Following are the factors that indicate the high probability of revenue reversal related to the amount of consideration: � High susceptibility to factors outside entity's control, � Uncertainty exists and it's expected to resolve for a long time. Accounts This standard is expected to impact all companies, though the impact could be more pronounced for some depending on their industry sector, existing customer contracting practices and more importantly the accounting policies already adopted. An entity shall recognise revenue when (or as) the entity satisfies a performance Obligation by transferring a promised good or service (ie an asset) to a customer. 5. The consideration will then be allocated to multiple POs and revenue recognized when control over those distinct goods or services is transferred. Amount of consideration may include a variable component like discount, rebates, credits, refunds, price concessions, incentives and similar items. An entity recognizes over time revenue that is associated with a performance obligation that is satisfied over time by measuring its progress toward completion of that performance obligation. II. An entity should recognize the reduction of revenue when (or as) either of the following events occurs: � Recognizes revenue for the transfer of related goods or service to the customer, � Pays or promises to pay the consideration, 6. The Indian Accounting Standards (Ind AS), as notified under section 133 of the Companies Act 2013, have been formulated keeping the Indian economic & legal environment in view and with a view to converge with IFRS Standards, as issued by and copyright of which is held by the IFRS Foundation. (E.g.- Sales Commission etc.). IND AS 18 Revenue Recognition sets the guidelines as to when to recognize the revenue arising from certain types of transactions and the accounting treatment of the same. Entities may agree to provide goods or services for consideration that varies upon certain future events which may or may not occur. on 01 September 2018. The entity must update this measurement over time as circumstances change and accounts for these changes as a change in accounting estimate under Ind AS 8Accounting Policies, Changes in Accounting Estimates and Errors'. To estimate the transaction price in a contract that includes variable consideration, entity may use any of two methods: An entity should use one method consistently to estimate the transaction price throughout the life of a contract. ClearTax is a product by Defmacro Software Pvt. = Fair Value of consideration – Nominal Amount of consideration, For example, when the product price includes a substantial amount for subsequent servicing. Ind AS 115 provides following guidance in respect of recognition of contract costs: � Incremental cost of obtaining contract with a customer: Entity should recognize as an asset if it expects to recover those costs. © 2020 ‐ Defmacro Software Pvt. A customer obtains control when it has the ability to direct the … In assessing if a contract contains a significant financing component; an entity should consider the relevant facts including both of the following: � Difference between the amount of promised consideration and the cash selling price of the goods or services. The first step for revenue recognition is identifying a contract … Companies will have to necessarily determine if there are multiple distinct promises in a contract or a single performance obligation (PO). This corroborates Ind AS-18 as it says: “revenue recognition is postponed if there is any uncertainty regarding its ultimate’s collection“. CAs, experts and businesses can get GST ready with ClearTax GST software & certification course. A Ltd sells goods with a policy that if a customer is not satisfied with the product, it can be returned and A Ltd would refund the amount paid by the customer for the product. It gives clear steps to recognise such revenue – A. Decidewhetheroutcome of a transaction can be estimated reliably. Ind AS 16 Property, Plant and Equipment: 18. Revenue recognition is a generally accepted accounting principle (GAAP) that stipulates how and when revenue is to be recognized. The objective in adjusting the transaction price for the time value of money is to reflect an amount for the selling price as though the customer had paid cash for the goods or services when they were transferred. Fair Value (FV) is the amount for which an asset could be exchanged or the liability set… If a customer promises consideration in a form other than cash, an entity measures the non- cash consideration at fair value in determining the transaction price. In this case, A Ltd would recognize sales of 1,00,000 and the present value of 50,000 should be recognized over the next 3 years as service income. The timing of revenue recognition might change under Ind AS 115’s control-based model. significant downward adjustment) when the uncertainty associated with the variable consideration subsequently resolves. III. COVID-19 cover with monthly payments. Under an effective financing transaction, the fair value of the consideration is determined by discounting all future receipts using an imputed rate of interest. Under new standard, an entity is required to capitalize certain costs incurred in obtaining a contract if specified criteria are met. For example, when the product price includes a substantial amount for subsequent servicing, that amount is deferred and recognized as revenue when that service is performed. Even when real estate entities meet the over-time revenue recognition criterion under Ind AS 115, the POCM as per the GN (withdrawn) and Ind AS 115 are dissimilar in many respects, such as: The GN requires revenue recognition under POCM to commence when atleast 25% of the construction work is completed. ClearTax serves 2.5+ Million happy customers, 20000+ CAs & tax experts & 10000+ businesses across India. , that amount is deferred and recognized as revenue when that service is performed. Efiling Income Tax Returns(ITR) is made easy with ClearTax platform. This method is permitted only if the entity either: � Sells the same good/service to different customers (at or near the same time) for a broad range of amounts; or. If the remaining goods or services are not distinct and are part of a single performance obligation that is partially satisfied, entity should adjust both transaction price and measure of progress towards completion. Under AS regime, AS 9, Revenue Recognition states that the amount of revenue shall be measured at the gross inflow of cash, receivables or other considerations received. � Cost to fulfill a Contract: An entity should recognize an asset for cost incurred to fulfill a contract if those costs: � Relate directly to an existing contract or specific anticipated contract, � Generate or enhance resources that will be used in satisfying Performance Obligation in future. Indian Accounting Standard (Ind AS) 18, Revenue, prescribes the recognition and measurement principles for revenue arising from certain types of transactions and events. Allocation of Transaction Price to Performance Obligation. In assessing the uncertainty related to variable consideration, an entity should consider both the likelihood and the magnitude of revenue reversal. Control is considered to be transferred over time if one of the following conditions exists: � Customer controls the asset as it is created or enhanced by entity's performance under the contract, � A customer receives a benefit from the entity's performance as the entity performs. Revenue recognition for a rendering of Services – Ind AS 18 requires recognition of revenue using a percentage of completion method only. 1,50,000 ( actual cash price is 1,00,000). Variable consideration may be attributable to the entire contract or only to a specific part. 2. Involves subtracting the sum of observable stand-alone selling prices for other goods and services promised under the contract from the total transaction price to arrive at an estimated selling price for a good or service. Identify the Contract with a customer. A donates certain perishable food products to Homeless people, which have reached their best before date but are still fit for human consumption. Control includes the ability to prevent other entities from directing the use of and obtaining the benefits from an asset. It permits either, � Full Retrospective' adoption in which the standard is applied to all of the periods presented; OR. � Has not yet established price for the good/ service and the good/ service has not previously been sold on a stand-alone basis. Ind AS 115 replaces existing revenue recognition standards Ind AS 11, Construction Contracts and Ind AS 18, Revenue and revised guidance note of the Institute of Chartered Accountants of India (ICAI) on Accounting for Real Estate Transactions for Ind AS entities issued in 2016. II. The collection of paymentSales and Collection CycleThe Sales and Collection Cycle, also known as the revenue, receivables, and receipts (RRR) cycle, comprises of various classes of transactions. ii) Physical Possession The seller does not have control over the goods sold. However, this does not imply that entities can ignore past revenue contracts. Revenue is measured at FV of the consideration received or receivable after deducting trade discounts and rebates. Professional Course, India's largest network for finance professionals, Ind AS-115: The New Standard for Revenue Recognition, All You Need to Know About UDIN (Unique Document Identification Number) by Chartered Accountants in Practice, Cancellation of registration under Rule 22 of the CGST Rules aligned with newly inserted sub-rule (2A) of Rule 21A, Equalisation Levy - Most Vital Concept in International Taxation, GST - Due Date Compliance Calendar for January 2021 and Recent Updates on The Portal, Role of Dividend Tax in Achieving the Essence of the Budget, In a manner that depicts the transfer of goods or services to customers, At an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services, Expected Value - Sum of probability weighted amounts in range of possible consideration. and Indian GAAP as they exist today, and to the timing and scope of accounting changes that the standard setting agendas of the International Accounting Standards Board (IASB), the Financial Accounting Standards Board (FASB) and Institute of Chartered Accountants of India (ICAI) (collectively, the Boards) will bring. Ind AS 19 Employee Benefits: 21. A Performance Obligation is a promise in a contract with customer to transfer either, i) A good or service, or a bundle of goods or services, that is distinct OR, ii) A series of distinct goods or services that are substantially the same and have pattern of transfer to the customer. On 28 March 2018, the MCA notified Ind AS 115, a new revenue recognition standard that replaces existing Ind AS 11 and Ind AS 18. The treatment and effect on revenue of the following incentives are discussed here from AS and Ind AS perspective: 1. Recognise revenue from the sale of goods when all below conditions are met: Criteria to be considered for reliably estimating the outcome of the transaction: The stage of completion of a transaction may be determined based on the nature of the transaction using the following: (b) Services performed to date as a percentage of total services to be performed. In this article we cover the following topics w.r.t IND AS 18 Revenue Recognition: This Standard should be applied in accounting for revenue arising from the following transactions: 3. However, entity may apply it to a portfolio of contracts with similar characteristics if entity reasonably expects reasonably that effects of applying it to portfolio would not differ materially from that if applied to individual contracts. The Ministry of Corporate Affairs (MCA), on 28 March 2018, notified Ind AS 115,Revenue from Contracts with Customerswhich is based on … Transfer of significant risks and rewards of ownership, Neither continuing managerial involvement nor effective control, Recognise revenue by reference to stage of completion (percentage of completion method) at end of reporting period, Recognise revenue only to extent of expenses recognized that are recoverable (no profit recognized), Reliable measurement of stage of completion, Effective interest method (as per Ind AS 109), Accrual basis in accordance with substance of the agreement, Shareholder’s right to receive payment is established, Revenue covers all economic benefits that arise in the ordinary course of activities of an entity which result in increases in equity, other than increases relating to contributions from equity participants, Revenue is gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of an enterprise from the sale of goods, from the rendering of services, and from the use by others of enterprise resources yielding interest, royalties and dividends, Real estate revenue is specifically not covered, Revenue has to be measured at fair value of the consideration receivable, Revenue is recognized at the nominal amount of consideration receivable, Specific guidance regarding barter transactions involving advertising services is given, Uses, only percentage of completion method for revenue recognition for rendering of service, Permits the use of completed service contract method, Requires interest to be recognized using effective interest rate method, Uses time proportion basis for interest recognition, IND AS 18 does not specifically deal with the same, Existing AS 9 specifically deals with disclosure of excise duty as a deduction from revenue from sales transactions, Disclosure requirements are more detailed, n recognize only when A sells the goods to the third parties, Indian Accounting Standard 11 – Construction Contracts, Indian AS 101 – First time adoption of Indian Accounting standards, This page is best viewed in Chrome, Firefox or IE 11. Entity shall account for modification as separate contract if: � Scope increases due to addition of distinct- goods or services, AND, � Price increase reflects the goods' or services' standalone selling prices under circumstances of modified contract. Thus, revenue recognition emphasizes on the timing of recognition of revenue in the statement of profit and loss of an enterprise. If the amount of consideration from a customer contract is variable, an entity is required to evaluate whether the cumulative amount of revenue recognized should be constrained. real estate infrastructure, EPC (Engineering, Procurement and Construction), IT services, etc. Indian Accounting Standard (Ind AS) 18 Revenue, prescribes principles for recognition and measurement of revenue. However, an entity would allocate a discount to only some of the performance obligations only if it has observable evidence of the obligations to which the entire discount belongs. 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