Financial Reporting · Ind AS 115 Revenue from Contracts with Customers

Ind AS 115: Contract Costs, Contract Assets and Contract Liabilities

Updated 5 October 2026 · Fact-checked

Ind AS 115 requires you to capitalise incremental costs of obtaining a contract and costs of fulfilling it (if they meet set conditions), amortise them as the goods or services transfer, and test for impairment. Present a contract asset, contract liability or receivable by comparing performance with payment, contract by contract.

Understand Contract Costs, Contract Assets and Liabilities

Revenue is only half of an Ind AS 115 story. The entity also spends money to win and perform a contract. The standard says when that spending becomes an asset instead of an immediate expense, and how the contract itself appears on the balance sheet.

Costs to obtain a contract are incremental costs you would not have incurred if the contract had not been won. A sales commission paid only on signing is the classic case. Costs incurred whether or not you win, such as bid costs, legal due diligence or travel for a tender, are expensed unless they are explicitly chargeable to the customer regardless of outcome. You recognise the incremental cost as an asset if you expect to recover it. As a practical expedient, you may expense it if the amortisation period would be one year or less.

Costs to fulfil a contract are first checked against other standards such as Ind AS 2, Ind AS 16 and Ind AS 38. If another standard applies, follow it. If not, capitalise only when all three conditions are met: the costs relate directly to a contract or a specific anticipated contract; they generate or enhance resources used to satisfy performance obligations in future; and they are expected to be recovered. General and administrative costs, wasted materials, labour or other costs, costs relating to satisfied performance obligations, and costs you cannot separate from unsatisfied ones are expensed.

Capitalised costs are amortised on a systematic basis consistent with the pattern of transfer of the related goods or services. Amortisation may extend to specific anticipated contracts (including renewals) when the asset relates to goods or services under those contracts. They are tested for impairment: recognise a loss in profit or loss when the carrying amount exceeds the remaining consideration expected, less the costs directly related to providing those goods or services that have not been recognised as expenses. Reversal is allowed up to the amount that would have been carried with no impairment.

For presentation, look at each contract. If you have performed but the right to payment depends on something other than time passing, show a contract asset. If the right is unconditional (only time must pass), show a receivable. If the customer has paid, or payment is due, before you perform, show a contract liability. Net contract assets and liabilities within one contract; never net across different contracts.

Key rules to remember

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.

How to solve Contract Costs, Contract Assets and Liabilities questions

Use this order for any question on contract costs or contract balances.

1Identify the contract and split the facts into costs, performance and payments.
2For each cost, ask: would it have been incurred if the contract was not obtained? If yes, it is a cost to fulfil or an expense. If no, it is incremental to obtain.
3For costs to fulfil, first check whether Ind AS 2, 16 or 38 applies. If so, follow that standard. Otherwise test the three conditions.
4Exclude general overheads, abnormal wastage, and costs relating to past performance. These are expenses.
5Capitalise the eligible cost. Check the one-year practical expedient for costs to obtain.
6Compute amortisation using the pattern of transfer. Extend it to specific anticipated contracts (including renewals) when the asset relates to goods or services under those contracts.
7Apply the impairment test at the reporting date and recognise any loss in profit or loss.
8Present the contract position: compare revenue recognised, amounts billed and cash received, then classify as contract asset, receivable or contract liability, and add disclosures.

Quickest way: Three-bucket shortcut

When to use it: Use it in MCQs and short written answers when you must classify items quickly.

Costs: label each cost 'incremental to win', 'directly to fulfil' or 'expense'. Bid costs and overheads are expenses.
Fulfilment costs under another standard go to that standard, not to Ind AS 115.
Balances: compare revenue earned, invoice raised and cash received. Earned but not yet unconditionally billable gives contract asset. Unconditional claim gives receivable. Cash or due amount ahead of performance gives contract liability.
Impairment: expected remaining consideration less remaining direct cost must be at least the carrying amount; if not, the shortfall is the loss.

Common mistakes in Contract Costs, Contract Assets and Liabilities

Capitalising all costs incurred in obtaining a contract, including legal fees for the bid and travel.
Students assume any cost linked to a contract is an asset.
Fix: Capitalise only incremental costs that would not arise without winning the contract. Expense the rest unless explicitly chargeable to the customer.
Capitalising fulfilment costs without checking Ind AS 2, 16 or 38.
The three conditions are remembered, but not the scope order.
Fix: Always state first that costs within another standard follow that standard. Then apply the three conditions.
Showing a receivable when the right to payment is conditional on further performance.
Billing is confused with the right to consideration.
Fix: If only time must pass, it is a receivable. If other conditions remain, it is a contract asset.
Netting a contract asset of one contract against a contract liability of another.
Students look at the total position with the same customer.
Fix: Net only within a single contract (or contracts combined under the contract-combination rules). Present separate contracts separately.
Amortising capitalised costs over the contract term automatically.
Straight-line is the default habit.
Fix: Use the pattern of transfer of the related goods or services. This may extend to specific anticipated contracts (including renewals) when the asset relates to goods or services under those contracts.
Writing down the impairment test using only the carrying amount versus expected consideration.
The deduction for remaining direct costs is forgotten.
Fix: Compare carrying amount with remaining consideration less costs directly related to providing the goods or services not yet expensed.

Worked examples

Example 1

Case: Zenith Tech Ltd (Ind AS entity) wins a 3-year managed-services contract with a customer. It pays a sales commission of ₹6,00,000 to its salesperson only because the contract was signed. It also spent ₹2,00,000 on legal due diligence and travel to prepare its bid. Services transfer evenly over 3 years. Compute the amount capitalised and the annual amortisation, and state the treatment of the other costs.

Show the solution

Commission of ₹6,00,000 would not have been incurred without the contract, so it is an incremental cost of obtaining the contract.
The amortisation period is 3 years, which is more than one year, so the practical expedient to expense it does not apply. Assuming the cost is expected to be recovered, capitalise it.
Legal due diligence and bid travel of ₹2,00,000 would have been incurred whether or not the contract was won. They are not chargeable to the customer in any case, so expense them when incurred.
Services transfer evenly, so amortise on a straight-line basis: ₹6,00,000 ÷ 3 = ₹2,00,000 per year.

Answer: Capitalise ₹6,00,000 as an asset for the cost to obtain the contract and amortise ₹2,00,000 each year. Expense the ₹2,00,000 bid costs immediately.

Example 2

Case: Alpha Builders Ltd signs a contract to build a facility for ₹50,00,000. During the year it performs work and recognises revenue of ₹30,00,000 over time. Billing terms: it can invoice ₹20,00,000 now, payable in 30 days; the balance ₹10,00,000 of earned revenue can be invoiced only after final customer acceptance. The customer has paid no cash yet. Separately, Alpha capitalised ₹4,00,000 of eligible fulfilment costs. At year-end, Alpha expects to receive ₹20,00,000 as consideration for the unperformed part of the contract (the contract price not yet earned), and ₹16,00,000 of directly related costs are still to be incurred. Show the balance-sheet items and test the capitalised cost for impairment.

Show the solution

Revenue recognised is ₹30,00,000.
The ₹20,00,000 invoiced is an unconditional right because only time must pass. Present it as a receivable of ₹20,00,000.
The ₹10,00,000 depends on final customer acceptance, not just time. Present it as a contract asset of ₹10,00,000.
No cash has been received in advance, so there is no contract liability.
Impairment test: the consideration Alpha expects to receive for the unperformed part is ₹20,00,000 (₹50,00,000 contract price − ₹30,00,000 relating to work already performed). The receivable of ₹20,00,000 and the contract asset of ₹10,00,000 relate to work already done. They are not part of this figure and are tested separately under Ind AS 109.
Less directly related costs still to be incurred ₹16,00,000: ₹20,00,000 − ₹16,00,000 = ₹4,00,000.
Carrying amount of capitalised fulfilment cost is ₹4,00,000. It does not exceed ₹4,00,000, so the shortfall is nil. Note that this shows no impairment, but also no headroom.
No impairment loss is recognised, and the asset stays at ₹4,00,000. Impairment of other assets under other standards, if any, is applied first.

Answer: Receivable ₹20,00,000; contract asset ₹10,00,000; no contract liability. Expected consideration for the unperformed part (₹20,00,000) less remaining direct costs (₹16,00,000) is ₹4,00,000, equal to the carrying amount of ₹4,00,000, so there is no impairment and the capitalised fulfilment cost stays at ₹4,00,000. The contract asset and receivable are tested separately under Ind AS 109.

Exam tips

In case-scenario MCQs, first label every cost: incremental to obtain, direct to fulfil, or expense. Most options are wrong because of one misclassified cost.
In written answers, use the provision-facts-conclusion form: state the Ind AS 115 rule, apply it to the numbers, then give the entry or presentation.
Always show the check for another standard before capitalising fulfilment costs. Examiners award marks for this step.
For presentation questions, set out revenue earned, amount billed and cash received in three lines. The classification becomes easy.
Mention disclosures briefly: closing contract asset and liability balances, revenue recognised from opening contract liability, and closing balances of capitalised contract costs with amortisation and impairment.

Practice questions from Ind AS 115 Revenue from Contracts with Customers

Contract Costs, Contract Assets and Liabilities in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Contract Costs, Contract Assets and Liabilities: frequently asked questions

What is the difference between a contract asset and a receivable in Ind AS 115?

A receivable is an unconditional right to consideration, where only the passage of time is needed before payment is due. A contract asset is a right to consideration for work done that is conditional on something else, such as further performance or customer acceptance. Receivables are then accounted for under Ind AS 109.

Can sales commission always be capitalised under Ind AS 115?

No. It must be an incremental cost of obtaining the contract and be expected to be recovered. If the amortisation period would be one year or less, you may choose to expense it using the practical expedient.

How are capitalised contract costs amortised?

Amortise them on a systematic basis that matches the pattern of transfer of the goods or services to which the asset relates. This can include anticipated contracts if the asset relates to them. Review the pattern if it changes significantly, as a change in estimate.

When do you recognise a contract liability?

Recognise it when the customer has paid, or payment is due, before you have transferred the goods or services. It is reduced and revenue is recognised as you perform. Present it at contract level, net of any contract asset for the same contract.