Ind AS 115

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Unit 3 Ind AS 115 on Revenue from

Contracts with Customers
Questions from Study Material

Question 1: Q TV released an advertisement in Deshabandhu, a vernacular daily. Instead of
paying for the same, Q TV allowed Deshabandhu a free advertisement spot, which was duly
utilised by Deshabandu. How revenue for these nonmonetary transactions in the area of
advertising will be recognised and measured?
(Study Material)
Answer: Paragraph 5(d) of Ind AS 115 excludes non -monetary exchanges between entities in
the same line of business to facilitate sales to customers or potential customers. For example,
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this Standard would not apply to a contract between two oil companies that agr ee to an
exchange of oil to fulfil demand from their customers in different specified locations on a timely
basis.
In industries with homogenous products, it is common for entities in the same line of business to
exchange products in order to sell them to customers or potential customers other than parties to
exchange. The current scenario, on the contrary, will be covered under Ind AS 115 since the
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same is exchange of dissimilar goods or services because both of the entities deal in different
mode of media, i.e., one is print media and another is electronic media and both parties are
acting as customers and suppliers for each other.
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Further, in the current scenario, it seems it is for consumption by the said parties and hence it
does not fall under paragraph 5(d). It may also be noted that, even if it was to facilitate sales to
customers or potential customers, it would not be scoped out since the parties are not in the
same line of business.
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As per paragraph 47 of Ind AS 115, “An entity shall consider the terms of the contract and its
customary business practices to determine the transaction price. The transaction price is the
amount of consideration to which an entity expects to be entitled in exchange for transferring
promised goods or services to a customer, excluding amounts collected on behalf of third parties
(for example, some sales taxes). The consideration promised in a contract with a customer may
include fixed amounts, variable amounts, or both”.
Paragraph 66 of Ind AS 115 provides that to determine the transaction price for contracts in which
a customer promises consideration in a form other than cash, an entity shall measure the non-
cash consideration (or promise of non -cash consideration) at fair value.
In accordance with the above, QTV and Deshabandhu should measure the revenue promised in
the form of non-cash consideration as per the above referred principles of Ind AS 115.
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2 Chap. 7  Unit 3: Ind AS 115 on Revenue from Contracts with Customers

Question 2: New way limited decides to enter a new market that is currently experiencing
economic difficulty and expects that in future economy will improve. New way enters into an
arrangement with a customer in the new region for networking products for promised
consideration of ` 1,250,000. At contract inception, New way expects that it may not be able to
collect the full amount from the customer.
Determine how New way will recognise this transaction?
(Study Material)
Answer:: Assuming the contract meets the other criteria covered within the scope of the model in
Ind AS 115, New way need to assesses whether collectability is probable.
In making this assessment, New way considers whether the customer has the ability and intent to
pay the estimated transaction price, which may be an amount less than the contract price.
Question 3: A gymnasium enters into a contract with a new member to provide access to its gym
for a 12 - month period at ` 4,500 per month. The member can cancel his or her membership
without penalty after three months. Specify the contract term.
(Study Material)
Answer:: The enforceable rights and obligations of this contract are for three months, and
therefore the contract term is three months.
Question 4: Manufacturer of airplanes for the air force negotiates a contract to design and
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manufacture new fighter planes for a Kashmir air base. At the same meeting, the manufacturer
enters into a separate contract to supply parts for existing planes at other bases.
Would these contracts be combined?
(Study Material)
Answer: Contracts were negotiated at the same time, but they appear to have separate
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commercial objectives. Manufacturing and supply contracts are not dependent on one another,
and the planes and the parts are not a single performance obligation. Therefore, contracts for
supply of fighter planes and supply of parts shall not b e combined and instead, they shall be
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accounted separately.
Question 5: A construction services company enters into a contract with a customer to build a
water purification plant. The company is responsible for all aspects of the plant including overall
project management, engineering and design services, site preparation, physical construction of
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the plant, procurement of pumps and equipment for measuring and testing flow volumes and
water quality, and the integration of all components.
Determine whether the company has a single or multiple performance obligations under the
contract?
(Study Material)
Answer: Determining whether a good or service represents a performance obligation on its own
or is required to be aggregated with other goods or services can have a significant impact on the
timing of revenue recognition. In order to determine how many performance obligations are
present in the contract, the company applies the guidance above. While the customer may be
able to benefit from each promised good or service on its own (or together with other readily
available resources), they do not appear to be separately identifiable within the context of the
contract. That is, the promised goods and services are subject to significant integration, and as a
result will be treated as a single performance obligation.
This is consistent with a view that the customer is primarily interested in acquiring a single asset
(a water purification plant) rather than a collection of related components and services.
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Chap. 7  Unit 3: Ind AS 115 on Revenue from Contracts with Customers 3

Question 6: An entity provides broadband services to its customers along with voice call service.
Customer buys modem from the entity. However, customer can also get the connection from the
entity and modem from any other vendor. The installation activity requires limited effort and the
cost involved is almost insignificant. It has various plans where it provides either broadband
services or voice call services or both.
Are the performance obligations under the contract distinct?
(Study Material)
Answer: Entity promises to customer to provide
❖ Broadband Service
❖ Voice Call services
❖ Modem
Entity’s promise to provide goods and services is distinct if
❖ customer can benefit from the good or service either on its own or together with other
resources that are readily available to the customer, and
❖ entity’s promise to transfer the good or service to the customer is separately identifiable from
other promises in the contract
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For broadband and voice call services -
❖ Broadband and voice services are separately identifiable from other promises as company
has various plans to provide the two services separately. These two services are not
dependant or interrelated. Also the customer can benefit on its own from the services
received.
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For sale of modem -
❖ Customer can either buy product from entity or third party. No significant customisation or
modification is required for selling product.
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Based on the evaluation we can say that there are three separate performance obligation: -
❖ Broadband Service
❖ Voice Call services
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❖ Modem
Question 7: An entity enters into a contract to build a power plant for a customer. The entity will
be responsible for the overall management of the project including services to be provided like
engineering, site clearance, foundation, procurement, construction of the structure, piping and
wiring, installation of equipment and finishing.
Determine how many performance obligations does the entity have?
(Study Material)
Answer: Based on the discussion above it needs to be determined that the promised goods and
services are capable of being distinct as per the principles of Ind AS 115. That is, whether the
customer can benefit from the goods and services either on their own or together with other
readily available resources. This is evidenced by the fact that the entity, or competitors of the
entity, regularly sells many of these goods and services separately to other customers. In
addition, the customer could generate economic benefit from the individual goods and services by
using, consuming, selling or holding those goods or services.
However, the goods and services are not distinct within the context of the contract. That is, the
entity's promise to transfer individual goods and services in the contract are not separately
identifiable from other promises in the contract. This is evidenced by the fact that the entity
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provides a significant service of putting together the various inputs or goods and services into the
power plant or the output for which the customer has contracted.
Since both the criteria has not met, the goods and services are not distinct. The entity accounts
for all of the goods and services in the contract as a single performance obligation.
Question 8: Could the series requirement apply to hotel management services where day to day
activities vary, involve employee management, procurement, accounting, etc?
(Study Material)
Answer: The series guidance requires each distinct good or service to be “substantially the
same.” Management should evaluate this requirement based on the nature of its promise to
customer. For example, a promise to provide hotel management services for a specified contract
term may meet the series criteria. This is because the entity is providing the same service of
“hotel management” each period, even though some on underlying activities may vary each day.
The underlying activities for e.g. reservation services, property maintenance services are
activities to fulfil the hotel management service rather than separate promises. The distinct
service within the series is each time increment of performing the service.
Question 9: Entity A, a specialty construction firm, enters into a contract with Entity B to design
and construct a multi-level shopping centre with a customer car parking facility located in sub -
levels underneath the shopping centre. Entity B solicited bids from multiple firms on both phases
of the project — design and construction.
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The design and construction of the shopping centre and parking facility involves multiple goods
and services from architectural consultation and engineering through procurement a nd
installation of all of the materials. Several of these goods and services could be considered
separate performance obligations because Entity A frequently sells the services, such as
architectural consulting and engineering services, as well as standalone construction services
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based on third party design, separately. Entity A may require to continually alter the design of the
shopping centre and parking facility during construction as well as continually assess the
propriety of the materials initially selected for the project.
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Determine how many performance obligations does the entity A have?

(Study Material)
Answer: Entity A analyses that it will be required to continually alter the design of the shopping
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centre and parking facility during construction as well as continually assess the propriety of the
materials initially selected for the project. Therefore, the design and construction phases are
highly dependent on one another (i.e., the two phases are highly interrelated). Entity A also
determines that significant customisation and modification of the design and construction services
is required in order to fulfil the performance obligation under the contract. As such, Entity A
concludes that the design and construction services will be bundled and accounted for as one
performance obligation.
Question 10: An entity, a software developer, enters into a contract with a customer to transfer a
software license, perform an installation service and provide unspecified software updates and
technical support (online and telephone) for a two -year period. The entity sells the license,
installation service and technical support separately. The installation service includes changing
the web screen for each type of user (for example, marketing, inventory management and
information technology). The installation service is routinely performed by other entities and does
not significantly modify the software. The software remains functional without the updates and the
technical support.
(Study Material)
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Answer: The entity assesses the goods and services promised to the customer to determine
which goods and services are distinct. The entity observes that the software is delivered before
the other goods and services and remains functional without the updates and the technical
support. Thus, the entity concludes that the customer can benefit from each of the goods and
services either on their own or together with the other goods and services that are readily
available.
The entity also considers the factors of Ind AS 115 and determines that the promise to transfer
each good and service to the customer is separately identifiable from each of the other promises.
In particular, the entity observes that the installation service does not significantly modify or
customise the software itself and, as such, the software and the installation service are separate
outputs promised by the entity instead of inputs used to produce a combined output.
On the basis of this assessment, the entity identifies four performance obligations in the contract
for the following goods or services:
• The software license
• An installation service
• Software updates
• Technical support
Question 11: Significant customization: The promised goods and services are the same as in
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the above Question, except that the contract specifies that, as part of the installation service, the
software is to be substantially customised to add significant new functionality to enable the
software to interface with other customised software applications used by the customer. The
customised installation service can be provided by other entities.
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(Study Material)
Answer: The entity assesses the goods and services promised to the customer t o determine
which goods and services are distinct. The entity observes that the terms of the contract result in
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a promise to provide a significant service of integrating the licensed software into the existing
software system by performing a customised installation service as specified in the contract. In
other words, the entity is using the license and the customised installation service as inputs to
produce the combined output (i.e. a functional and integrated software system) specified in the
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contract. In addition, the software is significantly modified and customised by the service.
Although the customised installation service can be provided by other entities, the entity
determines that within the context of the contract, the promise to transfer the license is not
separately identifiable from the customised installation service and, therefore, the criterion on the
basis of the factors is not met. Thus, the software license and the customised installation service
are not distinct.
The entity concludes that the software updates and technical support are distinct from the other
promises in the contract. This is because the customer can benefit from the updates and
technical support either on their own or together with the other goods and services that a re
readily available and because the promise to transfer the software updates and the technical
support to the customer are separately identifiable from each of the other promises.
On the basis of this assessment, the entity identifies three performance ob ligations in the
contract for the following goods or services:
(a) customised installation service (that includes the software license);
(b) software updates; and
(c) technical support.
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Question 12: A cable company provides television services for a fixed rate fee of ` 800 per
month for a period of 3 years. Cable services is satisfied overtime because customer consumes
and receives benefit from services as it is provided i.e. customer generally benefits each day that
they have access to cable service.
Determine how many performance obligations does the cable company have?
(Study Material)
Answer: Cable company determines that each increment of its services e.g. day or month, is a
distinct performance obligation because customer benefits from that period of services on its own.
Additionally, each increment of service is separately identifiable from those preceding and
following it i.e. one service period does not significantly affect, modify or customise another.
Therefore, it can be concluded that its contract with customer is a single performance obligation
to provide three years of cable service because each of the distinct increments of service is
satisfied over time. Also, cable company uses the same measure of progress to recognise
revenue on its cable television service regardless of the contract’s time period.
Question 13: Minitek Ltd. is a payroll processing company. Minitek Ltd. enters into a contract to
provide monthly payroll processing services to ABC limited for one year. Determine how entity will
recognise the revenue?
(Study Material)
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Answer: Payroll processing is a single performance obligation. On a monthly basis, as Microtek
Ltd carries out the payroll processing –
• The customer, ie, ABC Limited simultaneously receives and consumes the benefits of the
entity’s performance in processing each payroll transact ion.
• Further, once the services have been performed for a particular month, in case of
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termination of the agreement before maturity and contract is transferred to another entity,
then such new entity will not need to re -perform the services for expired months.
Therefore, it satisfies the first criterion, ie, services completed on a monthly basis are
consumed by the entity at the same time and hence, revenue shall be recognised over the period
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of time.
Question 14: T&L Limited (‘T&L’) is a logistics company that provides inland and sea
transportation services. A customer – Horizon Limited (‘Horizon’) enters into a contract with T&L
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for transportation of its goods from India to Srilanka through sea. The voyage is expected to take
20 days Mumbai to Colombo. T&L is responsible for shipping the goods from Mumbai port to
Colombo port.
Whether T&L’s performance obligation is met over period of time?
(Study Material)
Answer: T&L has a single performance to ship the goods from one port to another. The following
factors are critical for assessing how services performed by T&L are consumed by the customer –
• As the voyage is performed, the service undertaken by T&L is progressing, such that no
other entity will need to re-perform the service till so far as the voyage has been
performed, if T&L was to deliver only part-way.
• The customer is directly benefitting from the performance of th e voyage as & when it
progresses.
Therefore, such performance obligation is said to be met over a period of time.
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Question 15: AFS Ltd. is a risk advisory firm and enters into a contract with a company – WBC
Ltd to provide audit services that results in AFS issuing an audit opinion to the Company. The
professional opinion relates to facts and circumstances that are specific to the company. If the
Company was to terminate the consulting contract for reasons other than the entity's failure to
perform as promised, the contract requires the Company to compensate the risk advisory firm for
its costs incurred plus a 15 per cent margin. The 15 per cent margin approximates the profit
margin that the entity earns from similar contracts.
Whether risk advisory firm’s performance obligation is met over period of time?
(Study Material)
Answer: AFS has a single performance to provide an opinion on the professional audit services
proposed to be provided under the contract with the customer. Evaluating the criterion for
recognising revenue over a period of time or at a point in time, Ind AS 115 requires one of the
following criterion to be met –
• Criterion (a) – whether the customer simultaneously receives and consumes the benefits
from services provided by AFS: Company shall benefit only when the audit opinion is
provided upon completion. And in case the contract was to be terminated, any other firm
engaged to perform similar services will have to substantially re -perform.
Hence, this criterion is not met.
• Criterion (b) – An asset created that customer controls: This is service contract and no asset
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created, over which customer acquires control.
• Criterion (c) – no alternate use to entity and right to seek payment:
❖ The services provided by AFS are specific to the company – WBC and do not have any
alternate use to AFS
❖ Further, AFS has a right to enforce payment if contract was early terminated, for reasons
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other than AFS’s failure to perform. And the profit margin approximates what entity
otherwise earns.
Therefore, criterion (c) is met and such performance obligation is said to be met over a period of
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time.
Question 16: Space Ltd. enters into an arrangement with a government agency for construction
of a space satellite. Although Space Ltd is in this business for building such satellites for various
customers across the world, however the specifications for each satellite may vary based on
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technology that is incorporated in the satellite. In the event of termination, Company has right to
enforce payment for work completed to date.
Evaluate if contract will qualify for satisfaction of performance obligation over a period of time.
(Study Material)
Answer: While evaluating the pattern of transfer of control to the customer, the Company shall
evaluate conditions laid in para 35 of Ind AS 115 as follows:
• Criterion (a) – whether the customer simultaneously receives and consumes t he
benefits: Customer can benefit only when the satellite is fully constructed and no benefits
are consumed as its constructed. Hence, this criterion is not met.
• Criterion (b) – An asset created that customer controls: Per provided facts, the customer
does not acquire control of the asset as its created.
❖ The asset is being specifically created for the customer. The asset is customised to
customer’s requirements, such that any diversion for a different customer will require
significant work. Therefore, the asset has practical limitation in being put to alternate
use.
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❖ Further, Space Ltd. has a right to enforce payment if contract was early terminated,
for reasons other than Space Ltd.’s failure to perform.
Therefore, criterion (c) is met and such performance obligation is said to be met over a period of
time.
Question 17: ABC enters into a contract with a customer to build an item of equipment. The
customer pays 10% advance and then 80% in instalments of 10% each over the period of
construction with balance 10% payable at the end of construction period. The payments are non -
refundable unless the company fails to perform as per the contract. Further, if the customer
terminates the contract, then entity is entitled to retain payments made. The company will have
no further right to compensation from the customer.
Evaluate if contract will qualify for satisfaction of performance obligation over a period of time.
(Study Material)
Answer: The Company shall evaluate conditions laid in para 35 of Ind AS 115 as follows:
• Criterion (a) – whether the customer simultaneously receives and consumes the benefits:
Customer can benefit only when the asset is fully constructed and no benefits are consumed
as its constructed. Hence, this criterion is not met.
• Criterion (b) – An asset created that customer controls: Per provided facts, the customer
does not acquire control of the asset as its created.
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❖ The customer has specific right over the asset and company does not have right to divert
it for any alternate use. In other words, there is contractual restriction to use the asset for
any alternate purpose.
❖ In the event of early termination, Company has a right to retain any payments made by
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the customer. However, such payments need not necessarily compensate the selling
price of the partially constructed asset, if the customer was to stop making payments.
Therefore, Company does not have a legally enforceable right to payment for work completed to
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date and the criterion under para 35 is not. Thus, revenue cannot be recognised over a period of
time.
Question 18 : Measuring progress on straight line basis: An entity, an owner and manager of
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health clubs, enters into a contract with a customer for one year of access to any of its health
clubs. The customer has unlimited use of the health clubs and promises to pay CU100 per month.
The entity’s promise to the customer is to provide a service of making the health clubs available
for the customer to use as and when the customer wishes.
Evaluate if contract will qualify for satisfaction of performance obligation over a period of time. If
yes, how should an entity measure its progress of service provided?
(Study Material)
Answer: The entity shall determine if revenue should be recognised over a period of time by
evaluating the conditions laid in para 35 of Ind AS 115.
- Applying the first criterion of para 35 to establish if the customer simultaneously receives and
consumes the benefits, as the entity provides service – The health club provides access to
services uniformly through the year. The extent to which the customer uses the health clubs
does not affect the amount of the remaining goods and services to which the customer is
entitled. The customer therefore simultaneously receives and consumes the benefits of the
entity's performance as it performs by making the health clubs available.
- Consequently, the entity's performance obligation is satisfied over time
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- Once the pattern of satisfying performance obligation is defined, the Company then
determines how progress should be measured. The services are uniformly provided to the
customer through the year. Therefore, the best measure of progress is to recognise revenue
on a straight line basis over the year.
Question 19: Uninstalled materials: On 01 January 20X1, an entity contracts to renovate a
building including the installation of new elevators. The entity estimates the following with respect
to the contract:
Particulars Amount (`)
Transaction price 5,000,000
Expected costs:
(a) Elevators 1,500,000
(b) Other costs 2,500,000
Total 4,000,000
The entity purchases the elevators and they are delivered to the site six months before they will
be installed. The entity uses an input method based on cost to measure progress towards
completion. The entity has incurred actual other costs of 500,000 by March 31, 20 X1.
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How will the Company recognize revenue, if performance obligation is met over a period of time?
(Study Material)
Answer: Costs to be incurred comprise two major components – elevators and cost of
construction service.
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(a) The elevators are part of the overall construction project and are not a distinct
performance obligation
(b) The cost of elevators is substantial to the overall project and are incurred well in advance.
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(c) Upon delivery at site, customer acquires control of such elevators.

(d) And there is no modification done to the elevators, which the company only procures and
delivers at site. Nevertheless, as part of materials used in overall construction project, the
company is a principal in the transaction with the customer for such elevators also.
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Therefore, applying the guidance on Input method –

- The measure of progress should be made based on percentage of costs incurred
relative to the total budgeted costs.
- The cost of elevators should be excluded when measuring such progress and
revenue for such elevators should be recognized to the extent of costs incurred.
The revenue to be recognized is measured as follows:
Transaction price 5,000,000
Costs incurred:
(a) Cost of elevators 1,500,000
(b) Other costs 500,000
Measure of progress: 500,000 / 2,500,000 = 20%
Revenue to be recognised:
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(a) For costs incurred (other than Total attributable revenue = 3,500,000
elevators) % of work completed = 20%
Revenue to be recognised = 700,000
(b) Revenue for elevators 1,500,000 (equal to costs incurred)
Total revenue to be recognised 1,500,000 + 700,000 = 2,200,000
Therefore, for the year ended 31 March 20X1, the Company shall recognize revenue of `
2,200,000 on the project.
Question 20: Company X enters into an agreement on January 1, 20 X1 with a customer for
renovation of hospital and install new air-conditioners for total consideration of ` 50,00,000. The
promised renovation service, including the installation of new air-conditioners is a single
performance obligation satisfied over time. Total expected costs are ` 40,00,000 including `
10,00,000 for the airconditioners.
Company X determines that it acts as a principal in accordance with paragraphs B34-B38 of Ind
AS 115 because it obtains control of the air conditioners before they are transferred to the
customer. The customer obtains control of the air conditioners when they are delivered to the
hospital premises.
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Company X uses an input method based on costs incurred to measure its progress towards
complete satisfaction of the performance obligation.
As at March 31, 20X1, other costs incurred excluding the air conditioners are `6,00,000.
Whether Company X should include cost of the air conditioners in measure of its progress of
performance obligation? How should revenue be recognised for the year ended March 20X1?
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(Study Material)
Answer: Paragraph B19 of Ind AS 115 inter alia, states that, “an entity shall exclude from an
input method the effects of any inputs that, in accordance with the objective of measuring
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progress in paragraph 39, do not depict the entity’ s performance in transferring control of goods
or services to the customer”.
In accordance with the above, Company X assesses whether the costs incurred to procure the air
conditioners are proportionate to the entity’s progress in satisfying the performance obligation.
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The costs incurred to procure the air conditioners (`10,00,000) are significant relative to the total
costs to completely satisfy the performance obligation (`40,00,000). Also, Company X is not
involved in manufacturing or designing the air conditioners.
Company X concludes that including the costs to procure the air conditioners in the measure of
progress would overstate the extent of the entity’s performance. Consequently, in accordance
with paragraph B19 of Ind AS 115, the entity adjusts its measure of progress to exclude the costs
to procure the air conditioners from the measure of costs incurred and from the transaction price.
The entity recognises revenue for the transfer of the air conditioners at an amount equal to the
costs to procure the air conditioners (i.e., at a zero margin).
Company X assesses that as at March 20X1, the performance is 20 per cent complete (i.e., `
6,00,000/` 30,00,000). Consequently, Company X recognises the following -
As at March 31, 20X1
Amount in `
Revenue 18,00,000
Cost of goods sold 16,00,000
Profit 2,00,000
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Revenue recognised is calculated as (20 per cent × ` 40,00,000) + ` 10,00,000.
(` 40,00,000 = ` 50,00,000 transaction price – ` 10,00,000 costs of air conditioners.)
Cost of goods sold is ` 6,00,000 of costs incurred + ` 10,00,000 costs of air conditioners.
Question 21 – Estimating variable consideration: XYZ Limited enters into a contract with a
customer to build a sophisticated machinery. The promise to transfer the asset is a performance
obligation that is satisfied over time. The promised consideration is ` 2.5 crores, but that amount
will be reduced or increased depending on the timing of completion of the asset. Specifically, for
each day after 31 March 20X1 that the asset is incomplete, the promised consideration is
reduced by ` 1 lakh. For each day before 31 March 20X1 that the asset is complete, the promised
consideration increases by ` 1 lakh.
In addition, upon completion of the asset, a third party will inspect the asset and assign a rating
based on metrics that are defined in the contract. If the asset receives a specified rating, the
entity will be entitled to an incentive bonus of ` 15 lakhs.
Determine the transaction price.
(Study Material)
Answer: In determining the transaction price, the entity prepares a separate estimate for each
element of variable consideration to which the entity will be entitled using the estimation methods
described in paragraph 53 of Ind AS 115:
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(a) the entity decides to use the expected value method to estimate the variable consideration
associated with the daily penalty or incentive (i.e. ` 2.5 crores, plus or minus ` 1 lakh per
day). This is because it is the method that the entity expects to better predict the amount of
consideration to which it will be entitled.
(b) the entity decides to use the most likely amount to estimate the variable consideration
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associated with the incentive bonus. This is because there are only two possible outcomes (`
15 lakhs or ` Nil) and it is the method that the entity expects to better predict the amount of
consideration to which it will be entitled.
Question 22 – Estimating variable consideration: AST Limited enters into a contract with a
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customer to build a manufacturing facility. The entity determines that the contract contains one
performance obligation satisfied over time.
Construction is scheduled to be completed by the end of the 36th month for an agreed-upon price
of ` 25 crores.
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The entity has the opportunity to earn a performance bonus for early completion as follows:
• 15 percent bonus of the contract price if completed by the 30th month (25% likelihood)
• 10 percent bonus if completed by the 32nd month (40% likelihood)
• 5 percent bonus if completed by the 34th month (15% likelihood)
In addition to the potential performance bonus for early completion, AST Limited is entitled to a
quality bonus of ` 2 crores if a health and safety inspector assigns the facility a gold star rating as
defined by the agency in the terms of the contract. AST Limited concludes that it is 60% likely that
it will receive the quality bonus.
(Study Material)
Answer: In determining the transaction price, AST Limited separately estimates variable
consideration for each element of variability ie the early completion bonus and the quality bonus.
AST Limited decides to use the expected value method to estimate the variable consideration
associated with the early completion bonus because there is a range of possible outcomes and
the entity has experience with a large number of similar contracts that provide a reasonable basis
to predict future outcomes. Therefore, the entity expects this method to best predict the amount of
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variable consideration associated with the early completion bonus. AST’s best estimate of the
early completion bonus is ` 2.13 crores, calculated as shown in the following table:
Bonus % Amount of bonus Probability Probability-weighted
(` in crores) amount (` in crores)
15% 3.75 25% 0.9375
10% 2.50 40% 1.00
5% 1.25 15% 0.1875
0% - 20% -
2.125
AST Limited decides to use the most likely amount to estimate the variable consideration
associated with the potential quality bonus because there are only two possible outcomes (` 2
crores or ` Nil) and this method would best predict the amount of consideration associated with
the quality bonus. AST Limited believes the most likely amount of the quality bonus is ` 2 crores.
Question 23 – Volume discount incentive: HT Limited enters into a contract with a customer
on 1 April 20X1 to sell Product X for ` 1,000 per unit. If the customer purchases more than 100
units of Product A in a financial year, the contract specifies that the price per unit is
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retrospectively reduced to ` 900 per unit. Consequently, the consideration in the contract is
variable.
For the first quarter ended 30 June 20X1, the entity sells 10 units of Product A to the customer.
The entity estimates that the customer's purchases will not exceed the 100 unit threshold
required for the volume discount in the financial year. HT Limited determines that it has significant
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experience with this product and with the purchasing pattern of the customer. Thus, HT Limited
concludes that it is highly probable that a significant reversal in the cumulative amount of revenue
recognised (i.e. ` 1,000 per unit) will not occur when the uncertainty is resolved (i.e. when the
total amount of purchases is known).
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Further, in May 20X1, the customer acquires another company and in the second quarter ended
30 September 20X1 the entity sells an additional 50 units of Product A to the customer. In the
light of the new fact, the entity estimates that the customer's purchases will exceed the 100 unit
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threshold for the financial year and therefore it will be required to retrospectively reduce the price
per unit to ` 900.
Determine the amount of revenue to be recognise by HT Ltd. for the quarter ended 30 June 20X1
and 30 September 20X1.
(Study Material)
Answer: The entity recognises revenue of ` 10,000 (10 units × ` 1,000 per unit) for the quarter
ended 30 June 20X1.
HT Limited recognises revenue of ` 44,000 for the quarter ended 30 September 20X1. That
amount is calculated from ` 45,000 for the sale of 500 units (50 units × ` 900 per unit) less the
change in transaction price of ` 1,000 (10 units × ` 100 price reduction) for the reduction of
revenue relating to units sold for the quarter ended 30 June 20X1.
Question 24 – Measurement of variable consideration: An entity has a fixed fee contract for `
1 million to develop a product that meets specified performance criteria. Estimated cost to
complete the contract is ` 950,000. The entity will transfer control of the product over five years,
and the entity uses the cost -to-cost input method to measure progress on the contract. An
incentive award is available if the product meets the following weight criteria:
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Weight (kg) Award % of fixed fee Incentive fee
951 or greater 0% —
701–950 10% ` 100,000
700 or less 25% ` 250,000
The entity has extensive experience creating products that meet the specific performance criteria.
Based on its experience, the entity has identified five engineering alternatives that will achieve the
10 percent incentive and two that will achieve the 25 percent incentive. In this case, the entity
determined that it has 95 percent confidence that it will achieve the 10 percent incentive and 20
percent confidence that it will achieve the 25 percent incentive.
Based on this analysis, the entity believe s 10 percent to be the most likely amount when
estimating the transaction price. Therefore, the entity includes only the 10 percent award in the
transaction price when calculating revenue because the entity has concluded it is probable that a
significant reversal in the amount of cumulative revenue recognized will not occur when the
uncertainty associated with the variable consideration is subsequently resolved due to its 95
percent confidence in achieving the 10 percent award.
The entity reassesses its production status quarterly to determine whether it is on track to meet
the criteria for the incentive award. At the end of the year four, it becomes apparent that this
contract will fully achieve the weight -based criterion. Therefore, the entity revises its estimate of
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variable consideration to include the entire 25 percent incentive fee in the year four because, at
this point, it is probable that a significant reversal in the amount of cumulative revenue recognized
will not occur when including the entire variable consideration in the transaction price.
Evaluate the impact of changes in variable consideration when cost incurred is as follows:
`
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Year
1 50,000
2 1,75,000
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3 4,00,000
4 2,75,000
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5 50,000
(Study Material)
Answer: [Note: For simplification purposes, the tab le calculates revenue for the year
independently based on costs incurred during the year divided by total expected costs, with the
assumption that total expected costs do not change.]
Fixed consideration A 1,000,000
Estimated costs to B 950,000
complete*
Year 1 Year 2 Year 3 Year 4 Year 5
Total estimated C 100,000 100,000 100,000 250,000 250,000
variable
consideration
Fixed revenue D=A x H/B 52,632 184,211 421,053 289,474 52,632
Variable revenue E=C x H/B 5,263 18,421 42,105 72,368 13,158
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Cumulative revenue F (see — — — 99,370 —
adjustment below)
Total revenue G=D+E+F 57,895 202,632 463,158 461,212 65,790
Costs H 50,000 175,000 400,000 275,000 50,000
Operating profit I=G–H 7,895 27,632 63,158 186,212 15,790
Margin (rounded off) J=I/G 14% 14% 14% 40% 24%
* For simplicity, it is assumed there is no change to the estimated costs to complete throughout
the contract period.
* In practice, under the cost-to-cost measure of progress, total revenue for each period is
determined by multiplying the total transaction price (fixed and variable) by the ratio of
cumulative cost incurred to total estimated costs to complete, less revenue recognized to date.
Calculation of cumulative catch-up adjustment:
Updated variable conside ration L 250,000
Percent complete in Year 4: (rounded off) M=N/O 95%
Cumulative costs through Year 4 N 900,000
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Estimated costs to complete O 950,000
Cumulative variable revenue through Year 4: P 138,130
Cumulative catch-up adjustment F=L x M–P 99,370
Question 25 – Management fees subject to the constraint: On 1 April 20X1, an entity enters
into a contract with a client to provide asset management services for five years. The entity
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receives a two per cent quarterly management fee based on the client's assets under
management at the end of each quarter. At 31 March 20X2, the client's assets under
management are ` 100 crores. In addition, the entity receives a performance - based incentive
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fee of 20 per cent of the fund's return in excess of the return of an observable market index over
the five -year period. Consequently, both the management fee and the performance fee in the
contract are variable consideration.
Analyse the revenue to be recognised on 31 March, 20X2.
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(Study Material)
Answer: The entity accounts for the services as a single performance obligation because it is
providing a series of distinct services that are substantially the same and have the same pattern
of transfer (the services transfer to the customer over time and use the same method to measure
progress—that is, a time-based measure of progress).
The entity observes that the promised consideration is dependent on the market and thus is
highly susceptible to factors outside the entity's influence. In addition, the incentive fee has a
large number and a broad range of possible consideration amounts. The entity also observes that
although it has experience with similar contracts, that experience is of little predictive value in
determining the future performance of the market. Therefore, at contract inception, the entity
cannot conclude that it is highly probable that a significant reversal in the cumulative amount of
revenue recognised would not occur if the entity included its estimate of the management fee or
the incentive fee in the transaction price.
At each reporting date, the entity updates its estimate of the transaction price. Consequently, at
the end of each quarter, the entity concludes that it can include in the transaction price the actual
amount of the quarterly management fee because the uncertainty is resolved. However, the entity
concludes that it cannot include its estimate of the incentive fee in the transaction price at those
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dates. This is because there has not been a change in its assessment from contract inception—
the variability of the fee based on the market index indicates that the entity cannot conclude that it
is highly probable that a significant reversal in the cumulative amount of revenue recognised
would not occur if the entity included its estimate of the incentive fee in the transaction price.
At 31 March 20X2, the client's assets under management are ` 100 crores. Therefore, the
resulting quarterly management fee and the transaction price is ` 2 crores.
At the end of each quarter, the entity al locates the quarterly management fee to the distinct
services provided during the quarter. This is because the fee relates specifically to the entity's
efforts to transfer the services for that quarter, which are distinct from the services provided in
other quarters.
Consequently, the entity recognises ` 2 crores as revenue for the quarter ended 31 March 20X2.
Question 26 – Right of return: An entity enters into 1,000 contracts with customers. Each
contract includes the sale of one product for ` 50 (1,000 total products × ` 50 = ` 50,000 total
consideration). Cash is received when control of a product transfers. The entity's customary
business practice is to allow a customer to return any unused product within 30 days and receive
a full refund. The entity's cost of each product is ` 30.
The entity applies the requirements in Ind AS 115 to the portfolio of 1,000 contracts because it
reasonably expects that, in accordance with paragraph 4, the effects on the financial statements
from applying these requirements to the portfolio would not differ materially from applying the
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requirements to the individual contracts within the portfolio. Since the contract allows a customer
to return the products, the consideration received from the customer is variable. To estimate the
variable consideration to which the entity will be entitled, the entity decides to use the expected
value method (see paragraph 53(a) of Ind AS 115) because it is the method that the entity
expects to better predict the amount of consideration to which it will be entitled. Using the
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expected value method, the entity estimates that 970 products will not be returned.
The entity estimates that the costs of recovering the products will be immaterial and expects that
the returned products can be resold at a profit.
Determine the amount of revenue, refund liability and the asset to be recognised by the entity for
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the said contracts.

(Study Material)
Answer: The entity also considers the requirements in paragraphs 56–58 of Ind AS 115 on
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constraining estimates of variable consideration to determine whether the estimated amount of

variable consideration of ` 48,500 (` 50 × 970 products not expected to be returned) can be
included in the transaction price. The entity considers the factors in paragraph 57 of Ind AS 115
and determines that although the returns are outside the entity's influence, it has significant
experience in estimating returns for this product and customer class. In addition, the uncertainty
will be resolved within a short time frame (ie the 30-day return period). Thus, the entity concludes
that it is highly probable that a significant reversal in the cumulative amount of revenue
recognised (i.e. ` 48,500) will not occur as the uncertainty is resolved (i.e. over the return period).
The entity estimates that the costs of recovering the products will be immaterial and expects that
the returned products can be resold at a profit.
Upon transfer of control of the 1,000 products, the entity does not recognise revenue for the 30
products that it expects to be returned. Consequently, in accordance with paragraphs 55 and B21
of Ind AS 115, the entity recognises the following:
(a) revenue of ` 48,500 (` 50 × 970 products not expected to be returned);
(b) a refund liability of ` 1,500 (` 50 refund × 30 products expected to be returned); and
(c) an asset of ` 900 (` 30 × 30 products for its right to recover products from customers on
settling the refund liability).
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Question 27 – Entitlement to non-cash consideration: An entity enters into a contract with a
customer to provide a weekly service for one year. The contract is signed on 1st April 20X1 and
work begins immediately. The entity concludes that the service is a single performance obligation.
This is because the entity is providing a series of distinct services that are substantially the same
and have the same pattern of transfer (the services transfer to the customer over time and use
the same method to measure progress — that is, a time-based measure of progress).
In exchange for the service, the customer promises its 100 equity shares per week of service (a
total of 5,200 shares for the contract). The terms in the contract require that the shares must be
paid upon the successful completion of each week of service.
How should the entity decide the transaction price?
(Study Material)
Answer: The entity measures its progress towards complete satisfaction of the performance
obligation as each week of service is complete. To determine the transaction price (and the
amount of revenue to be recognised), the entity has to measure the fair value of 100 shares that
are received upon completion of each weekly service. The entity shall not reflect any subsequent
changes in the fair value of the shares received (or receivable) in revenue.
Question 28 – Fair value of non-cash consideration varies for reasons other than the form
of the consideration: RT Limited enters into a contract to build an office building for AT Limited
over an 18 -month period. AT Limited agrees to pay the construction entity ` 350 crores for the
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project. RT Limited will receive a bonus of 10 lakhs equity shares of AT Limited if it completes
construction of the office building within one year. Assume a fair value of ` 100 per share at
contract inception.
(Study Material)
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Answer: The ultimate value of any shares the entity might receive could change for two reasons:
(1) the entity earns or does not earn the shares and
(2) the fair value per share may change during the contract term.
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When determining the transaction price, the entity would reflect changes in the number of shares
to be earned. However, the entity would not reflect changes in the fair value per share. Said
another way, the share price of ` 100 is used to value the potential bonus throughout the life of
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the contract.
As a result, if the entity earns the bonus, its revenue would be ` 350 crores plus 10 lakhs equity
shares at ` 100 per share for total consideration of ` 360 crores.
Question 29: A Ltd. a telecommunication company, entered into an agreement with B Ltd. which
is engaged in generation and supply of power. The agreement provided that A Ltd. will provide
1,00,000 minutes of talk time to employees of B Ltd. in exchange for getting power equivalent to
20,000 units. A Ltd. normally charges Re.0.50 per minute and B Ltd. charges ` 2.5 per unit. How
should revenue be measured in this case?
(Study Material)
Answer: Paragraph 5(d) of Ind AS 115 excludes non -monetary exchanges between entities in
the same line of business to facilitate sales to customers or potential customers. For example,
this Standard would not apply to a contract between two oil companies that agree to an exchange
of oil to fulfil demand from their customers in different specified locations on a timely basis.
However, the current scenario will be covered under Ind AS 115 since the same is exchange of
dissimilar goods or services.
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As per paragraph 47 of Ind AS 115, “an entity shall consider the terms of the contract and its
customary business practices to determine the transaction price. The transaction price is the
amount of consideration to which an entity expects to be entitled in exchange for transferring
promised goods or services to a customer, excluding amounts collected on behalf of third parties
(for example, some sales taxes). The consideration promised in a contract with a customer may
include fixed amounts, variable amounts, or both”.
Paragraph 66 of Ind AS 115 provides that to determine the transaction price for contracts in which
a customer promises consideration in a form other than cash, an entity shall measure the non-
cash consideration (or promise of noncash consideration) at fair value.
On the basis of the above, revenue recognised by A Ltd. will be the consideration in the form of
power units that it expects to be entitled for talktime sold, i.e. ` 50,000 (20,000 units x `2.5). The
revenue recognised by B Ltd. will be the consideration in the form of talk time that it expects to be
entitled for the power units sold, i.e., ` 50,000 (1,00,000 minutes x Re. 0.50).
Question 30 – Customer-provided goods or services: MS Limited is a manufacturer of cars. It
has a supplier of steering systems – SK Limited. MS Limited places an order of 10,000 steering
systems on SK Limited. It also agrees to pay ` 25,000 per steering system and contributes tooling
to be used in SK’s production process.
The tooling has a fair value of ` 2 crores at contract inception. SK Limited determines that each
steering system represents a single performance obligation and that control of the steering
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system transfers to MS Limited upon delivery.
SK Limited may use the tooling for other projects and determines that it obtains control of the
tooling.
Determine the transaction price?
(Study Material)
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Answer: As a result, at contract inception, SK Limited includes the fair value of the tooling in the
transaction price at contract inception, which it determines to be ` 27 crores (` 25 crores for the
steering systems and ` 2 crores for the tooling).
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Question 31 – Consideration payable to a customer: An entity that manufactures consumer

good s enters into a one-year contract to sell goods to a customer that is a large global chain of
retail stores. The customer commits to buy at least ` 15 crores of products during the year. The
contract also requires the entity to make a non - refundable payment of ` 1.5 crores to the
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customer at the inception of the contract. The ` 1.5 crores payment will compensate the customer
for the changes it needs to make to its shelving to accommodate the entity's products. The entity
does not obtain control of any rights to the customer's shelves.
(Study Material)
Answer: The entity considers the requirements in paragraphs 70 – 72 of Ind AS 115 and
concludes that the payment to the customer is not in exchange for a distinct good or service that
transfers to the entity. This is because the entity does not obtain control of any rights to the
customer's shelves. Consequently, the entity determines that, in accordance with paragraph 70 of
Ind AS 115, the ` 1.5 crores payment is a reduction of the transaction price.
The entity applies the requirements in paragraph 72 of Ind AS 115 and concludes that the
consideration payable is accounted for as a reduction in the transaction price when the entity
recognises revenue for the transfer of the goods. Consequently, as the entity transfers goods to
the customer, the entity reduces the transaction price for each good by 10 per cent [(` 1.5 crores
÷ ` 15 crores) x 100]. Therefore, in the first month in which the entity transfers goods to the
customer, the entity recognises revenue of ` 1.125 crores (` 1.25 crores invoiced amount less
` 0.125 crore of consideration payable to the customer).
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Question 32 – Financing component: significant or insignificant?: A commercial airplane
component supplier enters into a contract with a customer for promised consideration of `
7,000,000. Based on an evaluation of the facts and circumstances, the supplier concluded that `
140,000 represented a insignificant financing component because of an advance payment
received in excess of a year before the transfer of control of the product.
State whether company needs to make any adjustment in determining the transaction price.
What if the advance payment was larger and received further in advance, such that the entity
concluded that ` 1,400,000 represented the financing component based on an analysis of the
facts and circumstances.
(Study Material)
Answer: The entity may conclude that ` 140,000, or 2 percent of the contract price, is not
significant, and the entity may not need to adjust the consideration promised in determining the
transaction price.
However, when the advance payment was larger and received further in advance, such that the
entity may conclude that ` 1,400,000 represents the financing component based on an analysis
of the facts and circumstances. In such a case, the entity may conclude that ` 1,400,000, or 20
percent of the contract price, is significant, and the entity should adjust the consideration
promised in determining the transaction price.
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Note: In this Question, the entity’s conclusion that 2 percent of the transaction price was not
significant and 20 percent was significant is a judgment based on the entity’s facts and
circumstances. An entity may reach a different conclusion based on its facts and circumstances.
Question 33 – Accounting for significant financing component: NKT Limited sells a product
to a customer for ` 121,000 that is payable 24 months after delivery. The customer obtains
control of the product at contract inception. The contract permits the customer to return the
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product within 90 days. The product is new and the entity has no relevant historical evidence of
product returns or other available market evidence.
The cash selling price of the product is ` 100,000 which represents the amount that t he customer
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would pay upon delivery for the same product sold under otherwise identical terms and conditions
as at contract inception. The entity's cost of the product is ` 80,000. The contract includes an
implicit interest rate of 10 per cent (i.e. the interest rate that over 24 months discounts the
promised consideration of ` 121,000 to the cash selling price of ` 100,000). Analyse the above
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transaction with respect to its financing component.

(Study Material)
Answer: The contract includes a significant financing component. This is evident from the
difference between the amount of promised consideration of ` 121,000 and the cash selling price
of ` 100,000 at the date that the goods are transferred to the customer.
The contract includes an implicit interest rate of 10 per cent (i.e. the interest rate that over 24
months discounts the promised consideration of ` 121,000 to the cash selling price of ` 100,000).
The entity evaluates the rate and concludes that it is commensurate with the rate that would be
reflected in a separate financing transaction between the entity and its customer at contract
inception.
Until the entity receives the cash payment from the customer, interest revenue would be
recognised in accordance with Ind AS 109. In determining the effective interest rate in
accordance with Ind AS 109, the entity would consider the remaining contractual term.
Question 34 – Determining the discount rate: VT Limited enters into a contract with a
customer to sell equipment. Control of the equipment transfers to the customer when the contract
is signed. The price stated in the contract is ` 1 crore plus a 10% contractual rate of interest,
payable in 60 monthly instalments of ` 212,470.
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Determine the discounting rate and the transaction price when
Case A—Contractual discount rate reflects the rate in a separate financing transaction
Case B—Contractual discount rate does not reflect the rate in a separate financing transaction ie
14%.
(Study Material)
Answer:
Case A—Contractual discount rate reflect s the rate in a separate financing transaction
In evaluating the discount rate in the contract that contains a significant financing component, VT
Limited observes that the 10% contractual rate of interest reflects the rate that would be used in a
separate financing transaction between the entity and its customer at contract inception (i.e. the
contractual rate of interest of 10% reflects the credit characteristics of the customer).
The market terms of the financing mean that the cash selling price of the equipment is ` 1 crore.
This amount is recognised as revenue and as a loan receivable when control of the equipment
transfers to the customer. The entity accounts for the receivable in accordance with Ind AS 109.
Case B—Contractual discount rate does not reflect the rate in a separate financing transaction
In evaluating the discount rate in the contract that contains a significant financing component, the
entity observes that the 10% contractual rate of interest is significantly lower than the 14%
interest rate that would be used in a separate financing transaction between the entity and its
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customer at contract inception (i.e. the contractual rate of interest of 10% does not reflect the
credit characteristics of the customer). This suggests that the c ash selling price is less than ` 1
crore.
VT Limited determines the transaction price by adjusting the promised amount of consideration to
reflect the contractual payments using the 14% interest rate that reflects the credit characteristics
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of the customer. Consequently, the entity determines that the transaction price is ` 9,131,346 (60
monthly payments of ` 212,470 discounted at 14%). The entity recognizes revenue and a loan
receivable for that amount. The entity accounts for the loan receivable in accordance with Ind AS
109.
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Question 35 – Advance payment and assessment of discount rate: ST Limited enters into a
contract with a customer to sell an asset. Control of the asset will transfer to the customer in two
years (i.e. the performance obligation will be satisfied at a point in time). The contract includes
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two alternative payment options:

(1) Payment of ` 5,000 in two years when the customer obtains control of the asset or
(2) Payment of ` 4,000 when the contract is signed. The customer elects to pay ` 4,000 when the
contract is signed.
ST Limited concludes that the contract contains a significant financing component because of the
length of time between when the customer pays for the asset and when the entity transfers the
asset to the customer, as well as the prevailing interest rates in the market.
The interest rate implicit in the transaction is 11.8 per cent, which is the interest rate necessary to
make the two alternative payment options economically equivalent. However, the entity
determines that, the rate that should be used in adjusting the promised consideration is 6%,
which is the entity's incremental borrowing rate.
Pass journal entries showing how the entity would account for the significant financing component
(Study Material)
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Answer:
Journal Entries showing accounting for the significant financing component:
(a) Recognise a contract liability for the ` 4,000 payment received at contract inception:
Cash Dr. ` 4,000
To Contract liability ` 4,000
(b) During the two years from contract inception until the transfer of the asset, the entity adjusts
the promised amount of consideration and accretes the contract liability by recognising
interest on ` 4,000 at 6% for two years:
Interest expense Dr. ` 494*
To Contract liability ` 494
* ` 494 = ` 4,000 contract liability × (6% interest per year for two years).
(c) Recognise revenue for the transfer of the asset:
Contract liability Dr. ` 4,494
To Revenue ` 4,494
Question 36 – Withheld payments on a long-term contract: ABC Limited enters into a
contract for the construction of a power plant that includes scheduled milestone payments for the
performance by ABC Limited throughout the contract term of three years. The performance
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obligation will be satisfied over time and the milestone payments are scheduled to coincide with
the expected performance by ABC Limited. The contract provides that a specified percentage o f
each milestone payment is to be withheld as retention money by the customer throughout the
arrangement and paid to the entity only when the building is complete.
Analyse whether the contract contains any financing component.
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(Study Material)
Answer: ABC Limited concludes that the contract does not include a significant financing
component since the milestone payments coincide with its performance and the contract requires
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amounts to be retained for reasons other than the provision of finance. The withholding of a
specified percentage of each milestone payment is intended to protect the customer from the
contractor failing to adequately complete its obligations under the contract.
Question 37 – Advance payment: XYZ Limited, a personal computer (PC) manufacturer, enters
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into a contract with a customer to provide global PC support and repair coverage for three years
along with its PC. The customer purchases this support service at the time of buying the product.
Consideration for the service is an additional ` 3,000. Customers electing to buy this service must
pay for it upfront (i.e. a monthly payment option is not available).
Analyse whether there is any significant financing component in the contract or not.
(Study Material)
Answer: To determine whether there is a significant financing component in the contract, the
entity considers the nature of the service being offered and the purpose of the payment terms.
The entity charges a single upfront amount, not with the primary purpose of obtaining financing
from the customer but, instead, to maximise profitability, taking into consideration the risks
associated with providing the service. Specifically, if customers could pay monthly, they would be
less likely to renew and the population of customers that continue to use the support service in
the later years may become smaller and less diverse over time (i.e. customers that choose to
renew historically are those that make greater use of the service, thereby increasing the entity's
costs). In addition, customers tend to use services more if they pay monthly rather than making
an upfront payment. Finally, the entity would incur higher administration costs such as the costs
related to administering renewals and collection of monthly payments.
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In assessing whether or not the contract contains a significant financing component, XYZ Limited
determines that the payment terms were structured primarily for reasons other than the provision
of finance to the entity. XYZ Limited charges a single upfront amount for the services because
other payment terms (such as a monthly payment plan) would affect the nature of the risks it
assumes to provide the service and may make it uneconomical to provide the service. As a result
of its analysis, XYZ Limited concludes that there is not a significant financing component.
Question 38 – Advance payment: A computer hardware vendor enters into a three-year
arrangement with a customer to provide support services. For customers with low credit ratings,
the vendor requires the customer to pay for the entire arrangement in advance of the provision of
service. Other customers pay over time.
(Study Material)
Answer: Due to this customer’s credit rating, the customer pays in advance for the three -year
term. Because there is no difference between the amount of promised consideration and the cash
selling price (that is, the customer does not receive a discount for paying in advance), the vendor
requires payment in advance only to protect against customer non -payment, and no other factors
exist to suggest the arrangement contains a financing, the vendor concludes this contract does
not provide the customer or the entity with a significant benefit of financing.
Question 39 – Sales based royalty: A software vendor enters into a contract with a customer to
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provide a license solely in exchange for a sales-based royalty.
(Study Material)
Answer: Although the payment will be made in arrears, because the total consideration varies
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based on the occurrence or non-occurrence of a future event that is not within the control of the
customer or the entity, the software vendor concludes the contract does not provide the customer
or the entity with a significant benefit of financing.
Question 40 – Payment in arrears: An EPC contractor enters into a two -year contract to
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develop customized machine for a customer. The contractor concludes that the goods and
services in this contract constitute a single performance obligation.
Based on the terms of the contract, the contractor determines that it transfers control over time,
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and recognizes revenue based on an input method best reflecting the transfer of control to the
customer. The customer agrees to provide the contractor monthly progress payments, with the
final 25 percent payment (holdback payment) due upon contract completion. As a result of the
holdback payment, there is a gap between when control transfers and when consideration is
received, creating a financing component.
(Study Material)
Answer: There is no difference between the amount of promised consideration and the cash
selling price (that is, the customer did not pay a premium for paying a portion of the consideration
in arrears) . The payment terms included a holdback payment only to ensure successful
completion of the project, and no other factors exist to suggest the arrangement contains a
financing . Hence, the contractor concludes this contract does not provide the customer or the
contractor with a significant benefit of financing.
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Question 41 – Payment in arrears: Company Z is a developer and manufacturer of defence
systems that is primarily a Tier -II supplier of parts and integrated systems to original equipment
manufacturers (OEMs) in the commercial markets. Company Z enters into a contract with
Company X for the development and delivery of 5,000 highly technical, specialized missiles for
use in one of Company X’s platforms.
As a part of the contract, Company X has agreed to pay Company Z for their cost plus an award
fee up to ` 100 crores. The consideration will be paid by the customer related to costs incurred
near the time Company Z incurs such costs. However, the ` 100 crores award fee is awarded
upon successful completion of the development and test fire of a missile to occur in 16 months
from the time the contract is executed.
The contract specifies Company Z will earn up to ` 100 crores based on Company X’s
assessment of Company Z’s ability to develop and manufacture a missile that achieves multiple
factors, including final weight, velocity, and accuracy. Partial award fee s may be awarded based
on a pre-determined scale based on their success.
Assume Company Z has assessed the contract under Ind AS 115 and determined the award fee
represents variable consideration. Based on their assessment, Company Z has estimated a total
of ` 80 crores in the transaction price related to the variable consideration pursuant to guidance
within Ind AS 115. Further, the entity has concluded it should recognize revenue over time for a
single performance obligation using a cost -to-cost input method.
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(Study Material)
Answer: Company Z will transfer control over time beginning shortly after the contract is
executed, but will not receive the cash consideration related to the award fee component from
Company X for more than one year in the future. Hence, Company Z should assess whether the
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award fee represents a significant financing component.
The intention of the parties in negotiating the award fee due upon completion of the test fire, and
based on the results of that test fire, was to provide incentive to Company Z to produce high
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functioning missiles that achieved successful scoring from Company X. Therefore, it was
determined the contract does not contain a significant financing component, and Company Z
should not adjust the transaction price.
As per Ind AS 115.63, as a practical expedient, an entity need not adjust the promised amount of
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consideration for the effects of a significant financing component if the entity expects, at contract
inception, that the period between:
(a) when the entity transfers a promised good or service to a customer and
(b) when the customer pays for that good or service
will be one year or less.
Question 42 – Applying practical expedient: Company H enters into a two -year contract to
develop customized software for Company C. Company H concludes that the goods and services
in this contract constitute a single performance obligation.
Based on the terms of the contract, Company H determines that it transfers control over time, and
recognizes revenue based on an input method best reflecting the transfer of control t o Company
C.
Company C agrees to provide Company H monthly progress payments. Based on the
expectation of the timing of costs to be incurred, Company H concludes that progress payments
are being made such that the timing between the transfer of control an d payment is never
expected to exceed one year.
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(Study Material)
Answer: Company H concludes it will not need to further assess whether a significant financing
component is present and does not adjust the promised consideration in determining the
transaction price, as they are applying the practical expedient under Ind AS 115.
As per Ind AS 115.65, an entity shall present the effects of financing (interest revenue or interest
expense) separately from revenue from contracts with customers in the statement of profit and
loss. Interest revenue or interest expense is recognised only to the extent that a contract asset (or
receivable) or a contract liability is recognised in accounting for a contract with a customer.
Question 43 – Allocation methodology: An entity enters into a contract with a customer to sell
Products A, B and C in exchange for ` 10,000. The entity will satisfy the performance obligations
for each of the products at different points in time. The entity regularly sells Product A separately
and therefore the stand -alone selling price is directly observable. The stand -alone selling prices
of Products B and C are not directly observable.
Because the stand-alone selling prices for Products B and C are not directly observable, the
entity must estimate them. To estimate the stand-alone selling prices, the entity uses the adjusted
market assessment approach for Product B and the expected cost plus a margin approach for
Product C. In making those estimates, the entity maximises the use of observable inputs.
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The entity estimates the stand-alone selling prices as follows:
Product Stand-alone selling price Method
`
Product A 5,000 Directly observable
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Product B 2,500 Adjusted market assessment approach
Product C 7,500 Expected cost plus a margin approach
Total 15,000
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Determine the transaction price allocated to each product.

(Study Material)
Answer: The customer receives a discount for purchasing the bundle of goods because the sum
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of the stand-alone selling prices (` 15,000) exceeds the promised consideration (` 10,000). The
entity considers that there is no observable evidence about the performance obligation to which
the entire discount belongs. The discount is allocated proportionately across Products A, B and
C.
The discount, and therefore the transaction price, is allocated as follows:
Product Allocated transaction price (to nearest `100)
`
Product A 3,300 (` 5,000 ÷ ` 15,000 × ` 10,000)
Product B 1,700 (` 2,500 ÷ ` 15,000 × ` 10,000)
Product C 5,000 (` 7,500 ÷ ` 15,000 × ` 10,000)
Total 10,000
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Question 44 – Allocating a discount: An entity regularly sells Products X, Y and Z individually,
thereby establishing the following stand-alone selling prices:
Product Stand-alone selling price
`
Product X 50,000
Product Y 25,000
Product Z 45,000
Total 1,20,000
In addition, the entity regularly sells Products Y and Z together for ` 50,000.
Case A—Allocating a discount to one or more performance obligations
The entity enters into a contract with a customer to sell Products X, Y and Z in exchange for `
100,000. The entity will satisfy the performance obligations for each of the products at different
points in time; or Product Y and Z at same point of time. Determine the allocation of transaction
price to Product Y and Z.
Case B—Residual approach is appropriate
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The entity enters into a contract with a customer to sell Products X, Y and Z as described in Case
A. The contract also includes a promise to transfer Product Alpha. Total consideration in the
contract is ` 130,000. The stand-alone selling price for Product Alpha is highly variable because
the entity sells Product Alpha to different customers for a broad range of amounts (` 15,000 – `
45,000). Determine the stand -alone selling price of Products, X, Y, Z and Alpha using the
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residual approach.
Case C—Residual approach is inappropriate
The same facts as in Case B apply to Case C except the transaction price is ` 1,05,000 instead
of ` 130,000.
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(Study Material)
Answer:
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Case A—Allocating a discount to one or more performance obligations

The contract includes a discount of ` 20,000 on the overall transaction, which would be allocated
proportionately to all three performance obligations when allocating the transaction price using
the relative stand -alone selling price method.
However, because the entity regularly sells Products Y and Z together for ` 50,000 and Product X
for ` 50,000, it has evidence that the entire discount should be allocated to the promises to
transfer Products Y and Z in accordance with paragraph 82 of Ind AS 115.
If the entity transfers control of Products Y and Z at the same point in time, then the entity
could, as a practical matter, account for the transfer of those products as a single performance
obligation. That is, the entity could allocate ` 50,000 of the transaction price to the single
performance obligation and recognise revenue of ` 50,000 when Products Y and Z
simultaneously transfer to the customer.
If the contract requires the entity to transfer control of Products Y and Z at different points
in time, then the allocated amount of ` 50,000 is individually allocated to the promises to transfer
Product Y (stand-alone selling price of ` 25,000) and Product Z (stand-alone selling price of `
45,000) as follows:
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Product Allocated transaction price

`
Product Y 17,857 (` 25,000 ÷ ` 70,000 total stand-alone selling price × ` 50,000)
Product Z 32,143 (` 45,000 ÷ ` 70,000 total stand-alone selling price × ` 50,000)
Total 50,000
Case B—Residual approach is appropriate
Before estimating the stand-alone selling price of Product Alpha using the residual approach, the
entity determines whether any discount should be allocated to the other performance obligations
in the contract.
As in Case A, because the entity regularly sells Products Y and Z together for ` 50,000 and
Product X for ` 50,000, it has observable evidence that ` 100,000 should be allocated to those
three products and a ` 20,000 discount should be allocated to the promises to transfer Products
Y and Z in accordance with paragraph 82 of Ind AS 115.
Using the residual approach, the entity estimates the stand -alone selling price of Product Alpha
to be ` 30,000 as follows:
CA
Product Stand-alone selling price Method
`
Product X 50,000 Directly observable
Products Y and Z 50,000 Directly observable with discount
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Product Alpha 30,000 Residual approach
Total 130,000
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The entity observes that the resulting ` 30,000 allocated to Product Alpha is within the range of its
observable selling prices (` 15,000 – ` 45,000).
Case C—Residual approach is inappropriate
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The same facts as in Case B apply to Case C except the transaction price is ` 105,000 instead of
` 130,000. Consequently, the application of the residual approach would result in a stand - alone
selling price of ` 5,000 for Product Alpha (` 105,000 transaction price less ` 100,000 allocated to
Products X, Y and Z).
The entity concludes that ` 5,000 would not faithfully depict the amount of consideration to which
the entity expects to be entitled in exchange for satisfying its performance obligation to transfer
Product Alpha, because ` 5,000 does not approximate the stand -alone selling price of Product
Alpha, which ranges from ` 15,000 – ` 45,000.
Consequently, the entity reviews its observable data, including sales and margin reports, to
estimate the stand-alone selling price of Product Alpha using another suitable method. The entity
allocates the transaction price of ` 1,05,000 to Products X, Y, Z and Alpha using the relative
stand-alone selling prices of those products in accordance with paragraphs 73–80 of Ind AS 115.
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Question 45 – Allocation of variable consideration: An entity enters into a contract with a
customer for two intellectual property licences (Licences A and B), which the entity determines to
repre sent two performance obligations each satisfied at a point in time. The stand-alone selling
prices of Licences A and B are ` 1,600,000 and ` 2,000,000, respectively. The entity transfers
Licence B at inception of the contract and transfers Licence A one month later.
Case A—Variable consideration allocated entirely to one performance obligation
The price stated in the contract for Licence A is a fixed amount of ` 1,600,000 and for Licence B
the consideration is three per cent of the customer's future sal es of products that use Licence B.
For purposes of allocation, the entity estimates its sales -based royalties (ie the variable
consideration) to be ` 2,000,000. Allocate the transaction price.
Case B—Variable consideration allocated on the basis of stand -alone selling prices
The price stated in the contract for Licence A is a fixed amount of ` 600,000 and for Licence B the
consideration is five per cent of the customer's future sales of products that use Licence B. The
entity's estimate of the sales -based royalties (ie the variable consideration) is ` 3,000,000.
Allocate the transaction price and determine the revenue to be recognised for each licence and
the contract liability, if any.
(Study Material)
Answer:
CA
Case A—Variable consideration allocated entirely to one performance obligation
To allocate the transaction price, the entity considers the criteria in paragraph 85 and concludes
that the variable consideration (ie the sales -based royalties) should be allocated entirely to
Licence B. The entity concludes that the criteria are met for the following reasons:
(a) the variable payment relates specifically to an outcome from the performance obligation to
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transfer Licence B (ie the customer's subsequent sales of products that use Licence B).
(b) allocating the expected royalty amounts of ` 2,000,000 entirely to Licence B is consistent
with the allocation objective in paragraph 73 of Ind AS 115. This is because the entity's
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estimate of the amount of sales -based royalties (` 2,000,000) approximates the stand -
alone selling price of Licence B and the fixed amount of ` 1,600,000 approximates the stand-
alone selling price of Licence A. The entity allocates ` 1,600,000 to Licence A. This is
because, based on an assessment of the facts and circumstances relating to both licences,
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allocating to Licence B some of the fixed consideration in addition to all of the variable
consideration would not meet the allocation objective in paragraph 73 of Ind AS 115.
The entity transfers Licence B at inception of the contract and transfers Licence A one month
later. Upon the transfer of Licence B, the entity does not recognise revenue because the
consideration allocated to Licence B is in the form of a sales-based royalty. Therefore, the entity
recognises revenue for the sales -based royalty when those subsequent sales occur.
When Licence A is transferred, the entity recognises as revenue the ` 1,600,000 allocated to
Licence A.
Case B— Variable consideration allocated on the basis of stand -alone selling prices
To allocate the transaction pric e, the entity applies the criteria in paragraph 85 of Ind AS 115 to
determine whether to allocate the variable consideration (ie the sales -based royalties) entirely to
Licence B.
In applying the criteria, the entity concludes that even though the variable payments relate
specifically to an outcome from the performance obligation to transfer Licence B (ie the
customer's subsequent sales of products that use Licence B), allocating the variable
consideration entirely to Licence B would be inconsistent with the principle for allocating the
transaction price. Allocating ` 600,000 to Licence A and ` 3,000,000 to Licence B does not reflect
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a reasonable allocation of the transaction price on the basis of the stand -alone selling prices of
Licences A and B of ` 1,600,000 and ` 2,000,000, respectively. Consequently, the entity applies
the general allocation requirements of Ind AS 115.
The entity allocates the transaction price of ` 600,000 to Licences A and B on the basis of relative
stand-alone selling prices of ` 1,600,000 and ` 2,000,000, respectively. The entity also allocates
the consideration related to the sales -based royalty on a relative stand -alone selling price basis.
However, when an entity licenses intellectual property in which the consideration is in the form of
a sales-based royalty, the entity cannot recognise revenue until the later of the following events:
the subsequent sales occur or the performance obligation is satisfied (or partially satisfied).
Licence B is transferred to the customer at the inception of the contract and Licence A is
transferred three months later. When Licence B is transferred, the entity recognises as revenue `
333,333 [(` 2,000,000 ÷ ` 3,600,000) × ` 600,000] allocated to Licence B. When Licence A is
transferred, the entity recognises as revenue ` 266,667 [(` 1,600,000 ÷ ` 3,600,000) × ` 600,000]
allocated to Licence A.
Question 46 – Allocating a change in transaction price: On 1 April 20X0, a consultant enters
into an arrangement to provide due diligence, valuation, and software implementation services to
a customer for ` 2 crores. The consultant can earn ` 20 lakhs bonus if it completes the software
implementation by 30 September 20X0 or ` 10 lakhs bonus if it completes the software
implementation by 31 December 20X0.
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The due diligence, valuation, and software implementation services are distinct and therefore are
accounted for as separate performance obligations. The consultant allocates the transaction
price, disregarding the potential bonus, on a relative stand -alone selling price basis as follows:
• Due diligence – ` 80 lakhs
• Valuation – ` 20 lakhs
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• Software implementation – ` 1 crore
At contract inception, the consultant believes it will complete the software implementation by 30
January 20X1. After considering the factors in Ind AS 115, the consultant cannot conclude that a
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significant reversal in the cumulative amount of revenue recognized would not occur when the
uncertainty is resolved since the consultant lacks experience in completing similar projects. As a
result, the consultant does not include the amount of the early completion bonus in its estimated
transaction price at contract inception.
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On 1 July 20X0, the consultant notes that the project has progressed better than expected and
believes that implementation will be completed by 30 September 20X0 based on a revised
forecast. As a result, the consultant updates its estimated transaction price to reflect a bonus of `
20 lakhs.
After reviewing its progress as of 1 July 20X0, the consultant determines that it is 100 percent
complete in satisfying its performance obligations for due diligence and valuation and 60 percent
complete in satisfying its performance obligation for software implementation.
(Study Material)
Answer: On 1 July 20X0, the consultant allocates the bonus of ` 20 lakhs to the software
implementation performance obligation, for total consideration of ` 1.2 crores allocated to that
performance obligation, and adjusts the cumulative revenue to date for the software
implementation services to ` 72 lakhs (60 percent of ` 1.2 crores).
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Question 47: An entity enters into a contract for the sale of Product A for ` 1,000. As part of the
contract, the entity gives the customer a 40% discount voucher for any future purchases up to `
1,000 in the next 30 days. The entity intends to offer a 10% discount o n all sales during the next
30 days as part of a seasonal promotion. The 10% discount cannot be used in addition to the
40% discount voucher.
The entity believes there is 80% likelihood that a customer will redeem the voucher and on an
average, a customer will purchase ` 500 of additional products.
Determine how many performance obligations does the entity have and their stand -alone selling
price and allocated transaction price?
(Study Material)
Answer: Since all customers will receive a 10% discount on purchases during the next 30 days,
the only additional discount that provides the customer with a material right is the incremental
discount of 30% on the products purchased. The entity accounts for the promise to provide the
incremental discount as a separate performance obligation in the contract for the sale of Product
A.
The entity believes there is 80% likelihood that a customer will redeem the voucher and on an
average, a customer will purchase ` 500 of additional products. Consequently, the entity’s
estimated stand-alone selling price of the discount voucher is ` 120 (` 500 average purchase
price of additional products × 30% incremental discount × 80% likelihood of exercising the
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option). The stand-alone selling prices of Product A and the discount voucher and the resulting
allocation of the ` 1,000 transaction price are as follows:
Performance obligations Stand-alone selling price
Product A ` 1000
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Discount voucher ` 120
Total ` 1120
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Performance obligations Allocated transaction price

(to nearest `10)
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Product A (` 1000 ÷ ` 1120 × ` 1000) ` 890

Discount voucher (` 120 ÷ ` 1120 × ` 1000) ` 110
Total ` 1000
The entity allocates ` 890 to Product A and recognises revenue for Product A when control
transfers. The entity allocates ` 110 to the discount voucher and recognises revenue for the
voucher when the customer redeems it for goods or services or when it expires.
Question 48: Customer outsources its information technology data centre
Term = 5 years plus two 1-yr renewal options
Average customer relationship is 7 years
Entity spends ` 400,000 designing and building the technology platform needed to accommodate
out-sourcing contract:
Design services ` 50,000
Hardware ` 140,000
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Software ` 100,000
Migration and testing of data centre ` 110,000
TOTAL ` 400,000
How should such costs be treated?
(Study Material)
Answer:
Design services ` 50,000 Assess under Ind AS 115. Any resulting
asset would be amortised over 7 years (i.e.
include renewals)
Hardware ` 140,000 Account for asset under Ind AS 16
Software ` 100,000 Account for asset under Ind AS 38
Migration and testing of data ` 110,000 Assess under Ind AS 115. Any resulting
centre asset would be amortised over 7 years (i.e.
include renewals)
TOTAL ` 400,000
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Question 49: Amortisation: An entity enters into a service contract with a customer and incurs
incremental costs to obtain the contract and costs to fulfil the contract. These costs are
capitalised as assets in accordance with Ind AS 115. The initial term of the contract is five years
but it can be renewed for subsequent one-year periods up to a maximum of 10 years. The
average contract term for similar contracts entered into by entity is seven years.
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Determine appropriate method of amortisation?
(Study Material)
Answer: The most appropriate amortisation period is likely to be seven years (i.e. the initial term
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of five years plus two anticipated one year renewals) because that is the period over which the
entity expects to provide services under the contract to which the capitalised costs relate.
Question 50: Manufacturer M enters into a 60-day consignment contract to ship 1,000 dresses to
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Retailer A’s stores. Retailer A is obligated to pay Manufacturer M ` 20 per dress when the dress
is sold to an end customer.
During the consignment period, Manufacturer M has the contractual right to require Retailer A to
either return the dresses or transfer them to another retailer. Manufacturer M is also required to
accept the return of the inventory. State when the control is transferred.
(Study Material)
Answer: Manufacturer M determines that control has not been transferred to Retailer A on
delivery, for the following reasons:
(a) Retailer A does not have an unconditional obligation to pay for the dresses until they have
been sold to an end customer;
(b) Manufacturer M is able to require that the dresses be transferred to another retailer at any
time before Retailer A sells them to an end customer; and
(c) Manufacturer M is able to require the return of the dresses or transfer them to another
retailer.
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Manufacturer M determines that control of the dresses transfers when they are sold to an end
customer i.e. when Retailer A has an unconditional obligation to pay Manufacturer M and can no
longer return or otherwise transfer the dresses.
Manufacturer M recognises revenue as the dresses are sold to the end customer.
Question 51: An entity negotiates with major airlines to purchase tickets at reduced rates
compared with the price of tickets sold directly by the airline s to the public. The entity agrees to
buy a specific number of tickets and will pay for those tickets even if it is not able to resell them.
The reduced rate paid by the entity for each ticket purchased is negotiated and agreed in
advance. The entity determines the prices at which the airline tickets will be sold to its customers.
The entity sells the tickets and collects the consideration from customers when the tickets are
purchased; therefore, there is no credit risk.
The entity also assists the customer s in resolving complaints with the service provided by
airlines. However, each airline is responsible for fulfilling obligations associated with the ticket,
including remedies to a customer for dissatisfaction with the service.
Determine whether the entity is a principal or an agent.
(Study Material)
Answer: To determine whether the entity’s performance obligation is to provide the specified
goods or services itself (i.e. the entity is a principal) or to arrange for another party to provide
those goods or services (i.e. the entity is an agent), the entity considers the nature of its promise.
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The entity determines that its promise is to provide the customer with a ticket, which provides the
right to fly on the specified flight or another flight if the specified flight is c hanged or cancelled.
The entity considers the following indicators for assessment as principal or agent under the
contract with the customers:
(a) the entity is primarily responsible for fulfilling the contract, which is providing the right to
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fly. However, the entity is not responsible for providing the flight itself, which will be
provided by the airline.
(b) the entity has inventory risk for the tickets because they are purchased before they are
sold to the entity’s customers and the entity is exposed to any loss as a result of not
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being able to sell the tickets for more than the entity’s cost.
(c) the entity has discretion in setting the sales prices for tickets to its customers.
The entity concludes that its promise is to provide a ticket (i.e. a right to fly) to the customer. On
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the basis of the indicators, the entity concludes that it controls the ticket before it is transferred to
the customer. Thus, the entity concludes that it is a principal in the transaction and recognises
revenue in the gross amount of consideration to which it is entitled in exchange for the tickets
transferred.
Question 52: Customer buy a new data connection from the telecom entity. It pays one-time
registration and activation fees at the time of purchase of new connection.
The customer will be charged based on the usage of the data services of the connection on
monthly basis.
Are the performance obligations under the contract distinct?
(Study Material)
Answer: By selling a new connection, the entity promises to supply data services to customer.
Customer will not be able to benefit from just buying a data card and data services from third
party. The activity of registering and activating connection is not a service to customer and
therefore does not represent satisfaction of performance obligation.
Entity’s obligation is to provide data service and hence activation is not a separate performance
obligation.
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Question 53: An entity enters into a contract with a customer for the sale of a tangible asset on 1
January 20X1 for ` 1 million. The contract includes a call option that gives the entity the right to
repurchase the asset for ` 1.1 million on or before December 31, 20X1.
How would the entity account for this transaction?
(Study Material)
Answer: In the above case, where the entity has a right to call back the goods upto a certain
date–
• The customer cannot be said to have acquired control, owing to the repurchase right with the
seller entity
• Since the original selling price (` 1 million) is lower than the repurchase price (` 1.1 million),
this is construed to be a financing arrangement and accounted as follows:
(a) Amount received shall be recognized as ‘liability’
(b) Difference between sale price and repurchase price to be recognised as ‘finance cost’
and recognised over the repurchase term.
Question 54: An entity enters into a contract with a customer for the sale of a tangible asset on 1
January 20X1 for ` 1,000,000. The contract includes a put option that gives the customer the right
to sell the asset for ` 900,000 on or before December 31, 20X1. The market price for such goods
is expected to be ` 750,000
CA
How would the entity account for this transaction?
(Study Material)
Answer: In the above case, where the entity has an obligation to buy back the goods upto a
certain date –
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• The entity shall evaluate if the customer has a significant economic incentive to return the
goods. Since the repurchase price is significantly higher than market price, therefore,
customer has a significant economic incentive to return the goods. There are no other
factors which entity may affect this assessment.
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• Therefore, company determines that ‘control’ of goods is not transferred to the customer
till 31 December 20X1, ie, till the put option expires.
• Against payment of ` 1,000,000; the customer only has a right to use the asset and put it
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back to the entity for ` 900,000. Therefore, this will be accounted as a leas e transaction
in which difference between original selling price (ie, ` 1,000,000) and repurchase price
(ie, ` 900,000) shall be recognized as lease income over the period of lease.
• At the end of repurchase term, ie, 31 December 20X1, if the customer does not exercise
such right, then the control of goods would be passed to the customer at that time and
revenue shall be recognized for sale of goods for repurchase price (ie, ` 900,000).
Question 55: An entity enters into a contract with a customer on 1 April 20 X1 for the sale of a
machine and spare parts. The manufacturing lead time for the machine and spare parts is two
years.
Upon completion of manufacturing, the entity demonstrates that the machine and spare parts
meet the agreed-upon specifications in the contract. The promises to transfer t he machine and
spare parts are distinct and result in two performance obligations that each will be satisfied at a
point in time. On 31 March 20X3, the customer pays for the machine and spare parts, but only
takes physical possession of the machine. Although the customer inspects and accepts the spare
parts, the customer requests that the spare parts be stored at the entity's warehouse because of
its close proximity to the customer's factory. The customer has legal title to the spare parts and
the parts can be identified as belonging to the customer. Furthermore, the entity stores the spare
parts in a separate section of its warehouse and the parts are ready for immediate shipment at
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the customer's request. The entity expects to hold the spare parts for two to four years and the
entity does not have the ability to use the spare parts or direct them to another customer.
How will the Company recognise revenue for sale of machine and spare parts? Is there any other
performance obligation attached to this sale of goods?
(Study Material)
Answer: In the facts provided above, the entity has made sale of two goods – machine and
space parts, whose control is transferred at a point in time. Additionally, company agrees to hold
the spare parts for the customer for a period of 2 -4 years, which is a separate performance
obligation. Therefore, total transaction price shall be divided amongst 3 performance obligations –
(i) Sale of machinery
(ii) Sale of spare parts
(iii) Custodial services for storing spare parts.
Recognition of revenue for each of the three performance obligations shall occur as follows:
- Sale of machinery: Machine has been sold to the customer and physical possession as well
as legal title passed to the customer on 31 March 20 X3. Accordingly, revenue for sale of
machinery shall be recognised on 31 March 20 X3.
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- Sale of spare parts: The customer has made payment for the spare parts and legal title has
been passed to specifically identified goods, but such spares continue to be physically held
by the entity. In this regard, the company shall evaluate if revenue can be recognized on bill-
n-hold basis if all below criteria are met:
(a) the reason for the bill-and-hold arrangement The customer has specifically requested
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must be substantive (for example, the customer for entity to store goods in their
has requested the arrangement); warehouse, owing to close proximity to
customer’s factory.
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(b) the product must be identified separately as The spare parts have been specifically
belonging to the customer; identified and inspected by the customer.
(c) the product currently must be ready for The spares are identified and segregated,
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physical transfer to the customer; and therefore, read for delivery.
(d) the entity cannot have the ability to use the Spares have been segregated and cannot
product or to direct it to another customer be redirected to any other customer.
Therefore, all conditions of bill -and-hold are met and hence, company can recognize
revenue for sale of spare parts on 31 March 20 X3.
- Custodial services: Such services shall be given for a period of 2 to 4 years from 31 March
20X3. Where services are given uniformly and customer receives & consumes benefits
simultaneously, revenue for such service shall be recognized on a straight line basis over a
period of time.
Question 56: On 1 April, 20X1, KLC Ltd. enters into a contract with Mr. K to provide
- A machine for ` 2.5 million
- One year of maintenance services for ` 55,000 per month
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On 1 October 20X1, KLC Ltd. and Mr. K agree to modify the contract to reduce the amount of
services from ` 55,000 per month to ` 45,000 per month. Determine the effect of change in the
contract?
(Study Material)
Answer: The next six months of services are distinct from the services provided in the first six
months before modification in contract,
Therefore, KLC Ltd. will account for the contract modification as if it were a termination of the
existing contract and the creation of a new contract.
The consideration allocated to remaining performance obligation is ` 270,000, which is the sum of
● The consideration promised by the customer (including amounts already received from the
customer) that was included in the estimate of the transaction price and had not yet been
recognized as revenue. This amount is zero.
● The consideration promised as part of the contract modification ie ` 270,000.
Question 57: Growth Ltd enters into an arrangement with a customer for infrastructure
outsourcing deal. Based on its experience, Growth Ltd determines that customising the
infrastructure will take approximately 200 hours in total to complete the project and charges ` 150
per hour.
After incurring 100 hours of time, Growth Ltd and the customer agree to change an aspect of the
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project and increases the estimate of labour hours by 50 hours at the rate of ` 100 per hour.
Determine how contract modification will be accounted as per Ind AS 115?
(Study Material)
Answer: Considering that the remaining goods or services are not distinct, the modification will
be accounted for on a cumulative catch up basis, as given below:
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Particulars Hours Rate (`) Amount (`)
Initial contract amount 200 150 30,000
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Modification in contract 50 100 5,000

Contract amount after modification 250 140* 35,000
Revenue to be recognised 100 140 14,000
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Revenue already booked 100 150 15,000

Adjustment in revenue (1,000)
*35,000 /250 = 140
Question 58: An entity promises to sell 120 products to a customer for ` 120,000 (` 1,000 per
product). The products are transferred to the customer over a six -month period. The entity
transfers control o f each product at a point in time. After the entity has transferred control of 60
products to the customer, the contract is modified to require the delivery of an additional 30
products (a total of 150 identical products) to the customer at a price of ` 950 per product which is
the standalone selling price for such additional products at the time of placing this additional
order. The additional 30 products were not included in the initial contract.
It is assumed that additional products are contracted for a price that reflects the stand -alone
selling price.
Determine the accounting for the modified contract?
(Study Material)
Page 34

Answer: When the contract is modified, the price of the contract modification for the additional 30
products is an additional ` 28,500 or ` 950 per product. The pricing for the additional products
reflects the stand-alone selling price of the products at the time of the contract modification and
the additional products are distinct from the original products.
Accordingly, the contract modification for the additional 30 products is, in effect, a new and
separate contract for future products that does not affect the accounting for the existing contract
and ` 950 per product for the 30 products in the new contract.
Question 59: A Ltd. is in the business of the infrastructure and has two divisions under the same;
(I) Toll Roads and (II) Wind Power. The brief details of these business and underlying project
details are as follows:
I. Bhilwara-Jabalpur Toll Project - The Company has commenced the construction of the
project in the current year and has incurred total expenses aggregating to ` 50 crores as on
31st December, 20X1. Under IGAAP, the Company has 'recorded such expense s as
Intangible Assets in the books of account. The brief details of the Concession Agreement are
as follows:
• Total Expenses estimated to be incurred on the project ` 100 crores;
• Fair Value of the construction services is ` 110 crores;
• Total Cash Flow guaranteed by the Government under the concession agreement is `
CA
200 crores;
• Finance revenue over the period of operation phase is ` 15 crores:
• Other income relates to the services provided during the operation phase.
II. Kolhapur- Nagpur Expressway - The Company has also entered into another concession
agreement with Government of Maharashtra in the current year. The construction cost for the
NE
said project will be ` 110 crores. The fair value of such construction cost is approximately `
200 crores. The said concession agreement is Toll based project and the Company needs to
collect the toll from the users of the expressway. Under IGAAP, UK Ltd. has recorded the
expenses incurred on the said project as an Intangible Asset.
DI
Required
(i) What would be the classification of Bhilwara-Jabalpur Toll Project as per applicable Ind
AS? Give brief reasoning for your choice.
AL
(ii) What would be the classification of Kolhapur -Nagpur Expressway Toll Project as per
applicable Ind AS? Give brief reasoning for your choice.
(iii) Also, suggest suitable accounting treatment for preparation of financial statements as per
Ind AS for the above 2 projects.
(Study Material)
Answer:
(i) Here the operator has a contractual right to receive cash from the grantor. The grantor has
little, if any, discretion to avoid payment, usually because the agreement is enforceable by
law. The operator has an unconditional right to receive cash if the grantor contractually
guarantees to pay the operator. Hence, operator recognizes a financial asset to the extent it
has a contractual right to receive cash.
(ii) Here the operator has a contractual right to charge users of the public services. A right to
charge users of the public service is not an unconditional right to receive cash because the
amounts are contingent on the extent that the public uses the service. Therefore, the
operator shall recognise an intangible asset to the extent it receives a right (a licence) to
charge users of the public service.
Page 35

(iii) Accounting treatment for preparation of fin ancial statements
Bhilwara-Jabalpur Toll Project
Journal Entries
Particulars Dr. Cr.
(` in crores) (` in crores)
During construction:
1 Financial asset A/c Dr. 110
To Construction revenue 110
[To recognise revenue relating to construction services,
to be settled in case]
2 Cost of construction (profit or loss) Dr. 100
To Bank A/c (As and when incurred) 100
[To recognise costs relating to construction services]
During the operation phase:
3 Financial asset Dr. 15
CA
To Finance revenue (As and when received or due to 15
receive)
[To recognise interest income under the financial asset
model]
4 Financial asset Dr. 75
NE
To Revenue [(200-110) – 15] 75
[To recognise revenue relating to the operati on phase]
5 Bank A/c Dr. 200
DI
To Financial asset 200

[To recognise cash received from the grantor]
AL
Kolhapur-Nagpur Expressway -Intangible asset

Journal Entries
Particulars Dr. Cr.
During construction:
1 Cost of construction (profit or loss) Dr. 110
To Bank A/c (As and when incurred) 110
[To recognise costs relating to construction services]
2 Intangible asset Dr. 200
To Revenue 200
[To recognise revenue relating to constructio n services
provided for non-cash consideration]
Page 36
Particulars Dr. Cr.

During the operation phase:
3 Amortisation expense Dr. 200
To Intangible asset (accumulated amortisation) 200
[To recognise amortisation expense relating to the
operation phase over the period of operation]
4 Bank A/c Dr. ?
To Revenue ?
[To recognise revenue relating to the operation phase]
Note: Amount in entry 4 is kept blank as no information in this regard is given in the question.
CA
NE
DI
AL

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Page 1

Unit 3 Ind AS 115 on Revenue from

Questions from Study Material

2 Chap. 7  Unit 3: Ind AS 115 on Revenue from Contracts with Customers

Chap. 7  Unit 3: Ind AS 115 on Revenue from Contracts with Customers 3

4 Chap. 7  Unit 3: Ind AS 115 on Revenue from Contracts with Customers

Determine how many performance obligations does the entity A have?

Chap. 7  Unit 3: Ind AS 115 on Revenue from Contracts with Customers 5

6 Chap. 7  Unit 3: Ind AS 115 on Revenue from Contracts with Customers

Chap. 7  Unit 3: Ind AS 115 on Revenue from Contracts with Customers 7

8 Chap. 7  Unit 3: Ind AS 115 on Revenue from Contracts with Customers

Chap. 7  Unit 3: Ind AS 115 on Revenue from Contracts with Customers 9

(c) Upon delivery at site, customer acquires control of such elevators.

Therefore, applying the guidance on Input method –

10 Chap. 7  Unit 3: Ind AS 115 on Revenue from Contracts with Customers

Particulars Amount (`)

Chap. 7  Unit 3: Ind AS 115 on Revenue from Contracts with Customers 11

12 Chap. 7  Unit 3: Ind AS 115 on Revenue from Contracts with Customers

Chap. 7  Unit 3: Ind AS 115 on Revenue from Contracts with Customers 13

14 Chap. 7  Unit 3: Ind AS 115 on Revenue from Contracts with Customers

Chap. 7  Unit 3: Ind AS 115 on Revenue from Contracts with Customers 15

the said contracts.

constraining estimates of variable consideration to determine whether the estimated amount of

16 Chap. 7  Unit 3: Ind AS 115 on Revenue from Contracts with Customers

Chap. 7  Unit 3: Ind AS 115 on Revenue from Contracts with Customers 17

Question 31 – Consideration payable to a customer: An entity that manufactures consumer

18 Chap. 7  Unit 3: Ind AS 115 on Revenue from Contracts with Customers

transaction with respect to its financing component.

Chap. 7  Unit 3: Ind AS 115 on Revenue from Contracts with Customers 19

two alternative payment options:

20 Chap. 7  Unit 3: Ind AS 115 on Revenue from Contracts with Customers

Chap. 7  Unit 3: Ind AS 115 on Revenue from Contracts with Customers 21

22 Chap. 7  Unit 3: Ind AS 115 on Revenue from Contracts with Customers

Chap. 7  Unit 3: Ind AS 115 on Revenue from Contracts with Customers 23

Determine the transaction price allocated to each product.

24 Chap. 7  Unit 3: Ind AS 115 on Revenue from Contracts with Customers

Case A—Allocating a discount to one or more performance obligations

Chap. 7  Unit 3: Ind AS 115 on Revenue from Contracts with Customers 25

Product Allocated transaction price

26 Chap. 7  Unit 3: Ind AS 115 on Revenue from Contracts with Customers

Chap. 7  Unit 3: Ind AS 115 on Revenue from Contracts with Customers 27

28 Chap. 7  Unit 3: Ind AS 115 on Revenue from Contracts with Customers

Performance obligations Allocated transaction price

Product A (` 1000 ÷ ` 1120 × ` 1000) ` 890

Chap. 7  Unit 3: Ind AS 115 on Revenue from Contracts with Customers 29

30 Chap. 7  Unit 3: Ind AS 115 on Revenue from Contracts with Customers

Chap. 7  Unit 3: Ind AS 115 on Revenue from Contracts with Customers 31

32 Chap. 7  Unit 3: Ind AS 115 on Revenue from Contracts with Customers

physical transfer to the customer; and therefore, read for delivery.

Chap. 7  Unit 3: Ind AS 115 on Revenue from Contracts with Customers 33

Modification in contract 50 100 5,000

Revenue already booked 100 150 15,000

34 Chap. 7  Unit 3: Ind AS 115 on Revenue from Contracts with Customers

Chap. 7  Unit 3: Ind AS 115 on Revenue from Contracts with Customers 35

To Financial asset 200

Kolhapur-Nagpur Expressway -Intangible asset

36 Chap. 7  Unit 3: Ind AS 115 on Revenue from Contracts with Customers

Particulars Dr. Cr.

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