Revenue Recognition in Deposit Work Model under Ind AS 115

1. Facts of the Case

XY Limited (hereinafter referred to as “the Company”) is a wholly owned government subsidiary engaged in healthcare-related infrastructure and procurement projects. These projects are carried out under a Deposit Work model, where the client ministry or institution such as Ministry of Health and Family Welfare (MoHFW) provides project funds in advance. The Company uses these funds to appoint contractors or suppliers, supervises the work, certifies bills, and makes payments to vendors from the client’s money.

In its books, the Company records revenue only for the consultancy and supervision fees it charges, not the full value of construction or procurement. Payments made to contractors and suppliers are adjusted directly against the client’s deposit funds, so the gross value of the project never appears as revenue or expense.

During audit, it was observed that since the Company uses its GSTIN/Import Code, executes agreements with contractors, and oversees the entire process, it may be viewed as a principal under Ind AS 115. If that is the case, it should record the entire project or procurement value as revenue (with corresponding expenses), instead of showing only service fees.

State, whether the Company should recognise revenue only to the extent of consultancy/supervision fees (net basis) or the full value of the projects/procurements (gross basis) in its financial statements?

2. Relevant Provisions

2.1 Ind AS 115: Revenue from Contracts with Customers

1. 1. B34. When another party is involved in providing goods or services to a customer, the entity shall determine whether the nature of its promise is a performance obligation to provide the specified goods or services itself (i.e. the entity is a principal) or to arrange for those goods or services to be provided by the other party (i.e. the entity is an agent). An entity determines whether it is a principal or an agent for each specified good or service promised to the customer. A specified good or service is a distinct good or service (or a distinct bundle of goods or services) to be provided to the customer (see paragraphs 27-30). If a contract with a customer includes more than one specified good or service, an entity could be a principal for some specified goods or services and an agent for others.
   2. B34A. To determine the nature of its promise (as described in paragraph B34), the entity shall:
      (a) identify the specified goods or services to be provided to the customer (which, for example, could be a right to a good or service to be provided by another party (see paragraph 26)); and
      (b) assess whether it controls (as described in paragraph 33) each specified good or service before that good or service is transferred to the customer.
   3. B35. An entity is a principal if it controls the specified good or service before that good or service is transferred to a customer. However, an entity does not necessarily control a specified good if the entity obtains legal title to that good only momentarily before legal title is transferred to a customer. An entity that is a principal may satisfy its performance obligation to provide the specified good or service itself or it may engage another party (for example, a sub-contractor) to satisfy some or all of the performance obligation on its behalf.
   4. B35A. When another party is involved in providing goods or services to a customer, an entity that is a principal obtains control of any one of the following:
      (a) a good or another asset from the other party that it then transfers to the customer.
      (b) a right to a service to be performed by the other party, which gives the entity the ability to direct that party to provide the service to the customer on the entity’s behalf.
      (c) a good or service from the other party that it then combines with other goods or services in providing the specified good or service to the customer. For example, if an entity provides a significant service of integrating goods or services (see paragraph 29(a)) provided by another party into the specified good or service for which the customer has contracted, the entity controls the specified good or service before that good or service is transferred to the customer. This is because the entity first obtains control of the inputs to the specified good or service (which includes goods or services from other parties) and directs their use to create the combined output that is the specified good or service.
   5. B35B. When (or as) an entity that is a principal satisfies a performance obligation, the entity recognises revenue in the gross amount of consideration to which it expects to be entitled in exchange for the specified good or service transferred.
   6. B36. An entity is an agent if the entity’s performance obligation is to arrange for the provision of the specified good or service by another party. An entity that is an agent does not control the specified good or service provided by another party before that good or service is transferred to the customer. When (or as) an entity that is an agent satisfies a performance obligation, the entity recognises revenue in the amount of any fee or commission to which it expects to be entitled in exchange for arranging for the specified goods or services to be provided by the other party. An entity’s fee or commission might be the net amount of consideration that the entity retains after paying the other party the consideration received in exchange for the goods or services to be provided by that party.
   7. B37. Indicators that an entity controls the specified good or service before it is transferred to the customer (and is therefore a principal (see paragraph B35)) include, but are not limited to, the following:
      (a) the entity is primarily responsible for fulfilling the promise to provide the specified good or service. This typically includes responsibility for the acceptability of the specified good or service (for example, primary responsibility for the good or service meeting customer specifications). If the entity is primarily responsible for fulfilling the promise to provide the specified good or service, this may indicate that the other party involved in providing the specified good or service is acting on the entity’s behalf.
      (b) the entity has inventory risk before the specified good or service has been transferred to a customer or after transfer of control to the customer (for example, if the customer has a right of return). For example, if the entity obtains, or commits itself to obtain, the specified good or service before obtaining a contract with a customer, that may indicate that the entity has the ability to direct the use of, and obtain substantially all of the remaining benefits from, the good or service before it is transferred to the customer.
      (c) the entity has discretion in establishing the price for the specified good or service. Establishing the price that the customer pays for the specified good or service may indicate that the entity has the ability to direct the use of that good or service and obtain substantially all of the remaining benefits. However, an agent can have discretion in establishing prices in some cases. For example, an agent may have some flexibility in setting prices in order to generate additional revenue from its service of arranging for goods or services to be provided by other parties to customers.
   8. B37A. The indicators in paragraph B37 may be more or less relevant to the assessment of control depending on the nature of the specified good or service and the terms and conditions of the contract. In addition, different indicators may provide more persuasive evidence in different contracts.
   9. B38. If another entity assumes the entity’s performance obligations and contractual rights in the contract so that the entity is no longer obliged to satisfy the performance obligation to transfer the specified good or service to the customer (i.e. the entity is no longer acting as the principal), the entity shall not recognise revenue for that performance obligation. Instead, the entity shall evaluate whether to recognise revenue for satisfying a performance obligation to obtain a contract for the other party (i.e. whether the entity is acting as an agent).

3. Expert Advisory Committee Opinion

The Expert Advisory Committee (EAC) explained that under Ind AS 115, the core issue is whether the Company is acting as a principal or an agent. A principal records revenue on a gross basis for the full value of goods or services provided, while an agent records only the fee or commission received for arranging goods or services on behalf of a client.

Looking at the Infrastructure Division, the EAC noted that the Ministry itself specifies project details, approves the contractors, fixes prices, and retains ownership of both funds and project benefits. The Company’s role is limited to supervision and certification of work, as well as facilitating payments out of client funds. It receives only a fixed service fee and bears no risks such as inventory or credit risk.

For the Procurement Division, the EAC observed that client ministry set product specifications, vendors are paid only after the Company receives funds from the client, and ownership of goods always rests with the client. Further, insurance for goods is arranged directly by vendors, and the Company has no control over pricing or profit margins. Here too, the Company receives only a fixed consultancy fee.

On these facts, the EAC concluded that the Company does not control the goods or services before they are transferred to the client in either division. Therefore, the Company is acting as an agentand not as a principal. Consequently, the Company should recognise revenue only to the extent of consultancy or supervision fees, on a net basis, rather than booking the full project or procurement value as revenue.

4. Conclusion

Based on the provisions of Ind AS 115 and the opinion of EAC, the Company’s role in both the Infrastructure and Procurement Divisions is limited to arranging, supervising, and certifying work, while the client ministry retains control over project specifications, pricing, ownership of funds, and overall risks. Since the Company neither controls the goods or services before transfer to the client nor bears significant risks such as inventory or credit risk, it is acting as an agent and not a principal. Accordingly, the Company should continue to recognise revenue only to the extent of consultancy or supervision fees earned (net basis), and not the entire project or procurement value (gross basis).

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