Financial Reporting · Ind AS 115 Revenue from Contracts with Customers

Ind AS 115: Determining the Transaction Price

Updated 5 October 2026 · Fact-checked

The transaction price is the amount of consideration an entity expects to be entitled to for transferring promised goods or services, excluding amounts collected for third parties such as GST. To solve questions, estimate variable consideration, apply the constraint, adjust for financing, fair value non-cash items, and net off payments to the customer.

Understand Determining the Transaction Price

Step 3 of the Ind AS 115 model fixes how much revenue you will recognise in total. It is the amount you expect to be entitled to, not the amount written on the invoice. Amounts collected on behalf of third parties, such as GST, are excluded.

The price can differ from the stated price in five ways. Discounts, rebates, refunds, bonuses and penalties make it variable consideration. Long gaps between payment and delivery may create a significant financing component. The customer may pay in goods or shares, which is non-cash consideration. You may pay the customer something, which is consideration payable to a customer. Also, you assume the contract runs as agreed, with no cancellation or renegotiation.

For variable consideration, you first estimate it using either the expected value (probability-weighted) or the most likely amount. Choose the method that better predicts the amount you will be entitled to. Expected value is suitable where the entity has a large number of contracts with similar characteristics. Most likely amount is suitable where the contract has only two possible outcomes, such as a bonus that is either earned or not.

Then you apply the constraint. Include variable consideration only to the extent it is highly probable that a significant reversal of cumulative revenue will not occur when the uncertainty is resolved. The constraint is about reversal risk. Factors that raise the risk include dependence on factors outside your control, a long period before resolution, limited experience, and a wide range of outcomes. Reassess the estimate at every reporting date.

For a significant financing component, adjust the price to reflect the cash selling price, discounting at the rate the contract would carry in a separate financing transaction between the parties. As a practical expedient, you need not adjust if the gap between transfer and payment is expected to be one year or less.

The one-year gap is not the only test. Even where the gap is more than one year, a contract may have no significant financing component. Examples are where the timing of payment is at the customer's discretion, where the amount and timing of consideration vary on events outside the control of both parties, or where the difference between the promised consideration and the cash selling price arises for reasons other than financing.

Key rules to remember

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.

How to solve Determining the Transaction Price questions

Use this order for any Step 3 question. It keeps the working clean and earns step marks.

1List every item in the contract: fixed price, discounts, rebates, bonuses, penalties, credit period, non-cash items and payments to the customer.
2Remove amounts collected for third parties, such as GST.
3For each variable item, choose expected value or most likely amount and estimate it.
4Apply the constraint. Include only the amount where a significant revenue reversal is highly probable not to occur. State the reasons.
5Test for a significant financing component. If the gap is over one year, discount to present value at the stated rate.
6Convert non-cash consideration to fair value at contract inception.
7Treat payments to the customer as a price reduction unless a distinct good or service is received. Then add everything to get the transaction price.
8State the revenue to recognise and any reassessment at the reporting date.

Quickest way: Five-question scan

When to use it: Use when time is short, especially for MCQs and short numericals.

Ask: is any amount uncertain? If yes, pick the method (only two possible outcomes: most likely amount; a large number of similar contracts: expected value).
Ask: could revenue reverse later? If yes, cut the estimate to the highly probable amount.
Ask: is payment more than one year from transfer? If yes, discount.
Ask: is anything received other than cash? Use fair value.
Ask: do I pay the customer? If not for a distinct item, deduct it. Write the total with one line of reasoning per item.

Common mistakes in Determining the Transaction Price

Treating the constraint as an alternative to expected value or most likely amount.
Students think the three are choices of a method.
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.
Students discount whenever a credit period appears.
Fix: Check the gap. If it is expected to be one year or less, the practical expedient allows no adjustment.
Using the wrong discount rate, such as the entity's borrowing rate by default.
The word 'rate' in the question is taken as the answer.
Fix: Use the rate of a separate financing transaction between the parties, reflecting the customer's credit risk. Use the rate given in the question.
Deducting every payment to a customer from revenue.
Students remember 'reduction of price' only.
Fix: If the customer supplies a distinct good or service, treat it as a purchase up to fair value. Only the excess reduces the price.
Including GST in the transaction price.
Invoice totals are used directly.
Fix: Exclude amounts collected for third parties. Revenue is the net amount.
Not reassessing variable consideration at the reporting date.
Students treat the estimate as fixed at inception.
Fix: Update the transaction price at each reporting date and recognise changes as revenue adjustments in the period.

Worked examples

Example 1

A Ltd sells 1,000 units to a new customer at ₹500 per unit and receives ₹5,00,000 in cash on delivery. The contract gives a retrospective volume rebate of ₹50 per unit on all units if the customer buys more than 5,000 units in the year. A Ltd estimates a 60% chance that the threshold is not reached (no rebate) and a 40% chance that it is reached. A Ltd has limited experience with this type of customer, and the customer's volumes depend on its own market demand, which A Ltd cannot influence. Determine the transaction price per unit and the revenue and refund liability at the first sale.

Show the solution

Identify the variable item: the rebate of ₹50 per unit on all units, with two possible outcomes.
Choose the method. With only two outcomes, most likely amount is suitable. The most likely outcome is no rebate (60%), giving an unconstrained estimate of ₹500 per unit. Expected value would give ₹480 (60% × ₹500 + 40% × ₹450), but that is not a price the customer can actually pay, so it does not suit a two-outcome contract.
Apply the constraint. If A Ltd recognises ₹500 per unit and the rebate is later granted, ₹50 per unit of cumulative revenue reverses. On 1,000 units that is ₹50,000 of the ₹5,00,000 recognised. Whether a reversal is significant is a judgment made against the revenue of the contract. There is no fixed percentage that makes a reversal significant.
Test the risk factors. Volumes depend on factors outside A Ltd's control and A Ltd has limited experience with this customer. Both raise the risk of reversal, and a 40% chance of the rebate is high. On these facts, A Ltd concludes that only ₹450 per unit is highly probable not to reverse. Recognising ₹500 does not meet that test, and neither does ₹480, because the rebate could still be granted. With different facts, such as extensive experience and a low chance of the rebate, the conclusion could differ.
So A Ltd includes only the amount that is highly probable not to reverse. Transaction price = ₹500 − ₹50 = ₹450 per unit.
Revenue for 1,000 units = 1,000 × ₹450 = ₹4,50,000. Cash received is ₹5,00,000, so the difference of ₹50,000 is a refund liability.
Reassess at each reporting date. If it becomes highly probable that the threshold will not be reached, release the refund liability to revenue.

Answer: The most likely amount is ₹500 per unit. Because A Ltd has limited experience and the customer's volumes are outside its control, only ₹450 per unit is highly probable not to reverse, so the constrained transaction price is ₹450 per unit. Revenue is ₹4,50,000 and a refund liability of ₹50,000 is recognised against the ₹5,00,000 received.

Example 2

On 1 April 2026, B Ltd sells equipment to a customer for ₹6,00,000 with control transferring on that date. The customer will pay on 31 March 2028, two years later. A separate financing arrangement between the parties would carry an interest rate of 10% per annum. Compute the revenue on 1 April 2026 and the interest income for the year ended 31 March 2027.

Show the solution

The gap between transfer and payment is two years, which is more than one year. So the financing component is significant and requires adjustment.
Present value = ₹6,00,000 ÷ (1.10)² = ₹6,00,000 ÷ 1.21 = ₹4,95,868 (rounded).
Revenue on 1 April 2026 = ₹4,95,868. Receivable is recognised at the same amount.
Interest for year 1 = ₹4,95,868 × 10% = ₹49,587 (rounded).
Receivable at 31 March 2027 = ₹4,95,868 + ₹49,587 = ₹5,45,455. Check: ₹6,00,000 ÷ 1.10 = ₹5,45,455.
Interest in year 2 is ₹54,545, bringing the receivable to ₹6,00,000.

Answer: Revenue is ₹4,95,868 on 1 April 2026. Interest income for 2026-27 is ₹49,587, recognised separately from revenue.

Exam tips

Show the method choice (expected value or most likely amount) with a one-line reason. Examiners award marks for it.
In constraint questions, write the words 'highly probable that a significant reversal will not occur' and name the risk factor from the case.
Always state the one-year practical expedient test before discounting. Missing it loses an easy mark.
Present interest income on a financing component separately from revenue, and show the receivable or contract liability build-up.
In MCQs on payments to a customer, check first whether the customer provides a distinct good or service.

Practice questions from Ind AS 115 Revenue from Contracts with Customers

Determining the Transaction Price in other exams

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

Determining the Transaction Price: frequently asked questions

What is the difference between expected value and most likely amount?

Expected value is the sum of each possible outcome multiplied by its probability. Most likely amount is the single outcome with the highest probability. Use the method that better predicts the amount you will be entitled to.

When does the constraint apply under Ind AS 115?

It applies to every estimate of variable consideration. You include the estimate only to the extent that a significant reversal of cumulative revenue is highly probable not to occur. It is reassessed at each reporting date.

Do I always adjust for a financing component?

No. You adjust only if the component is significant. If the gap between transfer and payment is expected to be one year or less, you may skip the adjustment as a practical expedient.

How is non-cash consideration measured?

At fair value. If fair value cannot be reasonably estimated, you measure it indirectly by reference to the stand-alone selling price of the goods or services promised in exchange.