The primary objective of Ind AS 115 is to provide a comprehensive and consistent framework for revenue recognition, which can help entities to provide more useful information to users of financial statements. The standard applies to all contracts with customers, except for those that are covered by other Ind AS standards.
The standard introduces a five-step model for revenue recognition, which is as follows:
Step 1: Identify the Contract
The first step in the revenue recognition model is to identify the contract with the customer. A contract is an agreement between two or more parties that creates enforceable rights and obligations. To be recognized under Ind AS 115, a contract must meet the following criteria:
- The contract has commercial substance.
- The parties to the contract have approved the contract, and their rights and obligations can be identified.
- The entity can identify the payment terms for the goods or services provided.
- It is probable that the entity will collect the consideration to which it is entitled under the contract.
Step 2: Identify the Performance Obligations
The second step is to identify the performance obligations in the contract. A performance obligation is a promise to transfer a good or service to a customer. A contract may have one or more performance obligations. The entity must identify the distinct goods or services that are promised to the customer.
Step 3: Determine the Transaction Price
The third step is to determine the transaction price, which is the amount of consideration that the entity expects to receive in exchange for the goods or services. The transaction price may be fixed or variable. The entity must consider any discounts, rebates, or other incentives that it offers to the customer.
Step 4: Allocate the Transaction Price
The fourth step is to allocate the transaction price to the performance obligations in the contract. The allocation must be based on the relative stand-alone selling prices of the goods or services promised in the contract.
Step 5: Recognize Revenue
The fifth and final step is to recognize revenue when the entity satisfies a performance obligation by transferring control of a good or service to the customer. Control refers to the ability to direct the use of and obtain the benefits from the good or service.
Ind AS 115 also requires entities to provide additional disclosures about their revenue recognition policies and practices. The standard aims to improve transparency and comparability of financial statements by requiring entities to provide more detailed information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
The standard also provides guidance on specific topics, such as contract modifications, performance obligations satisfied over time, and licensing arrangements. Entities must apply the standard retrospectively to all contracts that are not completed as of the date of initial application.
Overall, Ind AS 115 aims to provide a more comprehensive and consistent framework for revenue recognition, which can help entities to provide more useful information to users of financial statements. The standard requires entities to exercise judgment and make estimates when applying the five-step model, which can make it a complex standard to apply in practice.