Nirvaan Infra Tech: Variable Consideration, Loss-Making Contract and a Covenant Under Pressure
Nirvaan Infra Tech Ltd won a ₹1,250 crore fixed-price contract from a State discom in April 2024 to supply, install and maintain 4.2 million smart meters over three years, with operation and maintenance for a further five years. Thirty per cent of the price (₹375 crore) is payable only if metering uptime averages 98.5% each year; the group's two comparable contracts achieved 97.2% and 99.1%. Management has included ₹85 crore of the variable amount in the transaction price. At 31 March 2025, costs incurred are ₹310 crore against a revised total estimate of ₹1,410 crore, and the cost-to-cost measure is accepted as the best measure of progress. A ₹48 crore change order for additional substation work is under negotiation and unsigned. Bid and tender costs of ₹8 crore are carried as a contract asset. The bank covenant tests net debt/EBITDA at 3.0x, and the CFO has asked whether the contract can be presented as 'profitable on an adjusted basis'.
1. Compute the revenue, the loss for the year and any provision at 31 March 2025 under Ind AS 115 / Ind AS 37, showing your reasoning at each step.
Read the worked answer
Step 1 - Transaction price. Fixed component = 1,250 − 375 = ₹875 crore. Variable component constrained to ₹85 crore (see next task). Transaction price = ₹960 crore. The unsigned change order and any unpriced claims are excluded.
Step 2 - Progress. Cost-to-cost: 310 / 1,410 = 21.99%.
Step 3 - Revenue. 960 × 21.99% = ₹211.1 crore.
Step 4 - Result for the year. Cost incurred 310.0 less revenue 211.1 = loss of ₹98.9 crore.
Step 5 - Onerous contract. Expected total loss = 1,410 − 960 = ₹450 crore. Of this, ₹98.9 crore has been charged through the contract position; the balance must be provided immediately under Ind AS 37 (Ind AS 115 does not defer the recognition of an expected loss on a loss-making contract):
| Item | ₹ crore |
|---|---|
| Estimated total cost | 1,410.0 |
| Transaction price | 960.0 |
| Expected total loss | 450.0 |
| Loss already recognised | (98.9) |
| Provision at year end | 351.1 |
Step 6 - Presentation. Show a contract liability (or a net contract provision) rather than a contract asset of ₹211 crore, and disclose the significant judgements under Ind AS 115. Note that revenue cannot be uplifted to convert the ₹98.9 crore loss into a profit; the constraint and the onerous provision both operate in the same direction.
2. Assess whether the ₹85 crore of variable consideration and the ₹8 crore of bid costs are supportable, and deal with the ₹48 crore change order.
Read the worked answer
Variable consideration - Ind AS 115 constraint. The ₹375 crore is variable and is included only to the extent that a significant reversal is not highly probable when the uncertainty resolves. Evidence points to constraint, not optimism:
- One of two comparable contracts achieved 97.2%, below the 98.5% hurdle, so the hurdle has not been demonstrated as achievable.
- The measure is an annual average across 4.2 million meters; a single underperforming circle could drag the average down.
- The constraint must be applied contract by contract on the most likely amount.
₹85 crore (22.7% of the variable amount) needs a documented basis - for example, the probability-weighted outcome using achieved uptime bands and the specific SLA penalty mechanics. A figure pulled from the bid model, or one anchored to the ₹450 crore hole, is not that basis. If the supportable amount is, say, ₹40 crore, revenue falls by a further ₹9.9 crore at 21.99% progress and the provision rises by the same amount.
Bid costs ₹8 crore. Only incremental costs of obtaining a contract that are expected to be recovered are capitalised. On a contract with an expected ₹450 crore loss, recoverability is not demonstrable, so the amount must be expensed. If part of the ₹8 crore would have been incurred regardless of success, it was never capitalisable.
Change order ₹48 crore. A contract modification is recognised only when approved; an unsigned, unagreed order gives no enforceable right to consideration and no reliable measure. Exclude it, disclose the claim, and recognise only when the variation is approved - or, if the work is being performed under a direction with an enforceable right, when the price can be estimated reliably.
3. The CFO proposes presenting the contract 'on an adjusted basis' to protect the 3.0x covenant. How should the audit committee respond, and what is the reporting consequence?
Read the worked answer
The covenant position. Reported EBITDA already absorbs the ₹98.9 crore contract loss and the ₹351.1 crore provision sits outside EBITDA but inside net debt metrics such as gearing. If the covenant is actually breached once the provision is booked, that is a fact about the company's risk, not a presentation problem. Recasting the contract 'on an adjusted basis' would misstate a contract that is loss-making on its own estimates.
Why the proposal is not available. Ind AS 1 and Ind AS 8 do not permit alternative performance measures to replace or offset recognised amounts. Adjusted measures may be disclosed only alongside the Ind AS figures, with a reconciliation and a clear statement that they are not a substitute. Where the adjustment is designed to reverse a required provision, it is not an alternative measure at all - it is an error.
Governance response. The audit committee should:
- Require the constraint analysis and total cost estimate to be documented and challenged, with engineering sign-off on the ₹1,410 crore estimate.
- Obtain the covenant calculation under the facility agreement, test headroom, and if a breach is likely, open a waiver discussion with lenders before signing the accounts.
- Record the CFO's request in the minutes, since a proposal to adjust a required provision is a control and tone-at-the-top matter relevant to SA 240.
Audit consequence. The area is a significant risk with management bias indicators; expect challenge of the ₹85 crore, a written representation on the change order, and KAM disclosure on revenue recognition and the onerous provision. Concealment of a liability from lenders would raise section 447 considerations, not merely a disclosure note.