This standard is usually separately applied to each transaction but to reflect the substance of the transaction, it can be applied to separately identifiable components of a single transaction. Revenue should be recognized by measuring progress of complete satisfaction at end of every reporting period. Under Indian Accounting Standards (Ind AS), accounting for revenue and customer loyalty programmes would be governed by Ind AS 115, Revenue from Contracts with Customers1.Ind AS 115 provides a five-step model for revenue recognition, and also provides specific guidance for options provided to customers to purchase additional goods and services. Just upload your form 16, claim your deductions and get your acknowledgment number online. � The entity's performance creates or enhances an asset that has no alternative use to the entity, and the entity has the right to receive payment for work performed to date. Ind AS 12 Income Taxes: 17. iii) Customer has significant risk and rewards It applies to individual contract with customer. v) Entity has present right to payment. the entity's performance and the customer's payment. ClearTax can also help you in getting your business registered for Goods & Services Tax Law. Ind AS compliant entities will have to now adopt the new Ind AS 115, Revenue from Contract with Customers from April 1, 2018. These are expenses that would not have incurred if contract had not been obtained, i.e., costs incurred are direct incremental costs associated with obtaining contract. is income that arises in the course of ordinary activities of an entity and if referred to by the variety of different names including sales, fees, interest, dividends, and royalties. Ind AS 115 requires that variable consideration is allocated entirely to a single performance obligation (or to a distinct good or service that forms part of a performance obligation) if and only if both of the following conditions have been met: o The terms of the variable payment relate specifically to the entity's efforts towards, or outcome from, satisfying that performance obligation (or distinct good or service), o The result of the allocation is consistent with the amount of consideration to which the entity expects to be entitled in exchange for the promised goods or services, 7. Transfer of significant risks and rewards of ownership, Neither continuing managerial involvement nor effective control, Recognise revenue by reference to stage of completion (percentage of completion method) at end of reporting period, Recognise revenue only to extent of expenses recognized that are recoverable (no profit recognized), Reliable measurement of stage of completion, Effective interest method (as per Ind AS 109), Accrual basis in accordance with substance of the agreement, Shareholder’s right to receive payment is established, Revenue covers all economic benefits that arise in the ordinary course of activities of an entity which result in increases in equity, other than increases relating to contributions from equity participants, Revenue is gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of an enterprise from the sale of goods, from the rendering of services, and from the use by others of enterprise resources yielding interest, royalties and dividends, Real estate revenue is specifically not covered, Revenue has to be measured at fair value of the consideration receivable, Revenue is recognized at the nominal amount of consideration receivable, Specific guidance regarding barter transactions involving advertising services is given, Uses, only percentage of completion method for revenue recognition for rendering of service, Permits the use of completed service contract method, Requires interest to be recognized using effective interest rate method, Uses time proportion basis for interest recognition, IND AS 18 does not specifically deal with the same, Existing AS 9 specifically deals with disclosure of excise duty as a deduction from revenue from sales transactions, Disclosure requirements are more detailed, n recognize only when A sells the goods to the third parties, Indian Accounting Standard 11 – Construction Contracts, Indian AS 101 – First time adoption of Indian Accounting standards, This page is best viewed in Chrome, Firefox or IE 11. But importantly entities will have to closely analyze their business practices within the revenue cycle including changes to customer contracts, IT systems, tax implications, the introduction of new processes or controls, changes to management KPIs, disclosures and broader stakeholder communication. � Parties have approved the contract and are committed to perform their respective obligations, i) Each party's rights Identify the Contract with a customer. However, an entity would allocate a discount to only some of the performance obligations only if it has observable evidence of the obligations to which the entire discount belongs. In assessing if a contract contains a significant financing component; an entity should consider the relevant facts including both of the following: � Difference between the amount of promised consideration and the cash selling price of the goods or services. I. Thus, revenue recognition emphasizes on the timing of recognition of revenue in the statement of profit and loss of an enterprise. Revenue is income that arises in the course of ordinary activities of an entity and if referred to by the variety of different names including sales, fees, interest, dividends, and royalties. III. Contract modification can be accounted for termination of existing contract and creation of a new contract if the remaining goods or services are distinct from the goods or services transferred on or before the date of contract modification. Indian Accounting Standard (Ind AS) 18, Revenue, prescribes the recognition and measurement principles for revenue arising from certain types of transactions and events. damanoberoi@hotmail.com, Category Fair Value (FV) is the amount for which an asset could be exchanged or the liability set… Using the percentage of completion method also provides useful information on the extent of service activity and the performance during the period. It permits either, � Full Retrospective' adoption in which the standard is applied to all of the periods presented; OR. Companies based in India will need to adopt a more detailed process for revenue recognition as the Ind AS 115 removes scope for interpretation in several areas. Our GST Software helps CAs, tax experts & business to manage returns & invoices in an easy manner. The Companies (Indian Accounting Standards) Rules, 2015. International Accounting Standard (IAS-18)/ Ind AS – 18 (Old AS – 9) Revenue Performance Obligation is generally specified in contract, but could also include promises implied by entity's customary business practices, published policies or specific statement that create a valid customer expectation. IFRS 15 provides the 5 step framework on how and when to … A contract can be written, oral or implied by an entity's customary business practices. The entity would update the refund liability each reporting period based on current facts and circumstances. � The combined effect of the prevailing interest rate in the market and expected length of time between when the transfer of goods or services and the time when the customer makes the payment. significant downward adjustment) when the uncertainty associated with the variable consideration subsequently resolves. Thus, income comprises both revenue and gains. Revenue is measured at FV of the consideration received or receivable after deducting trade discounts and rebates. Ltd. ClearTax offers taxation & financial solutions to individuals, businesses, organizations & chartered accountants in India. An entity determines at contract inception whether each performance obligation will be satisfied (that is, control will be transferred) over time or at a specific point in time. Ind AS 115 requires retrospective application. INDIAN ACCOUNTING STANDARDS (Ind AS) AS - 9 Revenue Recognition This is the best notes on accounting standard 9 revenue recognition with examples. If a customer promises consideration in a form other than cash, an entity measures the non- cash consideration at fair value in determining the transaction price. 2. As per the AS 9 Revenue Recognition issued by ICAI “Revenue is the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of an enterprise from the sale of goods, rendering of services & from various other sources like interest, royalties & dividends”. (c) The proportion of the costs that are incurred to date bear to the estimated total costs of the transaction. In addition, they must disclose the amount by which each financial statement line is impacted due to Ind AS 115 application in the current period for the year ended March 2018. The Indian Accounting Standards (Ind AS), as notified under section 133 of the Companies Act 2013, have been formulated keeping the Indian economic & legal environment in view and with a view to converge with IFRS Standards, as issued by and copyright of which is held by the IFRS Foundation. Ind AS 115 is effective from annual reporting period beginning on or after April 1, 2018. However, this does not imply that entities can ignore past revenue contracts. The timing of revenue recognition might change under Ind AS 115’s control-based model. This method is permitted only if the entity either: � Sells the same good/service to different customers (at or near the same time) for a broad range of amounts; or. Major impact would be seen on following sectors: The author is CA-Final Student and may be contacted at II. An entity shall recognise revenue when (or as) the entity satisfies a performance Obligation by transferring a promised good or service (ie an asset) to a customer. In situations where control over an asset (goods or services) is transferred at a single point in time, an entity recognizes revenue by evaluating when the customer obtains control of the asset. In this case, A Ltd would recognize sales of 1,00,000 and the present value of 50,000 should be recognized over the next 3 years as service income. The entity must update this measurement over time as circumstances change and accounts for these changes as a change in accounting estimate under Ind AS 8Accounting Policies, Changes in Accounting Estimates and Errors'. on 01 September 2018. File Income tax returns for free in 7 minutes, Get expert help for tax filing or starting your business, Curated Mutual Funds & plans for tax savings, Complete solution for all your e-invoicing needs, I-T, e-TDS & Audit Software for CAs & Tax Professionals, Employee health plan, incl. The first step for revenue recognition is identifying a contract … Recognition and Measurement] used to contain the accounting principles for securitisation. Variable consideration may be attributable to the entire contract or only to a specific part. However, the same was later on withdrawn. Under AS regime, AS 9, Revenue Recognition states that the amount of revenue shall be measured at the gross inflow of cash, receivables or other considerations received. Ind AS 115 is based on core principle that requires an entity to recognize revenue: (adsbygoogle = window.adsbygoogle || []).push({}); Ind AS 115 prescribes 5 Step model for recognition of revenue. Transfer of Control over a period of Time. Accordingly, the requirements of Ind AS mandatorily require an entity to analyse and recognise discounts and sales schemes while accounting for revenue. An entity would forecast its expected costs to provide goods or services and add an appropriate margin. Revenue recognition is a generally accepted accounting principle (GAAP) that stipulates how and when revenue is to be recognized. If price is not directly available it should be estimated using: Involves evaluating the market in which the entity sells goods or services and estimating the price that customers in that market would pay for those goods or services. Contract modification arises when the parties approve a change in the scope and/or price of a contract, the accounting for same depends upon whether the modification is deemed to be a separate contract or not. Damandeep Singh  Can A recognize the entrance fee as revenue upon receipt? Indian GAAP, IFRS and Ind AS A Comparison | 5 The table on the following pages sets out some of the key differences between Indian GAAP (including the provisions of Schedule III to the Companies Act, 2013, where considered necessary), IFRSs in issue as at 31 December 2014 and Ind ASs. estimating variable consideration and assessing if constrained and allocating to performance obligations), xviii) Reconciliation of the amount of revenue recognized in the statement of profit and loss with the contracted price showing separately each of the adjustments made to the contract price specifying the nature and amount of each such adjustment separately (carve-out). The core principle of Ind AS 115 is that revenue needs to be Companies will have to necessarily determine if there are multiple distinct promises in a contract or a single performance obligation (PO). I. Entities may agree to provide goods or services for consideration that varies upon certain future events which may or may not occur. III. Revenue is typically recognized once the goods reach the buyer when the risks and rewards of ownership typically transfer to the customer. Accounting for securitisation transactions is also covered by the The collection of paymentSales and Collection CycleThe Sales and Collection Cycle, also known as the revenue, receivables, and receipts (RRR) cycle, comprises of various classes of transactions. 2. (E.g.- Sales Commission etc.). Revenue is recognized when it is probable that future economic benefits will flow to the entity and these benefits can be measured reliably. In the earlier post, we saw various differences between the Accounting Standards / Ind AS and GST Law. The treatment and effect on revenue of the following incentives are discussed here from AS and Ind AS perspective: 1. real estate infrastructure, EPC (Engineering, Procurement and Construction), IT services, etc. This includes arrangements in which the customer transfers control of goods or services (e.g. The objective in adjusting the transaction price for the time value of money is to reflect an amount for the selling price as though the customer had paid cash for the goods or services when they were transferred. Some of the concepts introduced by Ind AS 115 are completely new like upward adjustment of revenue. This will require entities to maintain two accounting records in the year of adoption�one as per Ind AS 115 and the other as per Ind AS 11 and/or 18 to comply with the disclosure requirement. iii) Financial Instruments and other contractual rights (Ind AS-109, 28) An entity shall allocate transaction price to each separate performance obligation within that contract on a relative stand-alone selling price basis. The Standard is concerned with the recognition of revenue arising in the course of the ordinary activities of the enterprise from the sale of goods the rendering of services The new standard can result in both increases and decreases in previously reported revenues. Transaction Price is not adjusted for customer's credit risk, but is adjusted if entity has created a valid expectation that it will enforce its rights for only a portion of contract price. An entity shall present any unconditional rights to consideration separately as a receivable. 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