Collecting a fee does not establish a performance obligation
Ind AS 115 B48–B51 requires an entity charging a non-refundable upfront fee to determine whether a promised good or service transfers to the customer. An internal setup or activation activity often transfers nothing to the customer. If no promised good or service transfers, the fee is an advance for future goods or services and is recognised as those are provided. If it does relate to a promised transfer, apply paragraphs 22–30 to determine whether it is a separate performance obligation.
Read the applicable text: MCA: Ind AS 115, paragraphs 22–30, 31–45, 47, 73–86, 95 and B39–B51.
Read what the customer receives
Compare the contract, work performed and customer acceptance criteria. Internal registration, customer data entry and account activation may be administrative steps. A distinct deliverable may be different if the customer can benefit from it on its own or with readily available resources, and the promise is separately identifiable. The label 'implementation' and a separate invoice line are not conclusive. If there are several performance obligations, apply the allocation requirements; the separately billed fee need not equal the amount allocated to a deliverable.
Check when future service starts and whether renewals convey a material right
Recognise revenue on transfer under paragraphs 31–45. When the future service is transferred evenly, a time-based measure may depict it faithfully. B49 says the recognition period may extend beyond the initial contract period if the renewal option gives the customer a material right under B40. Compare renewal terms with what a comparable customer could obtain without entering the initial contract. Apply B40–B43 as relevant; do not automatically spread an upfront fee across all forecast customer years.
Separate the cost question and progress measure
B51 requires the entity to disregard setup activities and related costs when measuring progress if the activities do not depict transfer of a service to the customer. Assess whether the costs qualify for an asset under paragraph 95 after considering other applicable standards. Among the paragraph 95 conditions are a direct relationship to a contract or specifically identifiable anticipated contract, generation or enhancement of resources for future satisfaction, and expected recovery. Do not capitalise costs simply to match a deferred fee. Paragraph 98 requires expensing costs that relate to satisfied or partially satisfied performance obligations; paragraph 99 governs amortisation of an eligible contract cost asset.
Close the fee and cost ledgers independently
Reconcile cash and billed consideration to contract liabilities and revenue by obligation. Track the initial service date, allocation, renewal status and close balance, and keep any qualifying cost asset in a separate roll-forward. Review material facts again when an implementation scope, renewal price or service period changes.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Activation without a separate transfer
A customer prepays ₹24,000 for an evenly delivered 12-month service, including an activation charge that transfers no separate service. At the end of month three, revenue is ₹6,000 and the contract liability is ₹18,000.
Illustrative example 2: Billing precedes all service
₹60,000 is collected in March and a six-month evenly delivered service starts in April. Assuming no other obligation is satisfied, March revenue is nil; monthly revenue from April is ₹10,000 and the March closing liability is ₹60,000.
Illustrative example 3: Distinct deliverable priced below allocation
A contract price of ₹1,08,000 includes a distinct diagnostic report and a year of service. Stand-alone prices are ₹30,000 and ₹90,000. With no allocation exception, allocate ₹27,000 to the report and ₹81,000 to the service. If the report transfers first and no service has been delivered, ₹27,000 is recognised then.
Illustrative example 4: Separate a renewal option
Assume an initial service and a material renewal right are the only obligations, with supported stand-alone selling prices of ₹54,000 and ₹6,000. The estimated stand-alone selling price of the option reflects the factors in paragraph B42; this example uses the relative stand-alone selling price method rather than the B43 practical alternative. With ₹60,000 paid upfront, allocate ₹6,000 to the right. After the initial service is completely delivered, that ₹6,000 remains deferred if the option has not yet been exercised or expired. If exercised, recognise it as the related future service transfers; if the option expires unexercised, recognise it on expiry.
Illustrative example 5: Exclude setup cost from the progress measure
A cost-based measure faithfully depicts a ₹1,00,000 service obligation when non-transfer setup activity is excluded. Qualifying progress inputs are ₹20,000 of ₹80,000 expected transfer inputs. An extra ₹10,000 setup cost depicts no transfer. Progress is 25% and cumulative revenue ₹25,000; assess the setup cost separately.
Illustrative example 6: Close two separate balances
Opening contract liability is ₹45,000, new upfront collections are ₹30,000 and revenue released is ₹50,000. The liability closes at ₹25,000. Separately, a qualifying cost asset opens at ₹12,000, increases ₹6,000 and is amortised ₹4,000; closing asset is ₹14,000.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Confirm the reporting framework | Ind AS applicability and contract scope |
| 2 | Collect the original promise terms | Contract and customer offer |
| 3 | Identify what setup delivers | Work descriptions and customer acceptance |
| 4 | Assess distinctness | Paragraphs 22–30 memo |
| 5 | Check renewal options | Pricing and material-right assessment |
| 6 | Support transaction-price allocation | Stand-alone price worksheet |
| 7 | Determine recognition start and pattern | Delivery date and service record |
| 8 | Review setup cost eligibility | Applicable standards and paragraph 95 tests |
| 9 | Reconcile contract liability and cost asset | Separate movement schedules |
| 10 | Approve changes before close | Updated terms and controller sign-off |
Sixteen practitioner FAQs
1. Does non-refundable mean earned on billing?
No. Identify the performance obligation and when the promised transfer occurs.
2. Can activation be a separate service?
Yes, if the facts establish a promised transfer and the separate performance obligation criteria are satisfied.
3. What if activation is mandatory before service?
That fact alone does not make it a transfer to the customer.
4. Do we have to recognise the separately invoiced amount for a distinct report?
Apply the allocation requirements rather than copying billed lines automatically.
5. What if the contract starts after collection?
Record the consideration for unsatisfied obligations as appropriate and recognise revenue on transfer.
6. When can an evenly delivered service use straight-line recognition?
When passage of time faithfully depicts the transfer pattern for the obligation.
7. Does a renewal option always extend the period?
No. Assess whether it conveys a material right and apply the relevant option guidance.
8. Is an option at the ordinary stand-alone price normally a material right on price alone?
B41 indicates that an option priced at stand-alone selling price would not provide a material right.
9. When is an allocation to an unexercised material right recognised?
Apply B40: as future goods or services transfer or when the option expires, as appropriate.
10. Does a forecast renewal alone justify extending revenue deferral?
No. Identify the enforceable promise and material-right facts.
11. Is internal setup time automatically progress?
No. Disregard activities that do not depict transfer when measuring progress.
12. Are setup costs automatically expensed?
Check other applicable standards and paragraph 95 before reaching a conclusion.
13. Does deferred revenue justify deferring all related costs?
No. The fee and cost recognition tests are independent.
14. Can a service amendment change the analysis?
Yes. Review the modified rights, promises, price and applicable contract modification guidance.
15. What if some collection includes taxes collected for third parties?
Identify the transaction price under paragraph 47; amounts collected on behalf of third parties are excluded.
16. What should the reviewer be able to reproduce?
The link from contract terms and cash to obligations, allocated amounts, delivery dates and closing balances.
Official sources
MCA: Ind AS 115, paragraphs 22–30, 31–45, 47, 73–86, 95 and B39–B51