Apply the five steps to contracts in scope
Ind AS 115 recognises revenue as an entity transfers promised goods or services to its customer, in the amount to which it expects to be entitled. Check the scope first; other standards govern matters such as leases and financial instruments. Billing, collection, transfer of title and physical delivery may supply evidence, but the recognition test is transfer of control.
| Step | Assessment |
|---|---|
| 1. Identify the contract (paragraphs 9–16) | Confirm approval and commitment, identifiable rights and payment terms, commercial substance and probable collection of consideration to which the entity expects to be entitled. Consider the customer’s ability and intention to pay when due. If paragraph 9 is not yet met, generally carry cash received as a liability; recognise it as revenue only when the requirements are later met or paragraph 15 permits it: substantially all promised consideration has been received and is non-refundable with no remaining transfer obligations, or the contract is terminated and the amount received is non-refundable. |
| 2. Identify performance obligations (paragraphs 22–30) | A distinct promise can benefit the customer on its own or with readily available resources and is separately identifiable in the contract. Significant integration, modification or interdependence can indicate a single combined obligation. Also consider a qualifying series of distinct goods or services with the same transfer pattern. |
| 3. Determine the transaction price (paragraphs 47–72) | Exclude amounts collected for third parties, such as GST where collected on their behalf. Estimate variable consideration using the method that better predicts entitlement, then apply the significant reversal constraint. Consider financing, non-cash consideration and payments to the customer. A customer payment for a distinct good or service is evaluated at fair value; an excess over fair value reduces the transaction price. |
| 4. Allocate the price (paragraphs 73–90) | Use relative stand-alone selling prices at inception unless the conditions for specific allocation of a discount or variable amount are met. Use observable evidence where available. Estimation methods include market assessment, expected cost plus margin, and the residual approach only in the circumstances in paragraph 79(c). |
| 5. Recognise revenue (paragraphs 31–45) | Recognise over time if any paragraph 35 condition is met. Otherwise, recognise at the point the customer obtains control. For an over-time obligation, select a progress measure that depicts transfer and reassess it at reporting dates. |
Control, financing and supporting balances
Paragraph 35 permits over-time recognition when the customer simultaneously receives and consumes the benefits; when it controls an asset as it is created or enhanced; or when the asset has no alternative use to the entity and the entity has an enforceable right to payment for performance to date. The third route requires both tests. Assess the right throughout performance and consider applicable law and termination rights, including compensation for performance completed when the customer terminates for reasons other than the entity’s failure to perform. For real estate, examine the specific agreement and law. Do not assume that registration, a deposit percentage or handover alone determines the accounting in every case.
Where no over-time criterion applies, weigh paragraph 38 indicators, including present right to payment, legal title, possession, risks and rewards and acceptance. For financing, consider whether payment timing gives a significant benefit of financing or reflects a different substantive reason. Paragraph 63 permits an expedient if, at inception, the expected time between transfer and payment is one year or less. If a significant financing component exists, use the rate of a separate financing transaction at inception and present interest separately from revenue.
A receivable is an unconditional right to consideration, even if an invoice has not yet been issued. A contract asset is a conditional right for goods or services already transferred. A contract liability represents an obligation to transfer goods or services for consideration received or due. Apply Ind AS 109 impairment requirements to the relevant receivables and contract assets. Reconcile the amounts and conditions by contract; invoicing alone does not determine the caption.
For warranties, assess whether the customer can purchase the warranty separately and whether it provides a service beyond assurance. Account for a pure assurance warranty under Ind AS 37. If service and assurance elements cannot reasonably be accounted for separately, account for both together as one performance obligation. In principal-versus-agent assessments, identify each specified good or service and test whether the entity controls it before transfer. Primary responsibility, inventory risk and pricing discretion are indicators; they do not replace the control test. A principal records the relevant gross revenue and an agent records the fee or commission.
Recognise a contract acquisition cost asset for incremental costs expected to be recovered, subject to the one-year amortisation expedient. For fulfilment costs, first apply any other relevant standard. If none applies, paragraph 95 requires the costs to relate directly to a contract or specific anticipated contract, generate or enhance resources for future performance and be expected to be recovered. Contract cost assets have their own amortisation and impairment rules; they are different from contract assets for conditional consideration.
Six worked cases
1. Hardware, a right-to-use licence and support
On 1 April 2024 a supplier agrees to provide a server, a distinct three-year right-to-use licence for software as it exists at transfer, and 36 months of distinct support. The contract price is ₹30 lakh against stand-alone prices of ₹8 lakh, ₹18 lakh and ₹14 lakh (₹40 lakh in total). Assume no significant financing component on the facts and no basis for allocating the ₹10 lakh (25%) discount to one promise. The relative weights are 20%, 45% and 35%, allocating ₹6 lakh, ₹13.50 lakh and ₹10.50 lakh respectively.
Assume the server and licence transfer on 1 April 2024, and support transfers evenly. The first 12 months of support yield ₹3.50 lakh, so FY 2024–25 revenue is ₹23 lakh. If ₹10 lakh has been paid and the balance is contractually conditional on future service milestones, the illustrative net contract asset at year-end is ₹13 lakh. If a right is unconditional and payment is deferred only by time, present a receivable instead and assess financing separately. Do not classify based only on the annual billing schedule.
2. Retroactive volume rebate
The list price is ₹1,000 per tonne, reduced retrospectively to ₹900 if annual purchases exceed 10,000 tonnes. In Q1 the customer buys 2,500 tonnes and is expected to reach 12,000. Assume the selected estimate and constraint support ₹900 per tonne. Invoice ₹25 lakh, recognise revenue ₹22.50 lakh and recognise the expected ₹2.50 lakh refund liability. In Q2 the customer buys another 1,000 tonnes and the full-year estimate falls to 7,000. If it is now highly probable that recognising ₹1,000 per tonne will not result in a significant cumulative reversal, cumulative revenue is ₹35 lakh on 3,500 tonnes. Q2 revenue is ₹12.50 lakh, including release of the ₹2.50 lakh Q1 refund liability. Reassess the estimate and constraint at each reporting date.
3. Advance payment that finances a project
For a two-year substation project, assume control passes only at completion, the ₹10 lakh advance gives the supplier a significant financing benefit rather than protecting either party for a non-financing reason, and 8% is the separate financing rate at inception. Initially credit contract liability by ₹10 lakh. Year 1 interest expense is ₹80,000, increasing the liability to ₹10.80 lakh. Year 2 interest is ₹86,400, bringing the liability to ₹11,66,400 before delivery. Recognise that amount as revenue on transfer. Total financing expense is ₹1,66,400, so revenue less financing expense equals ₹10 lakh before construction and other costs. This difference is not net profit.
4. Assurance warranty and separate maintenance
A robotic arm with a standard one-year assurance warranty and a distinct three-year maintenance service sells for ₹50 lakh. Their stand-alone prices are ₹48 lakh and ₹8 lakh. Allocate ₹42,85,714 (85.71%) to the arm and ₹7,14,286 (14.29%) to maintenance after whole-rupee rounding. At transfer, recognise the arm revenue and a separate ₹1.20 lakh assurance warranty provision if the Ind AS 37 recognition criteria are satisfied. Assuming payment or unconditional billing at transfer and even service over years 2–4, release the maintenance liability by ₹2,38,095 in each of years 2 and 3 and ₹2,38,096 in year 4, including the rounding balance.
5. Commercial property and the right to payment
A buyer contracts for a floor for ₹12 crore. Estimated eligible construction cost is ₹8 crore and Year 1 cost is ₹3.20 crore. In scenario A, assume no alternative use and an enforceable right throughout the contract to payment for performance completed if the customer terminates for reasons other than the developer’s failure. If cost-to-cost faithfully depicts progress with no excluded costs, 40% progress gives ₹4.80 crore revenue and ₹1.60 crore gross profit after ₹3.20 crore cost.
In scenario B, assume the developer can redirect the unit and its only remedy on cancellation is to keep a 10% deposit of ₹1.20 crore. If none of paragraph 35(a), (b) or (c) is satisfied, there is no Year 1 revenue; recognise when control actually transfers. Account for the advance as a contract liability and assess the ₹3.20 crore of costs under applicable inventory or other cost requirements. Capitalisation depends on the nature and recoverability of each cost. The hypothetical cancellation terms are not a general statement of RERA.
6. Modification of a two-year developer-hours contract
The original contract from 1 January 2024 provides 200 hours a month at ₹2,000 per hour: 4,800 hours and ₹96 lakh total. After 2,400 hours and ₹48 lakh revenue in Year 1, the parties add 1,200 Year 2 hours. If the added services are distinct and ₹1,800 per hour reflects their stand-alone selling price, adjusted for the contract circumstances, account for the addition separately under paragraph 20. Year 2 revenue is ₹48 lakh plus ₹21.60 lakh, or ₹69.60 lakh.
If instead the added hours are priced at ₹1,200 without a qualifying stand-alone price adjustment and the remaining services are distinct from those already transferred, paragraph 21(a) applies prospectively. Combine the unrecognised ₹48 lakh and ₹14.40 lakh additional consideration: ₹62.40 lakh for 3,600 hours, or about ₹1,733.33 per hour where a uniform allocation reflects the facts. Use unrounded amounts for totals. Both variants leave Year 1 revenue unchanged. If the remaining goods or services are not distinct and form part of one partially satisfied obligation, paragraph 21(b) instead requires a cumulative catch-up.
Practical FAQs and reporting checks
When can an entity use a residual selling price?
Paragraph 79(c) permits the residual approach when the selling price is highly variable, or uncertain because a price has not yet been set and the item has not previously been sold on its own. Document the conditions and ensure the allocation meets the overall objective.
How should an upfront joining fee be treated?
Check whether the activity transfers a promised good or service. A non-refundable fee that does not pay for a transferred service is generally an advance for future promises. Assess any renewal option that gives a material right before deciding the recognition period.
How should expected returns be presented?
Recognise revenue for the consideration expected to be retained, a refund liability, and a separate recovery asset measured by reference to former carrying amount less expected recovery costs and any potential decrease in value. Update the amounts at reporting dates.
Can a sales commission be expensed immediately?
First check that the commission is incremental and recoverable. Paragraph 94 permits expensing when the asset’s otherwise applicable amortisation period is one year or less. Do not infer that period solely from the contract term.
Is software revenue always recognised at delivery?
For a distinct right-to-use licence, recognise at the point the customer can use and benefit from it, subject to the contract and transfer evidence. A right-to-access licence and a hosted service require their own analysis. Recognise an over-time hosted service using a progress measure that depicts the transfer pattern.
What disclosures cover the order book and contract balances?
Apply paragraphs 110–129 to disaggregation, contract balances, significant judgments and related disclosures. Paragraph 120 covers remaining performance obligations and expected timing. Paragraph 121 permits omission in specified cases, including contracts with an original expected duration of one year or less and revenue recognised using the paragraph B16 right-to-invoice expedient. Document the basis and applicable explanatory disclosures. Keep a reconciliation of contracts, allocations, progress evidence, balances and notes; distinguish a control frequency from a mandatory accounting rule.