Financial Reporting · Ind AS 115 Revenue from Contracts with Customers

Scope and Five-Step Model of Ind AS 115 (CA Final FR)

Updated 5 October 2026

Ind AS 115 sets out how an entity recognises revenue from contracts with customers. Its core principle: recognise revenue when control of promised goods or services passes to the customer, at the amount the entity expects to be entitled to. To solve a question, apply five steps: identify the contract, identify performance obligations, determine the transaction price, allocate it, and recognise revenue as each obligation is satisfied.

Understand Scope and Five-Step Model of Ind AS 115

Ind AS 115 answers one question: how much revenue should you record, and when? It replaced Ind AS 18 and Ind AS 11 and their interpretations with one model for all contracts with customers.

The core principle is simple. You recognise revenue to show the transfer of promised goods or services to a customer. The amount is what you expect to be entitled to in exchange. The trigger is transfer of control, not the raising of an invoice or receipt of cash.

Scope. The standard applies to all contracts with customers, except some that are covered by other standards. The exclusions are lease contracts (Ind AS 116), insurance contracts (Ind AS 117), financial instruments and other contractual rights or obligations within the scope of Ind AS 109, Ind AS 110, Ind AS 111, Ind AS 27 and Ind AS 28, and non-monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers.

A contract can be partly in scope. If the other standard says how to separate or initially measure some parts of the contract, apply those requirements first. Take out the amount measured under the other standard from the transaction price. Then apply Ind AS 115 to the rest of the contract. If the other standard gives no separation or measurement rules, apply Ind AS 115 to separate and measure the parts.

Key definitions. A contract is an agreement between two or more parties that creates enforceable rights and obligations. A customer is a party that has contracted to obtain goods or services that are an output of the entity's ordinary activities in exchange for consideration. Income includes revenue and gains. Revenue is income arising in the course of ordinary activities. A performance obligation is a promise to transfer a distinct good or service (or a series of them). The transaction price is the consideration the entity expects to be entitled to, excluding amounts collected for third parties such as GST. A contract asset is the right to consideration that is conditional on something other than the passage of time. A contract liability is the obligation to transfer goods or services for which consideration has been received or is due.

The five steps. Step 1: identify the contract. Step 2: identify the performance obligations. Step 3: determine the transaction price. Step 4: allocate the transaction price to the performance obligations. Step 5: recognise revenue when (or as) each performance obligation is satisfied. Steps 1 to 4 decide the amount and the unit of account. Step 5 decides the timing.

Key rules to remember

Core principle: Revenue = amount the entity expects to be entitled to, recognised when (or as) control of promised goods or services transfers to the customer; Control, not invoicing or cash receipt, drives timing.
Five-step model: 1 Identify contract → 2 Identify performance obligations → 3 Determine transaction price → 4 Allocate price → 5 Recognise revenue; Write these five headings in every answer on this standard.
Contract existence criteria (Step 1): Approved and committed + rights identifiable + payment terms identifiable + commercial substance + collection of consideration probable; All five must be met. Collectability is judged on the amount the entity expects to be entitled to. If any criterion is not met at inception, keep reassessing the contract. Apply the model from the time the criteria are met.
Distinct good or service (Step 2): Capable of being distinct AND distinct within the context of the contract; If both are met, it is a separate performance obligation.
Relative stand-alone selling price allocation (Step 4): Allocated price = Stand-alone selling price of the obligation ÷ Total of stand-alone selling prices × Transaction price; Use observable prices where available. Otherwise estimate.
Contract balances: Unconditional right to consideration = receivable; conditional right = contract asset; consideration received or due before performance = contract liability; Present on a net basis for a single contract.

How to solve Scope and Five-Step Model of Ind AS 115 questions

Use the same sequence for any case. Show each step as a heading so the examiner can award marks step by step.

1Check scope. Confirm the arrangement is with a customer and is not excluded (lease, insurance, financial instrument, and similar).
2Step 1: test the contract against the five criteria. If any fails at inception, do not apply the model yet. Recognise consideration received as a liability, and keep reassessing the criteria. Apply the model once they are met. Until then, recognise the consideration as revenue only when the entity has no remaining obligations to transfer goods or services and all, or substantially all, of the consideration is received and non-refundable, or when the contract is terminated and the consideration received is non-refundable.
3Step 2: list every promise. Decide which are distinct goods or services and which must be combined. Note any series of distinct items treated as one obligation.
4Step 3: compute the transaction price. Start with the fixed price, then adjust for variable consideration, significant financing, non-cash consideration and consideration payable to the customer. Exclude GST.
5Step 4: allocate the price using relative stand-alone selling prices. Handle discounts and variable amounts only where the standard permits allocation to specific obligations.
6Step 5: for each obligation, decide over time or point in time. Use the three over-time criteria. If none is met, it is a point in time, so look for transfer of control indicators.
7Measure progress for over-time obligations and compute revenue for the period. Then show the contract asset, receivable or contract liability.
8State the conclusion in one line with the amount and the timing.

Quickest way: Five-step table with control test

When to use it: Use when time is short, especially in case-scenario MCQs and 4 to 5 mark written parts.

Underline the promises in the case. Count them. That gives a likely number of performance obligations.
Ask: can the customer benefit from each promise on its own, and is it separable from the other promises? If yes to both, treat it as distinct.
Take the stated price. Adjust only for what the case mentions: discount, bonus, refund, financing, GST.
Allocate using proportions of stand-alone selling prices. Do the ratio once and apply it to each obligation.
Ask who controls the asset when work happens. If the customer controls it as it is built, or gets and consumes benefits simultaneously, or the asset has no alternative use plus a right to payment, it is over time. Otherwise point in time.
Write the revenue figure and the journal entry in one line each.

Common mistakes in Scope and Five-Step Model of Ind AS 115

Recognising revenue when the invoice is raised or cash is received.
Old habits from the earlier realisation-based approach.
Fix: Always ask when control passes. An advance is a contract liability until the obligation is satisfied.
Applying the five-step model to a contract that fails the Step 1 criteria.
Students jump to allocation without testing collectability or commercial substance.
Fix: Test all five criteria first. If they fail at inception, do not apply the model yet; show consideration received as a liability and keep reassessing the criteria. Apply the model once they are met. Until then, recognise the consideration as revenue only when the entity has no remaining obligations and all, or substantially all, of the consideration is received and non-refundable, or when the contract is terminated and the consideration received is non-refundable.
Treating every promise as a separate performance obligation.
Students count items listed in the contract and skip the distinct test.
Fix: Apply both parts of the test: capable of being distinct and distinct in the context of the contract. Highly interrelated or significantly customised items are combined.
Including GST in the transaction price.
The invoice total looks like the price.
Fix: Amounts collected on behalf of third parties, such as GST, are not revenue. Strip them out before allocation.
Ignoring scope exclusions and treating a lease or financial instrument as revenue.
Students focus on the model and skip the scope paragraph.
Fix: Spend a few seconds on scope. Identify the correct standard first, then apply Ind AS 115 only to what remains.
Confusing a contract asset with a receivable.
Both represent amounts yet to be collected.
Fix: If only the passage of time is needed before payment, it is a receivable. If it depends on further performance, it is a contract asset.

Worked examples

Example 1

Case: Zenith Tech Ltd (an Ind AS company) enters into a written, approved contract with a customer to sell a software licence and one year of technical support for a total of ₹10,00,000 (excluding GST). The licence is functional on its own and the support is not essential to its use. Stand-alone selling prices are licence ₹8,00,000 and support ₹4,00,000. The ₹2,00,000 by which the total of these prices exceeds the contract price is a discount for buying both together. The case gives no evidence that the discount relates to only one of the two items. Collection is probable and the contract has commercial substance. Identify the performance obligations and allocate the transaction price.

Show the solution

Scope: the contract is with a customer for goods and services from ordinary activities, and no exclusion applies. Ind AS 115 applies.
Step 1: the contract is approved, rights and payment terms are identifiable, it has commercial substance and collection is probable. A contract exists.
Step 2: the licence can be used on its own and the technical support is not needed to use it. Both are capable of being distinct and distinct in context. There are two performance obligations.
Step 3: the transaction price is ₹10,00,000. GST is excluded as collected for the government.
Step 4: total of stand-alone selling prices = ₹8,00,000 + ₹4,00,000 = ₹12,00,000. The bundle discount is ₹12,00,000 − ₹10,00,000 = ₹2,00,000. Because there is no evidence that it relates to only one obligation, it is allocated proportionately across both obligations. The licence gets 8,00,000 ÷ 12,00,000 × 10,00,000 = ₹6,66,667 (rounded). Support gets 4,00,000 ÷ 12,00,000 × 10,00,000 = ₹3,33,333 (rounded). Total = ₹10,00,000.
Step 5: the licence revenue is recognised when control transfers to the customer, assuming a right to use the software as it exists at the point of grant. Support revenue is recognised over the year as the customer receives and consumes the service.

Answer: Two performance obligations. The ₹2,00,000 bundle discount is spread proportionately across both. Allocate ₹6,66,667 to the licence (recognised when control transfers) and ₹3,33,333 to technical support (recognised over one year).

Example 2

Case: Aarav Constructions Ltd signs a contract with a customer to construct a customised machine for ₹50,00,000 (excluding GST). Before work starts, the customer pays ₹10,00,000 as an advance. The machine is built to the customer's design, has no alternative use to Aarav, and Aarav has an enforceable right to payment for work done to date. At the year-end, Aarav estimates that 40% of the work is complete based on costs incurred to total expected costs. No invoice has been raised. Compute the revenue for the year and the contract balance, assuming the advance is the only amount received and the contract is the only one.

Show the solution

Step 1: assume the criteria are met, as the contract is enforceable and the customer has paid an advance. A contract exists.
Step 2: the machine is a single performance obligation, as the customised build is one integrated output.
Step 3: the transaction price is ₹50,00,000. There is no variable consideration, and the advance does not change the price in this case.
Step 4: with a single obligation, the whole ₹50,00,000 is allocated to it.
Step 5: the asset has no alternative use and Aarav has an enforceable right to payment for performance to date. Hence the obligation is satisfied over time.
Progress is 40% by the cost-to-cost input method. Revenue = 40% × ₹50,00,000 = ₹20,00,000.
Contract balances: when the advance of ₹10,00,000 was received, Aarav recorded Dr Bank ₹10,00,000, Cr Contract liability ₹10,00,000. On recognising revenue, Aarav has a right to consideration of ₹20,00,000 for work done, and that right is conditional on further performance, not only on time. The entry is: Dr Contract asset ₹20,00,000, Cr Revenue ₹20,00,000.
Presentation: this is a single contract, so the contract asset and contract liability are presented net. Contract asset ₹20,00,000 less contract liability ₹10,00,000 = net contract asset of ₹10,00,000.
Check: the ₹10,00,000 of revenue not covered by the advance is unbilled, which agrees with the net contract asset of ₹10,00,000.
If the right to the unbilled consideration became unconditional (only the passage of time needed before payment), that right would be a receivable instead of a contract asset. The net balance after setting off the advance would still be ₹10,00,000.

Answer: Revenue for the year is ₹20,00,000. Contract asset of ₹20,00,000 and contract liability of ₹10,00,000 (the advance) are presented net for this single contract, giving a net contract asset of ₹10,00,000. It would be a receivable if the right to payment became unconditional.

Exam tips

Open every case answer with the five steps as headings. Marks usually go to each step, including the one that is not much of a problem.
Spend the first line on scope when the case mentions leases, insurance, financial instruments or exchanges with a same-line entity.
In MCQs, look for the trigger words: distinct, control, variable consideration, advance, GST. Each points to a specific step.
Show the allocation ratio with the stand-alone selling prices clearly. Even if the final figure is off, method marks are protected.
Close with the accounting entry or the balance sheet presentation (receivable, contract asset or contract liability). Many answers lose marks by stopping at the revenue figure.

Practice questions from Ind AS 115 Revenue from Contracts with Customers

Scope and Five-Step Model of Ind AS 115: frequently asked questions

What is the five-step model in Ind AS 115?

It is the framework for recognising revenue from contracts with customers. You identify the contract, identify performance obligations, determine the transaction price, allocate it to the obligations, and recognise revenue when or as each obligation is satisfied.

What contracts are outside the scope of Ind AS 115?

Leases, insurance contracts, financial instruments and certain other contractual rights covered by other Ind AS are excluded. Non-monetary exchanges between entities in the same line of business to facilitate sales to customers are also excluded. If a contract is partly in scope, you apply the relevant standards to each part.

What is the difference between revenue and income under Ind AS 115?

Income is wider and includes both revenue and gains. Revenue is income that arises in the course of the entity's ordinary activities. A gain on selling an office building, for example, is income but not revenue.

Is GST part of the transaction price?

No. The transaction price excludes amounts collected on behalf of third parties, and GST is collected on behalf of the government. Take it out before allocating the price.