Accounting For Repurchase Arrangements Under Ind AS

1. Question

MedTech Limited (herein after referred as “the Company”) engages in the business of manufacturing of advanced robotic surgical equipment. On 1st April 2025 the Company sells one unit of surgical equipment to CarePlus Hospital (hereinafter referred as ” the Hospital”) on for Rs. 25 crore.

The contract terms are as follows:

• • •  Hospital has the right to resell the equipment back to the Company at any time within four years at a fixed price of Rs. 20 crore.
    •  The Company is under a contractual obligation to repurchase the asset if the hospital exercises the resale right.

The equipment is expected to lose significant value over the four-year period, with its estimated market price likely to decline to around Rs. 10-12 crore due to rapid technological advancements, while its highly specialized nature, limited secondary market demand, and costly maintenance requirements further reduce its attractiveness for continued use or independent resale.

The management seeks advice on:

(a) Whether the transfer of the surgical equipment should be recognized as a sale under Ind AS 115 or treated as a repurchase/financing arrangement.

(b) How the transaction should be reflected in the financial statements of the Company over the 4-year period.

2. Relevant Provision

Appendix B

Para 31: An entity shall recognise revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (i.e. an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset.

Para B64: A repurchase agreement is a contract in which an entity sells an asset and also promises or has the option (either in the same contract or in another contract) to repurchase the asset. The repurchased asset may be the asset that was originally sold to the customer, an asset that is substantially the same as that asset, or another asset of which the asset that was originally sold is a component.

Para B65: Repurchase agreements generally come in three forms:

(a) an entity’s obligation to repurchase the asset (a forward);

(b) an entity’s right to repurchase the asset (a call option); and

(c) an entity’s obligation to repurchase the asset at the customer’s request (a put option).

Para B70: If an entity has an obligation to repurchase the asset at the customer’s request (a put option) at a price that is lower than the original selling price of the asset, the entity shall consider at contract inception whether the customer has a significant economic incentive to exercise that right. The customer’s exercising of that right results in the customer effectively paying the entity consideration for the right to use a specified asset for a period of time. Therefore, if the customer has a significant economic incentive to exercise that right, the entity shall account for the agreement as a lease in accordance with Ind AS 116, unless the contract is part of a sale and leaseback transaction. If the contract is part of a sale and leaseback transaction, the entity shall continue to recognise the asset and shall recognise a financial liability for any consideration received from the customer. The entity shall account for the financial liability in accordance with Ind AS 109.]

Click Here To Read The Full Story