Financial Reporting · Ind AS 115 Revenue from Contracts with Customers

Identifying the Contract with a Customer (Ind AS 115 Step 1)

Updated 5 October 2026 · Fact-checked

Step 1 of Ind AS 115 decides whether a contract exists for revenue accounting. It must be approved, have identifiable rights and payment terms, have commercial substance, and collection must be probable. You then combine related contracts and treat modifications either as a separate contract or as an adjustment to the existing one.

Understand Identifying the Contract with a Customer

Ind AS 115 applies a five-step model. Step 1 is the gateway. If there is no contract in the Ind AS 115 sense, you cannot recognise revenue under the model, however much work you have done.

A contract is an agreement between two or more parties that creates enforceable rights and obligations. Enforceability is a matter of law. Contracts can be written, oral or implied by customary business practice. Ind AS 115 applies only when all five criteria are met: (a) the parties have approved the contract and are committed to perform; (b) you can identify each party's rights on the goods or services; (c) you can identify the payment terms; (d) the contract has commercial substance, meaning the risk, timing or amount of future cash flows is expected to change; and (e) it is probable that you will collect the consideration to which you will be entitled.

The collectability test looks at the customer's ability and intention to pay the amount you expect to be entitled to, not necessarily the stated price. If you may offer a price concession, the amount you expect to be entitled to may be lower than the price. If the criteria are not met at the start, you keep reassessing them. Until they are met, consideration received is recognised as revenue only when you have no remaining obligation to transfer goods or services and substantially all of the promised consideration has been received and is non-refundable, or when the contract is terminated and the consideration received is non-refundable. Until then, consideration received is a liability.

Two or more contracts entered into at or near the same time with the same customer (or its related parties) must be combined and treated as one if any one of these holds: they were negotiated as a package with a single commercial objective; the consideration in one depends on the price or performance of the other; or the goods or services promised are a single performance obligation.

A contract modification is a change in scope, price or both, approved by the parties. If approval is pending, you need to judge whether the change is enforceable. A modification is a separate contract if it adds distinct goods or services and the price rises by their stand-alone selling prices (adjusted for circumstances). Otherwise, it is accounted for either prospectively (remaining goods are distinct from those already transferred), or by a cumulative catch-up (remaining goods are not distinct and are part of a partly satisfied obligation), or by a mix of the two.

Key rules to remember

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.

How to solve Identifying the Contract with a Customer questions

Use this order for any Step 1 question. Write the criterion or condition you test, then the fact from the case, then your conclusion.

1List the contracts and agreements in the case, with dates, customers and who is related to whom.
2Test each contract against the five criteria. Note any fact on approval, enforceability, payment terms, commercial substance and credit risk.
3For collectability, work out the amount you expect to be entitled to (allow for likely price concessions), then judge whether collection is probable.
4If the criteria fail, state that Step 1 is not met. Treat consideration received as a liability until a retention condition is met: no remaining obligation and substantially all of the promised consideration received and non-refundable, or contract terminated and consideration received non-refundable. Mention reassessment.
5Check whether contracts with the same customer at or near the same time should be combined. Apply the three conditions and combine on any one.
6If a change in scope or price exists, confirm it is approved or enforceable, then ask whether it adds distinct goods and whether the price reflects stand-alone selling prices.
7If it is not a separate contract, decide whether the remaining goods are distinct from those already transferred. Choose prospective or cumulative catch-up and compute.
8Conclude in one line and state the journal or the revenue figure.

Quickest way: Three-gate scan for Step 1

When to use it: Use this for short case-scenario MCQs and for the first paragraph of a written answer when time is tight.

Gate 1: Does a contract exist? Scan for approval, payment terms, commercial substance and doubt about payment. One failure ends the analysis: no revenue yet.
Gate 2: Are there several contracts with one customer at about the same time? Look for a package, price linkage or one combined obligation. If yes, treat them as one.
Gate 3: Has anything changed after signing? Ask: distinct goods added at stand-alone price? If yes, separate contract. If no, ask whether the rest is distinct: yes means prospective, no means catch-up.
Compute only what the question asks for, and write the conclusion before the working.

Common mistakes in Identifying the Contract with a Customer

Treating collectability as a test of the full contract price.
Students read it as 'will the customer pay the invoice'.
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.
Students link revenue to delivery from the old rule.
Fix: If Step 1 fails, no model revenue arises. Record consideration received as a liability until the retention conditions are met.
Requiring all three combination conditions before combining contracts.
The conditions are listed together and read as cumulative.
Fix: Any one condition is enough. They are alternatives.
Treating every extra order as a separate contract.
Students ignore the price test.
Fix: Both tests must pass: the added goods are distinct and the price rises by their stand-alone selling price. A discount beyond the usual adjustment fails the test.
Applying prospective treatment when the remaining goods are not distinct.
Students memorise the order of the options and not the reasoning.
Fix: Ask whether the remaining goods are distinct from those already transferred. If they form part of one partly satisfied obligation, use cumulative catch-up.
Restating revenue already recognised under prospective treatment.
Students confuse it with catch-up.
Fix: Under prospective treatment, past revenue is untouched. Only the remaining consideration is spread over the remaining goods.

Worked examples

Example 1

Alpha Ltd agrees on 1 April to sell 100 units at ₹500 each (₹50,000) to Beta Ltd, with delivery on 1 July. On 1 May, with no units yet delivered, both parties agree to add 20 more units, distinct from the original, at ₹400 each. Alpha's stand-alone selling price is ₹480 per unit. No circumstance of this order, such as a saving in selling costs, justifies an adjustment to that price. Decide the accounting and the total revenue.

Show the solution

The added 20 units are distinct goods, so the first test is met.
The price test: the added price must reflect the stand-alone selling price, adjusted for circumstances. The price of ₹400 is below the ₹480 stand-alone selling price, and no circumstance of the order justifies an adjustment. So ₹400 does not reflect the stand-alone selling price, the price test fails and this is not a separate contract.
Are the remaining goods distinct from those already transferred? No units were transferred, and all 120 units are distinct goods. So use prospective treatment.
Combine consideration: original ₹50,000 (nothing recognised yet) + new 20 × ₹400 = ₹8,000, giving ₹58,000.
Spread the ₹58,000 over the 120 remaining units: ₹58,000 ÷ 120 = ₹483.33 per unit. This blended price is a result of prospective treatment.

Answer: The modification is not a separate contract. Account for it prospectively. Total revenue for the 120 units is ₹58,000, about ₹483.33 per unit, recognised as units are delivered.

Example 2

Gamma Ltd signs a 4-year service contract with Delta Ltd for ₹40,00,000, which is a single performance obligation satisfied over time. At the end of year 1, Gamma has recognised 25% of revenue (₹10,00,000). At that point, the parties agree to extend the scope with additional work that is not distinct from the original service and to increase the total price to ₹50,00,000. Based on the revised estimate of total costs, progress at the modification date is 30%. Compute the adjustment.

Show the solution

The additional work is not distinct, so it is not a separate contract. The remaining services are part of a single, partly satisfied obligation, so use cumulative catch-up.
Revised transaction price: ₹50,00,000.
Revised progress at the modification date: 30%, so cumulative revenue should be 30% × ₹50,00,000 = ₹15,00,000.
Revenue already recognised: ₹10,00,000.
Adjustment = ₹15,00,000 − ₹10,00,000 = ₹5,00,000 additional revenue at the modification date.

Answer: The modification is accounted for by cumulative catch-up. Gamma recognises additional revenue of ₹5,00,000 at the modification date, taking cumulative revenue to ₹15,00,000. The remaining ₹35,00,000 of the revised price is recognised as the rest of the service is performed. If revised progress had been lower than the amount already recognised, the adjustment would be a reduction of revenue.

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.

Practice questions from Ind AS 115 Revenue from Contracts with Customers

Identifying the Contract with a Customer in other exams

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

Identifying the Contract with a Customer: frequently asked questions

What are the criteria for a contract under Ind AS 115?

The parties approve the contract and are committed to perform, rights and payment terms are identifiable, the contract has commercial substance, and collection of the consideration is probable. All must be met before the five-step model applies.

When must contracts be combined under Ind AS 115?

Combine contracts with the same customer or its related parties, entered at or near the same time, if any one condition holds. They were negotiated as a package, the price of one depends on the other, or the goods or services form a single performance obligation.

How do you account for a contract modification?

First check whether it is a separate contract: distinct goods added at a price reflecting stand-alone selling prices. If not, treat it prospectively when remaining goods are distinct, or with a cumulative catch-up when they are not distinct.

What if collectability is not probable?

Step 1 is not met, so you do not apply the model. Consideration received is a liability until you have no remaining obligation and substantially all of the promised consideration has been received and is non-refundable, or the contract is terminated and the consideration received is non-refundable. You keep reassessing the criteria.