Revenue Recognition As Per Ind AS 115 and Situation for Deferment of the Revenue

CA Bharat Sonkhiya, CA Vikash Maharshi & Sahil Dewan – [2024] 158 taxmann.com 103 (Article)

To start with, first we need to understand what actually revenue is? Basically revenue is the gross inflows of cash, receivables and other consideration arising in the course of ordinary activities of an enterprise from the sale of goods, from the rendering of services, and from the use by others of enterprises resources.

For recognizing revenue, AS-9 and IND AS-115 provides the guidelines.

In IND AS regime, IND AS -115 deals only with the revenue recognitions related to contract with customers, other income like lease rent, finance income etc. dealt by their respective IND AS.

Revenue recognition principles: AS vs IND AS

As such there is no such difference between AS and IND AS in case of revenue recognition. Both deals with the same principle that revenue will be recognized only when risk and rewards have been transferred from seller to buyer and seller has no control over goods.

IND AS-115 provides a comprehensive framework for recognizing revenue arising from contracts with customers. It outlines the principles that an entity should apply to determine the amount and timing of revenue recognition.

So let’s understand how the revenue will be recognized under IND AS regime-

IND AS-115 provides five step model for recognizing revenue, which are as follows –

1. Identification of the Contract: Revenue recognition begins when a contract with a customer is identified. A contract is an agreement between two or more parties that creates enforceable rights and obligations.
2. Identification of Performance Obligations: The standard requires the identification of distinct performance obligations in the contract. Performance obligations are promises to transfer goods or services to the customer.
3. Determination of 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.
4. Allocation of Transaction Price: If a contract has more than one performance obligation, the transaction price is allocated to each performance obligation based on its standalone selling price.
5. Recognition of Revenue: Revenue is recognized when (or as) a performance obligation is satisfied, i.e., when control of the promised goods or services is transferred to the customer.

Presentation and Disclosures: The standard requires entities to provide relevant information in the financial statements to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

Now to understand more about revenue recognition, first we need to discuss further about performance obligation. So the question arises what are the performance obligations and how they affect recognition of revenue?

A performance obligation is a promise to provide a distinct good or service or a series of distinct goods or services as defined in the contract. In simple terms performance obligation is a “Promise” to deliver goods or services in lieu of payment.

As per IND AS 115, A good or service that is promised to a customer is distinct if both of the following criteria are met:

(a) The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e. the good or service is capable of being distinct); and

(b) The entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e. the good or service is distinct within the context of the contract).

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