it provides a material right the customer would not receive without entering the contract. A contractual discount is not automatically a material right. Compare the exercise terms with discounts normally available to the same class of customer in the same geographical area or market. An option at the stand-alone selling price is a marketing offer under B41 even if it can only be exercised after the first contract.
Read the applicable text: MCA: Ind AS 115, paragraphs 73–88 and B39–B43.
Estimate the incremental benefit and allocate
If the option’s stand-alone selling price is not observable, B42 requires an estimate reflecting the incremental discount after considering discounts available without the option and the likelihood of exercise. Support both estimates and the relevant customer population. Allocate the transaction price across the initial goods or services and the material right using relative stand-alone selling prices at contract inception, subject to the allocation exceptions in paragraphs 81–86. The option’s stand-alone price is an allocation input, not the amount directly deferred.
Release revenue when the right is satisfied
For a material right, recognise the allocated amount when the relevant future goods or services are transferred or the option expires. Reconcile exercise, additional consideration, transfer and expiry separately. Cash received on exercise does not by itself demonstrate transfer. B43 permits an alternative when the optional goods or services are similar to the original goods or services and are provided on the original contract’s terms: allocate by reference to the goods or services expected to be provided and the corresponding expected consideration.
Keep marketing, discounts and return rights separate
Compare actual offers and avoid treating ordinary customer discounts or all future purchases as material rights. Document contractual scope, expected exercise, the allocation and release events. The examples use assumed prices, probabilities and transfers before taxes, with amounts rounded to the nearest paise where relevant.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Estimate incremental discount
An option buys a ₹1,000 item at 20% off; comparable customers can get 10% off without it. Incremental discount is ₹100. With 60% expected exercise, estimated option stand-alone selling price is ₹60 on these simplified facts.
Illustrative example 2: No incremental advantage
A holder and a comparable customer without the option can each buy at ₹900 against a normal ₹1,000 price. Each obtains ₹100 off and the incremental discount is nil. On the stated facts there is no additional contractual benefit from this price.
Illustrative example 3: Allocate the original price
The customer pays ₹1,000 for an item with stand-alone price ₹1,000 and a material right with estimated stand-alone price ₹50. Relative allocation is ₹952.38 to the item and ₹47.62 to the option.
Illustrative example 4: Exercise and transfer
The customer exercises that right, pays an additional ₹800 and the future good transfers. On the stated facts, recognise ₹847.62, comprising ₹800 and the ₹47.62 previously allocated.
Illustrative example 5: Unexercised right expires
For a contract with an outstanding ₹47.62 allocated to one option, the right expires unused. Release ₹47.62 when it expires on the supported facts. Do not record a new cash receipt.
Illustrative example 6: Different exercise likelihood
The supported incremental benefit is ₹160 per option. At 25% expected exercise the estimated stand-alone price is ₹40. At 60% it would be ₹96. The ₹56 difference shows sensitivity in the estimate, not an instruction to reallocate an existing contract automatically.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Identify the contract and optional future purchase | Terms and customer communications |
| 2 | Determine what is available without the option | Comparable offers and market evidence |
| 3 | Measure any incremental discount | Documented pricing analysis |
| 4 | Assess whether the option conveys a material right | B39–B41 conclusion |
| 5 | Estimate the exercise likelihood where needed | Customer cohort and experience |
| 6 | Determine relative stand-alone selling prices | Allocation support |
| 7 | Record the allocated option amount | Contract liability and revenue bridge |
| 8 | Track exercise, future transfer or expiry | Operational event and billing evidence |
| 9 | Assess B43 only where its facts apply | Supported eligibility and method decision |
| 10 | Reconcile revenue and outstanding rights at close | Contract roll-forward and review sign-off |
Sixteen practitioner FAQs
1. Does every customer coupon create a performance obligation?
Only if the contract provides a material right under the standard.
2. Can a normal publicly available discount create incremental value?
Compare the actual benefit with what the customer could obtain without the option.
3. Does availability only to existing customers settle the question?
No. B41 addresses options at stand-alone selling price even where access requires a prior contract.
4. How is a non-observable option price estimated?
Assess incremental discount and likelihood of exercise under B42.
5. Does the estimated stand-alone price equal the deferred amount?
No. Use it to allocate the transaction price on a relative basis.
6. Can all original consideration be booked to the initial item?
Allocate a portion to any material right under the applicable requirements.
7. Does exercise alone always release revenue?
Recognise when the related future goods or services are transferred, or on expiry as applicable.
8. Does an expired option require a refund?
Check the contract; accounting for expiry does not itself create a refund right.
9. How is additional exercise consideration handled?
Reconcile it with the amount allocated to the option when recognising the related performance.
10. Should all options use one exercise probability?
Use supported evidence for the relevant option and customer population.
11. Does a price sensitivity mean an existing contract must be reallocated?
No. Paragraph 88 prohibits reallocating the transaction price solely to reflect changes in stand-alone selling prices after contract inception. Consider any other change under the applicable guidance.
12. What if the future price equals stand-alone selling price?
Under B41, an option priced at the stand-alone selling price is a marketing offer; account for it when the customer exercises the option.
13. Can the B43 alternative be used for every renewal?
Assess its specific similarity and original-term conditions before using it.
14. Is a product return the same as an option to buy?
No. Apply the separate right-of-return guidance where relevant.
15. Does a cash receipt establish the amount of revenue?
Reconcile cash, allocation and transfer under the standard.
16. What should the period-end working show?
Support the comparator offers, stand-alone price estimate, allocation and release or remaining liability.