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72 - Article Ship Registratin Letter78555fr Compiler 2.0 - Ca Final New - by Ca Ravi Agarwal

The document discusses Ind AS 115 Revenue from Contracts with Customers and provides answers to 10 illustrations testing the application of Ind AS 115. The illustrations cover topics such as determining the contract term, identifying performance obligations, accounting for contract modifications, and assessing whether multiple contracts should be combined. For each illustration, the answer explains how to apply the guidance in Ind AS 115 to conclude whether the contracts or contract modifications should be accounted for separately or on a combined basis, and whether to recognize revenue over time or at a point in time.

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0% found this document useful (0 votes)

55 views56 pages

72 - Article Ship Registratin Letter78555fr Compiler 2.0 - Ca Final New - by Ca Ravi Agarwal

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COMPILER 2.

0 FOR CA FINAL (NEW SYLLABUS) – PAPER 1- FINANCIAL REPORTING

- BY CA. RAVI AGARWAL

CHAPTER- 3 INDAS-115 REVENUE FROM

CONTRACTS WITH CUSTOMERS
Questions from STUDY MATERIAL
Illustrations
1. New way limited decides to enter a new market that is currently experiencing economic difficulty and
expects that in future economy will improve. New way enters into an arrangement with a customer in the
new region for networking products for promised consideration of ` 1,250,000. At contract inception, New
way expects that it may not be able to collect the full amount from the customer.
Determine how New way will recognise this transaction?
Answer
Assuming the contract meets the other criteria covered within the scope of the model in Ind AS 115, New way
need to assesses whether collectability is probable. In making this assessment, New way considers whether
the customer has the ability and intent to pay the estimated transaction price, which may be an amount less
than the contract price.

2. A gymnasium enters into a contract with a new member to provide access to its gym for a 12-month
period at ` 4,500 per month. The member can cancel his or her membership without penalty after three
months. Specify the contract term.
Answer:
The enforceable rights and obligations of this contract are for three months, and therefore the contract term
is three months.

3. Contractor P enters into a manufacturing contract to produce 100 specialized CCTV Cameras for Customer
Q for a fixed price of ` 1,000 per sensor. Customer Q can cancel the contract without a penalty after

69
receiving 10 CCTV Cameras. Specify the contract units.
Answer:
P determines that because there is no substantive compensation amount payable by Q on termination of the
contract – i.e. no termination penalty in the contract – it is akin to a contract to produce 10 CCTV Cameras that
gives Customer Q an option to purchase an additional 90 CCTV Cameras. Hence, contract is for 10 units.

4. Manufacturer of airplanes for the air force negotiates a contract to design and manufacture new fighter
69

planes for a Kashmir air base. At the same meeting, the manufacturer enters into a separate contract to
supply parts for existing planes at other bases. Would these contracts be combined?

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- BY CA. RAVI AGARWAL

Answer:
Contracts were negotiated at the same time, but they appear to have separate commercial objectives.
Manufacturing and supply contracts are not dependent on one another, and the planes and the parts are not
a single performance obligation. Therefore, contracts for supply of fighter planes and supply of parts shall not
be combined and instead, they shall be accounted separately.

5. Software Company S enters into a contract to license its customer relationship management software to
Customer B. Three days later, in a separate contract, S agrees to provide consulting services to significantly
customise the licensed software to function in B’s IT environment. B is unable to use the software until the
customisation services are complete. Would these contracts be combined?
Answer:
S determines that the two contracts should be combined because they were entered into at nearly the same
time with the same customer, and the goods or services in the contracts are a single performance obligation.

6. Manufacturer M enters into a contract to manufacture and sell a cyber-security system to Government-
related Entity P. One week later, in a separate contract, M enters into a contract to sell the same system to
Government-related Entity Q. Both entities are controlled by the same government. During the
negotiations, M agrees to sell the systems at a deep discount if both P and Q purchases the security system.
Should these contracts be combined or separately accounted?
Answer:
M concludes that the said two contracts should be combined because, among other things, P is a related party
of Q, the contracts were entered into at nearly the same time and the contracts were negotiated as a single
commercial package, which is clearly evident from the fact that discount is being offered if both the parties
purchases the security system, thereby also making the consideration in one contract dependent on the other
contract.

7. An entity promises to sell 120 products to a customer for ` 120,000 (` 1,000 per product). The products are
transferred to the customer over a six-month period. The entity transfers control of each product at a point
in time. After the entity has transferred control of 60 products to the customer, the contract is modified to
require the delivery of an additional 30 products (a total of 150 identical products) to the customer at a
price of ` 950 per product which is the standalone selling price for such additional products at the time of

70
placing this additional order. The additional 30 products were not included in the initial contract.
It is assumed that additional products are contracted for a price that reflects the stand –alone selling price.
Determine the accounting for the modified contract?
Answer:
When the contract is modified, the price of the contract modification for the additional 30 products is an
additional ` 28,500 or ` 950 per product. The pricing for the additional products reflects the stand-alone selling
price of the products at the time of the contract modification and the additional products are distinct from the
original products. Accordingly, the contract modification for the additional 30 products is, in effect, a new and
separate contract for future products that does not affect the accounting for the existing contract and ` 950
per product for the 30 products in the new contract.
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8. On 1st April, 20X1, KLC Ltd. enters into a contract with Mr. K to provide
- A machine for ` 2.5 million
- One year of maintenance services for ` 55,000 per month

On 1st October, 20X1, KLC Ltd. and Mr. K agree to modify the contract to reduce the amount of services
from ` 55,000 per month to ` 45,000 per month. Determine the effect of change in the contract?
Answer:
The next six months of services are distinct from the services provided in the first six months before
modification in contract, Therefore, KLC Ltd. will account for the contract modification as if it were a
termination of the existing contract and the creation of a new contract.
The consideration allocated to remaining performance obligation is ` 270,000, which is the sum of
● The consideration promised by the customer (including amounts already received from the customer) that
was included in the estimate of the transaction price and had not yet been recognized as revenue. This
amount is zero.
● The consideration promised as part of the contract modification ie ` 270,000.

(b) Second, when the remaining goods or services are not distinct and are part of a single performance
obligation that is partially satisfied, the entity recognizes the effect of the modification on a cumulative catch-
up basis. This is the case in many construction contracts where a modification does not result in the transfer of
additional distinct goods or services.

9. Growth Ltd enters into an arrangement with a customer for infrastructure outsourcing deal. Based on its
experience, Growth Ltd determines that customising the infrastructure will take approximately 200 hours in
total to complete the project and charges ` 150 per hour. After incurring 100 hours of time, Growth Ltd and
the customer agree to change an aspect of the project and increases the estimate of labour hours by 50
hours at the rate of ` 100 per hour.
Determine how contract modification will be accounted as per Ind AS 115?

Answer:
Considering that the remaining goods or services are not distinct, the modification will be
accounted for on a cumulative catch up basis, as given below:

*35,000 / 250 = 140

10. A construction services company enters into a contract with a customer to build a water purification
plant. The company is responsible for all aspects of the plant including overall project management,
engineering and design services, site preparation, physical construction of the plant, procurement of pumps
and equipment for measuring and testing flow volumes and water quality, and the integration of all
components.

Determine whether the company has a single or multiple performance obligations under the contract?
Answer:
Determining whether a good or service represents a performance obligation on its own or is required to be
aggregated with other goods or services can have a significant impact on the timing of revenue recognition. In
order to determine how many performance obligations are present in the contract, the company applies the
guidance above. While the customer may be able to benefit from each promised good or service on its own
(or together with other readily available resources), they do not appear to be separately identifiable within the
context of the contract. That is, the promised goods and services are subject to significant integration, and as a
result will be treated as a single performance obligation.
This is consistent with a view that the customer is primarily interested in acquiring a single asset (a water
purification plant) rather than a collection of related components and services.

11. An entity provides broadband services to its customers along with voice call service. Customer buys
modem from the entity. However, customer can also get the connection from the entity and modem from
any other vendor. The installation activity requires limited effort and the cost involved is almost
insignificant. It has various plans where it provides either broadband services or voice call services or both.

Are the performance obligations under the contract distinct?

Answer:
Entity promises to customer to provide
:- Broadband Service
: -Voice Call services
: -Modem

Entity‘s promise to provide goods and services is distinct if

: customer can benefit from the good or service either on its own or together with other resources that are
readily available to the customer, and
: - entity‘s promise to transfer the good or service to the customer is separately identifiable from other
promises in the contract

For broadband and voice call services -

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: - Broadband and voice services are separately identifiable from other promises as company has various plans
to provide the two services separately. These two services are not dependent or interrelated. Also the
customer can benefit on its own from the services received.

For sale of modem -

: Customer can either buy product from entity or third party. No significant customisation or modification is
required for selling product.
Based on the evaluation we can say that there are three separate performance obligation: -
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: - Broadband Service
: -Voice Call services
: -Modem

12. An entity enters into a contract to build a power plant for a customer. The entity will be responsible for
the overall management of the project including services to be provided like engineering, site clearance,
foundation, procurement, and construction of the structure, piping and wiring, installation of equipment
and finishing. Determine how many performance obligations does the entity have?
Answer:
Based on the discussion above it needs to be determined that the promised goods and services are capable of
being distinct as per the principles of Ind AS 115. That is, whether the customer can benefit from the goods
and services either on their own or together with other readily available resources. This is evidenced by the
fact that the entity, or competitors of the entity, regularly sells many of these goods and services separately to
other customers. In addition, the customer could generate economic benefit from the individual goods and
services by using, consuming, selling or holding those goods or services.
However, the goods and services are not distinct within the context of the contract. That is, the entity's
promise to transfer individual goods and services in the contract are not separately identifiable from other
promises in the contract. This is evidenced by the fact that the entity provides a significant service of putting
together the various inputs or goods and services into the power plant or the output for which the customer
has contracted. Since both the criteria has not met, the goods and services are not distinct. The entity
accounts for all of the goods and services in the contract as a single performance obligation.

13. Could the series requirement apply to hotel management services where day to day activities vary,
involve employee management, procurement, accounting, etc?
Answer:
The series guidance requires each distinct good or service to be ―substantially the same. Management should
evaluate this requirement based on the nature of its promise to customer. For example, a promise to provide
hotel management services for a specified contract term may meet the series criteria. This is because the
entity is providing the same service of ―hotel management each period, even though some on underlying
activities may vary each day. The underlying activities for e.g. reservation services, property maintenance
services are activities to fulfil the hotel management service rather than separate promises. The distinct
service within the series is each time increment of performing the service.

14. Entity A, a specialty construction firm, enters into a contract with Entity B to design and construct a
multi-level shopping centre with a customer car parking facility located in sub-levels underneath the

73
shopping centre. Entity B solicited bids from multiple firms on both phases of the project — design and
construction. The design and construction of the shopping centre and parking facility involves multiple
goods and services from architectural consultation and engineering through procurement and installation
of all of the materials. Several of these goods and services could be considered separate performance
obligations because Entity A frequently sells the services, such as architectural consulting and engineering
services, as well as standalone construction services based on third party design, separately. Entity A may
require to continually alter the design of the shopping centre and parking facility during construction as well
as continually assess the propriety of the materials initially selected for the project.
Determine how many performance obligations does the entity A have?
Answer:
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Entity A analyses that it will be required to continually alter the design of the shopping centre and parking
facility during construction as well as continually assess the propriety of the materials initially selected for the
project. Therefore, the design and construction phases are highly dependent on one another (i.e., the two
phases are highly interrelated). Entity A also determines that significant customisation and modification of the
design and construction services is require in order to fulfil the performance obligation under the

contract. As such, Entity A concludes that the design and construction services will be bundled and accounted
for as one performance obligation.

15. An entity, a software developer, enters into a contract with a customer to transfer a software license,
perform an installation service and provide unspecified software updates and technical support (online and
telephone) for a two-year period. The entity sells the license, installation service and technical support
separately. The installation service includes changing the web screen for each type of user (for example,
marketing, inventory management and information technology). The installation service is routinely
performed by other entities and does not significantly modify the software. The software remains
functional without the updates and the technical support. Determine how many performance obligations
does the entity have?
Answer:
The entity assesses the goods and services promised to the customer to determine which goods and services
are distinct. The entity observes that the software is delivered before the other goods and services and
remains functional without the updates and the technical support. Thus, the entity concludes that the
customer can benefit from each of the goods and services either on their own or together with the other
goods and services that are readily available. The entity also considers the factors of Ind AS 115 and
determines that the promise to transfer each good and service to the customer is separately identifiable from
each of the other promises. In particular, the entity observes that the installation service does not significantly
modify or customise the software itself and, as such, the software and the installation service are separate
outputs promised by the entity instead of inputs used to produce a combined output. On the basis of this
assessment, the entity identifies four performance obligations in the contract for the following goods or
services:
- The software license
- An installation service
- Software updates
- Technical support

16 . Significant customisation

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The promised goods and services are the same as in the above Illustration, except that the contract specifies
that, as part of the installation service, the software is to be substantially customised to add significant new
functionality to enable the software to interface with other customised software applications used by the
customer. The customised installation service can be provided by other entities.
Determine how many performance obligations does the entity have?
Answer:
The entity assesses the goods and services promised to the customer to determine which goods and services
are distinct. The entity observes that the terms of the contract result in a

promise to provide a significant service of integrating the licensed software into the existing software system
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by performing a customised installation service as specified in the contract. In other words, the entity is using
the license and the customised installation service as inputs to produce the combined output (i.e. a functional
and integrated software system) specified in the contract. In addition, the software is significantly modified
and customised by the service. Although the customised installation service can be provided by other entities,
the entity determines that within the context of the contract, the promise to transfer the license is not

separately identifiable from the customised installation service and, therefore, the criterion on the basis of the
factors is not met. Thus, the software license and the customised installation service are not distinct.
The entity concludes that the software updates and technical support are distinct from the other promises in
the contract. This is because the customer can benefit from the updates and technical support either on their
own or together with the other goods and services that are readily available and because the promise to
transfer the software updates and the technical support to the customer are separately identifiable from each
of the other promises. On the basis of this assessment, the entity identifies three performance obligations in
the contract for the following goods or services:
a) Customised installation service (that includes the software license);
b) Software updates; and
c) Technical support.

17. Telco T Ltd. enters into a two-year contract for internet services with Customer C. C also buys a modem
and a router from T Ltd. and obtains title to the equipment. T Ltd. does not require customers to purchase
its modems and routers and will provide internet services to customers using other equipment that is
compatible with T Ltd.’s network. There is a secondary market in which modems and routers can be bought
or sold for amounts greater than scrap value. Determine how many performance obligations does the entity
T Ltd. have?
Answer:
T Ltd. concludes that the modem and router are each distinct and that the arrangement includes three
performance obligations (the modem, the router and the internet services) based on the following evaluation:
Criterion 1: Capable of being distinct
- C can benefit from the modem and router on their own because they can be resold for more than scrap
value.
- C can benefit from the internet services in conjunction with readily available resources – i.e. either the
modem and router are already delivered at the time of contract set – up, they could be bought from
alternative retail vendors or the internet service could be used with different equipment.

75
Criterion 2: Distinct within the context of the contract
- T Ltd. does not provide a significant integration service.
- The modem, router and internet services do not modify or customise one another.
- C could benefit from the internet services using routers and modems that are not sold by T Ltd. Therefore,
the modem, router and internet services are not highly dependent on or highly inter-related with each other.

18. V Ltd. grants Customer C a three-year license for anti-virus software. Under the contract, V Ltd. promises
to provide C with when-and-if-available updates to that software during the license period. The updates are
critical to the continued use of the anti -virus software. Determine how many performance obligations does
75

the entity have?

Answer:
V Ltd. concludes that the license and the updates are capable of being distinct because the anti -virus software
can still deliver its original functionality during the license period without the updates. C can also benefit from
the updates together with the license transferred when the contract is signed.

However, V Ltd. concludes that the license and the updates are not separately identifiable because the
software and the service are inputs into a combined item in the contract − i.e. the nature of V Ltd.‘s promise is
to provide continuous anti-virus protection for the term of the contract. Therefore, V Ltd. accounts for the
license and the updates as a single performance obligation.

19. Media Company P Ltd. offers magazine subscriptions to customers. When customers subscribe, they
receive a printed copy of the magazine each month and access to the magazine’s online content.
Determine how many performance obligations does the entity have?
Answer:
P evaluates whether the promises to provide printed copies and online access are separate performance
obligations. P determines that the arrangement includes two performance obligations for the following
reasons:
- The printed copies and online access are both capable of being distinct because the customer could use them
on their own.
- The printed copies and online access are distinct within the context of the contract because they are
different formats so they do not significantly customise or modify each other, nor is there any transformative
relationship into a single output.

20 .Software Company K Ltd. enters into a contract with reseller D, which then sells software products to
end users. K Ltd. has a customary business practice of providing free telephone support to end users
without involving the reseller, and both reseller and the customer expect K Ltd. to continue to provide this
support. Determine how many performance obligations does the entity K Ltd. have?

Answer:
In evaluating whether the telephone support is a separate performance obligation, K Ltd. Notes that the
promise to provide telephone support free of charge to end users is considered a service that meets the
definition of a performance obligation when control of the software product transfers to D. As a result, K Ltd.
accounts for the telephone support as a separate performance obligation in the transaction with D.

21. Implied performance obligation

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Carmaker N Ltd. has a historical practice of offering free maintenance services – e.g. oil changes and tyre
rotation – for two years to the end customers of dealers who buy its vehicles. However, the two years’ free
maintenance is not explicitly stated in the contract with its dealers, but it is typically stated in N’s
advertisements for the vehicles. Determine how many performance obligations does the entity have?
Answer:
The maintenance is treated as a separate performance obligation in the sale of the vehicle to the dealer.
Revenue from the sale of the vehicle is recognised when control of the vehicle is transferred to the dealer.
Revenue from the maintenance services is recognised separately as and when the maintenance services are
provided to the retail customer.
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22. Entity sells gym memberships for ` 7,500 per year to 100 customers, with an option to renew at a
discount in 2nd and 3rd years at ` 6,000 per year. Entity estimates an annual attrition rate of 50% each year.
Determine the amount of revenue to be recognised in the first year and the amount of contract liability
against the option given to the customer for renewing the membership at discount.
Answer:

Allocated price per unit (year) is calculated as follows:

Total estimated memberships is 175 members (Year 1 = 100; Year 2 = 50; Year 3 = 25) = 175
Total consideration is ` 12,00,000 {(100 x 7,500) + (50 x 6,000) + (25 x 6,000)}
Allocated price per membership is ` 6,857 approx. (12,00,000 / 175)
Basis on above, it is to be noted that although entity has collected ` 7,500 but revenue can be recognised at
` 6,857 approx. per membership and remaining ` 643 should be recorded as contract liability against option
given to customer for renewing their membership at discount.

23. An entity enters into a contract for the sale of Product A for ` 1,000. As part of the contract, the entity
gives the customer a 40% discount voucher for any future purchases up to ` 1,000 in the next 30 days. The
entity intends to offer a 10% discount on all sales during the next 30 days as part of a seasonal promotion.
The 10% discount cannot be used in addition to the 40% discount voucher.

The entity believes there is 80% likelihood that a customer will redeem the voucher and on an average, a
customer will purchase ` 500 of additional products. Determine how many performance obligations does
the entity have and their stand-alone selling price and allocated transaction price?
Answer:
Since all customers will receive a 10% discount on purchases during the next 30 days, the only additional
discount that provides the customer with a material right is the incremental discount of 30% on the products
purchased. The entity accounts for the promise to provide the incremental discount as a separate
performance obligation in the contract for the sale of Product A. The entity believes there is 80% likelihood
that a customer will redeem the voucher and on an average, a customer will purchase ` 500 of additional
products. Consequently, the entity‘s estimated stand-alone selling price of the discount voucher is ` 120 (` 500
average purchase price of additional products x 30% incremental discount x 80% likelihood of exercising the
option). The stand-alone selling prices of Product A and the discount voucher and the resulting allocation
of the ` 1,000 transaction price are as follows:

24. A cable company provides television services for a fixed rate fee of ` 800 per month for a period of
3 years. Cable services is satisfied overtime because customer consumes and receives benefit from services
as it is provided i.e. customer generally benefits each day that they have access to cable service.
Determine how many performance obligations does the cable company have?
Answer:
Cable company determines that each increment of its services e.g. day or month, is a distinct performance
obligation because customer benefits from that period of services on its own. Additionally, each increment of
service is separately identifiable from those preceding and
following it i.e. one service period does not significantly affect, modify or customise another. Therefore, it can
be concluded that its contract with customer is a single performance obligation to provide three years of cable
service because each of the distinct increments of service is satisfied over time. Also, cable company uses the
same measure of progress to recognise revenue on its cable television service regardless of the contract‘s time
period.

25. Manufacturer M enters into a 60-day consignment contract to ship 1,000 dresses to Retailer A’s stores.
Retailer A is obligated to pay Manufacturer M ` 20 per dress when the dress is sold to an end customer.
During the consignment period, Manufacturer M has the contractual right to require Retailer A to either
return the dresses or transfer them to another retailer. Manufacturer M is also required to accept the
return of the inventory. State when the control is transferred.
Answer:
Manufacturer M determines that control has not been transferred to Retailer A on delivery, for the following
reasons:
(a) Retailer A does not have an unconditional obligation to pay for the dresses until they have been sold to an
end customer;
(b) Manufacturer M is able to require that the dresses be transferred to another retailer at any time before
Retailer A sells them to an end customer; and
(c) Manufacturer M is able to require the return of the dresses or transfer them to another retailer.
Manufacturer M determines that control of the dresses transfers when they are sold to an end customer i.e.
when Retailer A has an unconditional obligation to pay Manufacturer M and can no longer return or otherwise
transfer the dresses. Manufacturer M recognises revenue as the dresses are sold to the end customer.

78
26. An entity negotiates with major airlines to purchase tickets at reduced rates compared with the price of
tickets sold directly by the airlines to the public. The entity agrees to buy a specific number of tickets and
will pay for those tickets even if it is not able to resell them. The reduced rate paid by the entity for each
ticket purchased is negotiated and agreed in advance. The entity determines the prices at which the airline
tickets will be sold to its customers. The entity sells the tickets and collects the consideration from
customers when the tickets are sold ; therefore, there is no credit risk.
The entity also assists the customers in resolving complaints with the service provided by airlines.However,
each airline is responsible for fulfilling obligations associated with the ticket, including remedies to a
customer for dissatisfaction with the service.
Determine whether the entity is a principal or an agent.
78

Answer:
To determine whether the entity‘s performance obligation is to provide the specified goods or services itself
(i.e. the entity is a principal) or to arrange for another party to provide those goods or services (i.e. the entity
is an agent), the entity considers the nature of its promise. The entity determines that its promise is to provide

the customer with a ticket, which provides the right to fly on the specified flight or another flight if the
specified flight is changed or cancelled. The entity considers the following indicators for assessment as
principal or agent under the contract with the customers:
(a) the entity is primarily responsible for fulfilling the contract, which is providing the right to fly. However, the
entity is not responsible for providing the flight itself, which will be provided by the airline.
(b) the entity has inventory risk for the tickets because they are purchased before they are sold to the entity‘s
customers and the entity is exposed to any loss as a result of not being able to sell the tickets for more than
the entity‘s cost.
(c) the entity has discretion in setting the sales prices for tickets to its customers.
The entity concludes that its promise is to provide a ticket (i.e. a right to fly) to the customer. On the basis of
the indicators, the entity concludes that it controls the ticket before it is transferred to the customer. Thus,
the entity concludes that it is a principal in the transaction and recognises revenue in the gross amount of
consideration to which it is entitled in exchange for the tickets transferred.

27. Company D Ltd. provides advertising services to customers. D Ltd. enters into a sub-contract with a
multinational online video sharing company, F Ltd. Under the sub-contract, F Ltd. places all of D Ltd.’s
customers’ adverts.
D Ltd. notes the following:
– D Ltd. works directly with customers to understand their advertising needs before placing adverts.
– D Ltd. is responsible for ensuring that the advert meets the customer’s needs after the advert is placed.
– D Ltd. directs F Ltd. over which advert to place and when to place it.
– D Ltd. does not bear inventory risk because there is no minimum purchase requirement with F Ltd.
– D Ltd. does not have discretion in setting the price because fees are charged based on F
Ltd.’s scheduled rates.
D is Principal or an agent?
Answer:
D Ltd. is primarily responsible for fulfilling the promise to provide advertising services. Although F
Ltd. delivers the placement service, D Ltd. directly works with customers to ensure that the
services are performed to their requirements. Even though D Ltd. does not bear inventory risk and
does not have discretion in setting the price, it controls the advertising services before they are
provided to the customer. Therefore, D Ltd. is a principal in this case.

28. Customer buy a new data connection from the telecom entity. It pays one-time registration and
activation fees at the time of purchase of new connection. The customer will be charged based on the usage 79
of the data services of the connection on monthly

basis. Are the performance obligations under the contract distinct?

Answer:
By selling a new connection, the entity promises to supply data services to customer. Customer will not be
able to benefit from just buying a data card and data services from third party. The activity of registering and
activating connection is not a service to customer and therefore does not represent satisfaction of
79

performance obligation. Entity‘s obligation is to provide data service and hence activation is not a separate
performance obligation.

29. XYZ Limited enters into a contract with a customer to build a sophisticated machinery. The promise to
transfer the asset is a performance obligation that is satisfied over time. The promised consideration is ` 2.5
crore, but that amount will be reduced or increased depending on the timing of completion of the asset.
Specifically, for each day after 31st March, 20X1 that the asset is incomplete, the promised consideration is
reduced by ` 1 lakh. For each day before 31st March, 20X1 that the asset is complete, the promised
consideration increases by ` 1 lakh. In addition, upon completion of the asset, a third party will inspect the
asset and assign a rating based on metrics that are defined in the contract. If the asset receives a specified
rating, the entity will be entitled to an incentive bonus of ` 15 lakh.
Determine the transaction price.
Answer:

In determining the transaction price, the entity prepares a separate estimate for each element of variable
consideration to which the entity will be entitled using the estimation methods described in paragraph 53 of
Ind AS 115:
a) the entity decides to use the expected value method to estimate the variable consideration associated with
the daily penalty or incentive (i.e. ` 2.5 crore, plus or minus ` 1 lakh per day). This is because it is the method
that the entity expects to better predict the amount of consideration to which it will be entitled.

b) the entity decides to use the most likely amount to estimate the variable consideration associated with the
incentive bonus. This is because there are only two possible outcomes (` 15 lakh or ` Nil) and it is the method
that the entity expects to better predict the amount of consideration to which it will be entitled.

30 : Estimating variable consideration

AST Limited enters into a contract with a customer to build a manufacturing facility. The entity determines
that the contract contains one performance obligation satisfied over time. Construction is scheduled to be
completed by the end of the 36th month for an agreed-upon price of ` 25 crore.
The entity has the opportunity to earn a performance bonus for early completion as follows:

- 15 percent bonus of the contract price if completed by the 30th month (25% likelihood)
- 10 percent bonus if completed by the 32nd month (40% likelihood)

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- 5 percent bonus if completed by the 34th month (15% likelihood)
In addition to the potential performance bonus for early completion, AST Limited is entitled to a quality
bonus of ` 2 crore if a health and safety inspector assigns the facility a gold star rating as defined by the
agency in the terms of the contract. AST Limited concludes that it is 60% likely that it will receive the quality
bonus. Determine the transaction price.
Answer:
In determining the transaction price, AST Limited separately estimates variable consideration for each element
of variability i.e the early completion bonus and the quality bonus. AST Limited decides to use the expected
value method to estimate the variable consideration associated with the early completion bonus because
there is a range of possible outcomes and the entity has experience with a large number of similar contracts
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that provide a reasonable basis to predict future outcomes. Therefore, the entity expects this method to best
predict the amount of variable consideration associated with the early completion bonus. AST‘s best estimate
of the early completion bonus is ` 2.13 crore, calculated as shown in the following table:

AST Limited decides to use the most likely amount to estimate the variable consideration associated with the
potential quality bonus because there are only two possible outcomes (` 2 crore or ` Nil) and this method
would best predict the amount of consideration associated with the quality bonus. AST Limited believes the
most likely amount of the quality bonus is ` 2 crore.

31. HT Limited enters into a contract with a customer on 1st April, 20X1 to sell Product X for ` 1,000 per unit.
If the customer purchases more than 100 units of Product A in a financial year, the contract specifies that
the price per unit is retrospectively reduced to ` 900 per unit. Consequently, the consideration in the
contract is variable. For the first quarter ended 30th June, 20X1, the entity sells 10 units of Product A to the
customer. The entity estimates that the customer's purchases will not exceed the 100 unit threshold
required for the volume discount in the financial year. HT Limited determines that it has

significant experience with this product and with the purchasing pattern of the customer. Thus, HT Limited
concludes that it is highly probable that a significant reversal in the cumulative amount of revenue
recognised (i.e. ` 1,000 per unit) will not occur when the uncertainty is resolved (i.e. when the total amount
of purchases is known). Further, in May, 20X1, the customer acquires another company and in the second
quarter ended
30th September, 20X1 the entity sells an additional 50 units of Product A to the customer. In the light of the
new fact, the entity estimates that the customer's purchases will exceed the 100 unit threshold for the
financial year and therefore it will be required to retrospectively reduce the price per unit to ` 900.
Determine the amount of revenue to be recognise by HT Ltd. for the quarter ended 30th June, 20X1 and
30th September, 20X1.

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Answer:
The entity recognises revenue of ` 10,000 (10 units × ` 1,000 per unit) for the quarter ended 30th June, 20X1.
HT Limited recognises revenue of ` 44,000 for the quarter ended 30th September, 20X1. That amount is
calculated from ` 45,000 for the sale of 500 units (50 units x ` 900 per unit) less the change in transaction price
of ` 1,000 (10 units x ` 100 price reduction) for the reduction of revenue relating to units sold for the quarter
ended 30th June, 20X1.

32 : Measurement of variable consideration

An entity has a fixed fee contract for ` 1 million to develop a product that meets specified performance
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criteria. Estimated cost to complete the contract is ` 9,50,000. The entity will transfer control of the product
over five years, and the entity uses the cost-to-cost input method to measure progress on the contract. An
incentive award is available if the product meets the following weight criteria:

The entity has extensive experience creating products that meet the specific performance criteria. Based on its
experience, the entity has identified five engineering alternatives that will achieve the 10 percent incentive
and two that will achieve the 25 percent incentive. In this case, the entity determined that it has 95 percent
confidence that it will achieve the 10 percent incentive and 20 percent confidence that it will achieve the 25
percent incentive. Based on this analysis, the entity believes 10 percent to be the most likely amount when
estimating the transaction price. Therefore, the entity includes only the 10 percent award in the transaction
price when calculating revenue because the entity has concluded it is probable that a significant reversal in the
amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable
consideration is subsequently resolved due to its 95 percent confidence in achieving the 10 percent award.
The entity reassesses its production status quarterly to determine whether it is on track to meet the criteria
for the incentive award. At the end of the year four, it becomes apparent that this contract will fully achieve
the weight-based criterion. Therefore, the entity revises its estimate of variable consideration to include the
entire 25 percent incentive fee in the year four because, at this point, it is probable that a significant reversal
in the amount of cumulative revenue recognized will not occur when including the entire variable
consideration in the transaction price. Evaluate the impact of changes in variable consideration when cost
incurred is as follows:

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Answer:
Note: For simplification purposes, the table calculates revenue for the year independently based on costs
incurred during the year divided by total expected costs, with the assumption that total expected costs do not
change.
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* For simplicity, it is assumed there is no change to the estimated costs to complete throughout the contract
period.
* In practice, under the cost-to-cost measure of progress, total revenue for each period is determined by
multiplying the total transaction price (fixed and variable) by the ratio of cumulative cost incurred to total
estimated costs to complete, less revenue recognized to date.

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33. Management fees subject to the constraint On 1st April, 20X1, an entity enters into a contract with a
client to provide asset management services for five years. The entity receives a two per cent quarterly
management fee based on the client's assets under management at the end of each quarter. At 31st March,
20X2, the client's assets under management are ` 100 crore. In addition, the entity receives a performance-
based incentive fee of 20 per cent of the fund's return in excess of the return of an observable market
index over the five-year period. Consequently, both the management fee and the performance fee
in the contract are variable consideration. Analyze the revenue to be recognised on 31st March, 20X2.
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Answer:
The entity accounts for the services as a single performance obligation because it is providing a series of
distinct services that are substantially the same and have the same pattern of transfer (the services transfer to
the customer over time and use the same method to measure progress — that is, a time-based measure of
progress).

The entity observes that the promised consideration is dependent on the market and thus is highly susceptible
to factors outside the entity's influence. In addition, the incentive fee has a large number and a broad range of
possible consideration amounts. The entity also observes that although it has experience with similar
contracts, that experience is of little predictive value in determining the future performance of the market.
Therefore, at contract inception, the entity cannot conclude that it is highly probable that a significant reversal
in the cumulative amount of revenue recognised would not occur if the entity included its estimate of the
management fee or the incentive fee in the transaction price.
At each reporting date, the entity updates its estimate of the transaction price. Consequently, at the end of
each quarter, the entity concludes that it can include in the transaction price the actual amount of the
quarterly management fee because the uncertainty is resolved. However, the entity concludes that it cannot
include its estimate of the incentive fee in the transaction price at those dates. This is because there has not
been a change in its assessment from contract inception —the variability of the fee based on the market index
indicates that the entity cannot conclude that it is highly probable that a
significant reversal in the cumulative amount of revenue recognised would not occur if the entity included its
estimate of the incentive fee in the transaction price. At 31st March, 20X2, the client's assets under
management are ` 100 crore. Therefore, the
resulting quarterly management fee and the transaction price is ` 2 crore. At the end of each quarter, the
entity allocates the quarterly management fee to the distinct services provided during the quarter. This is
because the fee relates specifically to the entity's efforts to transfer the services for that quarter, which are
distinct from the services provided in other quarters.
Consequently, the entity recognises ` 2 crore as revenue for the quarter ended 31st March, 20X2.

34 : Right of return
An entity enters into 1,000 contracts with customers. Each contract includes the sale of one product for ` 50
(1,000 total products × ` 50 = ` 50,000 total consideration). Cash is received when control of a product
transfers. The entity's customary business practice is to allow a customer to return any unused product
within 30 days and receive a full refund. The entity's cost of each product is ` 30.
The entity applies the requirements in Ind AS 115 to the portfolio of 1,000 contracts because it reasonably
expects that, in accordance with paragraph 4, the effects on the financial statements from applying these
requirements to the portfolio would not differ materially from applying the requirements to the individual
contracts within the portfolio. Since the contract allows a customer to return the products, the

84
consideration received from the customer is variable. To estimate the variable consideration to which the
entity will be entitled, the entity decides to use the expected value method (see paragraph 53(a) of Ind AS
115) because it is the method that the entity expects to better predict the amount of consideration to which
it will be entitled. Using the expected value method, the entity estimates that 970 products will not be
returned. The entity estimates that the costs of recovering the products will be immaterial and expects that
the returned products can be resold at a profit. Determine the amount of revenue, refund liability and the
asset to be recognised by the entity for the said contracts. [ALSO IN MTP - APRIL 2019 - 6 MARKS]
Answer:
The entity also considers the requirements in paragraphs 56–58 of Ind AS 115 on constraining estimates of
variable consideration to determine whether the estimated amount of variable consideration of ` 48,500 (` 50
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× 970 products not expected to be returned) can be included in the transaction price. The entity considers the
factors in paragraph 57 of Ind AS 115 and determines that although the returns are outside the entity's
influence, it has significant experience in estimating returns for this product and customer class. In addition,
the uncertainty will be resolved within a short time frame (ie the 30-day return period). Thus, the entity

concludes that it is highly probable that a significant reversal in the cumulative amount of revenue recognised
(i.e. ` 48,500) will not occur as the uncertainty is resolved (i.e. over the return period).
The entity estimates that the costs of recovering the products will be immaterial and expects that the
returned products can be resold at a profit. Upon transfer of control of the 1,000 products, the entity does not
recognise revenue for the 30 products that it expects to be returned. Consequently, in accordance with
paragraphs 55 and B21 of Ind AS 115, the entity recognises the following:
(a) revenue of ` 48,500 (` 50 × 970 products not expected to be returned);
(b) a refund liability of ` 1,500 (` 50 refund × 30 products expected to be returned); and
(c) an asset of ` 900 (` 30 × 30 products for its right to recover products from customers on settling the refund
liability).

35 : Warranty
An entity manufactures and sells computers that include an assurance-type warranty for the first 90 days.
The entity offers an optional ‘extended coverage’ plan under which it will repair or replace any defective
part for three years from the expiration of the assurance-type warranty. Since the optional ‘extended
coverage’ plan is sold separately, the entity determines that the three years of extended coverage represent
a separate performance obligation (i.e. a service-type warranty). The total transaction price for the sale of a
computer and the extended warranty is ` 36,000. The entity determines that the stand-alone selling prices
of the computer and the extended warranty are ` 32,000 and ` 4,000, respectively. The inventory value of
the computer is ` 14,400. Furthermore, the entity estimates that, based on its experience, it will incur `
2,000 in costs to repair defects that arise within the 90-day coverage period for the assurance-type warranty
Pass required journal entries.
Answer:
The entity will record the following journal entries:

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The entity derecognizes the accrued warranty liability associated with the assurance-type warranty as actual
warranty costs are incurred during the first 90 days after the customer receives the computer. The entity
recognises the contract liability associated with the service-type warranty as revenue during the contract
warranty period and recognises the costs associated with providing the service-type warranty as they are
incurred. The entity
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had to determine whether the repair costs incurred are applied against the warranty reserve already
established for claims that occur during the first 90 days or recognised as an expense as incurred.

36 : Warranty
Entity sells 100 ultra-life batteries for ` 2,000 each and provides the customer with a five-year guarantee
that the batteries will withstand the elements and continue to perform to specifications. The entity, which
normally provides a one-year guarantee to customer purchasing ultra-life batteries, determines that years
two through five represent a separate performance obligation. The entity determines that ` 1,70,000 of the `
2,00,000 transaction price should be allocated to the batteries and ` 30,000 to the service warranty (based
on estimated stand-alone selling prices and a relative selling price allocation). The entity’s normal one-year
warranty cost is ` 1 per battery. Pass required journal entries.
Answer:
The entity will record the following journal entries:
Upon delivery of the batteries, the entity records the following entry:

The contract liability is recognised as revenue over the service warranty period (years 2 - 5). The costs of
providing the service warranty are recognised as incurred. The assurance warranty obligation is used /
derecognized as defective units are replaced / repaired during the initial year of the warranty. Upon expiration
of the assurance warranty period, any remaining assurance warranty obligation is reversed.

37 : Financing component: significant or insignificant?

A commercial airplane component supplier enters into a contract with a customer for promised
consideration of ` 70,00,000. Based on an evaluation of the facts and circumstances, the supplier concluded
that ` 1,40,000 represented a insignificant financing component because of an advance payment received in
excess of a year before the transfer of control of the product. State whether company needs to make any
adjustment in determining the transaction price. What if the advance payment was larger and received
further in advance, such that the entity concluded that ` 14,00,000 represented the financing component
based on an analysis of the facts and circumstances.

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Answer:
The entity may conclude that ` 1,40,000, or 2 percent of the contract price, is not significant, and the entity
may not need to adjust the consideration promised in determining the transaction price. However, when the
advance payment was larger and received further in

advance, such that the entity may conclude that ` 14,00,000 represents the financing component based on an
analysis of the facts and circumstances. In such a case, the entity may conclude that ` 14,00,000, or 20 percent
of the contract price, is significant, and the entity should adjust the consideration promised in determining the
transaction price.
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Note: In this illustration, the entity‘s conclusion that 2 percent of the transaction price was not significant and
20 percent was significant is a judgment based on the entity‘s facts and circumstances. An entity may reach a
different conclusion based on its facts and circumstances.

38 : Accounting for significant financing component

NKT Limited sells a product to a customer for ` 1,21,000 that is payable 24 months after delivery. The
customer obtains control of the product at contract inception. The contract permits the customer to return
the product within 90 days. The product is new and the entity has no relevant historical evidence of product
returns or other available market evidence. The cash selling price of the product is ` 1,00,000 which
represents the amount that the customer would pay upon delivery for the same product sold under
otherwise identical terms and conditions as at contract inception. The entity's cost of the product is `
80,000. The contract includes an implicit interest rate of 10 per cent (i.e. the interest rate that over 24
months discounts the promised consideration of ` 1,21,000 to the cash selling price of ` 1,00,000). Analyze
the above transaction with respect to its financing component .
Answer:
The contract includes a significant financing component. This is evident from the difference between the
amount of promised consideration of ` 1,21,000 and the cash selling price of ` 1,00,000 at the date that the
goods are transferred to the customer. The contract includes an implicit interest rate of 10 per cent (i.e. the
interest rate that over 24 months discounts the promised consideration of ` 1,21,000 to the cash selling price
of ` 1,00,000). The entity evaluates the rate and concludes that it is commensurate with the rate that would be
reflected in a separate financing transaction between the entity and its customer at contract inception.
Until the entity receives the cash payment from the customer, interest revenue would be recognised in
accordance with Ind AS 109. In determining the effective interest rate in accordance with Ind AS 109, the
entity would consider the remaining contractual term.

39. Determining the discount rate

VT Limited enters into a contract with a customer to sell equipment. Control of the equipment transfers to
the customer when the contract is signed. The price stated in the contract is ` 1 crore plus a 10% contractual
rate of interest, payable in 60 monthly instalments of ` 212,470.
Determine the discounting rate and the transaction price when
Case A—Contractual discount rate reflects the rate in a separate financing transaction

Case B—Contractual discount rate does not reflect the rate in a separate financing transaction ie 14%.
Answer:
Case A—Contractual discount rate reflects the rate in a separate financing transaction

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In evaluating the discount rate in the contract that contains a significant financing component, VT Limited
observes that the 10% contractual rate of interest reflects the rate that would be used in a separate financing
transaction between the entity and its customer at contract inception (i.e. the contractual rate of interest of
10% reflects the credit characteristics of the customer). The market terms of the financing mean that the cash
selling price of the equipment is ` 1 crore. This amount is recognised as revenue and as a loan receivable when
control of the equipment transfers to the customer. The entity accounts for the receivable in accordance with
Ind AS 109.

Case B—Contractual discount rate does not reflect the rate in a separate financing transaction
In evaluating the discount rate in the contract that contains a significant financing component, the entity
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observes that the 10% contractual rate of interest is significantly lower than the 14% interest rate that would
be used in a separate financing transaction between the entity and its customer at contract inception (i.e. the
contractual rate of interest of 10% does not reflect the credit characteristics of the customer). This suggests
that the cash selling price is less than ` 1 crore. VT Limited determines the transaction price by adjusting the
promised amount of consideration to reflect the contractual payments using the 14% interest rate that

reflects the credit characteristics of the customer. Consequently, the entity determines that the transaction
price is ` 9,131,346 (60 monthly payments of ` 212,470 discounted at 14%). The entity recognises revenue and
a loan receivable for that amount. The entity accounts for the loan receivable in accordance with
Ind AS 109.

40. Advance payment and assessment of discount rate

ST Limited enters into a contract with a customer to sell an asset. Control of the asset will transfer to the
customer in two years (i.e. the performance obligation will be satisfied at a point in time). The contract
includes two alternative payment options:
1) Payment of ` 5,000 in two years when the customer obtains control of the asset or
2) Payment of ` 4,000 when the contract is signed. The customer elects to pay ` 4,000 when the contract is
signed. ST Limited concludes that the contract contains a significant financing component because of the
length of time between when the customer pays for the asset and when the entity transfers the asset to the
customer, as well as the prevailing interest rates in the market. The interest rate implicit in the transaction
is 11.8 per cent,

which is the interest rate necessary to make the two alternative payment options economically equivalent.
However, the entity determines that, the rate that should be used in adjusting the promised consideration
is 6%, which is the entity's incremental borrowing rate.
Pass journal entries showing how the entity would account for the significant financing component
Answer:
Journal Entries showing accounting for the significant financing component:

41 : Withheld payments on a long-term contract

ABC Limited enters into a contract for the construction of a power plant that includes scheduled milestone
payments for the performance by ABC Limited throughout the contract term of three years. The
performance obligation will be satisfied over time and the milestone payments are scheduled to coincide
with the expected performance by ABC Limited. The contract provides that a specified percentage of each
milestone payment is to be withheld as retention money by the customer throughout the arrangement and
paid to the entity only when the building is complete. Analyze whether the contract contains any financing
component.
Answer:
ABC Limited concludes that the contract does not include a significant financing component since the
milestone payments coincide with its performance and the contract requires amounts to be retained for
reasons other than the provision of finance. The withholding of a specified percentage of each milestone
payment is intended to protect the customer from the contractor failing to adequately complete its
obligations under the contract.

42 : Advance payment
XYZ Limited, a personal computer (PC) manufacturer, enters into a contract with a customer to provide
global PC support and repair coverage for three years along with its PC. The customer purchases this
support service at the time of buying the product. Consideration for the service is an additional ` 3,000.
Customers electing to buy this service must pay for it upfront (i.e. a monthly payment option is not
available). Analyse whether there is any significant financing component in the contract or not.
Answer:
To determine whether there is a significant financing component in the contract, the entity considers the
nature of the service being offered and the purpose of the payment terms. The entity charges a single upfront
amount, not with the primary purpose of obtaining financing from the customer but, instead, to maximize
profitability, taking into consideration the risks associated with providing the service. Specifically, if customers
could pay monthly, they would be less likely to renew and the population of customers that continue to use
the support service in the later years may become smaller and less diverse over time (i.e. customers that
choose to renew historically are those that make greater use of the service, thereby increasing the entity’s
costs). In addition, customers tend to use services more if they pay monthly rather than making an upfront

89
payment. Finally, the entity would incur higher administration costs such as the costs related to administering
renewals and collection of monthly payments. In assessing whether or not the contract contains a significant
financing component, XYZ Limited determines that the payment terms were structured primarily for reasons
other than the provision of finance to the entity. XYZ Limited charges a single upfront amount for the services
because other payment terms (such as a monthly payment plan) would affect the nature of the risks it
assumes to provide the service and may make it uneconomical to provide the service. As a result of its
analysis, XYZ Limited concludes that there is not a significant financing component.

43 : Advance payment
A computer hardware vendor enters into a three-year arrangement with a customer to provide support
89

services. For customers with low credit ratings, the vendor requires the customer to pay for the entire
arrangement in advance of the provision of service. Other customers pay over time. Analyse whether there
is any significant financing component in the contract or not.
Answer:

Due to this customer‘s credit rating, the customer pays in advance for the three -year term. Because there is
no difference between the amount of promised consideration and the cash selling price (that is, the customer
does not receive a discount for paying in advance), the vendor requires payment in advance only to protect
against customer non-payment, and no other factors exist to suggest the arrangement contains a financing,
the vendor concludes this contract does not provide the customer or the entity with a significant benefit of
financing.

44 : Sales based royalty

A software vendor enters into a contract with a customer to provide a license solely in exchange for a sales-
based royalty. Analyse whether there is any significant financing component in the contract or not.
Answer:
Although the payment will be made in arrears, because the total consideration varies based on the occurrence
or non-occurrence of a future event that is not within the control of the customer or the entity, the software
vendor concludes the contract does not provide the customer or the entity with a significant benefit of
financing.
45 : Payment in arrears
An EPC contractor enters into a two-year contract to develop customized machine for a customer. The
contractor concludes that the goods and services in this contract constitute a single performance obligation.
Based on the terms of the contract, the contractor determines that it transfers control over time, and
recognizes revenue based on an input method best reflecting the transfer of control to the customer. The
customer agrees to provide the contractor monthly progress payments, with the final 25 percent payment
(holdback payment) due upon contract completion. As a result of the holdback payment, there is a gap
between when control transfers and when consideration is received, creating a financing component.
Analyse whether there is any significant financing component in the contract or not.
Answer:
There is no difference between the amount of promised consideration and the cash selling price (that is, the
customer did not pay a premium for paying a portion of the consideration in arrears). The payment terms
included a holdback payment only to ensure successful completion of the project, and no other factors exist to
suggest the arrangement contains a financing. Hence, the contractor concludes this contract does not provide
the customer or the contractor with a significant benefit of financing.

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46 : Payment in arrears
Company Z is a developer and manufacturer of defense systems that is primarily a Tier -II supplier of parts
and integrated systems to original equipment manufacturers (OEMs) in the commercial markets. Company Z
enters into a contract with Company X for the development and delivery of 5,000 highly technical,
specialized missiles for use in one of Company X’s platforms. As a part of the contract, Company X has
agreed to pay Company Z for their cost plus an award fee up to ` 100 crore. The consideration will be paid
by the customer related to costs incurred near the time Company Z incurs such costs. However, the ` 100
crore award fee is awarded upon successful completion of the development and test fire of a missile to
occur in 16 months from the time the contract is executed. The contract specifies Company Z will earn up to
` 100 crore based on Company X’s assessment of Company Z’s ability to develop and manufacture a missile
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that achieves multiple factors, including final weight, velocity, and accuracy.

Partial award fees may be awarded based on a pre-determined scale based on their success. Assume
Company Z has assessed the contract under Ind AS 115 and determined the award fee represents variable
consideration. Based on their assessment, Company Z has estimated a total of ` 80 crore in the transaction
price related to the variable consideration pursuant to guidance within Ind AS 115. Further, the entity has
concluded it should recognize revenue over time for a single performance obligation using a cost-to-cost
input method. Analyse whether there is any significant financing component in the contract or not.
Answer:
Company Z will transfer control over time beginning shortly after the contract is executed, but will not receive
the cash consideration related to the award fee component from Company X for more than one year in the
future. Hence, Company Z should assess whether the award fee represents a significant financing component.
The intention of the parties in negotiating the award fee due upon completion of the test fire, and based on
the results of that test fire, was to provide incentive to Company Z to produce high functioning missiles that
achieved successful scoring from Company X. Therefore, it was determined the contract does not contain a
significant financing component, and Company Z should not adjust the transaction price.
As per Ind AS 115.63, as a practical expedient, an entity need not adjust the promised amount of
consideration for the effects of a significant financing component if the entity expects, at contract inception,
that the period between:
(a) when the entity transfers a promised good or service to a customer and
(b) when the customer pays for that good or service will be one year or less

47 : Applying practical expedient

Company H enters into a two-year contract to develop customized software for Company C. Company H
concludes that the goods and services in this contract constitute a single performance obligation.
Based on the terms of the contract, Company H determines that it transfers control over time, and
recognizes revenue based on an input method best reflecting the transfer of control to Company C.
Company C agrees to provide Company H monthly progress payments. Based on the expectation of the
timing of costs to be incurred, Company H concludes that progress payments are being made such that the
timing between the transfer of control and payment is never expected to exceed one year.
Analyse whether there is any significant financing component in the contract or not.
Answer:
Company H concludes it will not need to further assess whether a significant financing component is present

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and does not adjust the promised consideration in determining the transaction price, as they are applying the
practical expedient under Ind AS 115. As per Ind AS 115.65, an entity shall present the effects of financing
(interest revenue or interest

expense) separately from revenue from contracts with customers in the statement of profit and loss. Interest
revenue or interest expense is recognised only to the extent that a contract asset (or receivable) or a contract
liability is recognised in accounting for a contract with a customer.
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48 : Entitlement to non-cash consideration

An entity enters into a contract with a customer to provide a weekly service for one year. The contract is
signed on 1st April, 20X1 and work begins immediately. The entity concludes that the service is a single
performance obligation. This is because the entity is providing a series of distinct services that are
substantially the same and have the same pattern of transfer (the services transfer to the customer over
time and use the same method to measure progress — that is, a time-based measure of progress).
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In exchange for the service, the customer promises its 100 equity shares per week of service (a total of 5,200
shares for the contract). The terms in the contract require that the shares must be paid upon the successful
completion of each week of service. How should the entity decide the transaction price?
Answer:
The entity measures its progress towards complete satisfaction of the performance obligation as each week of
service is complete. To determine the transaction price (and the amount of revenue to be recognised), the
entity has to measure the fair value of 100 shares that are received upon completion of each weekly service.
The entity shall not reflect any subsequent changes in the fair value of the shares received (or receivable) in
revenue.

49 : Fair value of non-cash consideration varies for reasons other than the form of the consideration
RT Limited enters into a contract to build an office building for AT Limited over an 18 –month period. AT
Limited agrees to pay the construction entity ` 350 crore for the project. RT Limited will receive a bonus of
10 lakh equity shares of AT Limited if it completes construction of the office building within one year.
Assume a fair value of ` 100 per share at contract inception.
Determine the transaction price.
Answer:
The ultimate value of any shares the entity might receive could change for two reasons:
1) the entity earns or does not earn the shares and
2) the fair value per share may change during the contract term.
When determining the transaction price, the entity would reflect changes in the number of shares to be
earned. However, the entity would not reflect changes in the fair value per share. Said another way, the share
price of ` 100 is used to value the potential bonus throughout the life of the contract. As a result, if the entity
earns the bonus, its revenue would be ` 350 crore plus 10 lakh equity shares at ` 100 per share for total
consideration of ` 360 crore.

50. Non-cash consideration - Free advertising

Production Company Y sells a television show to Television Company X. The consideration under the
arrangement is a fixed amount of ` 1,000 and 100 advertising slots. Y determines that the stand-alone
selling price of the show would be ` 1,500. Based on market rates, Y determines that the fair value of the

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advertising slots is ` 600. Determine the transaction price.

Answer:
Y determines that the transaction price is ` 1,600, comprising of ` 1,000 fixed amount plus the fair value of the
advertising slots i.e ` 600. If the fair value of the advertising slots could not be reasonably estimated, then the
transaction price would be ` 1,500 i.e. Y would use the stand-alone selling price of the goods or services
promised for the non-cash consideration.

51 : Customer-provided goods or services

MS Limited is a manufacturer of cars. It has a supplier of steering systems – SK Limited. MS Limited places
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an order of 10,000 steering systems on SK Limited. It also agrees to pay ` 25,000 per steering system and
contributes tooling to be used in SK’s production process. The tooling has a fair value of ` 2 crore at contract
inception. SK Limited determines that each steering system represents a single performance obligation and
that control of the steering system transfers to MS Limited upon delivery.
SK Limited may use the tooling for other projects and determines that it obtains control of the tooling.

Determine the transaction price?

Answer:
As a result, at contract inception, SK Limited includes the fair value of the tooling in the transaction price at
contract inception, which it determines to be ` 27 crore (` 25 crore for the steering systems and ` 2 crore for
the tooling).

52 : Consideration payable to a customer

An entity that manufactures consumer goods enters into a one-year contract to sell goods to a customer
that is a large global chain of retail stores. The customer commits to buy at least ` 15 crore of products
during the year. The contract also requires the entity to make a non-refundable payment of ` 1.5 crore to
the customer at the inception of the contract. The ` 1.5 crore payment will compensate the customer for the
changes it needs to make to its shelving to accommodate the entity's products. The entity does not obtain
control of any rights to the customer's shelves.
Determine the transaction price.
Answer:
The entity considers the requirements in paragraphs 70 – 72 of Ind AS 115 and concludes that the payment to
the customer is not in exchange for a distinct good or service that

transfers to the entity. This is because the entity does not obtain control of any rights to the customer's
shelves. Consequently, the entity determines that, in accordance with paragraph 70 of Ind AS 115, the ` 1.5
crore payment is a reduction of the transaction price. The entity applies the requirements in paragraph 72 of
Ind AS 115 and concludes that the consideration payable is accounted for as a reduction in the transaction
price when the entity recognises revenue for the transfer of the goods. Consequently, as the entity transfers
goods to the customer, the entity reduces the transaction price for each good by 10 per cent [(` 1.5 crore ÷ `
15 crore) x 100]. Therefore, in the first month in which the entity transfers goods to the customer, the entity
recognises revenue of ` 1.125 crore (` 1.25 crore invoiced amount less ` 0.125 crore of consideration payable
to the customer).

53: Credits to a new customer

Customer C is in the middle of a two-year contract with Telco B Ltd., its current wireless service provider,

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and would be required to pay an early termination penalty if it terminated the contract today. If C cancels
the existing contract with B Ltd. and signs a two-year contract with Telco D Ltd. for ` 800 per month, then D
Ltd. promises at contract inception to give C a one-time credit of ` 2,000 (referred to as a ‘port-in credit’).
The amount of the port-in credit does not depend on the volume of service subsequently purchased by C
during the two-year contract. Determine the transaction price.
Answer:

D Ltd. determines that it should account for the port-in credit as consideration payable to a customer. This is
because the credit will be applied against amounts owing to D Ltd. Since, D Ltd. does not receive any distinct
goods or services in exchange for this credit, it will account for it as a reduction in the transaction price `
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17,200 [(` 800 x 24 month) – ` 2,000]. D Ltd. Will recognise the reduction in the transaction price as the
promised goods or services are transferred.

54: Allocation methodology

An entity enters into a contract with a customer to sell Products A, B and C in exchange for ` 10,000. The
entity will satisfy the performance obligations for each of the products at different points in time. The entity
regularly sells Product A separately and therefore the stand-alone selling price is directly observable. The
stand-alone selling prices of Products B and C are not directly observable.
Because the stand-alone selling prices for Products B and C are not directly observable, the entity must
estimate them. To estimate the stand-alone selling prices, the entity uses the adjusted market assessment
approach for Product B and the expected cost plus a margin approach for Product C. In making those
estimates, the entity maximizes the use of observable inputs. The entity estimates the stand-alone selling
prices as follows:

Determine the transaction price allocated to each product.

Answer:
The customer receives a discount for purchasing the bundle of goods because the sum of the stand-alone
selling prices (` 15,000) exceeds the promised consideration (` 10,000). The entity considers that there is no
observable evidence about the performance obligation to which the entire discount belongs. The discount is
allocated proportionately across Products A, B and C. The discount, and therefore the transaction price, is
allocated as follows:

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55 : Allocating a discount
An entity regularly sells Products X, Y and Z individually, thereby establishing the following stand-alone
selling prices:

In addition, the entity regularly sells Products Y and Z together for ` 50,000.

Case A—Allocating a discount to one or more performance obligations. The entity enters into a contract
with a customer to sell Products X, Y and Z in exchange for ` 100,000. The entity will satisfy the performance

obligations for each of the products at different points in time; or Product Y and Z at same point of time.
Determine the allocation of transaction price to Product Y and Z.

Case B—Residual approach is appropriate

The entity enters into a contract with a customer to sell Products X, Y and Z as described in Case A. The
contract also includes a promise to transfer Product Alpha. Total consideration in the contract is ` 130,000.
The stand-alone selling price for Product Alpha is highly variable because the entity sells Product Alpha to
different customers for a broad range of amounts (` 15,000 – ` 45,000). Determine the stand-alone selling
price of Products, X, Y, Z and Alpha using the residual approach.

Case C—Residual approach is inappropriate

The same facts as in Case B apply to Case C except the transaction price is ` 1,05,000 instead of ` 130,000.
Answer:
Case A—Allocating a discount to one or more performance obligations
The contract includes a discount of ` 20,000 on the overall transaction, which would be allocated
proportionately to all three performance obligations when allocating the transaction price using the relative
stand-alone selling price method. However, because the entity regularly sells Products Y and Z together for `
50,000 and Product X for ` 50,000, it has evidence that the entire discount should be allocated to the promises
to transfer Products Y and Z in accordance with paragraph 82 of Ind AS 115.
If the entity transfers control of Products Y and Z at the same point in time, then the entity could, as a practical
matter, account for the transfer of those products as a single performance obligation. That is, the entity could
allocate ` 50,000 of the transaction price to the single performance obligation and recognise revenue of `
50,000 when Products Y and Z simultaneously transfer to the customer.
If the contract requires the entity to transfer control of Products Y and Z at different points in time, then the
allocated amount of ` 50,000 is individually allocated to the promises to transfer Product Y (stand-alone selling
price of ` 25,000) and Product Z (stand-alone selling price of ` 45,000) as follows:

Case B—Residual approach is appropriate

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Before estimating the stand-alone selling price of Product Alpha using the residual approach, the entity
determines whether any discount should be allocated to the other performance obligations in the contract.
As in Case A, because the entity regularly sells Products Y and Z together for ` 50,000 and

Product X for ` 50,000, it has observable evidence that ` 100,000 should be allocated to those three products
and a ` 20,000 discount should be allocated to the promises to transfer Products Y and Z in accordance with
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paragraph 82 of Ind AS 115. Using the residual approach, the entity estimates the stand-alone selling price of
Product Alpha to
be ` 30,000 as follows:

The entity observes that the resulting ` 30,000 allocated to Product Alpha is within the range of its
observable selling prices (` 15,000 – ` 45,000).

Case C—Residual approach is inappropriate

The same facts as in Case B apply to Case C except the transaction price is ` 105,000 instead of ` 130,000.
Consequently, the application of the residual approach would result in a stand –alone selling price of ` 5,000
for Product Alpha (` 105,000 transaction price less ` 100,000 allocated to Products X, Y and Z).
The entity concludes that ` 5,000 would not faithfully depict the amount of consideration to which
the entity expects to be entitled in exchange for satisfying its performance obligation to transfer Product
Alpha, because ` 5,000 does not approximate the stand-alone selling price of Product Alpha, which ranges
from ` 15,000 – ` 45,000. Consequently, the entity reviews its observable data, including sales and margin
reports, to estimate the stand-alone selling price of Product Alpha using another suitable method. The entity
allocates the transaction price of ` 1,05,000 to Products X, Y, Z and Alpha using the relative stand-alone selling
prices of those products in accordance with paragraphs 73–80 of Ind AS 115.

56. Allocation of variable consideration

An entity enters into a contract with a customer for two intellectual property licences (Licences A and B),
which the entity determines to represent two performance obligations each satisfied at a point in time. The
stand-alone selling prices of Licences A and B are ` 1,600,000 and `2,000,000, respectively. The entity
transfers Licence B at inception of the contract and transfers Licence A one month later.

Case A—Variable consideration allocated entirely to one performance obligation

The price stated in the contract for Licence A is a fixed amount of ` 1,600,000 and for Licence B the

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consideration is three per cent of the customer's future sales of products that use Licence B. For purposes of
allocation, the entity estimates its sales-based royalties (ie the variable consideration) to be ` 2,000,000.
Allocate the transaction price.

Case B—Variable consideration allocated on the basis of stand-alone selling prices

The price stated in the contract for Licence A is a fixed amount of ` 600,000 and for Licence B the
consideration is five per cent of the customer's future sales of products that use Licence B. The entity's
estimate of the sales-based royalties (ie the variable consideration) is ` 3,000,000. Here, Licence A is
transferred 3 months later. The royalty due from the customer’s first month of sale is ` 4,00,000.
Allocate the transaction price and determine the revenue to be recognised for each licence and the
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contract liability, if any. [ALSO IN MTP - MARCH 2019 - 8 MARKS]

Answer:

Case A—Variable consideration allocated entirely to one performance obligation

To allocate the transaction price, the entity considers the criteria in paragraph 85 and concludes that the
variable consideration (ie the sales-based royalties) should be allocated entirely to Licence B. The entity
concludes that the criteria are met for the following reasons:
(a) the variable payment relates specifically to an outcome from the performance obligation to
transfer Licence B (ie the customer's subsequent sales of products that use Licence B).

(b) allocating the expected royalty amounts of ` 2,000,000 entirely to Licence B is consistent with the
allocation objective in paragraph 73 of Ind AS 115. This is because the entity's estimate of the amount of sales-
based royalties (` 2,000,000) approximates the stand-alone selling price of Licence B and the fixed amount of `
1,600,000 approximates the stand-alone selling price of Licence A. The entity allocates ` 1,600,000 to Licence
A. This is because, based on an assessment of the facts and circumstances relating to both licences, allocating
to Licence B some of the fixed consideration in addition to all of the variable consideration would not meet
the allocation objective in paragraph 73 of Ind AS 115.

The entity transfers Licence B at inception of the contract and transfers Licence A one month later. Upon the
transfer of Licence B, the entity does not recognise revenue because the consideration allocated to Licence B
is in the form of a sales-based royalty. Therefore, the entity recognises revenue for the sales-based royalty
when those subsequent sales occur. When Licence A is transferred, the entity recognises as revenue the `
1,600,000 allocated to Licence A.

Case B—Variable consideration allocated on the basis of stand-alone selling prices

To allocate the transaction price, the entity applies the criteria in paragraph 85 of Ind AS 115 to determine
whether to allocate the variable consideration (ie the sales-based royalties) entirely to Licence B.

In applying the criteria, the entity concludes that even though the variable payments relate specifically to an
outcome from the performance obligation to transfer Licence B (ie the customer's subsequent sales of
products that use Licence B), allocating the variable consideration entirely to Licence B would be inconsistent
with the principle for allocating the transaction price. Allocating ` 600,000 to Licence A and ` 3,000,000 to
Licence B does not reflect a reasonable allocation of the transaction price on the basis of the stand-alone
selling prices of Licences A and B of ` 1,600,000 and ` 2,000,000, respectively. Consequently, the entity applies
the general allocation requirements of Ind AS 115.

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The entity allocates the transaction price of ` 600,000 to Licences A and B on the basis of relative stand-alone
selling prices of ` 1,600,000 and ` 2,000,000, respectively. The entity also allocates the consideration related to
the sales-based royalty on a relative stand-alone selling price basis. However, when an entity licenses
intellectual property in which the consideration is in the form of a sales-based royalty, the entity cannot
recognise revenue until the later of the following events: the subsequent sales occur or the performance
obligation is satisfied (or partially satisfied). Licence B is transferred to the customer at the inception of the
contract and Licence A is transferred three months later. When Licence B is transferred, the entity recognises
as revenue ` 333,333 [(` 2,000,000 ÷ ` 3,600,000) × ` 600,000] allocated to Licence B. When Licence A is
transferred, the entity recognises as revenue ` 266,667 [(` 1,600,000 ÷ ` 3,600,000) × ` 600,000] allocated to
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Licence A.

In the first month, the royalty due from the customer's first month of sales is ` 400,000. Consequently, the
entity recognises as revenue ` 222,222 (` 2,000,000 ÷ ` 3,600,000 × ` 400,000) allocated to Licence B (which has
been transferred to the customer and is therefore a satisfied performance obligation). The entity recognises a

contract liability for the ` 177,778 (` 1,600,000 ÷ ` 3,600,000 × ` 400,000) allocated to Licence A. This is because
although the subsequent sale by the entity's customer has occurred, the performance obligation to which the
royalty has been allocated has not been satisfied.

57 : Allocating a change in transaction price

On 1st April, 20X0, a consultant enters into an arrangement to provide due diligence, valuation, and
software implementation services to a customer for ` 2 crore. The consultant can earn ` 20 lakh bonus if it
completes the software implementation by 30th September, 20X0 or ` 10 lakh bonus if it completes the
software implementation by 31st December, 20X0. The due diligence, valuation, and software
implementation services are distinct and therefore are accounted for as separate performance obligations.
The consultant allocates the transaction price, disregarding the potential bonus, on a relative stand-alone
selling price basis as follows:
: Due diligence – ` 80 lakh
: Valuation – ` 20 lakh
: Software implementation – ` 1 crore
At contract inception, the consultant believes it will complete the software implementation by 30th
January, 20X1. After considering the factors in Ind AS 115, the consultant cannot conclude that a significant
reversal in the cumulative amount of revenue recognized would not occur when the uncertainty is resolved
since the consultant lacks experience in completing similar projects. As a result, the consultant does not
include the amount of the early completion bonus in its estimated transaction price at contract inception.
On 1st July, 20X0, the consultant notes that the project has progressed better than expected and believes
that implementation will be completed by 30th September, 20X0 based on a revised forecast. As a result,
the consultant updates its estimated transaction price to reflect a bonus of ` 20 lakh.
After reviewing its progress as of 1st July, 20X0, the consultant determines that it is 100 percent complete in
satisfying its performance obligations for due diligence and valuation and 60 percent complete in satisfying
its performance obligation for software implementation. Determine the transaction price.
Answer:
On 1st July, 20X0, the consultant allocates the bonus of ` 20 lakh to the software implementation performance
obligation, for total consideration of ` 1.2 crore allocated to that performance obligation, and adjusts the
cumulative revenue to date for the software implementation services to ` 72 lakh (60 percent of ` 1.2 crore).

58 : Discretionary credit
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Telco G Ltd. grants a one-time credit of ` 50 to a customer in Month 14 of a two-year contract. The credit is
discretionary and is granted as a commercial gesture, not in response to prior service issues (often referred
to as a ‘retention credit’). The contract includes a subsidised handset and a voice and data plan. G Ltd. does
not regularly provide these credits and therefore customers do not expect them to be granted.
How this will be accounted for under Ind AS 115?
Answer:
G Ltd. concludes that this is a change in the transaction price and not a variable consideration. Since, the credit
does not relate to a satisfied performance obligation, the change in transaction price resulting from the credit
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is accounted for as a contract modification and recognised over the remaining term of the contract. If, in this
example, rather than providing a one-time credit, G Ltd. granted a discount of ` 5 per month for the remaining
contract term, then also G Ltd. Would conclude that it was a change in the transaction price. It would apply
the contract modification guidance and recognise the credit over the remaining term of the contract.

59. Minitek Ltd. is a payroll processing company. Minitek Ltd. enters into a contract to provide monthly
payroll processing services to ABC limited for one year. Determine how entity will recognise the revenue?
Answer:
Payroll processing is a single performance obligation. On a monthly basis, as Minitek Ltd carries out the payroll
processing –
- The customer, ie, ABC Limited simultaneously receives and consumes the benefits of the entity‘s
performance in processing each payroll transaction .

- Further, once the services have been performed for a particular month, in case of termination of the
agreement before maturity and contract is transferred to another entity, then such new entity will not need to
re-perform the services for expired months.
Therefore, it satisfies the first criterion, ie, services completed on a monthly basis are consumed by the entity
at the same time and hence, revenue shall be recognised over the period of time. For certain performance
obligations, an entity may not be able to readily identify whether a customer simultaneously receives and
consumes the benefits from the entity's performance as the entity performs. In such cases, a performance
obligation is satisfied over time if an entity determines that another entity would not need to substantially re-
perform the work that the entity has completed to date if that other entity were to fulfil the remaining
performance obligation to the customer.
In making such determination, an entity shall make both of the following assumptions:
(a) disregard potential contractual restrictions or practical limitations that otherwise would prevent the entity
from transferring the remaining performance obligation to another entity; and
(b) presume that another entity fulfilling the remainder of the performance obligation would not have the
benefit of any work in progress.

60. T&L Limited (‘T&L’) is a logistics company that provides inland and sea transportation services. A
customer – Horizon Limited (‘Horizon’) enters into a contract with T&L for transportation of its goods from
India to Sri Lanka through sea. The voyage is expected to take 20 days from Mumbai to Colombo. T&L is
responsible for shipping the goods from Mumbai port to Colombo port. Whether T&L’s performance
obligation is met over period of time?
Answer:
T&L has a single performance to ship the goods from one port to another. The following factors are critical for

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assessing how services performed by T&L are consumed by the customer –
: As the voyage is performed, the service undertaken by T&L is progressing, such that no other entity will need
to re-perform the service till so far as the voyage has been performed, if T&L was to deliver only part-way.
: The customer is directly benefitting from the performance of the voyage as & when it progresses.
Therefore, such performance obligation is said to be met over a period of time.

61.AFS Ltd. is a risk advisory firm and enters into a contract with a company – WBC Ltd to provide audit
services that results in AFS issuing an audit opinion to the Company. The professional opinion relates to
facts and circumstances that are specific to the company. If the Company was to terminate the consulting
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contract for reasons other than the entity's failure to perform as promised, the contract requires the
Company to compensate the risk advisory firm for its costs incurred plus a 15 per cent margin. The 15 per
cent margin approximates the profit margin that the entity earns from similar contracts.
Whether risk advisory firm’s performance obligation is met over period of time?
Answer:

AFS has a single performance to provide an opinion on the professional audit services proposed to be provided
under the contract with the customer. Evaluating the criterion for recognising revenue over a period of time
or at a point in time, Ind AS 115 requires one of the following criterion to be met –
: Criterion (a) – whether the customer simultaneously receives and consumes the benefits from services
provided by AFS: Company shall benefit only when the audit opinion is provided upon completion. And in case
the contract was to be terminated, any other firm engaged to perform similar services will have to
substantially re-perform. Hence, this criterion is not met.

: Criterion (b) – An asset created that customer controls: This is service contract and no asset created, over
which customer acquires control.

: Criterion (c) – no alternate use to entity and right to seek payment:

- The services provided by AFS are specific to the company – WBC and do not have any
alternate use to AFS
- Further, AFS has a right to enforce payment if contract was early terminated, for
reasons other than AFS‘s failure to perform. And the profit margin approximates what
entity otherwise earns.
Therefore, criterion (c) is met and such performance obligation is said to be met over a period of time.

62. Space Ltd. enters into an arrangement with a government agency for construction of a space satellite.
Although Space Ltd is in this business for building such satellites for various customers across the world,
however the specifications for each satellite may vary based on technology that is incorporated in the
satellite. In the event of termination, Company has right to enforce payment for work completed to date.
Evaluate if contract will qualify for satisfaction of performance obligation over a period of time.
Answer:
While evaluating the pattern of transfer of control to the customer, the Company shall evaluate conditions laid
in para 35 of Ind AS 115 as follows:
: Criterion (a) – whether the customer simultaneously receives and consumes the benefits:
Customer can benefit only when the satellite is fully constructed and no benefits are consumed as its
constructed. Hence, this criterion is not met.

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:Criterion (b) – An asset created that customer controls: Per provided facts, the customer does not acquire
control of the asset as its created.
:Criterion (c) – no alternate use to entity and right to seek payment:
--The asset is being specifically created for the customer. The asset is customised to customer‘s requirements,
such that any diversion for a different customer will require significant work. Therefore, the asset has practical
limitation in being put to alternate use.
--Further, Space Ltd. has a right to enforce payment if contract was early terminated, for reasons other than
Space Ltd.‘s failure to perform.
Therefore, criterion (c) is met and such performance obligation is said to be met over a period of time.
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63. ABC enters into a contract with a customer to build an i tem of equipment. The customer pays 10%
advance and then 80% in instalments of 10% each over the period of construction with balance 10% payable
at the end of construction period. The payments are non-refundable unless the company fails to perform as

per the contract. Further, if the customer terminates the contract, then entity is entitled to retain payments
made. The company will have no further right to compensation from the customer.
Evaluate if contract will qualify for satisfaction of performance obligation over a period of time.
Answer:
The Company shall evaluate conditions laid in para 35 of Ind AS 115 as follows:
:Criterion (a) – whether the customer simultaneously receives and consumes the benefits:
Customer can benefit only when the asset is fully constructed and no benefits are consumed as its
constructed. Hence, this criterion is not met.
:Criterion (b) – An asset created that customer controls: As per provided facts, the customer does not acquire
control of the asset as it is created.
:Criterion (c) – no alternate use to entity and right to seek payment:
---The customer has specific right over the asset and company does not have right to divert it for any alternate
use. In other words, there is contractual restriction to use the asset for any alternate purpose.
---In the event of early termination, Company has a right to retain any payments made by the customer.
However, such payments need not necessarily compensate the selling price of the partially constructed asset,
if the customer was to stop making payments. Therefore, Company does not have a legally enforceable right
to payment for work completed to date and the criterion under para 35 is not satisfied. Thus, revenue cannot
be recognised over a period of time.

64 : Measuring progress on straight line basis

An entity, an owner and manager of health clubs, enters into a contract with a customer for one year of
access to any of its health clubs. The customer has unlimited use of the health clubs and promises to pay
CU100 per month. The entity’s promise to the customer is to provide a service of making the health clubs
available for the customer to use as and when the customer wishes. Evaluate if contract will qualify for
satisfaction of performance obligation over a period of time. If yes, how should an entity measure its
progress of service provided?
Answer:
The entity shall determine if revenue should be recognised over a period of time by evaluating the conditions
laid in para 35 of Ind AS 115.
- Applying the first criterion of para 35 to establish if the customer simultaneously receives and consumes the
benefits, as the entity provides service – The health club provides access to services uniformly through the

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year. The extent to which the customer uses the health clubs does not affect the amount of the remaining
goods and services to which the customer is entitled. The customer therefore simultaneously receives and
consumes the benefits of the entity's performance as it performs by making the health clubs available.
- Consequently, the entity's performance obligation is satisfied over time
- Once the pattern of satisfying performance obligation is defined, the Company then determines how
progress should be measured. The services are uniformly provided to the customer through the year.
Therefore, the best measure of progress is to recognise revenue on a straight line basis over the year.
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65 : Uninstalled materials
On 1st January, 20X1, an entity contracts to renovate a building including the installation of new elevators.
The entity estimates the following with respect to the contract:

The entity purchases the elevators and they are delivered to the site six months before they will be
installed. The entity uses an input method based on cost to measure progress towards completion. The
entity has incurred actual other costs of 500,000 by 31st March, 20X1. How will the Company recognize
revenue, if performance obligation is met over a period of time?
Answer:
Costs to be incurred comprise two major components – elevators and cost of construction service.
(a) The elevators are part of the overall construction project and are not a distinct performance obligation
(b) The cost of elevators is substantial to the overall project and are incurred well in advance.
(c) Upon delivery at site, customer acquires control of such elevators.
(d) And there is no modification done to the elevators, which the company only procures and delivers at site.
Nevertheless, as part of materials used in overall construction project, the company is a principal in the
transaction with the customer for such elevators also. Therefore, applying the guidance on Input method –
- The measure of progress should be made based on percentage of costs incurred relative to the total
budgeted costs.
- The cost of elevators should be excluded when measuring such progress and revenue for such elevators
should be recognized to the extent of costs incurred.

The revenue to be recognized is measured as follows:

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Therefore, for the year ended 31st March, 20X1, the Company shall recognize revenue of ` 2,200,000 on the
project.

66. An entity enters into a contract with a customer for the sale of a tangible asset on
1st January, 20X1 for ` 1 million. The contract includes a call option that gives the entity the right to
repurchase the asset for ` 1.1 million on or before 31st December, 20X1. How would the entity account for
this transaction?
Answer:
In the above case, where the entity has a right to call back the goods upto a certain date –
: The customer cannot be said to have acquired control, owing to the repurchase right with the seller entity
: Since the original selling price (` 1 million) is lower than the repurchase price (` 1.1 million), this is construed
to be a financing arrangement and accounted as follows:
(a) Amount received shall be recognized as ‗liability‘
(b) Difference between sale price and repurchase price to be recognised as ‗finance cost‘and recognised over
the repurchase term.

67. An entity enters into a contract with a customer for the sale of a tangible asset on 1st January, 20X1 for
` 1,000,000. The contract includes a put option that gives the customer the right to sell the asset for `
900,000 on or before 31st December, 20X1. The market price for such goods is expected to be ` 750,000
How would the entity account for this transaction?
Answer:
In the above case, where the entity has an obligation to buy back the goods upto a certain date –
: The entity shall evaluate if the customer has a significant economic incentive to return the goods. Since the
repurchase price is significantly higher than market price, therefore, customer has a significant economic
incentive to return the goods. There are no other factors which entity may affect this assessment.
: Therefore, company determines that control‘ of goods is not transferred to the customer till 31st December,
20X1, ie, till the put option expires.
: Against payment of ` 1,000,000; the customer only has a right to use the asset and put it back to the entity
for ` 900,000. Therefore, this will be accounted as a lease transaction in which difference between original
selling price (ie, ` 1,000,000) and repurchase price (ie, ` 900,000) shall be recognized as lease income over the
period of lease.
: At the end of repurchase term, ie, 31st December, 20X1, if the customer does not exercise such right, then
the control of goods would be passed to the customer at that time and revenue shall be recognized for sale of
goods for repurchase price (ie, ` 900,000).

68. An entity enters into a contract with a customer on 1st April, 20X1 for the sale of a machine and spare
parts. The manufacturing lead time for the machine and spare parts is two years. Upon completion of 103
manufacturing, the entity demonstrates that the machine and spare parts meet the agreed-upon
specifications in the contract. The promises to transfer the machine and spare parts are distinct and result in
two performance obligations that each will be satisfied at a point in time. On 31st March, 20X3, the
customer pays for the machine and spare parts, but only takes physical possession of the machine. Although
the customer inspects and accepts the spare parts, the customer requests that the spare parts be stored at
the entity's warehouse because of its close proximity to the customer's factory. The customer has legal title
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to the spare parts and the parts can be identified as belonging to the customer. Furthermore, the entity
stores the spare parts in a separate section of its warehouse and the parts are ready for immediate
shipment at the customer's request. The entity expects to hold the spare parts for two to four years and the
entity does not have the ability to use the spare parts or direct them to another customer.
How will the Company recognise revenue for sale of machine and spare parts? Is there any other
performance obligation attached to this sale of goods?

Answer:
In the facts provided above, the entity has made sale of two goods – machine and space parts, whose control
is transferred at a point in time. Additionally, company agrees to hold the spare parts for the customer for a
period of 2-4 years, which is a separate performance obligation. Therefore, total transaction price shall be
divided amongst 3 performance obligations –
(i) Sale of machinery
(ii) Sale of spare parts
(iii) Custodial services for storing spare parts.
Recognition of revenue for each of the three performance obligations shall occur as follows:
- Sale of machinery: Machine has been sold to the customer and physical possession as well as legal title
passed to the customer on 31st March, 20X3. Accordingly, revenue for sale of machinery shall be recognised
on 31st March, 20X3.
- Sale of spare parts: The customer has made payment for the spare parts and legal title has been passed to
specifically identified goods, but such spares continue to be physically held by the entity. In this regard, the
company shall evaluate if revenue can be recognized on bill - n-hold basis if all below criteria are met:

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Therefore, all conditions of bill-and-hold are met and hence, company can recognize revenue for sale of spare
parts on 31st March, 20X3.
- Custodial services: Such services shall be given for a period of 2 to 4 years from 31st March, 20X3. Where
services are given uniformly and customer receives & consumes benefits simultaneously, revenue for such
service shall be recognized on a straight line basis over a period of time.

69. An entity, a music record label, licenses to a customer a 1975 recording of a classical symphony by a
noted orchestra. The customer, a consumer products company, has the right to use the recorded symphony
in all commercials, including television, radio and online advertisements for two years in Country A. In
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exchange for providing the licence, the entity receives fixe consideration of ` 50,000 per month. The
contract does not include any other goods or services to be provided by the entity. The contract is non-
cancellable. Determine how the revenue will be recognised?
Answer:
The entity assesses the goods and services promised to the customer to determine which goods and services

are distinct in accordance with paragraph 27 of Ind AS 115. The entity concludes that its only performance
obligation is to grant the licence. The entity does not have any contractual or implied obligations to change
the licensed recording. The licensed recording has significant stand-alone functionality (i.e. the ability to be
played) and, therefore, the ability of the customer to obtain the benefits of the recording is not substantially
derived from the entity‘s ongoing activities. The entity therefore determines that the contract does not
require, and the customer does not reasonably expect, the entity to undertake activities that significantly
affect the licensed recording. Consequently, the entity concludes that the nature of its promise in transferring
the licence is to provide the customer with a right to use the entity‘s intellectual property as it exists at the
point in time that it is granted. Therefore, the promise to grant the licence is a performance obligation
satisfied at a point in time. The entity recognises all of the revenue at the point in time when the customer can
direct the use of, and obtain substantially all of the remaining benefits from, the licensed intellectual property.

70 : Assessing the nature of a software licence with unspecified upgrades

Software Company X licenses its software application to Customer Y. Under the agreement, X will provide
updates or upgrades on a when-and-if-available basis; Y can choose whether to install them. Y expects that
X will undertake no other activities that will change the functionality of the software. Determine the nature
of license.
Answer:
Basis on the facts given in question it can be concluded that, although the updates and upgrades will change
the functionality of the software, they are not activities considered in determining the nature of the entity‘s
promise in granting the licence. The activities of X to provide updates or upgrades are not considered because
they transfer a promised good or service to Y – i.e. updates or upgrades are distinct from the licence.
Therefore, the software licence provides a right to use the IP that is satisfied at a point in time.

71 : Assessing the nature of a film licence and the effect of marketing activities
Film Studio C grants a licence to Customer D to show a completed film. C plans to undertake significant
marketing activities that it expects will affect box office receipts for the film. The marketing activities will
not change the functionality of the film, but they could affect its value. Determine the nature of license.
Anwer:
C would probably conclude that the licence provides a right to use its IP and, therefore, is transferred at a
point in time. There is no expectation that C will undertake activities to change the form or functionality of the

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film. Because the IP has significant stand-alone functionality, C‘s marketing activities do not significantly affect
D‘s ability to obtain benefit from the film, nor do they affect the IP available to D.

72 : Assessing the nature of a team name and logo

Sports Team D enters into a three-year agreement to license its team name and logo to Apparel Maker M.
The licence permits M to use the team name and logo on its products, including display products, and in its
advertising or marketing materials.
(i) Determine the nature of license in the above case.
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(ii) Modifying above facts that, Sports Team D has not played games in many years and the licensor is Brand
Collector B, an entity that acquires IP such as old team or brand names and logos from defunct entities or
those in financial distress. B’s business model is to license the IP, or obtain settlements from entities that
use the IP without permission, without undertaking any ongoing activities to promote or support the IP
Would the answer be different in this situation?

Answer:
(i) The nature of D‘s promise in this contract is to provide M with the right to access the sports team‘s IP and,
accordingly, revenue from the licence will be recognised over time. In reaching this conclusion, D considers all
of the following facts:
– M reasonably expects D to continue to undertake activities that support and maintain the value of the team
name and logo by continuing to play games and field a competitive team throughout the licence period. These
activities significantly affect the IP‘s ability to provide benefit to M because the value of the team name and
logo is substantially derived from, or dependent on, those ongoing activities.
– The activities directly expose M to positive or negative effects (i.e. whether D plays games and fields a
competitive team will have a direct effect on how successful M is in selling its products featuring the team‘s
name and logo).
– D‘s ongoing activities do not result in the transfer of a good or a service to M as they occur (i.e. the team
playing games does not transfer a good or service to M).
(ii) Based on B‘s customary business practices, Apparel Maker M probably does not reasonably expect B to
undertake any activities to change the form of the IP or to support or maintain the IP. Therefore, B would
probably conclude that the nature of its promise is to provide M with a right to use its IP as it exists at the
point in time at which the licence is granted.

73. Customer outsources its information technology data centre

Term = 5 years plus two 1-yr renewal options
Average customer relationship is 7 years
Entity spends ` 400,000 designing and building the technology platform needed to accommodate
outsourcing contract:

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Answer

106

74 : Amortization
An entity enters into a service contract with a customer and incurs incremental costs to obtain the contract
and costs to fulfil the contract. These costs are capitalized as assets in accordance with Ind AS 115. The
initial term of the contract is five years but it can be renewed for subsequent one year periods up to a
maximum of 10 years. The average contract term for similar contracts entered into by entity is seven years.
Determine appropriate method of amortization?
Answer:
The most appropriate amortisation period is likely to be seven years (i.e. the initial term of five years plus two
anticipated one year renewals) because that is the period over which the entity expects to provide services
under the contract to which the capitalised costs relate.

75. A Ltd. is in the business of the infrastructure and has two divisions under the same; (I) Toll Roads and (II)
Wind Power. The brief details of these business and underlying project details are as follows:
I. Bhilwara-Jabalpur Toll Project - The Company has commenced the construction of the project in the
current year and has incurred total expenses aggregating to ` 50 crore as on 31st December, 20X1. Under
IGAAP, the Company has 'recorded such expenses as Intangible Assets in the books of account. The brief
details of the Concession Agreement are as follows:
-Total Expenses estimated to be incurred on the project ` 100 crore;
-Fair Value of the construction services is ` 110 crore;
-Total Cash Flow guaranteed by the Government under the concession agreement is ` 200 crore;
-Finance revenue over the period of operation phase is ` 15 crore:
-Other income relates to the services provided during the operation phase.

II. Kolhapur- Nagpur Expressway - The Company has also entered into another concession agreement with
Government of Maharashtra in the current year. The construction cost for the said project will be ` 110
crore. The fair value of such construction cost is approximately ` 200 crore. The said concession agreement
is Toll based project and the Company needs t collect the toll from the users of the expressway. Under
IGAAP, UK Ltd. has recorded the expenses incurred on the said project as an Intangible Asset.
(i) What would be the classification of Bhilwara-Jabalpur Toll Project as per applicable
Ind AS? Give brief reasoning for your choice.

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(ii) What would be the classification of Kolhapur-Nagpur Expressway Toll Project as per applicable Ind AS?
Give brief reasoning for your choice.
(iii) Also, suggest suitable accounting treatment for preparation of financial statements as per Ind
AS for the above 2 projects.

Answer:
(i) Here the operator has a contractual right to receive cash from the grantor. The grantor has little, if any,
discretion to avoid payment, usually because the agreement is enforceable by law. The operator has an
unconditional right to receive cash if the grantor contractually guarantees to pay the operator. Hence,
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operator recognizes a financial asset to the extent it has a contractual right to receive cash.
(ii) Here the operator has a contractual right to charge users of the public services. A right to charge users of
the public service is not an unconditional right to receive cash because the amounts are contingent on the
extent that the public uses the service. Therefore, the operator shall recognise an intangible asset to the
extent it receives a right (a licence) to charge users of the public service.

(iii) Accounting treatment for preparation of financial statements

Bhilwara-Jabalpur Toll Project
Journal Entries

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Questions
1. Q TV released an advertisement in Deshabandhu, a vernacular daily. Instead of paying for the same, Q TV
allowed Deshabandhu a free advertisement spot, which was duly utilised by Deshabandu. How revenue for
these nonmonetary transactions in the area of advertising will be recognised and measured?
Answer:
Paragraph 5(d) of Ind AS 115 excludes non-monetary exchanges between entities in the same line of business
to facilitate sales to customers or potential customers. For example, this Standard would not apply to a
contract between two oil companies that agree to an exchange of oil to fulfil demand from their customers in
different specified locations on a timely basis. In industries with homogenous products, it is common for
entities in the same line of business to exchange products in order to sell them to customers or potential
customers other than parties to exchange. The current scenario, on the contrary, will be covered under Ind AS
115 since the same is exchange of dissimilar goods or services because both of the entities deal in different
mode of media, i.e., one is print media and another is electronic media and both parties are acting as
customers and suppliers for each other. Further, in the current scenario, it seems it is for consumption by the
said parties and hence it does not fall under paragraph 5(d). It may also be noted that, even if it was to
facilitate sales to customers or potential customers, it would not be scoped out since the parties are not in the
same line of business. As per paragraph 47 of Ind AS 115, ―An entity shall consider the terms of the contract
and its customary business practices to determine the transaction price. The transaction price is the amount of
consideration to which an entity expects to be entitled in exchange for transferring promised goods or services
to a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes). The
consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both.
Paragraph 66 of Ind AS 115 provides that to determine the transaction price for contracts in which a customer
promises consideration in a form other than cash, an entity shall measure the non-cash consideration (or
promise of non-cash consideration) at fair value. In accordance with the above, Q TV and Deshabandhu should
measure the revenue promised in the form of non-cash consideration as per the above referred principles of
Ind AS 115.
2. A Ltd. a telecommunication company, entered into an agreement with B Ltd. which is engaged in
generation and supply of power. The agreement provided that A Ltd. will provide 1,00,000 minutes of talk
time to employees of B Ltd. in exchange for getting power equivalent to 20,000 units. A Ltd. normally
charges ` 0.50 per minute and B Ltd. charges ` 2.5 per unit. How should revenue be measured in this case?

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Answer:
Paragraph 5(d) of Ind AS 115 excludes non-monetary exchanges between entities in the same line of business
to facilitate sales to customers or potential customers. For example, this Standard would not apply to a
contract between two oil companies that agree to an exchange of oil to fulfil demand from their customers in
different specified locations on a timely basis.
However, the current scenario will be covered under Ind AS 115 since the same is exchange of dissimilar goods
or services.
As per paragraph 47 of Ind AS 115, ―an entity shall consider the terms of the contract and its customary
business practices to determine the transaction price. The transaction price is the amount of consideration to
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which an entity expects to be entitled in exchange for transferrin promised goods or services to a customer,
excluding amounts collected on behalf of third parties (for example, some sales taxes). The consideration
promised in a contract with a customer may include fixed amounts, variable amounts, or both.
Paragraph 66 of Ind AS 115 provides that to determine the transaction price for contracts in which a customer
promises consideration in a form other than cash, an entity shall measure the non-cash consideration (or
promise of noncash consideration) at fair value. On the basis of the above, revenue recognised by A Ltd. will

be the consideration in the form of power units that it expects to be entitled for talktime sold, i.e. ` 50,000
(20,000 units x ` 2.5). The revenue recognised by B Ltd. will be the consideration in the form of talk time that it
expects to be entitled for the power units sold, i.e., ` 50,000 (1,00,000 minutes x ` 0.50).

3. Company X enters into an agreement on 1st January, 20X1 with a customer for renovation of hospital and
install new air-conditioners for total consideration of ` 50,00,000. The promised renovation service,
including the installation of new air -conditioners is a single performance obligation satisfied over time.
Total expected costs are ` 40,00,000 including ` 10,00,000 for the air conditioners.
Company X determines that it acts as a principal in accordance with paragraphs B34-B38 of Ind AS 115
because it obtains control of the air conditioners before they are transferred to the customer. The customer
obtains control of the air conditioners when they are delivered to the hospital premises.
Company X uses an input method based on costs incurred to measure its progress towards complete
satisfaction of the performance obligation. As at 31st March, 20X1, other costs incurred excluding the air
conditioners are ` 6,00,000. Whether Company X should include cost of the air conditioners in measure of its
progress of performance obligation? How should revenue be recognised for the year ended March 20X1?
Answer:
Paragraph B19 of Ind AS 115 inter alia, states that, ―an entity shall exclude from an input method the effects
of any inputs that, in accordance with the objective of measuring progress in paragraph 39, do not depict the
entity‘s performance in transferring control of goods or services to the customer.
In accordance with the above, Company X assesses whether the costs incurred to procure the air conditioners
are proportionate to the entity‘s progress in satisfying the performance obligation. The costs incurred to
procure the air conditioners (` 10,00,000) are significant relative to the total costs to completely satisfy the
performance obligation (` 40,00,000). Also, Company X is not involved in manufacturing or designing the air
conditioners. Company X concludes that including the costs to procure the air conditioners in the measure
of progress would overstate the extent of the entity‘s performance. Consequently, in accordance with
paragraph B19 of Ind AS 115, the entity adjusts its measure of progress to
exclude the costs to procure the air conditioners from the measure of costs incurred and from the transaction
price. The entity recognises revenue for the transfer of the air conditioners at an amount equal to the costs to
procure the air conditioners (i.e., at a zero margin). Company X assesses that as at March, 20X1, the
performance is 20 per cent complete (i.e.,
` 6,00,000 / ` 30,00,000). Consequently, Company X recognises the following-

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Revenue recognised is calculated as (20 per cent × ` 40,00,000) + ` 10,00,000.

(` 40,00,000 = ` 50,00,000 transaction price – ` 10,00,000 costs of air conditioners.)
Cost of goods sold is ` 6,00,000 of costs incurred + ` 10,00,000 costs of air conditioners.
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4. An entity G Ltd. enters into a contract with a customer P Ltd. for the sale of a machinery for ` 20,00,000. P
Ltd. intends to use the said machinery to start a food processing unit. The food processing industry is highly
competitive and P Ltd. has very little experience in the said industry.

P Ltd. pays a non-refundable deposit of `1,00,000 at inception of the contract and enters into a long-term
financing agreement with G Ltd. for the remaining 95 per cent of the agreed consideration which it intends
to pay primarily from income derived from its food processing unit as it lacks any other major source of
income. The financing arrangement is provided on a non-recourse basis, which means that if P Ltd. defaults
then G Ltd. can repossess the machinery but cannot seek further compensation from P Ltd., even if the full
value of the amount owed is not recovered from the machinery. The cost of the machinery for G Ltd. is
` 12,00,000. P Ltd. obtains control of the machinery at contract inception. When should G Ltd. recognise
revenue from sale of machinery to P Ltd. in accordance with Ind AS 115? [ALSO IN RTP - NOV 2019]
Answer:
As per paragraph 9 of Ind AS 115, ―An entity shall account for a contract with a customer that is within the
scope of this Standard only when all of the following criteria are met:
(a) the parties to the contract have approved the contract (in writing, orally or in accordance with other
customary business practices) and are committed to perform their respective obligations;
(b) the entity can identify each party‘s rights regarding the goods or services to be transferred;
(c) the entity can identify the payment terms for the goods or services to be transferred;
(d) the contract has commercial substance (ie the risk, timing or amount of the entity‘s future cash flows is
expected to change as a result of the contract); and
(e) it is probable that the entity will collect the consideration to which it will be entitled in exchange for the
goods or services that will be transferred to the customer. In evaluating whether collectability of an amount of
consideration is probable, an entity shall consider only the customer‘s ability and intention to pay that amount
of consideration when it is due. The amount of consideration to which the entity will be entitled may be less
than the price stated in the contract if the consideration is variable because the entity may
offer the customer a price concession.

Paragraph 9(e) above, requires that for revenue to be recognised, it should be probable that the entity will
collect the consideration to which it will be entitled in exchange for the goods or services that will be
transferred to the customer. In the given case, it is not probable that G Ltd. will collect the consideration to
which it is entitled in exchange for the transfer of the machinery. P Ltd.‘s ability to pay may be uncertain due
to the following reasons:

(a) P Ltd. intends to pay the remaining consideration (which has a significant balance) primarily from income

111
derived from its food processing unit (which is a business involving significant risk because of high competition
in the said industry and P Ltd.'s little experience);

(b) P Ltd. lacks sources of other income or assets that could be used to repay the balance consideration; and
(c) P Ltd.'s liability is limited because the financing arrangement is provided on a non - recourse basis.
In accordance with the above, the criteria in paragraph 9 of Ind AS 115 are not met.
Further, para 15 states that when a contract with a customer does not meet the criteria in paragraph 9 and an
entity receives consideration from the customer, the entity shall recognise the consideration received as
revenue only when either of the following events has occurred:
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(a) the entity has no remaining obligations to transfer goods or services to the customer and all, or
substantially all, of the consideration promised by the customer has been received by the entity and is non-
refundable; or
(b) the contract has been terminated and the consideration received from the customer is non-refundable.
Para 16 states that an entity shall recognise the consideration received from a customer as a liability until one
of the events in paragraph 15 occurs or until the criteria in paragraph 9 are subsequently met. Depending on

the facts and circumstances relating to the contract, the liability recognised represents the entity‘s obligation
to either transfer goods or services in the future or refund the consideration received. In either case, the
liability shall be measured at the amount of consideration received from the customer.
In accordance with the above, in the given case G Ltd. should account for the non –refundable deposit of `
1,00,000 payment as a deposit liability as none of the events
described in paragraph 15 have occurred—that is, neither the entity has received substantially all of the
consideration nor it has terminated the contract. Consequently, in accordance with paragraph 16, G Ltd. will
continue to account for the initial deposit as well as any future payments of principal and interest as a deposit
liability until the criteria in paragraph 9 are met (i.e. the entity is able to conclude that it is probable that the
entity will collect the consideration) or one of the events in paragraph 15 has occurred. Further, G Ltd. will
continue to assess the contract in accordance with paragraph 14 to determine whether the criteria in
paragraph 9 are subsequently met or whether the events in paragraph 15 of Ind AS 115 have occurred.

5. Entity I sells a piece of machinery to the customer for ` 2 million, payable in 90 days. Entity I is aware at
contract inception that the customer might not pay the full contract price. Entity I estimates that the
customer will pay atleast ` 1.75 million, which is sufficient to cover entity I's cost of sales (` 1.5 million) and
which entity I is willing to accept because it wants to grow its presence in this market. Entity I has granted
similar price concessions in comparable contracts.
Entity I concludes that it is highly probable that it will collect ` 1.75 million, and such amount is not
constrained under the variable consideration guidance. What is the transaction price in this arrangement?
Answer:
Entity I is likely to provide a price concession and accept an amount less than ` 2 million in exchange for the
machinery. The consideration is therefore variable. The transaction price in this arrangement is ` 1.75 million,
as this is the amount which entity I expects to receive after providing the concession and it is not constrained
under the variable consideration guidance. Entity I can also conclude that the collectability threshold is met for
` 1.75 million and therefore contract exists.

6. On 1 January 20X8, entity J enters into a one-year contract with a customer to deliver water
treatment chemicals. The contract stipulates that the price per container will be adjusted
retroactively once the customer reaches certain sales volume, defined, as follows:

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Volume is determined based on sales during the calendar year. There are no minimum
purchase requirements. Entity J estimates that the total sales volume for the year will be 2.8 million
containers, based on its experience with similar contracts and forecasted sales to the customer.
Entity J sells 700,000 containers to the customer during the first quarter ended 31st March 20X8 for a
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contract price of ` 100 per container. How should entity J determine the transaction price?
Answer:
The transaction price is ` 90 per container based on entity J's estimate of total sales volume for the year, since
the estimated cumulative sales volume of 2.8 million containers would result in a price per container of ` 90.
Entity J concludes that based on a transaction price of ` 90 per container, it is highly probable that a significant

reversal in the amount of cumulative revenue recognised will not occur when the uncertainty is resolved.
Revenue is therefore recognised at a selling price of ` 90 per container as each container is sold. Entity J will
recognise a liability for cash received in excess of the transaction price for the first 1 million containers sold at
` 100 per container (that is, ` 10 per container) until the cumulative sales volume is reached for the next
pricing tier and the price is retroactively reduced. For the quarter ended 31st March, 20X8, entity J recognizes
revenue of ` 63 million (700,000 containers x ` 90) and a liability of ` 7 million [700,000 containers x (` 100 - `
90)]. Entity J will update its estimate of the total sales volume at each reporting date until the uncertainty is
resolved.

7. Entity K sells electric razors to retailers for C 50 per unit. A rebate coupon is included inside the electric
razor package that can be redeemed by the end consumers for C 10 per unit. Entity K estimates that 20% to
25% of eligible rebates will be redeemed, based on its experience with similar programmes and rebate
redemption rates available in the market for similar programmes. Entity K concludes that the transaction
price should incorporate an assumption of 25% rebate redemption, as this is the amount for which it is
highly probable that a significant reversal of cumulative revenue will not occur if estimates of the rebates
change. How should entity K determine the transaction price?
Answer:
Entity K records sales to the retailer at a transaction price of ` 47.50 (` 50 less 25% of ` 10). The difference
between the per unit cash selling price to the retailers and the transaction price is recorded as a liability for
cash consideration expected to be paid to the end customer. Entity K will update its estimate of the rebate
and the transaction price at each reporting date if estimates of redemption rates change.

8. A manufacturer enters into a contract to sell goods to a retailer for ` 1,000. The manufacturer also offers
price protection, whereby it will reimburse the retailer for any difference between the sale price and the
lowest price offered to any customer during the following six months. This clause is consistent with other
price protection clauses offered in the past, and the manufacturer believes that it has experience which is
predictive for this contract.
Management expects that it will offer a price decrease of 5% during the price protection period.
Management concludes that it is highly probable that a significant reversal of cumulative revenue will not
occur if estimates change. How should the manufacturer determine the transaction price?
Answer:

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The transaction price is ` 950, because the expected reimbursement is ` 50. The expected payment to the
retailer is reflected in the transaction price at contract inception, as that is the amount of consideration to
which the manufacturer expects to be entitled after the price protection. The manufacturer will recognise a
liability for the difference between the invoice price and the transaction price, as this represents the cash that
it expects to refund to the retailer. The manufacturer will update its estimate of expected reimbursement at
each reporting date until the uncertainty is resolved.

9. Electronics Manufacturer M sells 1,000 televisions to Retailer R for ` 50,00,000 (` 5,000 per television). M
provides price protection to R by agreeing to reimburse R for the difference between this price and the
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lowest price that it offers for that television during the following six months. Based on M‘s extensive
experience with similar arrangements, it estimates the following outcomes.

Determine the transaction price.

Answer:
After considering all relevant facts and circumstances, M determines that the expected value method provides
the best prediction of the amount of consideration to which it will be entitled. As a result, it estimates the
transaction price to be ` 4,800 per television – i.e. (` 5,000 x 70%) + (` 4,500 x 20%) + (` 4,000 x 10%).

10. Construction Company C enters into a contract with Customer E to build an asset. Depending on when
the asset is completed, C will receive either ` 1,10,000 or `

1,30,000.
Determine the transaction price.
Answer:
Because there are only two possible outcomes under the contract, C determines that using the most likely
amount provides the best prediction of the amount of consideration to which it will be entitled. C estimates
the transaction price to be ` 1,30,000, which is the single most likely amount.

11. Franchisor Y Ltd. licenses the right to operate a store in a specified location to Franchisee F. The store
bears Y Ltd.‘s trade name and F will have a right to sell Y Ltd.‘s products for 10 years. F pays an up-front
fixed fee. The franchise contract also requires Y Ltd. to maintain the brand through product improvements,
marketing campaigns etc. Determine the nature of license.
Answer:
The licence provides F access to the IP as it exists at any point in time in the licence period.
This is because:

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– Y Ltd. is required to maintain the brand, which will significantly affect the IP by affecting F‘s ability to obtain
benefit from the brand;
– any action by Y Ltd. may have a direct positive or negative effect on F; and
– these activities do not transfer a good or service to F.

Therefore, Y Ltd. recognises the up-front fee over the 10-year franchise period. The licence provides F access
to the IP as it exists at any point in time in the licence period.

This is because:
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– Y Ltd. is required to maintain the brand, which will significantly affect the IP by affecting F‘s ability to obtain
benefit from the brand;
– any action by Y Ltd. may have a direct positive or negative effect on F; and
– these activities do not transfer a good or service to F.

Therefore, Y Ltd. recognises the up-front fee over the 10-year franchise period.
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PAST EXAMINATION, MTPs, RTPs QUESTIONS

1. Deluxe bike manufactured by Zed Limited is sold with an extended warranty of 2 years for Rs. 87,300
while an identical Deluxe bike without the extended warranty is sold in the market for Rs. 80,000 and
equivalent warranty is given in the market for Rs. 10,000. How should Zed Limited recognize and measure
revenue in the books on the sale of the bikes and warranty?
[NOV 2018 - 5 MARKS]
Answer:
Zed Ltd. has sold two products viz deluxe bike and the extended warranty. Revenue earned on sale of each
product should be recognised separately.

Calculation of Revenue attributable to both the components:

Total fair value of Deluxe bike and extended warranty (80,000+10,000) Rs. 90,000
Less: Sale price of the Deluxe bike with extended warranty (Rs. 87,300)
Discount Rs. 2,700

Discount and revenue attributable to each component of the transaction:

Proportionate discount attributable to sale of Deluxe bike Rs. 2,400

(2,700 x 80,000 / 90,000)
Revenue from sale of Deluxe bike (80,000 – 2,400) Rs. 77,600
Proportionate discount attributable to extended warranty Rs. 300
(2,700 x 10,000 / 90,000)
Revenue from extended warranty (10,000 - 300) Rs. 9,700

Revenue in respect of sale of Deluxe bike of Rs. 77,600 should be recognised immediately and revenue from
warranty of Rs. 9,700 should be recognised over the period of warranty ie. 2 years.

2. Orange Ltd. contracts to renovate a five star hotel including the installation of new elevators on

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01.10.2017. Orange Ltd. estimates the transaction price of Rs. 480 lakh. The expected cost of elevators is Rs.
144 lakh and expected other costs is Rs. 240 lakh. Orange Ltd. purchases elevators and they are delivered to
the site six months before they will be installed. Orange Ltd. uses an input method based on cost to
measure progress towards completion. The entity has incurred actual other costs of Rs. 48 lakh by
31.03.2018. How much revenue will be recognised as per relevant Ind AS 115 for the year ended 31 st March,
2018, if performance obligation is met over a period of time?
[MAY 2019 - 5 MARKS]
Answer:
Cost to be incurred comprises two major components – cost for elevators and cost of construction service.
115

(a) The elevators are part of the overall construction project and are not a distinct performance obligation
(b) The cost of elevators is substantial to the overall project and are incurred well in advance.
(c) Upon delivery at site, customer acquires control of such elevators.
(d) There is no modification done to the elevators, which the company only procures and

delivers at site. Nevertheless, as part of materials used in overall construction project, the company is a
principal in the transaction with the customer for such elevators also.

Therefore, applying the guidance on Input method –

- The measure of progress should be based on percentage of costs incurred relative to the total budgeted
costs.
- The cost of elevators should be excluded when measuring such progress and revenue for such elevators
should be recognized to the extent of costs incurred.

3. Nivaan Limited commenced work on two long-term contracts during the financial year ended on 31st

116
March, 2019. The first contract with A & Co. commences on 1st June, 2018 and had a total sales value
of Rs. 40 lakh. It was envisaged that the contract would run for two years and that the total expected costs
would be Rs. 32 lakh. On 31st March, 2019, Nivaan Limited revised its estimate of the total expected cost to
Rs. 34 lakh on the basis of the additional rectification cost of Rs. 2 lakh incurred on the contract during the
current financial year. An independent surveyor has estimated at 31st March, 2019 that the contract is 30%
complete. Nivaan Limited has incurred costs up to 31st March, 2019 of Rs. 16 lakh and has received
payments on account of Rs. 13 lakh. The second contract with B & Co. commenced on 1st September, 2018
and was for 18 months. The total sales value of contract was Rs. 30 lakh and the total expected cost is
Rs. 24 lakh. Payments on account already received were Rs. 9.50 lakh and total costs incurred to date were
Rs. 8 lakh. Nivaan Limited has insisted on a large deposit B & Co. because the companies had not traded
116

together prior to the contract. The independent surveyor estimated that on 31st March, 2019 the contract
was 20% complete. The two contracts meet the requirement of Ind AS 115 ‘Revenue from Contracts with
Customers’ to recognize revenue over time as the performance obligations are satisfied over time.
The company also has several other contracts of between twelve and eighteen months in duration. Some of
these contracts fall into two accounting periods and were not completed as at 31st March, 2019. In absence

of any financial date relating to the other contracts, you are advised to ignore these other contracts while
preparing the financial statements of the company for the year ended 31st March, 2019.
Prepare financial statement extracts for Nivaan Limited in respect of the two construction contracts for the
year ending 31st March, 2019.
[NOV 2019 - 12 MARKS]
Answer:
Extracts of Balance Sheet of Nivaan Ltd. as on 31st March, 2019

Working Notes:
1. Table showing calculation of total revenue, expenses and profit or loss on contract for the year (Rs. in
lakh)

*Note: Additional rectification cost of Rs. 2 lakh has been treated as normal cost. Hence total expected cost
has been considered as Rs. 34 lakh. However, in case this Rs. 2 lakh is treated as abnormal cost then expense
due for the year would be Rs. 11.6 lakh (ie 30% of Rs. 32 lakh plus Rs. 2 lakh). Accordingly, with respect to A &
Co., the profit for the year would be Rs. 0.4 lakh and work-in-progress recognised at the end of the year would
be Rs. 4.4 lakh.

2. Calculation of amount due from / (to) customers (Rs. in lakh) 117

117

3. Work in Progress recognised as part of contract asset at the end of the year

4. X Ltd. is engaged in manufacturing and selling of designer furniture. It sells goods on extended credit. X
Ltd. sold furniture for Rs. 40,00,000 to a customer, the payment against which was receivable after 12
months with interest at the rate of 3% per annum. The market interest rate on the date of transaction was
8% per annum. Calculate the revenue to be recognised by X Ltd. for the above transactions.
[MTP - MARCH 2018 - 6 MARKS]

Answer:
X Ltd. should determine the fair value of revenue by calculating the present value of the cash flows receivable.

Total amount receivable = Rs. 40,00,000 x 1.03 = Rs. 41,20,000.

Present Value of receivable (Revenue) = Rs. 41,20,000/1.08 = Rs. 38,14,815.
Interest income = Rs. 41,20,000 - Rs. 38,14,815 = Rs. 3,05,185.

Therefore, on transaction date, Rs. 38,14,815 will be recognised as revenue from sale of goods and Rs.
3,05,185 will be recognised as interest income receivable for the period in accordance with Ind AS 109.

5. A Ltd. has sold goods to B Ltd. at a consideration of Rs. 10 lakhs, receivable in three equal installments of
Rs. 3,33,333 over a two-year period (ie on 1st April 2018, 31st March 2019 and 31st March 2020).
The company is offering a discount of 5% (i.e. Rs. 50,000) if payment is made in full at the time of sale. The
sale agreement reflects an implicit interest rate of 5.36% p.a. The total consideration expected to be
received from such sale is Rs. 10 lakhs. Hence, the management has recognised the revenue from sale of
goods for Rs. 10 lakhs. Further, the management is of the view that there is no difference in this aspect
between Indian GAAP and Ind AS.

118
Analyse whether the above accounting treatment made by the accountant is in compliance with Ind AS. If
not, advise the correct treatment along with the workings for the same.
[MTP - OCTOBER 2018 - 8 MARKS]
Answer:
As per Ind AS 18, the revenue from sale of goods shall be recognised at the fair value of the consideration
received or receivable. The fair value of the consideration is determined by discounting all future receipts
using an imputed rate of interest where the receipt is deferred beyond normal credit terms. The difference
between the fair value and the nominal amount of the consideration is recognised as interest revenue.
The fair value of consideration (cash price equivalent) of the sale of goods is calculated as follows:
118

The Company that agrees for deferring the cash inflow from sale of goods will recognise the revenue from sale
of goods and finance income as follows:

119

6. The Company has sold certain items to a customer with after sale service for a period of two years from
the date of such sale i.e. 1st October, 2017 without any additional charges. The total amount payable by the
119

customer is agreed as follows:

• Rs. 8,00,000, if paid by 31st January, 2018;
• Rs. 8,10,000, if paid by 28th February, 2018;
• Rs. 8,20,000, if paid by 31st March, 2018.

Based on past experience it is highly probable that the customer makes the payment before 28th February,
2018. The standalone selling price of the product is Rs. 7,00,000 and two years' services are offered to the
customer at Rs. 1,40,000. Answer the following:
(1) How many transactions are included in the above arrangement as per applicable Ind AS
(2) What is the amount of revenue to be considered for revenue recognition as per the applicable Ind AS?
(3) What is the amount of revenue to be recognised under Ind AS towards sale of product as per the terms
of the contract with the customer?
(4) What is the amount of revenue to be recognised under Ind AS towards sale of service as per the terms of
the contract with the customer?
(5) What is the portion of current and non-current liabilities to be presented in the financial statements as
per Ind AS?
[MTP - OCTOBER 2018 - 8 MARKS]

Answer:
Two transactions are included in the above arrangement as per applicable Ind AS ie. sale of item includes
following transactions: (i) Selling price of item (ii) Two-years’ after sale service Revenue attributable to both
the components is calculated as follows:

Total fair value of item and two years’ service period (7,00,000 + 1,40,000) 8,40,000
Less: Sale price of the item and two years’ service period (8,10,000
Discount 30,000

Discount and revenue attributable to each component of the transaction:

Proportionate discount attributable to sale of item 25,000
(30,000 x 7,00,000 / 8,40,000)
Revenue from sale of item (7,00,000 – 25,000) 6,75,000
Proportionate discount attributable to two years’ service period 5,000
(30,000 x 1,40,000 / 8,40,000)
Revenue from two years’ service period (1,40,000 – 5,000) 1,35,000

120
Revenue in respect of sale of item should be recognised immediately and revenue from two years’ service
period should be recognised over the 2 year period on monthly basis ie on 31st March, 2017 revenue for two
years’ service period will be Rs. 5,625 (Rs. 1,35,000/24 months)

Amount of two years’ service period due within 12 months from the reporting date
= (1,35,000 / 24 months) x 12 months = Rs. 67,500 (Current).

Amount of two years’ service period due after 12 months from the reporting date
= (1,35,000 / 24 months) x 11 months = Rs. 61,875 (Non-current).
120

7. KK Ltd. runs a departmental store which awards 10 points for every purchase of Rs. 500 which can be
discounted by the customers for further shopping with the same merchant. Unutilised points will lapse on
expiry of two years from the date of credit. Value of each point is Rs. 0.50. During the accounting period
20X1-20X2, the entity awarded 1,00,00,000 points to various customers of which 18,00,000 points remained
undiscounted. The management expects only 80% will be discounted in future of which normally 60-70%
are redeemed during the next year. The Company has approached your firm with the following queries and
has asked you to suggest the accounting treatment (Journal Entries) under the applicable Ind AS for these
award points:
(a) How should the recognition be done for the sale of goods worth Rs. 10,00,000 on a particular day?
(b) How should the redemption transaction be recorded in the year 20X1-20X2? The Company has
requested you to present the sale of goods and redemption as independent transaction. Total sales of the
entity is Rs. 5,000 lakhs.
(c) How much of the deferred revenue should be recognised at the year-end (20X1-20X2) because of the
estimation that only 80% of the outstanding points will be redeemed?
(d) In the next year 20X2-20X3, 60% of the outstanding points were discounted Balance 40% of the
outstanding points of 20X1-20X2 still remained outstanding. How much of the deferred revenue should the
merchant recognize in the year 20X2-20X3 and what will be the amount of balance deferred revenue?
(e) How much revenue will the merchant recognized in the year 20X2-20X3, if 3,00,000 points are redeemed
in the year 20X2-20X3?
[RTP - MAY 2019 | MTP - OCTOBER 2019/OCT 2020 - 14 MARKS]
Answer:
(a) Points earned on Rs. 10,00,000 @ 10 points on every Rs. 500 = [(10,00,000/500) x 10] = 20,000 points.
Value of points = 20,000 points x Rs. 0.5 each point = Rs. 10,000

121
(b) Points earned on Rs. 50,00,00,000 @ 10 points on every Rs. 500 = [(50,00,00,000/500) x 10] =
1,00,00,000 points.

Value of points = 1,00,00,000 points x Rs. 0.5 each point = Rs. 50,00,000
121

Revenue recognized for sale of goods = Rs. 49,50,49,505 [50,00,00,000 x (50,00,00,000 /

50,50,00,000)]

Revenue for points = Rs. 49,50,495 [50,00,00,000x (50,00,000 / 50,50,00,000)]

Revenue for points to be recognized

Undiscounted points estimated to be recognized next year 18,00,000 x 80% = 14,40,000 points

Total points to be redeemed within 2 years = [(1,00,00,000-18,00,000) + 14,40,000] = 96,40,000

Revenue to be recognised with respect to discounted point = 49,50,495 x (82,00,000/96,40,000) = 42,11,002

(c) Revenue to be deferred with respect to undiscounted point in 20X1-20X2

= 49,50,495 – 42,11,002 = 7,39,493

(d) In 20X2-20X3, KK Ltd. would recognize revenue for discounting of 60% of outstanding points as follows:
Outstanding points = 18,00,000 x 60% = 10,80,000 points
Total points discounted till date = 82,00,000 + 10,80,000 = 92,80,000 points
Revenue to be recognized in the year 20X2-20X3
= [{49,50,495 x (92,80,000 / 96,40,000)} - 42,11,002] = Rs. 5,54,620.

Liability under Customer Loyalty programme Dr. 5,54,620

To Sales A/c 5,54,620

122
(On redemption of further 10,80,000 points)

The Liability under Customer Loyalty programme at the end of the year 20X2-20X3 will be Rs.
7,39,493 – 5,54,620 = 1,84,873.

(e) In the year 20X3-20X4, the merchant will recognized the balance revenue of Rs. 1,84,87 irrespective of the
points redeemed as this is the last year for redeeming the points. Journal entry will be as follows:
122

Liability under Customer Loyalty programme Dr. 1,84,873

To Sales A/c 1,84,873
(On redemption of remaining points)

8. (a) Entity I sells a piece of machinery to the customer for Rs. 2 million, payable in 90 days. Entity I is aware
at contract inception that the customer might not pay the full contract price. Entity I estimates that the
customer will pay atleast Rs. 1.75 million, which is sufficient to cover entity I's cost of sales (Rs. 1.5 million)
and which entity I is willing to accept because it wants to grow its presence in this market.
Entity I has granted similar price concessions in comparable contracts. Entity I concludes that it is highly
probable that it will collect Rs. 1.75 million, and such amount is not constrained under the variable
consideration guidance. What is the transaction price in this arrangement?

(b) On 1 January 20x8, entity J enters into a one-year contract with a customer to deliver water treatment
chemicals. The contract stipulates that the price per container will be adjusted retroactively once the
customer reaches certain sales volume, defined, as follows:
Volume is determined based on sales during the calendar year. There are no minimum purchase
requirements. Entity J estimates that the total sales volume for the year will be 2.8 million containers, based
on its experience with similar contracts and forecasted sales to the customer.
Entity J sells 700,000 containers to the customer during the first quarter ended 31 March 20X8 for a contract
price of Rs. 100 per container. How should entity J determine the transaction price?

(c) Entity K sells electric razors to retailers for C 50 per unit. A rebate coupon is included inside the electric
razor package that can be redeemed by the end consumers for C 10 per unit. Entity K estimates that 20% to
25% of eligible rebates will be redeemed, based on its experience with similar programmes and rebate
redemption rates available in the market for similar programmes. Entity K concludes that the transaction
price should incorporate an assumption of 25% rebate redemption, as this is the amount for which it is
highly probable that a significant reversal of cumulative revenue will not occur if estimates of the rebates
change. How should entity K determine the transaction price?

(d) A manufacturer enters into a contract to sell goods to a retailer for Rs. 1,000. The manufacturer also
offers price protection, whereby it will reimburse the retailer for any difference between the sale price and
the lowest price offered to any customer during the

following six months. This clause is consistent with other price protection clauses offered in the past, and
the manufacturer believes that it has experience

123
which is predictive for this contract. Management expects that it will offer a price decrease of 5% during the
price protection period. Management concludes that it is highly probable that a significant reversal of
cumulative revenue will not occur if estimates change. How should the manufacturer determine the
transaction price?
[RTP - MAY 2020]
Answer:
(a) Entity I is likely to provide a price concession and accept an amount less than Rs. 2 million in exchange for
the machinery. The consideration is therefore variable. The transaction price in this arrangement is Rs. 1.75
million, as this is the amount which entity I expects to receive after providing the concession and it is not
123

constrained under the variable consideration guidance. Entity I can also conclude that the collectability
threshold is met for Rs. 1.75 million and therefore contract exists.
(b) The transaction price is Rs. 90 per container based on entity J's estimate of total sales volume for the year,
since the estimated cumulative sales volume of 2.8 million containers would result in a price per container of
Rs. 90. Entity J concludes that based on a transaction price of Rs. 90 per container, it is highly probable that a
significant reversal in the amount of cumulative revenue recognised will not occur when the uncertainty is

resolved. Revenue is therefore recognised at a selling price of Rs. 90 per container as each container is sold.
Entity J will recognise a liability for cash received in excess of the transaction price for the first 1 million
containers sold at Rs. 100 per container (that is, Rs. 10 per container) until the cumulative sales volume is
reached for the next pricing tier and the price is retroactively reduced.
For the quarter ended 31st March, 20X8, entity J recognizes revenue of Rs. 63 million (700,000 containers x Rs.
90) and a liability of Rs. 7 million [700,000 containers x (Rs. 100 - Rs. 90)]. Entity J will update its estimate of
the total sales volume at each reporting date until the uncertainty is resolved.
(c) Entity K records sales to the retailer at a transaction price of Rs. 47.50 (Rs. 50 less 25% of Rs. 10). The
difference between the per unit cash selling price to the retailers and the transaction price is recorded as a
liability for cash consideration expected to be paid to the end customer. Entity K will update its estimate of the
rebate and the transaction price at each reporting date if estimates of redemption rates change.
(d) The transaction price is Rs. 950, because the expected reimbursement is Rs. 50. The expected payment to
the retailer is reflected in the transaction price at contract inception, as that is the amount of consideration to
which the manufacturer expects to be entitled after the price protection. The manufacturer will recognise a
liability for the difference between the invoice price and the transaction price, as this represents the cash that
it
expects to refund to the retailer. The manufacturer will update its estimate of expected reimbursement at
each reporting date until the uncertainty is resolved.

9. A contractor enters into a contract with a customer to build an asset for ` 1,00,000, with a
performance bonus of ` 50,000 that will be paid based on the timing of completion. The amount of the
performance bonus decreases by 10% per week for every week beyond the agreed-upon completion
date. The contract requirements are similar to those of contracts that the contractor has performed
previously, and management believes that such experience is predictive for this contract. The
contractor concludes that the expected value method is most predictive in this case.
The contractor estimates that there is a 60% probability that the contract will be completed by the
agreed-upon completion date, a 30% probability that it will be completed one week late, and a 10%
probability that it will be completed two weeks late.
Determine the transaction price.
ANSWER:

124
The transaction price should include management’s estimate of the amount of consideration to which the entity will be
entitled for the work performed.
Probability-weighted Consideration
`1,50,000(fixed fee plus full performance bonus) x `90,000
60%
`1,45,000 (fixed fee plus 90% of performance bonus) `43,500
x 30%
`1,40,000 (fixed fee plus 80% of performance bonus) `14,000
x 10%
Total probability-weighted consideration `1,47,500
The total transaction price is ` 1,47,500, based on the probability-weighted estimate. The contractor will update its
124

estimate at each reporting date.

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72 - Article Ship Registratin Letter78555fr Compiler 2.0 - Ca Final New - by Ca Ravi Agarwal

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72 - Article Ship Registratin Letter78555fr Compiler 2.0 - Ca Final New - by Ca Ravi Agarwal

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COMPILER 2.

0 FOR CA FINAL (NEW SYLLABUS) – PAPER 1- FINANCIAL REPORTING

CHAPTER- 3 INDAS-115 REVENUE FROM

*35,000 / 250 = 140

Are the performance obligations under the contract distinct?

Entity‘s promise to provide goods and services is distinct if

For broadband and voice call services -

For sale of modem -

the entity have?

21. Implied performance obligation

Allocated price per unit (year) is calculated as follows:

basis. Are the performance obligations under the contract distinct?

30 : Estimating variable consideration

32 : Measurement of variable consideration

37 : Financing component: significant or insignificant?

38 : Accounting for significant financing component

39. Determining the discount rate

40. Advance payment and assessment of discount rate

41 : Withheld payments on a long-term contract

44 : Sales based royalty

47 : Applying practical expedient

48 : Entitlement to non-cash consideration

50. Non-cash consideration - Free advertising

51 : Customer-provided goods or services

Determine the transaction price?

52 : Consideration payable to a customer

53: Credits to a new customer

54: Allocation methodology

Determine the transaction price allocated to each product.

Case B—Residual approach is appropriate

Case C—Residual approach is inappropriate

Case B—Residual approach is appropriate

Case C—Residual approach is inappropriate

56. Allocation of variable consideration

Case A—Variable consideration allocated entirely to one performance obligation

Case B—Variable consideration allocated on the basis of stand-alone selling prices

contract liability, if any. [ALSO IN MTP - MARCH 2019 - 8 MARKS]

Case A—Variable consideration allocated entirely to one performance obligation

Case B—Variable consideration allocated on the basis of stand-alone selling prices

57 : Allocating a change in transaction price

: Criterion (c) – no alternate use to entity and right to seek payment:

64 : Measuring progress on straight line basis

The revenue to be recognized is measured as follows:

70 : Assessing the nature of a software licence with unspecified upgrades

72 : Assessing the nature of a team name and logo

73. Customer outsources its information technology data centre

(iii) Accounting treatment for preparation of financial statements

Revenue recognised is calculated as (20 per cent × ` 40,00,000) + ` 10,00,000.

Determine the transaction price.

PAST EXAMINATION, MTPs, RTPs QUESTIONS

Calculation of Revenue attributable to both the components:

Discount and revenue attributable to each component of the transaction:

Proportionate discount attributable to sale of Deluxe bike Rs. 2,400

Therefore, applying the guidance on Input method –

2. Calculation of amount due from / (to) customers (Rs. in lakh) 117

Total amount receivable = Rs. 40,00,000 x 1.03 = Rs. 41,20,000.

customer is agreed as follows:

Discount and revenue attributable to each component of the transaction:

Revenue recognized for sale of goods = Rs. 49,50,49,505 [50,00,00,000 x (50,00,00,000 /

Revenue for points = Rs. 49,50,495 [50,00,00,000x (50,00,000 / 50,50,00,000)]

Revenue for points to be recognized

Total points to be redeemed within 2 years = [(1,00,00,000-18,00,000) + 14,40,000] = 96,40,000

(c) Revenue to be deferred with respect to undiscounted point in 20X1-20X2

Liability under Customer Loyalty programme Dr. 5,54,620

Liability under Customer Loyalty programme Dr. 1,84,873

estimate at each reporting date.

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