Ind AS 115 Revenue from Contracts with Customers: formula sheet

Key formulas

Five criteria for a contract

Approval and commitment + identifiable rights + identifiable payment terms + commercial substance + collection probable

All five must be met. If one fails, no Step 1 contract exists and received consideration is a liability for now.

Combination of contracts

Combine if: single commercial objective (package) OR price depends on the other contract OR goods/services form a single performance obligation

Applies only to contracts with the same customer or its related parties, entered at or near the same time. Meeting any one condition is enough.

Modification as a separate contract

Separate contract if: added goods/services are distinct AND price increases by their stand-alone selling price (adjusted)

Both conditions are needed. The original contract is left unchanged.

Modification not a separate contract: remaining goods distinct

Prospective treatment: new allocation = (unrecognised original consideration + new consideration) over remaining distinct goods

Treat as termination of the old contract and creation of a new one. No adjustment to revenue already recognised.

Modification not a separate contract: remaining goods not distinct

Cumulative catch-up = revised progress × revised transaction price − revenue already recognised

Applies when the remaining goods or services are part of a single, partly satisfied obligation. Adjust revenue at the modification date.

Revenue when criteria are not met

Recognise revenue only if (no remaining obligation AND substantially all of the promised consideration has been received AND it is non-refundable) OR (contract terminated AND consideration received is non-refundable)

Receiving only some non-refundable consideration is not enough. Until a limb is met, show consideration received as a liability.

Distinct good or service (both tests)

Distinct = capable of being distinct AND separately identifiable in the contract

If either test fails, combine the item with others until the bundle is distinct.

Indicators of not separately identifiable

Significant integration service OR significant modification/customisation OR high interdependence

These are indicators. Use judgement on the facts; they are not an exhaustive checklist.

Series of distinct goods or services

Substantially the same + same pattern of transfer + each satisfied over time with the same progress measure = one performance obligation

The series is a single performance obligation, even though each period's service is itself distinct.

Customer option as a material right

Option gives a right the customer would not get without the contract = separate performance obligation

A discount available to all customers, or a market-rate discount, is not a material right. Allocate part of the transaction price to the option.

Principal vs agent

Principal if you control the specified good or service before transfer to the customer; revenue = gross amount. Agent: revenue = fee or commission, net

Indicators of control: primary responsibility for fulfilment, inventory risk, discretion in setting the price. Indicators are aids to assessing control, not the test itself.

Transaction price

Fixed amount + estimated variable consideration (after constraint) ± financing adjustment + fair value of non-cash consideration − consideration payable to customer (where it is a price reduction)

Exclude amounts collected for third parties such as GST.

Expected value

Σ (amount of each outcome × its probability)

Suitable where the entity has a large number of contracts with similar characteristics.

Most likely amount

Single outcome with the highest probability

Suitable where the contract has only two possible outcomes.

Constraint

Include variable consideration only if a significant reversal of cumulative revenue is highly probable not to occur

Apply after estimating. Reassess at each reporting date.

Significant financing component

Revenue = present value of consideration = Payment ÷ (1 + r)ⁿ

Use the discount rate of a separate financing transaction. Unwind the discount as interest income or expense. Practical expedient: no adjustment if the gap is one year or less.

Non-cash consideration

Measure at fair value of the non-cash item received

If fair value cannot be reasonably estimated, use the stand-alone selling price of the goods or services promised.

Consideration payable to a customer

Reduce the transaction price, unless the payment is for a distinct good or service from the customer

For a distinct good or service, account for it like other purchases. Any excess over fair value reduces the price.

Relative SSP allocation

Allocated price of PO = Transaction price × (SSP of that PO ÷ Sum of SSPs of all POs)

Default method. Allocated amounts must add up to the transaction price.

Discount in the contract

Discount = Sum of standalone selling prices − Contract transaction price

Spread proportionately across all POs unless all the criteria of para 82 are met, in which case it is allocated to the specific POs only.

Residual approach

Estimated SSP = Total transaction price − Sum of observable SSPs of other goods or services

Use only if the SSP is highly variable (the item is sold to different customers for a broad range of amounts) or uncertain (price not yet established and the item not previously sold standalone). Check the result is not zero or a very small amount and is reasonable.

Expected cost plus margin

Estimated SSP = Expected cost of satisfying the PO + Appropriate margin

Use when no observable price exists and cost data is reliable.

Allocation of variable consideration

Allocate wholly to a PO (or distinct service in a series) if (a) it relates specifically to the entity's efforts to satisfy that PO, and (b) the result is consistent with the allocation objective

Both conditions must be met. Otherwise allocate on the relative SSP basis.

Changes in transaction price

Subsequent change in price is allocated on the same basis as at contract inception

SSPs are not updated after inception. Amounts allocated to a satisfied PO are recognised as revenue (or reduction of revenue) in the period of change.

Over-time criteria (any one)

(a) Customer receives and consumes benefits as entity performs; (b) Customer controls the asset as it is created or enhanced; (c) No alternative use AND enforceable right to payment for performance to date

If none is met, revenue is recognised at a point in time.

Cost-to-cost progress (input method)

Progress % = Costs incurred to date ÷ Total estimated costs

Costs that do not reflect transfer of control (wasted materials, uninstalled materials bought well ahead) are excluded or adjusted.

Cumulative revenue

Cumulative revenue = Transaction price × Progress %

Revenue for the year = cumulative revenue at year end − revenue recognised in earlier years.

Output method progress

Progress % = Value of units delivered or milestones achieved ÷ Total contract value or units

Use where output directly measures value to the customer.

Control indicators at a point in time

Present right to payment; legal title; physical possession; risks and rewards; customer acceptance

These are indicators, not a checklist where all must be met.

Outcome not reasonably measurable

Revenue = Costs incurred (only if costs are expected to be recovered)

Zero margin until progress can be measured reasonably.

Capitalise cost to obtain a contract

Incremental cost + expected to be recovered → asset

Costs incurred regardless of winning the contract are expensed unless explicitly chargeable to the customer.

Practical expedient

Amortisation period ≤ 1 year → may expense when incurred

It is an option, and applies to costs to obtain a contract.

Costs to fulfil: three conditions

Directly related to contract + generates/enhances resources + expected recovery

All three must be met, and the cost must be outside the scope of another standard.

Amortisation

Amortisation for the period = Capitalised cost × (Revenue/transfer in period ÷ Total expected transfer)

Any systematic basis that mirrors the pattern of transfer is acceptable; the revenue ratio is a common one.

Impairment test

Impairment loss = Carrying amount of cost asset − (Remaining consideration expected − Costs directly related, not yet expensed)

Recognise a loss only if the result is positive. Before this test, apply impairment rules of other standards first.

Contract asset

Revenue recognised > Amount unconditionally billable → contract asset

Right depends on something other than passage of time.

Contract liability

Consideration received or due > Performance to date → contract liability

Arises from advances, deposits and billed-in-advance amounts.

Receivable

Unconditional right to consideration → receivable (Ind AS 109)

Only time must pass before payment is due.

Revenue on sale with right of return

Revenue = Price × units not expected to be returned

The expected returned units are credited to a refund liability, not revenue.

Refund liability

Refund liability = Consideration received (or receivable) × expected return %

Reassess at each reporting date and adjust revenue.

Right to recover returned goods

Asset = Carrying amount of expected returns − expected recovery costs (and any expected fall in value)

Present separately from the refund liability. Do not net them.

Warranty classification

Separate purchase option or service beyond assurance → separate performance obligation; otherwise Ind AS 37

If you cannot reasonably separate the two parts of a combined warranty, account for them together as one performance obligation.

Repurchase price test for forward or call options

Repurchase price < original selling price → lease (Ind AS 116), unless part of a sale and leaseback → financing; repurchase price ≥ original selling price → financing

Applies to forward or call options, where the customer does not obtain control. In a financing arrangement the entity continues to recognise the asset.

Repurchase tests for put options

Price < original and significant economic incentive → lease (financing if sale and leaseback); price < original and no incentive → sale with right of return; price ≥ original and > expected market value → financing; price ≥ original and ≤ expected market value, no incentive → sale with right of return

A put option is the customer's right to require the entity to buy the asset back. Always check the incentive and compare the price with both the original price and the expected market value.

Bill-and-hold criteria (all four)

Substantive reason + identified separately as the customer's + ready for physical transfer + cannot be used or redirected by the entity

All four must be met for revenue before delivery. Consider also a separate custody-service obligation.

Breakage

Expected breakage recognised in proportion to the pattern of customer rights exercised

Only if the entity expects to be entitled to the breakage amount. Otherwise recognise when the likelihood of exercise becomes remote.

Licence revenue timing

Right to access IP → over time; right to use IP → point in time

Sales-based or usage-based royalty is recognised when the later event occurs: the sale or usage, or satisfaction of the related obligation.

Quick revision

• Core principle: recognise revenue when control of goods or services transfers, at the amount the entity expects to be entitled to.
• Five steps: contract, performance obligations, transaction price, allocation, recognition.
• A contract needs all of these: the parties have approved the contract and are committed to perform; the rights of each party are identifiable; the payment terms are identifiable; the contract has commercial substance; and it is probable the entity will collect the consideration it is entitled to.
• A good or service is a separate performance obligation if it is capable of being distinct and distinct within the context of the contract.
• Variable consideration is estimated by expected value or most likely amount, and included only to the extent it is highly probable that a significant reversal of cumulative revenue will not occur.
• Allocate the transaction price in proportion to relative stand-alone selling prices.
• Over-time recognition applies if the customer simultaneously receives and consumes the benefits, the entity creates or enhances an asset the customer controls, or the asset has no alternative use and there is an enforceable right to payment for work done.
• If no over-time criterion is met, revenue is recognised at a point in time when control passes.
• Revenue for a period under over-time recognition is cumulative revenue to date minus revenue recognised in earlier periods.
• A contract asset is a right to consideration conditional on something other than the passage of time; a receivable is unconditional.
• A contract liability arises when the customer pays, or payment is due, before the entity performs.
• A principal recognises revenue gross; an agent recognises only its fee or commission.

Common mistakes

• Treating collectability as a test of the full contract price. Fix: Test the amount you expect to be entitled to. If you expect to give a price concession, use the lower amount.
• Recognising revenue because goods were delivered, even though collection is not probable. Fix: If Step 1 fails, no model revenue arises. Record consideration received as a liability until the retention conditions are met.
• Treating every item listed in the contract as a separate performance obligation. Fix: Apply both tests to each item. Combine items that are highly interdependent or are inputs to a single integrated output.
• Testing only whether the item can be sold separately and stopping there. Fix: Always run the second test too. An item can be capable of being distinct yet not separately identifiable, for example a bespoke installation that significantly modifies the software.
• Treating the constraint as an alternative to expected value or most likely amount. Fix: Estimate first, then constrain. The constraint is a second filter on the estimate.
• Adjusting for financing when the gap is one year or less. Fix: Check the gap. If it is expected to be one year or less, the practical expedient allows no adjustment.
• Allocating the contract price in proportion to the invoiced or stated prices instead of SSPs. Fix: Always base the split on SSPs. Stated contract prices matter only if they equal SSPs.
• Treating list price as SSP without checking. Fix: Use list price only if it reflects the price actually charged when sold separately. Look for actual standalone sale data first.
• Recognising revenue when the invoice is raised or cash is received. Fix: Ask only one question: has control passed? Billing and cash are irrelevant to timing.
• Choosing over time because the contract is long term. Fix: A long contract can still be point in time. Test the three criteria first.

Exam tips

• In case-scenario MCQs, look for the one fact that fails a criterion, such as no approval, doubt about payment or a package of contracts.
• Write the answer in condition, fact, conclusion form. Name the criterion before you apply it.
• For modifications, draw the decision order in your head: separate contract, then prospective, then catch-up. Marks go for stating why a route is chosen.
• In numerical questions, show the revised price, the revised progress and the revenue already recognised on separate lines so partial marks are safe.
• Check for related parties and near dates in combination questions. These small facts decide the answer.
• In written answers, use the provision-facts-conclusion pattern: state the test, apply it to the facts given, then conclude the number of performance obligations.
• Always name both distinct tests, and quote the specific indicator in the facts, such as significant customisation or integration.
• For principal-agent questions, lead with control and then use indicators as support. Conclude clearly with gross or net revenue and the amount.