Financial Reporting · Ind AS 115 Revenue from Contracts with Customers

Ind AS 115 Specific Applications: Licensing, Warranties, Repurchase and Others

Updated 5 October 2026 · Fact-checked

These are special situations where the five-step model of Ind AS 115 needs extra guidance. For each, identify the performance obligation, decide who controls the goods or service and when, then recognise revenue. Treat assurance warranties under Ind AS 37, service warranties as separate obligations, and refund liabilities for returns.

Understand Specific Applications: Licensing, Warranties, Repurchase and Others

Ind AS 115 has one core model: identify the contract, identify performance obligations, fix the price, allocate it, and recognise revenue when control transfers. The specific applications are not new rules. They are situations where it is hard to see who has control, or what the promise really is.

The key question is always control. Control means the ability to direct the use of an asset and obtain substantially all its remaining benefits. Physical possession, legal title, risks and rewards, and the customer's acceptance are indicators. None of them is decisive alone.

In a sale with right of return, you do not recognise revenue for goods you expect to come back. You recognise a refund liability for the expected returns and an asset for the right to recover the goods, measured at the former carrying amount less recovery costs. Expected returns are estimated, and the constraint on variable consideration applies. Update the estimate at every reporting date.

A warranty is either an assurance type (it only promises the product meets agreed specifications, accounted for under Ind AS 37) or a service type (the customer can buy it separately, or it gives a service beyond that assurance). A service-type warranty is a separate performance obligation, and part of the price is allocated to it and recognised over the warranty period.

In repurchase agreements, the entity sells an asset and promises, or has the option, to buy it back. A forward or call option means the customer does not obtain control. If the repurchase price is below the original selling price, it is a lease (Ind AS 116), unless the arrangement is part of a sale and leaseback, in which case it is a financing arrangement. If the repurchase price is equal to or more than the original selling price, it is a financing arrangement.

A put option held by the customer is judged by comparing the repurchase price with the original selling price and the expected market value, and by asking whether the customer has a significant economic incentive to exercise it:

Price below the original selling price and a significant economic incentive to exercise: lease (Ind AS 116), unless part of a sale and leaseback, in which case financing.
Price below the original selling price and no significant economic incentive: sale with a right of return.
Price equal to or more than the original selling price and more than the expected market value: financing arrangement.
Price equal to or more than the original selling price but not more than the expected market value, and no significant economic incentive: sale with a right of return.

In bill-and-hold, control passes before delivery only if four criteria are all met. In consignment, the dealer does not obtain control, so the consignor recognises revenue only when the goods are sold on to the end customer or control otherwise passes. Principal versus agent turns on control of the specified good or service before it passes to the customer. Licences depend on whether the licence gives a right to access the entity's intellectual property (over time) or a right to use it as it exists at the grant date (point in time). Sales- or usage-based royalties on a licence are recognised at the later of the sale or usage and the satisfaction of the related obligation. Breakage is the portion of a prepaid right the customer never exercises. Non-refundable upfront fees are usually an advance payment for future goods or services, not revenue by themselves.

Key rules to remember

Revenue on sale with right of return: Revenue = Price × units not expected to be returned; The expected returned units are credited to a refund liability, not revenue.
Refund liability: Refund liability = Consideration received (or receivable) × expected return %; Reassess at each reporting date and adjust revenue.
Right to recover returned goods: Asset = Carrying amount of expected returns − expected recovery costs (and any expected fall in value); Present separately from the refund liability. Do not net them.
Warranty classification: Separate purchase option or service beyond assurance → separate performance obligation; otherwise Ind AS 37; If you cannot reasonably separate the two parts of a combined warranty, account for them together as one performance obligation.
Repurchase price test for forward or call options: Repurchase price < original selling price → lease (Ind AS 116), unless part of a sale and leaseback → financing; repurchase price ≥ original selling price → financing; Applies to forward or call options, where the customer does not obtain control. In a financing arrangement the entity continues to recognise the asset.
Repurchase tests for put options: Price < original and significant economic incentive → lease (financing if sale and leaseback); price < original and no incentive → sale with right of return; price ≥ original and > expected market value → financing; price ≥ original and ≤ expected market value, no incentive → sale with right of return; A put option is the customer's right to require the entity to buy the asset back. Always check the incentive and compare the price with both the original price and the expected market value.
Bill-and-hold criteria (all four): Substantive reason + identified separately as the customer's + ready for physical transfer + cannot be used or redirected by the entity; All four must be met for revenue before delivery. Consider also a separate custody-service obligation.
Breakage: Expected breakage recognised in proportion to the pattern of customer rights exercised; Only if the entity expects to be entitled to the breakage amount. Otherwise recognise when the likelihood of exercise becomes remote.
Licence revenue timing: Right to access IP → over time; right to use IP → point in time; Sales-based or usage-based royalty is recognised when the later event occurs: the sale or usage, or satisfaction of the related obligation.

How to solve Specific Applications: Licensing, Warranties, Repurchase and Others questions

Use this order for any case on specific applications. It keeps you inside the five-step model and gives the examiner the reasoning marks.

1Name the arrangement: return right, warranty, repurchase, bill-and-hold, consignment, licence, breakage, or upfront fee.
2Identify the promises to the customer and decide which are distinct performance obligations.
3Decide who controls the asset or service at each point. Use the indicators: title, possession, risks and rewards, acceptance, and right to payment.
4Apply the specific rule for that arrangement, and quote the condition that decides the outcome.
5Work out the amounts: transaction price, allocation, refund liability or deferred revenue, and any asset for recovery.
6Record the journal entries and state the revenue recognised and the liability carried at the reporting date.
7Conclude by stating the Ind AS 115 paragraph or rule applied, the facts, and the conclusion. Add any disclosure or reassessment required.

Quickest way: Control test first, then timing and amount

When to use it: Use this when the case is short and the question asks only 'what revenue is recognised' or 'what is the treatment'.

Ask: has control passed to the customer? If no, no revenue yet.
If control passed, ask: is anything promised separately (service warranty, custody, option)? If yes, split the price.
Ask: is any part of the price likely to be returned or never used? Set up a refund liability or breakage estimate.
Write the answer in one line: revenue now ₹X, liability ₹Y, remaining revenue later.

Common mistakes in Specific Applications: Licensing, Warranties, Repurchase and Others

Recognising full revenue on a sale with a right of return and creating a provision under Ind AS 37 for returns
Students think of returns as a cost provision.
Fix: Reduce revenue and recognise a refund liability. Recognise a separate asset for the right to recover goods, and reduce cost of sales for it.
Treating every warranty as a separate performance obligation
The word 'warranty' is assumed to mean a service.
Fix: Check whether the customer can buy it separately or it covers more than the product meeting its specification. If not, it is an assurance warranty under Ind AS 37.
Recognising revenue on consignment goods when they are shipped to the dealer
Students follow the legal movement of goods.
Fix: The dealer does not control the goods. Revenue is recognised when the dealer sells to the end customer or control otherwise passes.
Treating a repurchase at a higher price as a lease
The lease and financing outcomes are mixed up.
Fix: If the repurchase price is lower than the original price it is a lease, unless it is part of a sale and leaseback, which is financing. If the price is equal or higher, it is a financing arrangement and the asset stays on the books.
Applying bill-and-hold when only some of the four criteria are met
Students treat the criteria as indicators to weigh.
Fix: All four are required. If any one fails, no revenue until delivery.
Recognising non-refundable upfront fees as revenue on receipt
Cash receipt is confused with satisfying an obligation.
Fix: Unless the fee relates to a transferred good or service, defer it and recognise it as the future goods or services are provided.

Worked examples

Example 1

Alpha Ltd sells 1,000 units at ₹500 each on credit to a retailer, with a 30-day right of return. The cost of each unit is ₹350. Based on past experience, Alpha expects 8% of units to be returned, and the expected recovery cost is negligible. Show revenue, refund liability, and the asset recognised.

Show the solution

Total consideration = 1,000 × ₹500 = ₹5,00,000.
Expected returns = 8% × 1,000 = 80 units.
Units expected to be kept = 920. Revenue = 920 × ₹500 = ₹4,60,000.
Refund liability = 80 × ₹500 = ₹40,000.
Cost of units expected to be kept = 920 × ₹350 = ₹3,22,000. This is cost of sales.
Right to recover returned goods = 80 × ₹350 = ₹28,000, recognised as a separate asset.
Journal: Debit Trade receivables ₹5,00,000; Credit Revenue ₹4,60,000; Credit Refund liability ₹40,000. Debit Cost of sales ₹3,22,000; Debit Returns asset ₹28,000; Credit Inventory ₹3,50,000.

Answer: Revenue ₹4,60,000; refund liability ₹40,000; returns asset ₹28,000; cost of sales ₹3,22,000. The estimate is reassessed at each reporting date.

Example 2

Beta Ltd sells a machine for ₹10,00,000 with a standard one-year warranty that covers manufacturing defects. The customer also buys a separately priced extended service warranty for ₹60,000 (total consideration ₹10,60,000). The extended warranty runs for three years after the standard warranty ends and is available for purchase separately. Beta expects the standard warranty to cost ₹20,000. Explain the accounting for both warranties and give the revenue recognised at the date of sale and over the extended period.

Show the solution

The standard one-year warranty only assures the machine meets its specification. It is an assurance-type warranty under Ind AS 37.
Beta recognises a provision of ₹20,000 for it, with a corresponding expense, and records machine revenue of ₹10,00,000 at the time control passes.
The extended warranty is sold separately, so it is a service-type warranty and a separate performance obligation. The total price is allocated on the relative standalone selling prices. The stated prices are the standalone selling prices (₹10,00,000 and ₹60,000), and they add up to the total of ₹10,60,000, so no reallocation is needed.
The ₹60,000 is not recognised as revenue at sale. Record a contract liability of ₹60,000.
Revenue is recognised over the three years of extended cover, which begin after the standard warranty ends. On a straight-line basis, this is ₹60,000 ÷ 3 = ₹20,000 per year, provided cost is evenly spread.
The provision for the standard warranty is reviewed and used as claims arise.

Answer: Revenue at sale ₹10,00,000 for the machine, with a ₹20,000 warranty provision under Ind AS 37. The ₹60,000 extended warranty, allocated on relative standalone selling prices, is deferred and recognised at ₹20,000 per year for the three years after the standard warranty ends.

Exam tips

Write the control test in your first line. Examiners award marks for the reasoning before the figures.
In return-right questions, show three items: revenue, refund liability and the returns asset. Missing the asset loses easy marks.
For repurchase questions, state who holds the option (forward, call or put), then compare the price. The answer flows from those two facts.
For principal versus agent, discuss control of the specified good or service. Do not rely on a single factor such as inventory risk.
In MCQs, look for the condition that changes the answer, such as separately purchasable, all four bill-and-hold criteria, or price lower than original.

Practice questions from Ind AS 115 Revenue from Contracts with Customers

Specific Applications: Licensing, Warranties, Repurchase and Others in other exams

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

CMA FinalSpecific Applications: Licensing, Warranties, Repurchase and Others

Specific Applications: Licensing, Warranties, Repurchase and Others: frequently asked questions

How is a sale with right of return accounted for under Ind AS 115?

Recognise revenue only for goods not expected to be returned. Record a refund liability for expected returns, and a separate asset for the right to recover the goods. Reassess the estimate at each reporting date.

How do I tell an assurance warranty from a service warranty?

If the customer can buy the warranty separately, or it provides a service beyond assuring the product meets its specification, it is a service warranty and a separate performance obligation. Otherwise it is an assurance warranty under Ind AS 37. Legal requirement to give the warranty points to assurance type.

When is a repurchase agreement a lease and when is it a financing?

For a forward or call option, the customer does not obtain control. If the repurchase price is below the original selling price, it is a lease, unless the arrangement is part of a sale and leaseback, in which case it is a financing arrangement. If the price is equal to or above the original selling price, it is a financing arrangement.

When can revenue be recognised under bill-and-hold?

Only when the customer has obtained control, which requires all four criteria: a substantive reason, the goods identified as the customer's, ready for transfer, and the entity cannot use or redirect them. Otherwise revenue waits for delivery.