Revenue Recognition in Repurchase Arrangements Under Ind AS

1. Introduction

An entity has entered into a contractual arrangement involving the transfer of a specialised heavy machinery to a customer for a consideration of ₹50 crore. While the customer is allowed to use the machinery in its operations, the agreement includes a repurchase right granted to the entity. This right permits the entity to buy back the machinery at any point within the next three years at a predetermined fixed price. Such contractual terms raise significant accounting questions under Ind AS 115 – Revenue from Contracts with Customers.

2. Nature of the Arrangement

At first glance, the transaction may appear to be a straightforward sale of machinery. However, the existence of the repurchase right complicates the recognition of revenue. Since the entity retains a contractual right to reclaim the asset, control may not have fully passed to the customer at the time of transfer. The arrangement must therefore be carefully evaluated to determine whether it constitutes a genuine sale, a repurchase agreement, or a financing arrangement, depending on the substance of the terms.

3. Assessment Under Ind AS 115

According to Ind AS 115, if an entity retains substantive control through a repurchase option, the transaction may not qualify as a sale. Instead, it may fall into one of the following categories:

• Repurchase Arrangement: If the buyback price is lower than or equal to the original selling price, the customer is essentially acting as a custodian of the asset.

• Financing Arrangement: If the buyback price is higher than the original transfer price, the arrangement may be regarded as a financing transaction, where the customer has effectively provided funding against the asset.
  In this case, given the fixed repurchase price and the right exercisable anytime within three years, the entity would need to carefully assess whether the substance is that of a financing arrangement rather than a true sale.

4. Financial Reporting Implications

If treated as a repurchase or financing arrangement, the entity cannot immediately recognise the ₹50 crore as revenue. Instead, the consideration received should be recorded as a financial liability, with corresponding interest expense recognised over the three-year period. The machinery would continue to be reflected as an asset on the entity’s balance sheet until the repurchase right expires or is exercised. Only if the repurchase option lapses unexercised at the end of the term can the transaction then be accounted for as a genuine sale, leading to revenue recognition at that point.

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