CMA Final - CFR

Ind AS 115 - Revenue from Contracts with Customers

Scope of Ind AS 115
Ind AS 115 applies to all contracts with customers where the entity provides goods or services as part
of its ordinary business in exchange for consideration.
Exceptions: Ind AS 115 does not apply to:
• Leases (Ind AS 116)
• Insurance contracts (Ind AS 104)
• Financial instruments (Ind AS 109) and other contractual rights and obligations within the
scope of Ind AS 110, 111, 27, and 28.
• Non-monetary exchanges between entities in the same industry.
If a contract is covered partially by other Ind AS, the relevant part must be accounted for under those
standards first, and the remainder under Ind AS 115.
Ind AS 115 also deals with Contract Costs
• Incremental costs to obtain a contract should be capitalized if they are recoverable.
• Fulfilment costs directly related to a contract should be capitalized if they generate future
resources or satisfy performance obligations.

Core Principle:
Ind AS 115 establishes that revenue should be recognized:
• Reflecting the transfer of goods or services to customers.
• In an amount that reflects the consideration the entity expects to receive for those goods or
services.
To apply this core principle, entities must follow the Five-Step Model:
1. Identify the contract with the customer.
2. Identify the performance obligations in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to the performance obligations.
5. Recognize revenue when (or as) performance obligations are satisfied.

Step 1: Identifying the Contract

A contract is an agreement that creates enforceable rights and obligations. The following five criteria
must be met:
Criteria Description
The parties must have approved the contract and are committed to
Approval
performing their obligations (written, oral, or implied).
Each party's rights regarding the goods or services to be transferred are
Identifiable Rights
identifiable.
Identifiable Payment Payment terms for goods or services must be identifiable, even if price is not
Terms fixed.
Commercial The contract must change the entity’s future cash flows, indicating that the
Substance contract has economic consequences.
It must be probable that the entity will collect substantially all of the
Probable Collection
consideration for the goods/services transferred.

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Contracts that fail to meet these criteria at inception are reassessed later.
Recognize consideration received as a liability until each of the five criteria in Step 1 are met or one
of the following occurs:
• entity has no remaining performance obligations and substantially all consideration has been
received and is non-refundable.
• contract is terminated and consideration is non-refundable.

Termination Clauses:
If both parties can terminate the contract without penalty, it does not exist for accounting purposes.

Combining Contracts:
Contracts entered at the same time with the same customer must be combined if they form a single
commercial objective.
Situation If Yes If No
Are the contracts negotiated as a package with a single Treat as a single Treat as separate
commercial objective? contract contracts
Does the consideration in one contract depend on the price or Treat as a single Treat as separate
performance obligation in another? contract contracts
Do the goods or services promised in the contract lead to a Treat as a single Treat as separate
single performance obligation? contract contracts

Contract Modifications:

A modification exists if:

• There is a change in scope or price.
• The change is approved by both the entity and the customer.
• The change is enforceable.

Situation If Yes If No
Are both of the following true:
• The scope of the contract increases
because distinct promised goods or
Account for the modification as a
services are added to the contract. Check next situation
separate contract
• The consideration increases by the
stand-alone selling price of the added
goods or services.
Allocate the remaining transaction
price not yet recognized to the
Are the remaining goods or services
outstanding performance
distinct from the goods or services
obligations. In other words, treat Check next situation
transferred on or before the date of
as a termination of the old
the contract modification?
contract and the creation of a new
contract

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Situation If Yes If No
It means Some of the
remaining goods or
Are the remaining goods or services Account for the contract services are distinct and
not distinct and, therefore, form part modification as if it were a part of others not distinct.
of a single performance obligation the existing contract—that is, the Follow the guidance for
that is partially satisfied at the date adjustment to revenue is made on both distinct (new
of the contract modification? a cumulative catch-up basis contract) and non-distinct
(cumulative catch-up)
goods or services.

Step 2: Identifying Performance Obligations

A performance obligation is a promise in the contract to transfer distinct goods or services to the
customer made in a contract to transfer goods or services to a customer. These obligations are crucial
for determining the timing and amount of revenue recognition. Performance obligations can be explicit
(clearly stated in the contract) or implicit (based on customary business practices or customer
expectations). At contract inception, an entity must assess the promised goods or services in the contract
and identify performance obligations based on the goods or services that will be transferred to the
customer.

Criteria for Identifying Performance Obligations:

Performance Obligation Explanation
A good/service that is capable of being distinct and is separately
Distinct Good/Service
identifiable.
Goods/services that are substantially the same and have the same pattern
Series of Distinct Goods
of transfer.
If goods or services are not distinct, they are bundled into a single
Multiple Element
performance obligation. For example, when non-distinct services are
Arrangements
combined with distinct ones, they are treated as a single obligation.
When a contract provides customers with options to purchase additional
Customer Options for
goods or services (e.g., discounts, loyalty programs), these options are
Additional Goods or
treated as separate performance obligations only if they provide a
Services
material right.

Types of Promised Goods or Services:

Promise Type Example
Manufactured goods A manufacturer sells inventory to a customer.
Resale of purchased goods A retailer sells goods purchased for resale.
Construction of an asset A contractor builds a hospital for a customer.
Intellectual Property A business licenses its trade name to another entity.
Service Provision A consulting firm provides professional services to a client.
Right to future goods/services Retailer offers discounts or loyalty points for future purchases

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Explicit vs Implicit Promises:
• Explicit Promises: Clearly stated in the contract.
• Implicit Promises: Based on past business practices, published policies, or statements that
create valid expectations in the customer.

Distinct Performance Obligations:

A promised good/service is distinct if:
• Customer can benefit from the good/service on its own or with other readily available resources.
• The promise to transfer the good/service is separate from other promises in the contract (i.e.,
not highly dependent on or integrated with other promises).

Two-Step Model for Identifying Distinct Goods/Services:

Step Explanation
Step 1: Capable of The good/service can be used or sold independently or with available
Being Distinct resources.
The good/service is not highly integrated with or dependent on, interrelated
Step 2: Distinct in the
with or significantly modifying or customising other promised goods or
context of the contract
services in the contract.

Not Separately Identifiable Promises:

Indicator Explanation
Significant integration Goods/services are integrated to deliver a single output.
Significant
Goods/services are customized, making them inseparable.
modification/customization
Highly interdependent or Goods or services are highly dependent on each other, making
interrelated them difficult to separate.

Consignment Arrangements
In consignment agreements, the control of goods remains with the consignor until they are sold to the
end customer. Revenue is recognized when:
• Control of the goods passes to the customer.
• The consignment period expires.

Principal vs. Agent Consideration

The entity must determine whether it is acting as:
1. Principal: The entity controls the goods or services before transferring them to the customer.
Revenue is recognized at the gross amount.
2. Agent: The entity arranges for another party to provide the goods or services. Revenue is
recognized at the net amount (i.e., the commission or fee earned).
Indicator Explanation
Primary The entity is responsible for fulfilling the contract (e.g., ensuring
responsibility goods/services meet specifications).
Inventory risk The entity holds inventory risk before or after the transfer of control.

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Indicator Explanation
Discretion over
The entity has discretion in setting the price of goods/services.
price

Step 3: Determining the Transaction Price

The transaction price is the amount of consideration an entity expects to receive in exchange for
transferring goods or services to a customer. It excludes amounts collected on behalf of third parties
(e.g., taxes).
When determining the transaction price, an entity must consider various factors, including:
• Variable consideration (and applying constraints)
• Significant financing components
• Non-cash consideration
• Consideration payable to a customer
Factors Affecting the Transaction Price
Factor Description
Estimated amounts considering risks of revenue reversal (e.g.,
Variable Consideration
discounts, refunds, performance bonuses).
Significant Financing Adjustments made for the time value of money when a contract
Component contains deferred or advanced payments.
Measured at fair value or the stand-alone price of goods/services
Non-cash Consideration
exchanged.
Consideration Payable to Amounts paid or expected to be paid to customers (e.g., rebates,
Customer coupons) are deducted from the transaction price.

Variable Consideration
Variable consideration refers to any part of the transaction price that can vary based on discounts,
refunds, credits, performance bonuses, or penalties.
Type of
Example
Consideration
Discounts Customer is offered a price concession, reducing the transaction price.
Performance Bonuses A bonus paid based on achieving a specific performance milestone.
Penalties for delays or failure to meet contract conditions (e.g., late
Penalties
delivery).

Estimating Variable Consideration

Method Explanation
Expected Value Method Used when there are many contracts with similar characteristics.
Most Likely Amount Applied when there are only two possible outcomes (e.g., bonus or no
Method bonus).

Constraint on Variable Consideration

An entity should include variable consideration in the transaction price only to the extent that it is highly
probable that a significant revenue reversal will not occur.

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Refund Liabilities
A refund liability is recognized if the entity expects to refund some or all of the consideration received
from a customer. The liability is adjusted at each reporting period for changes in the expected refunds.
If a product is sold with the option for customers to return it, the entity must:
• Recognize revenue for products not expected to be returned.
• Recognize a refund liability for products expected to be returned.

Significant Financing Component

A significant financing component exists if the timing of payments provides a substantial benefit of
financing to either the customer or the entity. This could happen when:
• The customer pays in advance (customer loan to entity), or
• The customer pays after the entity delivers goods/services (entity loan to customer).
Adjustments are made to reflect the time value of money, and interest income or expense is recognized
using the effective interest method.

Non-cash Consideration
If the customer provides non-cash consideration (e.g., shares, advertising, equipment), it should be
measured at fair value. If fair value cannot be determined, the consideration is measured by the stand-
alone selling price of the goods or services.
Example of Non-cash Consideration Treatment
Shares or stock provided by the customer Measured at fair value of shares at the time of the contract.

Consideration Payable to a Customer

Consideration paid to a customer, such as rebates or coupons, should be deducted from the transaction
price unless it is in exchange for a distinct good or service. If the consideration exceeds the fair value
of the goods or services received, the excess should be deducted from the transaction price.
Examples:
1. Slotting Fees: Fees paid by a manufacturer to a retailer for product placement are treated as a
reduction of the transaction price.
2. Co-operative Advertising: If a vendor reimburses the customer for advertising costs, the
payment is treated as an expense unless it exceeds the fair value of the service.

Sales-based or Usage-based Royalties

For sales-based or usage-based royalties related to the licensing of intellectual property, revenue is
recognized when:
• The subsequent sale or usage occurs, and
• The performance obligation to which the royalty relates has been satisfied.

Step 4: Allocating the Transaction Price to Performance Obligations

The objective of allocating the transaction price is to distribute the total consideration to each
performance obligation in a contract. This is done in a way that reflects the entity's expected entitlement
for transferring promised goods or services to the customer.

The general rule is to allocate the transaction price based on the relative stand-alone selling price of
each performance obligation. However, there are two exceptions:
• Discounts: Allocate disproportionately if the discount relates to specific obligations.

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• Variable consideration: Allocate to specific obligations if it relates to them directly.

Determining Stand-alone Selling Price

The stand-alone selling price is the price at which an entity would sell the goods or services
individually.
Method Description
If available, the best evidence is the actual price the entity charges for the
Observable Price
goods or services in similar conditions.
Adjusted Market Estimate what customers in the market would pay for the goods or services,
Assessment adjusting for costs and margins.
Expected Cost Plus a Estimate the expected cost of fulfilling the obligation and add an appropriate
Margin margin.
Subtract the known prices of other obligations from the total contract price.
Residual Approach
Use only if the price is highly variable or uncertain.

Allocating Discounts
A discount occurs when the total of stand-alone selling prices exceeds the contract price. The discount
is allocated proportionally to all performance obligations, unless it relates only to specific obligations.

When to Allocate Discount to Specific Obligations

Allocate the discount to specific obligations if:
1. The entity regularly sells the items individually.
2. The entity sells bundles of these items at a discount.
3. The discount in the contract is the same as in the bundle, and evidence shows the discount
relates to specific obligations.

Allocating Variable Consideration

Variable consideration (e.g., bonuses or penalties) can be attributed to the entire contract or specific
performance obligations. It is allocated to specific obligations if:
1. The payment terms relate to a specific obligation.
2. Allocating it to that obligation meets the transaction price allocation objective.

Changes in the Transaction Price

Transaction price changes due to:
• Uncertain events (e.g., bonuses or penalties).
• Modifications to the contract.

Key principles:
• Changes are allocated on the same basis as the original allocation.
• Changes are recognized as revenue in the period in which the transaction price changes.
• If a contract modification creates a new contract, allocate the change to the new obligations. If
the modification continues the existing contract, allocate the change to the remaining
obligations.

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Step 5: Satisfying Performance Obligations
Revenue is recognized when a performance obligation is satisfied, which occurs when control of the
goods or services is transferred to the customer. The key factor in determining when to recognize
revenue is transfer of control.

What Does Transfer of Control Mean?

Control is defined as the customer's ability to:
• Direct the use of the asset
• Obtain the remaining benefits from the asset
• Prevent others from using or benefiting from the asset

Control can be transferred either:

1. Over time (as the entity performs the service or work), or
2. At a point in time (when a specific event or milestone is achieved, like delivery).

Determining Control: Over Time or Point in Time?

Transfer of Control Over Time
Control transfers over time if one of the following criteria is met:
1. Simultaneous receipt and consumption: The customer receives and consumes benefits as the
entity performs (e.g., cleaning services).
2. Creation of an asset the customer controls: The entity is creating or enhancing an asset the
customer controls during production (e.g., construction on the customer’s property).
3. No alternative use and enforceable right to payment: The asset being created has no alternative
use to the entity, and the entity has an enforceable right to payment for performance completed
to date (e.g., custom-made products).
If any of these criteria are met, revenue is recognized over time.
Criterion Example
1. The customer simultaneously receives and Routine or recurring services – e.g. cleaning
consumes the benefits provided by the entity’s services, routine transaction processing
performance as the entity performs services, hotel management services.
2. The entity’s performance creates or enhances an
asset that the customer controls as the asset is Building an asset on a customer’s site
created or enhanced
3. The entity’s performance does not create an asset
Building a specialized/highly customized asset
with an alternative use to the entity and the entity
that only the customer can use, or building an
has an enforceable right to payment for performance
asset according to a customer’s specifications.
completed to date

Methods for Recognizing Revenue Over Time

Output Methods Input Methods
Recognize revenue based on direct
measurements of the value to the customer of Recognize revenue based on the entity’s efforts or
the goods or services transferred to date inputs to the satisfaction of a performance
relative to the remaining goods or services obligation.
promised under the contract.

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Output Methods Input Methods
Example: Resources consumed, labor hours
Example: Surveys of performance completed
expended, costs incurred, time elapsed, or machine
to date, appraisals of results achieved
hours used

If none of the "over time" criteria are met, control is transferred at a point in time, typically when:
• The customer has the legal title of the asset
• The entity has transferred physical possession
• The customer has the risks and rewards of ownership
• The customer has accepted the asset

Indicators such as right to payment, physical possession, and legal title help determine when the control
is transferred.

Bill-and-Hold Arrangements
In a bill-and-hold situation, control may transfer even if the entity retains physical possession.
Conditions include:
• The customer has requested the bill-and-hold arrangement for a substantive reason.
• The product is separately identified as belonging to the customer.
• The product is ready for delivery.
• The entity cannot use or direct the product to another customer.

Contract Costs
Type of Contract Cost Treatment
These are the incremental costs that an entity incurs to acquire a contract
with a customer, which would not have been incurred if the contract had not
been obtained.
Examples:
Costs to Obtain a
• Commissions: A commission paid only upon the successful signing
Contract (Contract
of a contract is incremental. Since this would not have been paid
Acquisition Costs)
had the contract not been secured, it can be capitalized.
• Travel Expenses for Salespeople: If the travel expense would have
been incurred regardless of whether the contract is secured or not, it
should be expensed.
Costs incurred to fulfill a contract should be capitalized if they are directly
related to the contract and meet certain conditions.
Criteria for Capitalizing Fulfillment Costs:
1. Direct Relationship: Costs must relate directly to a specific
Costs to Fulfill a contract, such as direct labor, materials, and overhead directly
Contract (Contract linked to the contract.
Fulfillment Costs) 2. Generation or Enhancement of Resources: The costs must result in
an asset that will be used to fulfill future performance obligations.
3. Recoverability: The costs must be recoverable through future
revenues from the contract.
Examples of Capitalizable Fulfillment Costs:

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Type of Contract Cost Treatment

• Direct Materials and Labor: Costs incurred specifically for the
contract, such as materials for construction.
• Subcontractor Payments: Costs directly linked to the fulfillment of
a particular contract.
• General and Administrative Costs: Overhead not explicitly
chargeable to the customer.
Costs to be Expensed:
• Wasted Resources: Costs from inefficiencies not reflected in the
contract price.
Once the contract costs are capitalized, they are amortized over the period
during which the related goods or services are transferred to the customer. If
Amortization
there is a significant change in the pattern of performance, the entity must
adjust the amortization schedule accordingly.
An impairment loss is recognized if the carrying amount of contract costs
Impairment Testing
exceeds expected future revenues.

Capitalize or
Cost Reason
Expense
The commission is incremental since it would
Commission paid only upon
Capitalize not have been paid if the parties decided not to
successful signing of a contract
enter into the arrangement just before signing.
The costs are incurred regardless of whether
Travel expenses for salesperson
Expense the new contract is won or lost unless they are
pitching a new client contract
expressly reimbursable.
If the parties walk away during negotiations,
Legal fees for drafting terms of
the costs would still be incurred and therefore
arrangement for parties to approve Expense
are not incremental costs of obtaining the
and sign
contract.
Salaries are incurred regardless of whether
Salaries for salespeople working
Expense contracts are won or lost and are not
exclusively on obtaining new clients
incremental costs to obtain the contract.
Bonus based on quarterly sales Bonuses based solely on sales are incremental
Capitalize
target costs to obtain a contract.
The commissions are incremental costs that
Commission paid to sales manager
would not have been incurred had the entity
based on contracts obtained by the Capitalize
not obtained the contract, regardless of the
sales manager’s local employees
manager's title.

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Questions: [Institute Material]
Question 1A: [Institute Material]
Z Ltd. Agrees to sell 200 units of product A to a customer for ₹3,20,000 ( ₹1,600 per
unit). The product A units are transferred over to the customers from 01.01.2019 to
30.06.2019. On 31.03.2020 after transfer of control of 100 units of A, the contract is
modified to deliver additional 50 units at the then market price of ₹1,400 per unit to be
delivered in following 3 months. Show how the transaction will be accounted in books
of Z ltd.

Solution:
During F.Y. 2019-2020 revenue will be recognized for the performance obligation
satisfied in regard the identified contract. Although the contract is modified, the
modification is accounted as a distinct separate contract with its stand-alone price.
Thus in regard the original contract the transaction price to be allocated to the satisfied
performance obligation is (100×₹3,20,000)/200 = ₹ 1,60,000 to be recognized as
revenue to be credited to P & L.
In F.Y. 2019-20, on satisfaction of performance obligation of the original contract the
balance ₹ 1,60,000 of the transaction price will be recognized as revenue. Further, for
the modifications of the contract, treated as another distinct and new contract the
transaction price is 50 × ₹ 1,400 = ₹ 70,000 to be recognized as revenue on satisfaction
of performance obligation, i.e. on transfer of control of the units in 3 months.

Question 1B: [Institute Material]

On 1.4.2020 the contract is modified to deliver 150 units of A instead of remaining 100
units by 30.6.2020 at ₹ 1,500 per unit. Here additional performances are distinct but
additional consideration is not stand-alone selling price; hence, it is modification B.

Solution:
For FY 18-19 revenue recognition is ₹ 1,60,000 for 100 units at ₹ 1,600 p.u.. For 2020-
2021:
Unrecognized revenue of the original contract (as if terminated) Nil
Contract modification 150×₹1,500 ₹ 2,25,000
Total ₹ 2,25,000

Question 1C: [Institute Material]

Original contract price of a project was ₹ 50,000 based on estimated 200 production
hours at a rate of ₹ 250 per hour. After revenue recognition for 100 hours the contract
is modified to increase the required hours by 50 (i) at hourly rate by ₹200; (ii) at hourly
rate of ₹ 200 for the remaining hours; (iii) ) at hourly rate of ₹ 200 for the total hours
required

The remaining performance is not distinct in the modified estimate of input hours, hence
it is modification C.
(i) at hourly rate of ₹ 200 for 50 hours Hours Rate (₹) (₹)
Original contract 200 250 50,000
Modification 50 200 10,000

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Total 250 240 60,000

Revenue recognized (A) 100 250 25,000
Modified recognition (B) 100 240 24,000
Adjustment for past revenue recognition (A
(1,000)
– B)
Revenue recognition in future 150 240 36,000

(ii) at hourly rate of ₹ 200 for 150 hours Hours Rate (₹) (₹)
Revenue recognized (A) 100 250 25,000
Modification for remaining hours 150 200 30,000
Total 250 220 55,000
Modified recognition (B) 100 220 22,000
Adjustment for past revenue recognition (A –
(3,000)
B)
Revenue recognition in future 150 220 33,000

(iii) at hourly rate of ₹200 for 250 hours Hours Rate (₹) (₹)
Modification for total hours 250 200 50,000
Revenue recognised (A) 100 250 25,000
Modified recognition (B) 100 200 20,000
Adjustment for past revenue recognition (A (5,000)
– B)
Revenue recognition in future 150 200 30,000

Question 2: [Institute Material]

Determine whether there arise single or multiple performance obligations for the
following contracts with customers?
(a) A Ltd. Enter into a contract with a customer for installing a central air-conditioner
system including site preparation, assembling of plants and test running the
system.
(b) A Ltd. enter into a contract with a customer for installing a central air-conditioning
system and a power generating plant for support of the air-conditioning system.
However, the power generating unit can also serve other electrical uses and could
be acquired from other suppliers separately.
(c) A Ltd. enter into a contract with a customer for installing a power generating plant
which includes designing and construction of the plant.
(i) Designing could have been made by any other independent designer. Based
on the approved design construction of the plant has to be done.
(ii) Designing and construction are continuously modified during installation.
(d) A Ltd. enter into a contract with a customer for transfer of a software license
including its installation, where:
(i) Installation does not modify the software and installation could be done by
any other entity.

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(ii) Installation is customized to modify the software with additional
functionalities.

Solution:
(a) site preparation, assembling of plants and test running are integrated in single
performance obligation.
(b) As power generating unit can serve other uses and could be procured from
different supplier installation of power generation unit is distinct from installation
of air-conditioning system. Hence, there are multiple performance obligations.
(c) (i) Designing and construction are distinct performance obligations.
(ii) They are integrated and bundled into single performance obligation.
(d) (i) Software license transfer and installation are distinct and there are two
performance obligations.
(ii) They are integrated and bundled into single performance obligation.

Question 3: [Institute Material]

On 31.03.2020 A Ltd. enter into a contract with a customer for sale of goods of ₹ 4,000
granting 50% discount voucher to be availed in future purchase up to ₹ 3,000 within 30
days. Ordinarily 10% discount is allowed on sales. Ordinary discount will not be
available to avail the 50% discount voucher. There is 60% probability that the customer
will redeem the discount voucher and the estimated amount of purchase is ₹ 2,000 In
April 2020 the discount vouchers are redeemed for purchase of additional goods of ₹
2,800. Find revenue recognition in 2019-20 and in 2020-21.

Solution:
There are two performance obligations one for sale of goods and other for sale of
discount vouchers. Their standalone prices:

Goods 4000 less 10% ordinary discount ₹ 3,600

Discount Vouchers ₹ 480
Total ₹ 4080
[Value of vouchers = Discount in excess of ordinary rate of 10%× estimated Purchase
amount × probability of purchase = (50 – 10)% × 2000 × 60% = 480]

Transaction price is ₹ 3,600 which is sale price less current discount of 10%. It is to be
allocated between
performance obligations of goods and discount vouchers proportionately.

Allocation to goods ₹3,600 × (₹3,600/ ₹4,080) = ₹ 3,176

Allocation to Discount Voucher ₹3,600 × (480/4,080) = ₹ 424

Thus in 2019-20 Revenue is recognized for ₹ 3176 only, which is transaction price less
future discount. Discount Voucher is carried as a liability at ₹ 424.

In 2020-21 this liability will be cancelled and revenue will be recognized for₹ 424,
when the discount voucher is redeemed or expired.

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The Transaction Price for additional sale is ₹2,800 less 50% discount voucher = ₹ 1,400;
Total Revenue recognized is ₹1,400 + ₹ 424 =₹ 1,824.

Thus we see that ₹ 424 is deducted from revenue of 2019-20 and added to revenue of
2020-21.

Question 4: [Institute Material]

On 01.08.2020 A Ltd. enter into a contract with a hotel for daily sanitization of the
building for 3 years at ₹ 12,000 per month. The customer receives and consume benefits
each day. Determine the revenue to be recognized in 2020-21.

Solution:
It is a series of distinct goods and services constituting a single performance obligation
to be satisfied over time and transaction price has to be allocated proportionately to the
performance obligation satisfied.
Accordingly, for 8 months @ ₹ 12,000 per month, ₹ 96,000 will be the revenue to be
recognized in 2020-21.

Question 5: [Institute Material]

On 01.01.2020 A Ltd. entered into a contract with B to sell 20 TV sets at a price of ₹
50,000 per set and the goods were delivered in February, 2020. Determine revenue to
be recognized by A in 2019-20 in the following circumstances:
(i) 2 sets found damaged at the time of receiving and returned by B.
(ii) 4 sets found not properly functioning in March, 2020 and they were replaced by
A as per terms of warranty.
(iii) It is not a sale but goods sent on consignment and B will sell the TV sets at ₹
50,000 per set. 12 sets were sold by B.
(iv) It is a contract of sale or return. The TV sets can be returned by B unconditionally
within 3 months. The entity expects (a) full return; (b) 50% return

Solution:
(i) Revenue is recognized for 18 sets at ₹ 9,00,000. 2 sets returned to inventory of
defective items.
(ii) Revenue is recognized for 20 sets at ₹ 10,00,000 at delivery (assumed warranty is
required by law and subsequent replacement is not considered as performance
obligation to be satisfied over time and to attract any allocation of contract price).
(iii) Revenue is recognized for 12 sets at ₹ 6,00,000. The other 8 sets are recognized
as asset (inventory) at cost.
(iv) (a) No revenue is recognized on delivery as right of the customer to
unconditionally return the goods has not expired and full return is expected. The
amount received or receivable on delivery of the sets is recognized as a liability
and asset (inventory) is recognized for all 20 sets at cost. The performance
obligation will be satisfied at the point of time when that right to return will expire
and then only revenue will be recognized cancelling the liability.
(b) Revenue will be recognized at ₹ 5,00,000 (50% of delivery) and for balance ₹

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5,00,000, liability will be recognized. Further, asset (inventory) should be
recognized for 10 sets at cost.

Question 6: [Institute Material]

A. On 31.03.2017 X Ltd. Sold goods at a price of ₹ 1,33,100 payable on 31.03.2020.
The implicit interest rate is 10% p.a. What would be the revenue to be recognized
for the year 2016-17, 2017-18, 2018-19 and 2019-20?
Recognition Criteria.
I. There is a contract with the customer in 2016-17.
II. There is a performance obligation–selling goods.
III. Transaction Price is determinable. The sale price is ₹ 1,33,100 payable after 3 yrs.
Interest component at 10% pa is included in the price. The revenue to be
recognised (₹1,33,100 × 1) ÷ (1.10)3 = ₹1,00,000 in the f inancial year 2016-17.
IV. Transaction price is fully allocated to the performance obligation.
V. Revenue is recognized as performance obligation is satisfied.
The interest component of ₹ (1,33,100 –1,00,000) = ₹ 33,100 will be recognized
as interest income in F.Y.
2017-18: ₹ 10,000 (10% × ₹1,00,000)
2018-19: ₹ 11,000 (10% × ₹1,10,000)
2019-20: ₹ 12,100 (10% × ₹1,21,000)

Accounting Particulars Dr. (₹) Cr. (₹)

for the
years
16-17 Customer A/c Dr. 1,00,000
Accrued Interest Dr. 33,100
A/c 1,00,000
To, Sales A/c 33,100
To, Liability for Unearned Interest
A/c
17-18 Liability for Unearned Dr. 10,000
Interest A/c To, Interest 10,000
Income A/c
18-19 Liability for Unearned Dr. 11,000
Interest A/c To, Interest 11,000
Income A/c
19-20 Liability for Unearned Dr 12,100
Interest A/c To, Interest 12,100
Income
19-20 Bank a/c Dr. 1,33,100
To, Customer a/c 1,00,000
To, Accrued Interest a/c 33,100

B. On 01.04.2019 X Ltd. Sold goods at a price of ₹ 1,30,000 payable on 31.07.2019.

The implicit interest rate is 12% p.a. What would be the revenue to be recognized
for the year 2019-20?

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CORPORATE FINANCIAL REPORTING

Solution:
The financing component for 4 months amounts to ₹ 1,30,000× r/(1+ r) = ₹5,000,
[where r = 0.12×4/12 = 0.04] But such financing component is not considered
significant as the period is normal credit period. Hence, the entire sale value is
recognized as revenue from contract with customer.

C. On 01.04.2019 X Ltd. sold goods at a price of ₹ 1,25,000 plus interest at the rate
of 30% pa payable on 31.07. 2019 at the end of normal credit period of 4 months.
What would be the revenue to be recognized for the year 2019-20?

Solution:
Any abnormal interest charged is not considered a financing component of the contract
price, rather included as part of revenue from contract with customer. As the credit
period is normal ₹ 1,25,000 plus interest ₹ 10,000 = ₹ 1,35,000 is recognized as revenue
from contract with customer.

D. On 31.07.2019 X Ltd. sold goods at a price of ₹ 1,25,000 plus interest at the rate
of 30% p.a. payable on 31.07.2020. Normal interest rate is 10% p.a. What would
be the revenue to be recognized for the year 2019-20?

Solution:
As the credit period is longer than normal and the rate of interest charged is significantly
different from normal, ₹ 1,25,000 plus interest in excess of normal = ₹ 1,25,000 + 20%
× ₹ 1,25,000 = ₹ 1,50,000 is recognized as revenue from contract with customer in
2019-20 as the performance obligation is satisfied by sale of goods. The normal interest
for 1 year is recognized as interest income to be distributed for 8 months in year 2019-
2020 and for 4 months in 2020-2021.

Question 7: [Institute Material]

On 01.12.2020 A Ltd. enter into a contract with customer to install a system at ₹ 20
lakhs and implement a software by June 2021 at ₹ 80 lakhs plus ₹ 15 lakhs bonus for
completing software implementation by April 2021. Initially A Ltd. estimated the
contract price at 1 crore for two performance obligations – system installation and
software implementation by June 2021.
In March 2021 the company found system installation complete and software
implementation 80% complete with confidence to earn bonus of ₹ 15 lakhs by
completing implementation by April 2021. Compute revenue to be recognized in 2020-
21.

Solution:
Bonus of ₹ 15 Lakhs is the variable consideration considered as change in contract price
to be allocated to performance obligation of software implementation and recognized
to the extent of performance obligation satisfied over time.
Thus, revenue recognition in 2020-2021:
System installation completed ₹ 20 Lakhs; and

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Software implementation 80% completed = (₹ 80 lakhs + ₹ 15 lakhs) × 80% = ₹ 76
lakhs.
Had the software implementation be satisfied at a point in time when completed and
control is transferred in April 2021, no revenue would be recognized proportionately in
2020-2021 for software implementation.

Question 8: [Institute Material]

A Ltd. enter into a contract with a customer for construction of a machine at the site of
the customer at ₹ 8 lakhs and for supply of spare parts at ₹ 1.6 lakhs in the next financial
year but to hold the spare parts in A Ltd’s warehouse separately to be delivered to the
customer’s factory as and when required in following 3 financial years for additional
consideration of ₹ 20,000 pa. Recognise revenue in the financial years if the contract is
duly performed.

Solution:
In the year of contract no revenue is recognized as no performance obligation satisfied.
In the next year ₹8 lakhs is recognized for completing the construction and transfer of
control at the point in time.
Further ₹ 1.6 lakhs is recognized for supply of spare parts although it is held in
warehouse of A Ltd. as custodian as control is transferred.
₹ 20,000 in each of the 3 years next shall be recognized as revenue from custodial
services.

Question 9: [Workbook]
X Ltd sells 1,100 units of a product to customers at a price of ₹150 per unit. Payment is
received at the time the control of the product is transferred to the customers. X Ltd. has
a return policy that allows customers to return any unused units within 60 days for a full
refund. The cost incurred by X Ltd. for each unit is ₹120. Based on the experience in
selling similar products, X Ltd. estimates that 950 units will not be returned.

How this transaction will be accounted for in the books of accounts of X Ltd. as per Ind
AS 115.

Solution:
In the Books of X Ltd.
1. Record Cash Receipt for All 1,100 Products:
Cash/Bank Dr. ₹ 1,65,000
To Refund Liability ₹ 22,500
To Revenue ₹ 1,42,500

2. Remove Inventory for All 1,100 Units Sold:

Cost of Sales Dr. ₹ 1,32,000
To Inventory ₹ 1,32,000

Inventory is derecognized for all 1,100 units (1,100 units × ₹120=₹1,32,000).

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CORPORATE FINANCIAL REPORTING

3. Recognize Right to Recover Returned Goods for 150 Units:

Right to Recover Returned Goods Dr. ₹ 18,000
To Cost of Sales ₹ 18,000

An asset is recognized for the right to recover inventory from the expected returns
(150 units × ₹120 = ₹18,000).

Question 10: [Workbook]

A Ltd. sells three products at the following stand-alone selling prices:
Product Stand-alone selling price (₹)
Product A 200
Product B 140
Product C 110

A Ltd. sells one unit of each product to ASN for a total of ₹405.

How should A Ltd. allocate the discount in the transaction when

a) The products are to be delivered at three separate points in time, and each delivery
represents a separate performance obligation. A Ltd. regularly sells Products B and
C together for ₹205 and Product A for ₹200.

b) When the contract required the delivery of Products B and C at the same time and
A Ltd. treat the delivery as a single performance obligation. A Ltd. regularly sells
Products B and C together for ₹205 and Product A for ₹200.

c) A Ltd. agrees to sell one unit of each product to ASN for a total of ₹405, although
products are not usually sold at a discount. The products are to be delivered at
three separate points in time, and the delivery of each product represents a separate
performance obligation.

Solution:
a)
Stand-alone Allocated Transaction price
Product
selling price (₹) discount (₹) (₹)
Product A 200 0 200.00
(140 x 45/250) =
Product B 140 114.80
25.20
(110 x 45/250) =
Product C 110 90.20
19.80
Total 450 45 405.00

b)
Stand-alone Allocated Transaction price
Product
selling price (₹) discount (₹) (₹)
Product A 200 0 200

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 CMA Final - CFR
Product B 250 45 205
Product C 450 45 405

c)
Stand-alone Allocated discount Transaction price
Product
selling price (₹) (₹) (₹)
Product A 200 (200*45/450) = 20 180
Product B 140 (140*45/450) = 14 126
Product C 110 (110*45/450) = 11 99
Total 450 45 405

Question 11: [Workbook]

A Ltd. sells a machine on 1 April 2021. The terms of sale are that the enterprise will
receive ₹50 Lakh on 31st March 2023 (2 years later).

An appropriate discount rate is 10% and discounting factors are as below:

Discounting
Start of the Year End of Year 1 End of Year 2
Factor
10% 1.0000000 0.9090909 0.8264462

Pass the necessary Journal entries in the books of A Ltd.

Solution:
Calculation of Interest income and amount for initial booking of debtor.
Interest for the year
Closing 31st March
FY (i) Opening 1st April (ii) @ 10% (iii = 10% *
(iv = ii + iii)
ii)
2021-22 41,32,231* 4,13,223 45,45,454
2022-23 45,45,454 4,54,545 50,00,000
*(50 lakh × 0.8264462)

In the books of A Ltd.

Journal Entries
Date Particulars Debit (₹) Credit (₹)
01-04-2021 Sundry Debtors 41,32,231
To Sales 41,32,231
(initial recognition of sales)
31-03-2022 Sundry Debtors 4,13,223
To Interest Income 4,13,223
(Recognition of interest income)
31-03-2023 Sundry Debtors 4,54,545
To Interest Income 4,54,545
(Recognition of interest income)
31-03-2023 Bank Account 50,00,000

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CORPORATE FINANCIAL REPORTING

Date Particulars Debit (₹) Credit (₹)

To Sundry Debtors 50,00,000
(Realization of Debtor)

Question 12: [Workbook]

On 1st April 2021, A Ltd. entered into a contract with ASN Ltd. to construct a building
for a contract price of ₹ 10 lakhs. A Ltd. identifies a single performance obligation in
the contract, which is fulfilled over time. A Ltd. uses costs incurred as a percentage of
total expected costs as a measure of progress towards complete satisfaction of the
performance obligation. At the start of the contract, the total expected cost is estimated
to be ₹ 7 lakh. The Cost incurred till 31.03.2022 is ₹ 4.2 lakh.

On 15th May 2022, the contract is modified to change the kitchen cupboard
specifications. ASN Ltd. agreed to an additional payment of ₹ 2.5 lakh for the
modification, bringing the total contract price to ₹ 12.5 lakh. The estimated additional
cost for the modification is ₹ 1 lakh, increasing the total expected costs to ₹ 8 lakh.

A Ltd. evaluates the modification and concludes that the remaining goods and services
to be provided using the modified contract are not distinct from the goods and services
transferred on or before the date of contract modification.

Provide the revenue to be booked till 15th May 2022 in the books of A Ltd.

Solution:
At the Year end 31.03.2022
A Ltd. has incurred costs to date of ₹420,000 which is 60% of the total expected costs
(₹700,000).

The cumulative revenue and costs recognised for the first year are as follows:

Revenue (60% of 10,00,000) ₹ 6,00,000

Cost of sales (60% of 7,00,000) ₹ (4,20,000)
Gross profit ₹ 1,80,000
On 15th May 2022 the contract is modified, and the company concludes that the
remaining goods and services to be provided using the modified contract are not distinct
from the goods and services transferred on or before the date of contract modification.
Hence, the Company accounts for the contract modification as if it were part of the
original contract.

On 15th May 2022 the progress of the work is 52.5% (₹420,000/₹800,000).

A catch-up adjustment on 15th May 2022 has to be made in the accounts as follows.

Revenue (52.5% of 12,50,000) ₹ 6,56,250

Revenue recognized to date ₹ (6,00,000)
Catch-up Adjustment ₹ 56,250

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 CMA Final - CFR
Question 13: [December 2023]
On 31.03.2022 A Ltd. enter into a contract with a customer for sale of goods of ₹ 6,000
granting 50% discount voucher to be availed in future purchase up to ₹ 4,500 within 30
days. Ordinarily 10% discount is allowed on sales. Ordinary discount will not be
available to avail the 50% discount voucher. There is 60% probability that the customer
will redeem the discount voucher and the estimated amount of purchase is ₹ 3,000. In
April 2022, the discount vouchers are redeemed for purchase of additional goods of ₹
4,200. Find revenue recognition in 2021-22 and in 2022-23.

Solution:
There are two performance obligations-one for sale of goods and other for sale of
discount vouchers. Their standalone prices:
Goods ₹ 5,400
Discount Vouchers ₹ 720
Total ₹ 6,120
Transaction price is ₹ 5,400 which is sale price less current discount of 10%. It is to be
allocated between performance obligations of goods and discount vouchers
proportionately.
Allocation to goods = ₹ 4,765
Allocation to Discount Voucher = ₹ 635
Thus in 2021-22, Revenue is recognized for ₹ 4765 only, which is transaction price less
future discount.
Discount Voucher is carried as a liability at ₹ 635.
In 2022-23, this liability will be cancelled and revenue will be recognized for ₹ 635,
when the discount voucher is redeemed or it expires.
The transaction price for additional sale during 2022-23 being ₹ 4,200 less 50%
discount voucher being ₹ 2,100 comes to ₹ 2,100. Total revenue for 2022-23 is,
therefore, ₹ 2,100 plus the revenue upon cancellation of liability in the form of advance
for goods in the year 2021-22 i.e., ₹ 635.
Thus, the total revenue for 2022-23 is ₹ 2,735.

CA BISHNU KEDIA 21 Ind AS 115