Combination of Contracts as a Single Contract | Ind AS 115

1. Introduction to Combination of Contracts under Ind AS 115

Revenue recognition under Ind AS 115 is guided by the economic substance of arrangements rather than merely their legal form. Although entities may execute separate agreements for operational, administrative, or legal convenience, such documentation does not, by itself, determine the accounting outcome. Where multiple contracts with the same customer are economically linked, they must be assessed together to ensure that revenue recognition faithfully represents the underlying commercial intent.

To address this, Ind AS 115 prescribes specific guidance on the combination of contracts. The Standard requires two or more contracts entered into at or near the same time with the same customer to be accounted for as a single contract when they are negotiated as a package with a single commercial objective, when consideration in one contract depends on another, or when the promised goods or services together form a single performance obligation. This requirement prevents artificial separation of arrangements that are, in substance, components of one integrated transaction.

Accordingly, while the portfolio approach under Ind AS 115 aggregates similar contracts for operational practicality, the combination of contracts guidance ensures that interconnected agreements are not accounted for in isolation where doing so would distort the economic reality. The following discussion examines the statutory framework, key criteria, and practical illustrations relevant to the combination of contracts provisions.

Also See – Applying the Portfolio Approach under Ind AS 115—Practical Guidance with Illustrations and Collectability Insights

2. Statutory Provision related to Combination of Contracts under Ind AS

Paragraph 17 of Ind AS 115 discusses about the combination of contracts. The para states the following:

“An entity shall combine two or more contracts entered into at or near the same time with the same customer (or related parties of the customer) and account for the contracts as a single contract if one or more of the following criteria are met:

(a) the contracts are negotiated as a package with a single commercial objective;

(b) the amount of consideration to be paid in one contract depends on the price or performance of the other contract; or

(c) the goods or services promised in the contracts are a single performance obligation.”

Let us understand each of these criteria in detail.

1.1. Single Commercial Objective

Contracts negotiated together to achieve one integrated commercial outcome must be accounted for as a single contract. In such situations, the individual agreements do not have independent commercial substance when viewed in isolation; rather, they collectively fulfil a broader business purpose agreed between the parties.

Illustration

A company enters into two agreements with a manufacturing customer, one for the installation of automated production equipment and another for configuring specialised operating software required to run the equipment efficiently. Although documented separately for operational or legal reasons, both contracts were negotiated together as part of a single project to establish a fully functional production system.

The customer’s objective is not merely to acquire equipment or software individually but to obtain an operational manufacturing solution. Since both arrangements collectively achieve one integrated commercial outcome, the contracts must be combined and accounted for as a single contract under Ind AS 115.

1.2. Interdependent Pricing or Consideration

Contracts must also be combined when the amount of consideration payable under one contract depends on the pricing or performance of another contract. This indicates that the agreements were structured together economically, even if documented separately. Such interdependence may arise due to following reasons:

(a) Discounts or pricing incentives are conditional upon entering multiple contracts,

(b) Profit margins in one contract are intentionally reduced and recovered through another arrangement,

(c) Payments vary depending on fulfilment or continuation of a related contract.

Illustration

A supplier sells industrial machinery to a customer at a significantly discounted price. At the same time, the customer enters into a separate agreement committing to purchase consumables exclusively from the supplier for five years. The reduced price of the machinery is economically justified by expected profits from future consumable sales.

Although legally separate, the pricing of the equipment contract cannot be understood independently of the consumables agreement. Because consideration in one contract depends on the other, both contracts must be combined to ensure revenue and margins reflect the true economics of the overall arrangement

1.3. Single Performance Obligation

Contracts must also be combined when the goods or services promised across multiple contracts together constitute a single performance obligation in accordance with paragraphs 22–30 of Ind AS 115. This occurs when promised goods or services are not distinct because they are highly interrelated or significantly integrated.

Illustration

An engineering entity signs two contracts with a customer, one for designing a specialised industrial facility and another for constructing the facility based on that design. While the contracts are executed separately, the entity is responsible for delivering a fully operational facility and provides significant integration between design and construction activities.

The customer does not benefit separately from the design without construction, nor from construction without the customised design. Because the combined promises represent a single integrated deliverable, they form one performance obligation, requiring both contracts to be combined and accounted for together.

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