Start with the outstanding promise
Ind AS 115 B44–B47 addresses customer prepayments and unexercised contractual rights. For a customer prepayment within B44, recognise a contract liability for the obligation to transfer, or stand ready to transfer, goods or services. B45 discusses unexercised rights arising from a non-refundable prepayment. The initial cash receipt alone does not establish revenue. This guide considers the issuer's own prepaid rights within Ind AS 115, with simple examples where each rupee redeemed represents a rupee of performance before breakage.
Read the applicable text: MCA Ind AS 115, paragraphs 56–58 and B44–B47.
Choose the recognition branch before calculating
Under B46, if the entity expects to be entitled to breakage, recognise the expected amount in proportion to the pattern of rights exercised. Consider the variable consideration constraint in paragraphs 56–58, including whether it is highly probable that a significant reversal of cumulative revenue will not occur when uncertainty is resolved. If the entity does not expect entitlement, recognise breakage when the likelihood of exercise of the remaining rights becomes remote. Separately, B47 requires a liability where unexercised consideration must be remitted to another party.
Calculate on a cumulative basis
For an eligible, homogeneous illustrative cohort, estimate redeemable rights as consideration less expected breakage. Multiply expected breakage by cumulative actual redemption divided by expected total redemption; compare with breakage already recognised to determine the period movement. The denominator is expected lifetime redemption, not the original loaded balance. Revenue attributable to performed goods or services is calculated separately under the contract. Use this simple calculation only where it faithfully represents the exercise pattern; heterogeneous rights may need a different measure.
Test the evidence at each close
Segment cohorts by expiry, extension history, channel, product and customer behaviour. When applying Ind AS 115 to a portfolio rather than individual contracts, paragraph 4 also requires a reasonable expectation that the effect on the financial statements will not differ materially from individual contract accounting. Test whether elapsed cohorts are representative of newer ones; compare forecast with actual redemption and retain any change in entitlement, assumptions or constraint. A written expiry date does not on its own resolve a history of accepting expired balances or a legal remittance obligation. Identify refunds, cancellations, promotional rights and balances that are outside the revenue standard separately before modelling.
Build a liability roll-forward independent of the model
Match opening balances to the prior close, add valid loads, deduct performance revenue and eligible breakage, and reconcile refunds and remittances separately. Preserve a bridge from system units to consideration, and from cumulative calculations to period revenue. This financial-reporting analysis does not determine GST treatment or establish an Indian statutory rule for unclaimed balances.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Issue and redeem one cohort
A company receives ₹1,00,000 and supportably expects ₹10,000 breakage, leaving expected redemptions of ₹90,000. After ₹45,000 redemption, cumulative breakage is ₹5,000 and revenue is ₹50,000. The contract liability is ₹50,000.
Illustrative example 2: Second period cumulative catch-up
The same inputs and unchanged estimate give cumulative breakage of ₹8,000 after redemptions rise to ₹72,000. If ₹5,000 was recognised previously, current breakage is ₹3,000. Additional performance revenue is ₹27,000, and the remaining contract liability is ₹20,000.
Illustrative example 3: Keep cohorts separate
Cohort A has expected breakage of ₹12,000 and ₹48,000 expected redemption; ₹24,000 redeemed supports ₹6,000 breakage. Cohort B has ₹3,000 expected breakage and ₹27,000 expected redemption; ₹9,000 redeemed supports ₹1,000. Total cumulative breakage is ₹7,000.
Illustrative example 4: Reassess a prior estimate
On ₹1,00,000 loaded and ₹45,000 redeemed, revised supportable breakage of ₹4,000 implies expected redemption of ₹96,000. Cumulative breakage becomes ₹1,875; if ₹5,000 was recorded, reverse ₹3,125 through the period calculation.
Illustrative example 5: No early breakage supported
From a ₹60,000 load, performance revenue is ₹51,000 and the company does not expect entitlement at this stage. Keep ₹9,000 as a liability while exercise is not remote. If it later becomes remote, and there is no remittance or refund obligation, the remaining ₹9,000 is the breakage release on these facts.
Illustrative example 6: Remittance obligation
A cohort has ₹75,000 consideration and ₹68,000 redeemed. If all remaining ₹7,000 must be remitted, it stays a liability before settlement; remitting ₹7,000 settles the remittance liability without breakage revenue. Keep that liability separately identifiable from the obligation to deliver goods or services.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Confirm the contract population | Issuer terms and prepaid-right definitions |
| 2 | Identify receipt and performance events | Load and redemption transaction records |
| 3 | Split economically different cohorts | Term, channel and redemption history |
| 4 | Screen for refund and remittance | Contract and applicable legal evidence |
| 5 | Estimate expected redemption | Cohort model and actual experience |
| 6 | Test the constraint | Reversal risk and sensitivity review |
| 7 | Compute cumulative recognition | Eligible cohort calculation |
| 8 | Tie to amounts already posted | Prior period roll-forward |
| 9 | Check subsequent changes | Extensions, disputes and revised estimates |
| 10 | Approve the final ledger bridge | Contract liability reconciliation and disclosures |
Sixteen practitioner FAQs
1. Is unredeemed cash revenue on issue?
An outstanding obligation normally remains a contract liability.
2. What is breakage?
Customer contractual rights that are not exercised.
3. Which denominator is used in a simple eligible cohort?
Estimated lifetime redemption for that cohort.
4. Can balances from different expiry terms be combined?
Only if aggregation remains representative; test material differences.
5. Is a long observation history conclusive?
Check current terms and population comparability as well.
6. Does expiry always clear the balance?
Check contractual practice, remote exercise and any refund or remittance requirement.
7. When does proportional recognition begin?
When exercise occurs and the entitlement and constraint support the estimate.
8. Does a low estimated redemption rate always justify breakage?
No. Entitlement and the constraint are separate from the estimate.
9. How should an estimate change be reflected?
Recompute the cumulative supported amount and compare it with cumulative amounts posted.
10. Can breakage recognised in a prior period reverse?
Yes. Reassess the estimate and the constraint at each reporting date under paragraph 59. If the cumulative amount now supported is lower, recognise the resulting reversal in the period.
11. What if no redemption has occurred?
There is no proportional release from exercise; apply the applicable recognition branch.
12. What if rights may be refunded in cash?
Review the actual obligation and applicable accounting before treating balances as breakage.
13. What if unclaimed balances must be remitted?
Keep the applicable amount as a liability under B47.
14. Does the guidance cover distribution commissions?
The article concerns the issuer's performance obligation; account for agent arrangements separately.
15. Can promotional points be treated as paid balances?
Determine their contractual nature and any separate allocation first.
16. Is the accounting entry proof of GST treatment?
No. Determine indirect tax separately under applicable law.