Decoding ‘Control’ Under Ind AS 115 – Core Principle of Revenue Recognition

1. Introduction

The core principle of Ind AS 115, Revenue from contracts with customers, requires an entity to recognise revenue when it satisfies a performance obligation by transferring control of a promised good or service to the customer. Earlier, revenue was recognised when the significant risks and rewards of ownership of the underlying goods or services were transferred to the customer. However, under Ind AS 115, revenue is recognised only when control of the promised goods or services is transferred to the customer. Thus, Ind AS 115 marks a shift from a “risk-and-reward” approach to a “control-based” model of revenue recognition.

As defined under Ind AS 115, control refers to the ability of an entity to direct the use of, and obtain substantially all of the remaining benefits from, the asset. Control also includes the ability to prevent other entities from directing the use of and obtaining the benefits from the asset.

2. Indicators of Transfer of Control

Control is a broad and judgment-based concept and hence often leads to ambiguity in determining the exact point at which it is transferred to the customer. To aid this assessment, Ind AS 115 outlines a set of indicators that help entities to identify the point in time when control of a good or service is deemed to have passed to the customer. However, it is important to note that these indicators are not conclusive individually and must be considered collectively, in light of the contract’s terms and circumstances.

The following are the primary indicators of the transfer of control:

(a) The entity has a present right to payment for the asset.

(b) The customer has legal title to the asset.

(c) The entity has transferred physical possession of the asset.

(d) The customer has the significant risks and rewards of ownership of the asset.

(e) The customer has accepted the asset.

3. Transfer of Control in Case of License

In the case of a license of “Intellectual Property” with a right of use, Ind AS 115 states that revenue shall be recognized only when the customer begins using such intellectual property and starts deriving benefit from it, thus, the control of the license is generally transferred when the customer has commenced the use of such license and has started availing benefit from such use.

For example, Radiant Technologies Private Limited, hereinafter referred to as “the company,” is engaged in the business of providing telecommunication services. The company owns a patented design software that it licenses to clients for specialised networking services. On 1st April 2025, the company enters into a contract with “Alpha Limited”, granting it a two-year, non-exclusive license to use the software. The software activation key is delivered on 1st April 2025, but Alpha Limited will begin using the software only from 15th April 2026, when its new project starts.

As per Ind AS 115, the revenue shall be recognised only when the control of the asset is transferred to the customer. Further, in case of a license agreement, control is generally transferred when the customer has commenced the use of such license and has started availing the benefit from such use. Thus, in the extant case, the company shall recognise revenue on 15th April 2026, when the customer commences the use of such license and starts availing the benefit from such use. The fact that the activation key was delivered on 1st April 2025 will not have any impact while evaluating the transfer of control.

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