Webinar Series on Ind AS - icmai-wirc.inicmai-wirc.in/webinarppts/54_Webinar_series_ppt_15... · Webinar Series on Ind AS By CMA Milind Date M Com, FCMA, CMA (USA), Dip IFRS (ACCA

Webinar Series on Ind AS

By CMA Milind Date

M Com, FCMA, CMA (USA), Dip IFRS (ACCA UK)

01-07-2020 CMA Milind Date 1

Ind AS 115 Revenue from

contracts with customers


Ind AS 115 in India

Effective date 1st April 2018

• Ind AS 11 construction contracts

• Ind AS 18 revenue

• Guidance notes on barter exchanges, customer loyalty programs, agreements for sale of real estate & transfer of assets from customer

The standard replaced

Major change had already occurred when entities transited to Ind AS during 2017-18

Not many companies are significantly affected in the post Ind AS 115 scenario


Transition provisions for 1st time adoption of Ind AS 115


Approach Application Comparatives Practical expedients

Full retrospective The FS are presented as

if Ind AS 115 had always

been applied (Ind AS 8)

Comparatives (including

opening BS) are restated

All years – apply Ind AS

115, except contracts

1. That begin & end

within the same

period &

2. Are completed at the

beginning of the

earliest period

Modified retrospective Entities will recognise

cumulative effect of

initially applying Ind AS

115 as an adjustment to

the opening balance of

RE at 1st April 2018

Comparatives are not

restated

Date of equity

adjustment (RE) – 1st Apr

2018

Apply Ind AS from 1st Apr

2018

Objective


• Establish principles that entity applies to report useful information about nature, amount, timing & uncertainty of revenue and cash flows arising from contracts with customer

Objective

• Entity will recognise revenue to depict the transfer of goods or services to customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services

• An entity shall consider the terms & conditions of the contract and all relevant facts & circumstances

• Entity will apply practical expedients consistently to all contracts of similar nature & in similar circumstances

• Though a/c is specified for individual contract, the entity may apply it to a portfolio of contracts with similar characteristics, if it expects that the impact on the FS won’t materially differ

Meeting the objective

Scope exclusions

Lease contracts within the scope of Ind AS 116

Insurance contracts within the scope of Ind AS 104

Financial contracts (Ind AS 109) and other contractual rights & obligations (Ind AS 110, 111, Ind AS 27 & Ind AS 28)

Non-monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers e.g. contract between two oil companies that agree to exchange oil to fulfil the demand in different specified locations on a timely basis


Contract must be with ‘customer’

• A party that is contracted with the entity to obtain goods or services that are output of entity’s ordinary activities in exchange for consideration

• So if two entities perform a work in collaboration, it will not be covered under this standard

The standard is applied only when the counterparty is a ‘customer’


Example

Cybernet Ltd. provides internet-based advertising services to publishing companies. It purchases advertisement space on various websites from a selection of publishers as per the following scenarios:

(i) It pre-purchases the advertisement space from the publishers before it finds advertisers for that space.

(ii) It provides the service of matching the advertisers with the publishers.

In each of the above cases, which party will be identified as the customer?

In Scenario 1, where Cybernet Ltd. pre-purchases advertisement space on various websites from a selection of publishers, the companies (i.e. advertiser) to whom it will provide the advertising space will be identified as its customers

In Scenario 2, Cybernet Ltd., does not provide any ad-targeting services or purchase the advertising space from the publishers before it finds advertisers for that space. It only provides the service of matching the ad placement for advertisers with the publishers. Accordingly, the publisher to whom Cybernet Ltd. is providing services will be identified as its customer


Recognition – a five step process

Identify a contract with customer –single or composite

Identify performance obligations –single or multiple

Determine transaction price –consideration –fixed, variable or both

Allocating transaction price to performance obligations –allocation basis –stand alone prices

Recognise revenue when (or as) the performance obligations are fulfilled


Step 1 – identifying the contract (enforceable rights & obligations)

Parties have approved the contract & are committed to

perform – written/oral

Each party’s rights to goods/services can be

identified

The payment terms of goods/services can be

identified

The contract has commercial substance

It’s probable that the entity will collect the consideration (i.e. evaluate customer’s ability &

intention to pay)


Step 1 – identifying the contract (enforceable rights & obligations)


• Negotiated as a package, a single commercial objectives

• Consideration in one depends upon price or performance of other

• Goods/services promised are a single performance obligation

Combination of contracts

• Change in scope, price or both approved by parties

• May be treated as separate contract is scope & price increases

• Or may be treated as termination of earlier contract & creation of new contract for goods/services not yet transferred

Contract modification

Step 2 – identifying performance obligations

A promise (explicit or implicit) to transfer to customer either

Goods/service (or a bundle) that is distinct

May be treated as separate PO

Series of distinct goods/services that are substantially the same & have

same pattern of transfer

May be treated as a single PO satisfied over time

G/S are distinct if

1. Customer can benefit from them either on its own to together with others

2. entity’s promise to transfer is separately identifiable


Example

NJ Ltd. enters into a contract to build a house for a customer.

NJ Ltd. Is responsible for the overall management of the project and identifies various goods and services that are provided, including architectural design, site preparation, construction of the house, plumbing and electrical services and finish carpentry.

NJ Ltd. regularly enters into such contracts with customers to sell these goods and services individually to them.

How many performance obligations are in the contract?

Promised goods are capable of being distinct as

- Customer could benefit from it

- NJ regularly sells the g/s separately to customers

The nature of promise

- Whether to transfer the g/s separately or as combined items

Here, g/s can’t be separately identified as the customer will get a house

So there’s only a single performance obligation


Example

A software developer enters into a

contract with a customer to transfer

a software license, perform

installation, and provide upgrades

and technical support for 5 years

It sales the license, installation,

updates & support separately. The

installation does not modify the

software and it is functional even

without upgrades & support

• Each can be separately

identifiable

• Customer can benefit from each

good or service on its own

• There are 4 performance

obligations

– License

– Installation

– Upgrades

– Technical support


Step 3 – Determining transaction price

It’s the amount of consideration the entity expects to be entitled to

Excludes amount s collected on behalf of third parties e.g. GST

It is affected by nature, timing & amount of consideration

• significant financing component (e.g. interest charged on instalment sales i.e. time value),

• variable component (e.g. penalties, bonuses),

• Non-cash consideration (fair value)

• amounts payable to the customer (e.g. discounts, rebates)

Includes consideration of


Step 4 – Allocating transaction price

Total transaction price should be allocated to all separate performance obligations in proportion to the stand-alone selling price

The best evidence of a stand-alone price is the observable price of a good or service when the entity sells that separately in similar circumstances & to similar customers

If such price is not directly observable, the entity should estimate it

Allocation is made at the beginning of the contract & is not adjusted for any subsequent changes in the stand-alone price

In relation to a bundled sale, any discount should be allocated across each component in the transaction

Discount should be specifically allocated to a component, only if the component is regularly sold separately at a discount


Example

A company sells a machine for Rs 100,000 & one year support.

It usually sells the machine for Rs 95000, but it does not sell support separately as a stand-alone product.

Other support services offered by the company attract a mark up of 50%.

It is expected that the support will cost Rs 20,000

• The transaction price of Rs 100,000 will be allocated between the machine & support as follows:– Separately observable price for machine

= Rs 95,000

– Stand alone price for support is not observable & thus to be estimated as = 20000+(50%*20000) = Rs 30,000

– Thus total price for the bundled sale = 95 + 30 = Rs 125000

– However, the transaction price is Rs 100,000

– Hence, the customer is getting a discount of 20% (25/125)

– The allocation of price for machine = 95000*0.80 = Rs 76000

– The allocation of price for support = 30000*0.80 = Rs 24000


Step 5 – Recognise revenue when (or as) POs are satisfied

• Customer receives & consumes the benefits of the entity’s performance as the entity performs e.g. service contracts for cleaning

• The entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced e.g. contract work in progress

• Entity’s performance does not create an asset with an alternative use to the entity & the entity has an enforceable right to payment for performance completed to date

PO satisfied over time (% completion method)

• If it is not satisfied over time

• Indicators of PO satisfied at a time:

• Customer has an obligation to pay for asset

• Customer has legal title to the asset

• Entity has transferred physical possession of the asset

• Customer has significant risks & rewards of ownership

• Customer has accepted the asset

PO satisfied at a time


Example

A company is building a residential complex. It enters into a contract with customer for a specific unit under construction.

• Customer to pay non-refundable deposit

• Customer to pay progress payments

• If customer fails to pay progress payment, the company has the right to all contract consideration if it completes the unit

• The entity cannot direct the unit to other party

The contract provides for the following:

• Entity doesn’t have alternative use of the unit

• Entity has the right to all consideration

Obligation is satisfied over time because


Example

• Deposit is refundable if the entity can’t construct the unit by a certain time

• Remainder of the consideration is due upon completion of the unit

• If customer defaults on contract before completion, the entity has the right only to retain deposit

If the above contract was made on following terms

• It’s not a service contract

• Customer does not control the unit as it is created

• Entity does not have enforceable right to payment for performance obligation completed to date

Performance obligation is satisfied at a time because


Measuring progress towards completion

• Revenue is recognised on the basis of the value to the customer of the goods or services transferred to date relative to the remaining goods or services

• E.g. surveys of performance completed to date, work certified, appraisals of results achieved, milestones achieved, time elapsed, units produced or delivered

Output methods

Output method should is useful only when the output is observable


Measuring progress towards completion

• Revenue is recognised on the basis of entity’s efforts or inputs to the satisfaction of performance obligation relative to the total expected input

• E.g. resources consumed, labour hours worked, costs incurred, time elapsed etc.

Input methods

The method may not be useful if there’s no direct relationship between entity’s inputs and the transfer of control of goods & services to customer


Disclosures – Bajaj Auto


Ind AS 115 Revenue from Contracts with CustomersThe Company adopted Ind AS 115 using the modified retrospective method of adoption with the date of

initial application of 1 April 2018. Under this method, the standard can be applied either to all contracts at

the date of initial application or only to contracts that are not completed at this date. The Company elected

to apply the standard to all contracts as at 1 April 2018.

The cumulative effect of initially applying Ind AS 115 as at the date of initial application of 1 April 2018

amounts to H Nil. Therefore, the comparative information was not restated and continues to be reported

under Ind AS 18.

Disclosures – L & T


Disclosures – L & T


Disclosures DLF

Application of Ind AS 115 has impacted the accounting for recognition of revenue from real estate projects.

For certain contracts where, DLF was using the % completion method, now the revenue is recognised “at the point” under Ind AS 115

The cumulative effect of initially applying Ind AS 115 is shown as an adjustment to the opening balance of retained earnings as on 1st April 2018 & hence no comparatives of PY are adjusted

The company has applied modified retrospective approach to contracts that were not completed by 01-04-2018 and has given the impact by debiting the RE by Rs 3964 Cr

Due to application of Ind AS 115, the revenue for the year ended 31st

Mar 2019 is higher by Rs 1797 Cr and the net profit is higher by Rs 805 Cr for the said period



Webinar Series on Ind AS - icmai-wirc.inicmai-wirc.in/webinarppts/54_Webinar_series_ppt_15... · Webinar Series on Ind AS By CMA Milind Date M Com, FCMA, CMA (USA), Dip IFRS (ACCA

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