Revenue Recognition and Measurement
The five steps
Ind AS 115 requires: identify the contract; identify performance obligations; determine the transaction price; allocate it to the obligations; and recognise revenue when, or as, each obligation is satisfied.
Judgements that decide marks
- Variable consideration is estimated using expected value or most likely amount and constrained so a significant reversal is not probable.
- A significant financing component is separated unless the period is one year or less; discount at the rate that would apply in a separate financing transaction.
- Revenue is recognised over time if the customer simultaneously receives and consumes benefits, the asset creates or enhances a customer-controlled asset, or the asset has no alternative use and the entity has an enforceable right to payment for performance to date.
- Principal versus agent: the test is control of the good or service before transfer.
- Licensing: a right to access (over time) versus a right to use (point in time).
- Incremental costs of obtaining a contract are capitalised when recoverable.
Worked example
Fixed price ₹1,10,000 for two deliverables with standalone selling prices of ₹60,000 each; total SSP ₹1,20,000. The ₹10,000 discount is allocated proportionately, giving ₹55,000 to each obligation. Booking ₹60,000 against one deliverable because that is its SSP would misstate both revenue and the contract liability.
Traps
- Recognising revenue on despatch when control passes on delivery.
- Ignoring the constraint on variable consideration.
- Reporting agency commission gross instead of net.