Revenue from Contracts with Customers (Ind AS 115): formula sheet

Key formulas

Five-step model

Contract → Performance obligations → Transaction price → Allocation → Recognition

Learn the order. Every Ind AS 115 problem follows this sequence.

Scope exclusions (para 5)

Leases (Ind AS 116); insurance contracts (Ind AS 117); financial instruments etc. (Ind AS 109, 110, 111, 27, 28); non-monetary exchanges between entities in the same line of business to facilitate sales to customers

Everything else with a customer is in scope.

Performance obligation

Promise to transfer (a) a distinct good or service (or bundle), or (b) a series of distinct goods or services that are substantially the same with the same pattern of transfer

Set-up activities that transfer nothing to the customer are not performance obligations.

Combining contracts (para 17)

Same customer (or related parties) + at or near the same time + any one of: package with single commercial objective; price depends on the other contract; goods or services form a single performance obligation

Only one criterion needs to be met.

Progress measurement (para 39)

For obligations satisfied over time, measure progress to depict performance in transferring control

Used in Step 5 for over-time revenue.

Contract criteria (para 9)

Approved and committed + rights identifiable + payment terms identifiable + commercial substance + collection probable

All five must be met. Collectability considers only the customer's ability and intention to pay.

Separate contract (para 20)

Added goods/services are distinct AND price rises by stand-alone selling prices (with appropriate adjustments)

Both conditions are needed. Then the modification is a separate contract and the old contract is unchanged.

Prospective treatment (para 21(a))

Remaining consideration = unrecognised consideration of old contract + consideration for the modification

Used when remaining goods are distinct from those already transferred. Treated as termination of old and creation of new contract.

Cumulative catch-up (para 21(b))

Revenue adjustment at modification date = effect on transaction price and on measure of progress

Used when remaining goods are not distinct and form part of a single partly satisfied performance obligation.

Combination test (para 17)

Same customer + at or near same time + (package OR price interdependence OR single performance obligation)

Any one of the three criteria is enough.

Cash received, no contract (para 15)

Revenue only if no remaining obligations and consideration non-refundable, or contract terminated and non-refundable

Otherwise recognise a liability.

Performance obligation (para 22)

Performance obligation = promise to transfer (a) a distinct good/service or bundle, or (b) a series of distinct goods/services that are substantially the same with the same pattern of transfer

Assess at contract inception. Each such promise is accounted for separately.

Series conditions (para 23)

Series = one obligation if (a) each item is satisfied over time AND (b) the same progress measure applies to each item

Both conditions must be met. Failing either means the items are separate obligations.

Principal test (B34A, B35)

Principal = controls the specified good/service before transfer to the customer

Momentary legal title alone does not prove control. A principal may use a subcontractor.

Principal revenue (B35B)

Revenue = gross consideration the entity expects to be entitled to

Applies when the principal satisfies the performance obligation.

Agent revenue (B36)

Revenue = fee or commission, often = consideration received − amount paid to the other party

An agent does not control the good or service before transfer.

Expected value

Expected value = Σ (probability × possible consideration amount)

Paragraph 53(a). Suits a large number of contracts with similar characteristics.

Most likely amount

Most likely amount = single most likely outcome in the range

Paragraph 53(b). Suits contracts with only two possible outcomes, such as a bonus achieved or not.

Present value for financing component

Revenue = Present value of promised consideration at the contract-inception discount rate

The objective is the cash selling price (paragraph 61). Use the rate of a separate financing transaction and do not update it after inception (paragraph 64).

Non-cash consideration

Measure at fair value; if not reasonably estimable, use stand-alone selling price of goods or services promised

Paragraphs 66 and 67. If fair value varies for reasons other than form, apply the constraint (paragraph 68).

Consideration payable to a customer

Transaction price = Contract price − consideration payable to customer (unless for a distinct good or service)

Paragraphs 70 and 71. If the payment exceeds the fair value of a distinct good or service received, the excess reduces the transaction price. If fair value cannot be reasonably estimated, the whole payment reduces it.

No significant financing component

Advance payment with timing at customer's discretion; consideration that is substantially variable on an uncontrollable future event; difference arising for reasons other than finance

Paragraph 62 lists these three cases.

Relative SSP allocation

Amount allocated to an obligation = Transaction price × (SSP of that obligation ÷ Sum of SSPs of all obligations)

Para 74 and 76. SSP is determined at contract inception for each distinct good or service.

Discount in a bundle

Discount = Sum of SSPs − Promised consideration

Para 81. If positive, the customer has received a bundle discount. Spread it proportionately unless para 82 evidence exists.

Residual approach

Estimated SSP = Total transaction price − Sum of observable SSPs of the other items

Para 79(c). Allowed only if the price is highly variable or uncertain (not yet established and never sold stand-alone).

Estimation methods for SSP

Adjusted market assessment | Expected cost plus a margin | Residual approach

Para 79. The list is illustrative, not exhaustive. Combinations can be used (para 80).

Single performance obligation

No allocation needed

Para 75. Paras 76 to 86 do not apply, except that paras 84 to 86 may apply to a series with variable amounts.

Timing decision

Over time if any one criterion in paras 35 to 37 is met; otherwise point in time

Decide at contract inception for each performance obligation (para 32).

Output method

Progress % = value of goods or services transferred to date ÷ total value promised under the contract

Examples: surveys, appraisals, milestones, time elapsed, units produced or delivered (para B15).

Cost-based input method

Progress % = cost incurred to date ÷ total expected cost

Input methods use efforts such as costs, labour hours, machine hours. Adjust for costs that do not depict performance (para B19).

Cumulative revenue and period revenue

Revenue for the period = (Progress % × transaction price) − revenue recognised in earlier periods

This is the working method used to apply progress; it follows from remeasuring progress each period (para 40).

Costs excluded from input method

Exclude wasted costs from significant inefficiencies not reflected in price; exclude uninstalled-goods margin where the B19(b) conditions are met

For such goods, revenue may equal their cost (para B19(b)).

Single method rule

One method per performance obligation, applied consistently, progress remeasured each reporting date

Para 40.

Capitalising costs to fulfil (para 95)

Capitalise only if: (a) directly related to a specific contract + (b) generates or enhances resources for future performance + (c) expected to be recovered

All three must be met, and the costs must not be within the scope of another Standard (Ind AS 2, 16, 38).

Incremental cost to obtain a contract

Capitalise if incremental and expected to be recovered; otherwise expense

Costs incurred whether or not the contract is won are expensed, unless explicitly chargeable to the customer.

Practical expedient (para 94)

Amortisation period ≤ 1 year → may expense incremental costs when incurred

It is an option, not a requirement. It applies to costs of obtaining a contract.

Impairment of contract cost asset

Impairment = Carrying amount of asset − (Remaining consideration expected − Costs still to be incurred)

Recognised in profit or loss. Impair other-Standard assets first (para 103).

Contract asset

Contract asset = Revenue recognised for work done − Amounts billed or unconditionally due

Applies where the right to payment depends on something other than passage of time.

Contract liability

Contract liability = Consideration received or due − Revenue recognised so far

Shown when the customer has paid (or payment is due) before you perform.

Key disclosures (paras 116, 118, 127, 128)

Opening and closing receivables, contract assets, contract liabilities; revenue recognised from opening contract liability; explanation of significant changes; closing balance of cost assets by category; amortisation and impairment for the period

Para 127 also requires judgements made and the amortisation method.

Right of return: what to recognise

Revenue = price × units NOT expected to be returned; Refund liability = price × units expected to be returned; Asset = cost of units expected to be returned (less any recovery cost)

Cost of sales is reduced for the asset. Update the refund liability at each reporting date; the change goes to revenue.

Exchange is not a return

Same type, quality, condition and price exchange → not a return

Defective-for-working exchanges follow the warranty guidance.

Warranty test

Assurance only → not a separate performance obligation; extra service → separate performance obligation

If both are promised and cannot be separated, treat as one performance obligation.

Bill-and-hold criteria (all four)

Substantive reason + separately identified + ready for transfer + no ability to use or redirect

Plus the control test in paragraph 38. If met, consider custodial obligations and allocate price to them.

Repurchase forms

Forward = obligation; Call = right; Put = obligation at customer's request

Identify the form first, as the accounting depends on it.

Material right allocation

Allocate transaction price on relative stand-alone selling prices, including the option

The option's stand-alone price reflects the discount and the likelihood of exercise.

Quick revision

• The five steps: identify the contract, identify performance obligations, determine the transaction price, allocate the price, recognise revenue as obligations are satisfied.
• The allocation objective (para 73): allocate the price to each performance obligation to depict the consideration the entity expects to be entitled to.
• Allocation is on a relative stand-alone selling price basis (para 74), with separate rules for discounts and for variable consideration.
• If a contract has only one performance obligation, the allocation paragraphs 76 to 86 do not apply (para 75), though 84 to 86 may apply to a series of distinct goods or services with variable amounts.
• Transaction price covers variable consideration, time value of money and non-cash consideration. Variable consideration is estimated and may be constrained.
• Costs to fulfil a contract are capitalised only if outside Ind AS 2, 16 and 38 and they meet all three tests in para 95: directly related, generate or enhance resources, and expected to be recovered.
• Over-time recognition needs a method (output or input) and an explanation of why it faithfully depicts transfer (para 124).
• Disclose opening and closing receivables, contract assets and contract liabilities, and revenue recognised from the opening contract liability (para 116).
• Disclose a reconciliation of revenue to the contracted price, showing each adjustment such as discounts, rebates, refunds and bonuses (para 126AA).
• A practical expedient lets you skip remaining-obligation disclosure for contracts of one year or less (para 121), but you must say whether you use it (para 122).
• Write the conclusion for every judgement: state the test, apply the facts, then give the treatment.

Common mistakes

• Applying Ind AS 115 to lease contracts or financial instruments. Fix: Remember the para 5 exclusions: leases go to Ind AS 116 and financial instruments to Ind AS 109 and related Standards.
• Treating contract set-up work as a separate performance obligation. Fix: Para 25 says set-up activities are not performance obligations unless they transfer a good or service to the customer.
• Treating any modification adding distinct goods as a separate contract. Fix: Also check that the price rise reflects stand-alone selling prices. A discounted add-on beyond appropriate adjustments fails.
• Recognising cash received as revenue when the para 9 criteria fail. Fix: Recognise a liability until a para 15 event occurs, or until the criteria are later met (para 14).
• Treating every item listed in the contract as a separate performance obligation. Fix: Test each item. If it is not distinct from other promises, combine it into a distinct bundle and count that bundle once.
• Deciding principal or agent once for the whole contract. Fix: Paragraph B34 requires the assessment for each specified good or service. Conclude item by item.
• Using the contract price as revenue without checking for discounts, rebates or bonuses. Fix: Scan every clause for amounts that depend on future events and estimate them before totalling.
• Using expected value for a two-outcome bonus. Fix: For a bonus earned or not, the most likely amount is the usual choice under paragraph 53(b). Use expected value for a large portfolio of similar contracts.
• Allocating the entire discount to the main product, or to the item easiest to discount. Fix: Allocate proportionately to all obligations unless the question gives observable evidence that the whole discount relates to specific items (para 81 and 82).
• Allocating the price based on cost or on the invoice split in the contract. Fix: Allocate on relative stand-alone selling prices. Contract prices are used only if they equal the SSP.

Exam tips

• In MCQs, the scope exclusions and the para 17 combination criteria are favourite test points. Learn the exact lists.
• In case-based answers, name each step of the model in your working. Examiners award marks per step.
• Use Ind AS terminology: 'balance sheet' and 'statement of profit and loss'.
• Do not quote a paragraph number unless you are sure. The ones in this page are safe: 5, 17, 25, 39, 113.
• Always end a scenario answer with a clear conclusion on whether, what and when revenue is recognised.
• Write the paragraph number next to each conclusion. It shows the examiner your basis.
• In case scenarios, look for words such as same customer, negotiated together, or discount linked to another contract. They signal combination under para 17.
• For modifications, state both tests of para 20 explicitly before moving to para 21.