IND AS 115 Explained: Transactions are the cornerstone of commerce, yet the exchange of money can often create conflict, as the legitimacy of their term “Revenue” such as when the money was actually received require clarity. It’s been a headache for accountants and finance people for ages. And that’s where IND AS 115 which is India’s accounting standard of revenue’ recognition comes in, It is based on the internationally recognized IFRS 15. By presenting a systematic number of 5 stages in revenue recognition, it brings in uniformity on recognition of revenue across industries.
This blog is your ultimate guide to understanding IND AS 115. Whether you’re an accounting student prepping for exams or a finance professional mastering compliance, here you’ll get a detailed walk-through of the standard, the five-step model, practical applications, challenges, and even case studies.
Let’s get started!
The Foundation of IND AS 115
What is IND AS 115?
IND AS 115, which became mandatory in India on April 1, 2018, aims to provide a consistent approach to recognizing revenue. Before its introduction, revenue recognition standards were fragmented, leading to inconsistencies and a lack of comparability between financial statements.
The standard is rooted in a simple yet powerful concept—to recognize revenue only when goods or services are transferred to the customer, at an amount expected to be received in exchange.
Why the Standard Matters
- Consistency: It creates uniformity in revenue reporting across industries and regions.
- Clarity: It aligns closely with contractual agreements and performance obligations.
- Global Standardization: It bridges the gap between Indian standards and international norms, helping businesses collaborating globally.
Key Upgrades from Previous Standards
Unlike earlier standards, IND AS 115 shifts the focus from merely completing a transaction to fulfilling defined contractual obligations. It emphasizes judgment, requiring businesses to evaluate contracts for performance obligations, transaction price allocations, and timing of revenue recognition.
Read Also: How to Claim Input Tax Credit (ITC) in GSTR-3B Correctly?
The Five-Step Model for Revenue Recognition
At IND AS 115’s core lies the Five-Step Model, which is designed to make revenue recognition methodical and straightforward. Here’s an overview of the steps you’ll use to decide when and how revenue should be recognized.
Step 1: Identify the Contract(s) with a Customer
A contract is any agreement between two parties that creates enforceable rights and obligations.
Key Criteria for Contract Identification
- Both parties must approve the agreement.
- Each party’s rights and payment terms must be clearly stated.
- The contract must have commercial substance.
Practical Insights
- Combining contracts: If multiple contracts are interdependent, they might be bundled as one.
- Modifications: Changes to a contract need careful evaluation to determine if they form a new arrangement or adjust the existing one.
Example: Meera’s Bakery enters a contract to deliver 100 cakes for ₹20,000. If she later agrees to add 50 more cakes for ₹10,000, is this a new contract or a modification? IND AS 115 offers the criteria to decide.
Step 2: Identify the Performance Obligations in the Contract
A performance obligation is a promise to deliver distinct goods or services to the customer.
Distinct Performance Obligations
- Can the customer benefit from the good/service on its own?
- Is the good/service separately identifiable in the contract?
Challenges in Bundling and Unbundling
For instance, in software sales, bundling the software with services like installation and upgrades might be tricky. Are these all part of one obligation, or should they be recognized separately?
Step 3: Determine the Transaction Price
The transaction price is the amount of consideration an entity expects to receive for transferring goods or services.
Factors to Consider
- Variable Considerations: Includes discounts, rebates, or performance bonuses.
- Time Value of Money: Long-term contracts may require adjustments to reflect the present value.
- Non-Cash Considerations: Payments in goods or services instead of cash must be valued fairly.
Example: If Meera offers a refund option or quantity discounts, she needs to adjust her transaction price to reflect these possibilities.
Step 4: Allocate the Transaction Price to the Performance Obligations
Once the transaction price is finalized, allocate it to the identified performance obligations.
Allocation Principles
Use the standalone selling price of goods or services as the basis for allocation.
Adjustments
- Discounts should be allocated proportionally unless specific obligations warrant a different approach.
- Variable considerations should also follow logical allocation frameworks.
Step 5: Recognize Revenue When (or As) a Performance Obligation is Satisfied
Revenue is only recognized when the customer gains control of the promised good or service.
Timing Options
- Point-in-Time Recognition: For example, Meera delivers wedding cakes upfront and recognizes revenue immediately.
- Over-Time Recognition: Long-term contracts, like supplying cakes daily to a café, require revenue to be recognized over time.
Industry Practices
- Software companies might recognize recurring subscription fees over the subscription term.
- Real estate contracts often mandate over-time recognition as construction progresses.
Practical Implementation Challenges
Implementing IND AS 115 can feel like a maze. Here are key challenges and how to overcome them:
- Transition Adjustments: Moving from old standards to IND AS 115 can lead to accounting restatements. Invest time in understanding transition provisions.
- Complex Contracts: Contracts with multiple variables require advanced judgment and robust software systems.
Industry-Specific Applications
IND AS 115 adapts uniquely across industries.
- Software and IT Services rely on performance-based revenue milestones.
- Real Estate companies deal with revenue based on construction progress.
- Manufacturing companies often deal with bundled contracts requiring distinct obligation evaluations.
Importance of Transparency Through Disclosures
IND AS 115 mandates qualitative and quantitative disclosures to ensure transparency.
- Information about contract terms, performance obligations, and significant judgments must be shared.
- The goal is to provide stakeholders with a clear view of business conditions.
Case Studies
Case 1 – Software Subscription Business
A software company sells annual subscriptions for ₹12,000, payable upfront. Revenue is recognized evenly across the 12 months, aligning with the subscription’s delivery.
Case 2 – Real Estate Development
A real estate firm recognizes revenue progressively over time, as construction milestones are achieved and certified by third-party surveyors.
Shaping the Future of Revenue Recognition
IND AS 115 has revolutionized the revenue recognition landscape by introducing structure, consistency, and global alignment. While its implementation presents unique hurdles, the benefits—transparency, accuracy, and investor confidence—far outweigh the challenges.
For businesses like Meera’s Bakery or large-scale enterprises, this standard ensures revenue is recognized fairly and accurately, benefiting all stakeholders.
FAQs on IND AS 115
1. Does IND AS 115 apply to small businesses?
Yes, IND AS 115 applies to all entities following accounting standards notified under the Companies Act.
2. Can IND AS 115 reduce revenue misstatements?
Absolutely! Its structured, principles-based approach reduces ambiguity, resulting in more accurate financial reporting.
3. How does IND AS 115 benefit investors?
Transparent and consistent revenue recognition helps investors better evaluate companies’ financial performance and health.
