Corporate Financial Reporting · Revenue from Contracts with Customers (Ind AS 115)

Ind AS 115 Contract Costs, Contract Balances and Presentation

Updated 11 October 2026 · Fact-checked

Ind AS 115 lets you capitalise incremental costs of obtaining a contract and costs of fulfilling it, if set criteria are met, and amortise them as goods or services transfer. A contract asset is a right to consideration that is not yet unconditional; a receivable is unconditional; a contract liability is an obligation to transfer goods or services for consideration already received or due.

Understand Contract Costs, Contract Balances and Presentation

Ind AS 115 does not only tell you when to book revenue. It also tells you what to do with the costs you spend on a contract and how to show the balances that arise between performing and getting paid.

There are two types of contract cost. Costs to obtain a contract are incremental costs you would not have incurred if the contract had not been won, such as a sales commission payable only on signing. Costs you incur anyway, such as bid costs or legal fees for a tender you may lose, are expensed unless the customer explicitly bears them. Costs to fulfil a contract are costs of doing the work. If they fall under another Standard (Ind AS 2, Ind AS 16, Ind AS 38), you follow that Standard (para 96). Only costs outside those Standards can become an asset under Ind AS 115.

For fulfilment costs, para 95 sets three tests, all of which must be met: (a) the costs relate directly to a contract or a specific anticipated contract; (b) they generate or enhance resources that will be used to satisfy performance obligations in future; and (c) they are expected to be recovered. Para 97 lists costs that relate directly: direct labour, direct materials, allocated contract management, supervision, insurance and depreciation, costs explicitly chargeable to the customer, and costs incurred only because of the contract, such as subcontractor payments. General administration and wasted materials do not qualify.

The resulting asset is amortised on a systematic basis consistent with the transfer of the related goods or services. If its carrying amount exceeds the remaining consideration less the costs still to be incurred, you recognise an impairment loss. Para 103 fixes the order: first impair assets under other Standards (Ind AS 2, 16, 38), then test the contract cost asset, then include it in the cash-generating unit for Ind AS 36.

On the balance sheet, three balances matter. A receivable is a right to consideration that is unconditional, as only the passage of time is needed before payment is due. A contract asset is a right to consideration for work done, conditional on something other than time, such as completing the other obligations in the contract. A contract liability is your obligation to transfer goods or services for which you have received (or are due) consideration. Para 109 allows other labels, but then you must give enough information to tell receivables and contract assets apart.

Key rules to remember

Capitalising costs to fulfil (para 95): Capitalise only if: (a) directly related to a specific contract + (b) generates or enhances resources for future performance + (c) expected to be recovered; All three must be met, and the costs must not be within the scope of another Standard (Ind AS 2, 16, 38).
Incremental cost to obtain a contract: Capitalise if incremental and expected to be recovered; otherwise expense; Costs incurred whether or not the contract is won are expensed, unless explicitly chargeable to the customer.
Practical expedient (para 94): Amortisation period ≤ 1 year → may expense incremental costs when incurred; It is an option, not a requirement. It applies to costs of obtaining a contract.
Impairment of contract cost asset: Impairment = Carrying amount of asset − (Remaining consideration expected − Costs still to be incurred); Recognised in profit or loss. Impair other-Standard assets first (para 103).
Contract asset: Contract asset = Revenue recognised for work done − Amounts billed or unconditionally due; Applies where the right to payment depends on something other than passage of time.
Contract liability: Contract liability = Consideration received or due − Revenue recognised so far; Shown when the customer has paid (or payment is due) before you perform.
Key disclosures (paras 116, 118, 127, 128): Opening and closing receivables, contract assets, contract liabilities; revenue recognised from opening contract liability; explanation of significant changes; closing balance of cost assets by category; amortisation and impairment for the period; Para 127 also requires judgements made and the amortisation method.

How to solve Contract Costs, Contract Balances and Presentation questions

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

1Identify each cost and decide whether it is a cost to obtain or a cost to fulfil the contract.
2For obtaining costs, ask if they are incremental, meaning they would not arise without winning the contract. If not, expense them. If yes, check the one-year practical expedient (para 94).
3For fulfilment costs, first check whether another Standard (Ind AS 2, 16, 38) applies (para 96). If not, apply the three tests in para 95 and the direct cost list in para 97.
4Set the amortisation pattern in line with the transfer of goods or services, including any anticipated renewal if the asset relates to it. Compute the yearly charge.
5Test for impairment: compare carrying amount with remaining consideration less costs still to be incurred. Do other-Standard impairments first.
6Classify balances. Unconditional right = receivable. Conditional right for work done = contract asset. Payment ahead of performance = contract liability.
7Compute each balance using cumulative revenue against billing or cash received, contract by contract. Do not net a contract asset of one contract against a liability of another.
8State the required disclosures or journal entries, and conclude with the amounts shown in the balance sheet and profit or loss.

Quickest way: Three-question screen for costs and balances

When to use it: Use it for MCQs and for the first two minutes of a long numerical question.

Cost: would it exist without the contract? No means expense it. Yes means check if it generates resources and is recoverable.
Cost: does Ind AS 2, 16 or 38 apply? If yes, that Standard governs, not Ind AS 115.
Balance: compare cumulative revenue with cumulative billing or cash. Revenue higher means contract asset or receivable (depending on whether the right is unconditional). Cash or billing higher means contract liability.

Common mistakes in Contract Costs, Contract Balances and Presentation

Capitalising all costs of winning a contract, such as tender preparation and legal fees.
Students treat any cost linked to a contract as an asset.
Fix: Only incremental costs qualify, meaning costs that would not be incurred if the contract were not obtained. Others are expensed unless explicitly chargeable to the customer.
Applying para 95 to inventory, plant or software development costs on a contract.
The fulfilment-cost rule looks like a general rule for all contract costs.
Fix: Para 96 sends costs within the scope of Ind AS 2, 16 or 38 to those Standards. Para 95 applies only to the rest.
Calling every unbilled amount a receivable.
Students think of anything owed by the customer as a receivable.
Fix: A receivable needs an unconditional right, where only time must pass. If payment depends on something else, such as completing the full project, it is a contract asset.
Netting contract assets and liabilities across different contracts.
Both are seen as customer-related balances.
Fix: Net them only within the same contract. Present separately across contracts.
Treating the one-year practical expedient as mandatory or applying it to fulfilment costs.
Para 94 is remembered loosely.
Fix: Para 94 is an option and covers incremental costs of obtaining a contract with an amortisation period of one year or less.
Forgetting the order of impairment testing.
Students test the contract cost asset in isolation.
Fix: Impair assets under other Standards first, then test the contract cost asset, then include it in the CGU for Ind AS 36 (para 103).

Worked examples

Example 1

Bharat Infotech Ltd wins a 3-year IT support contract with a customer and pays a sales commission of ₹6,00,000 to its employee, payable only because the contract was signed. It also spends ₹2,00,000 on a tender it prepared before winning. Services are rendered evenly over three years, and no renewal is expected. Show the accounting for the year 1 financial statements.

Show the solution

The commission is incremental, as it arises only because the contract was won. Amortisation period is 3 years, which is more than one year, so the para 94 expedient is not available. The commission is capitalised as an asset, assuming it is expected to be recovered.
The ₹2,00,000 tender cost would have been incurred whether or not the contract was won. It is not incremental, so it is expensed in the period incurred.
Services transfer evenly, so amortisation is ₹6,00,000 ÷ 3 = ₹2,00,000 per year.
Year 1 closing carrying amount of the asset = ₹6,00,000 − ₹2,00,000 = ₹4,00,000.
Disclose the closing balance by category, amortisation of ₹2,00,000, any impairment (nil), the judgements made and the amortisation method (paras 127 and 128).

Answer: Capitalise ₹6,00,000 commission and amortise ₹2,00,000 a year; year 1 closing balance is ₹4,00,000. Expense the ₹2,00,000 tender cost immediately.

Example 2

Kaveri Constructions Ltd has a contract with a customer for ₹50,00,000, with a single performance obligation satisfied over time. At the year end, cumulative revenue recognised is ₹30,00,000. Cumulative invoices raised are ₹24,00,000, all of which have been collected. The balance payment is conditional on final completion of the project. Show the balance sheet position and what disclosure is needed.

Show the solution

Cumulative revenue = ₹30,00,000. Cumulative amount billed and collected = ₹24,00,000.
Revenue exceeds billing by ₹30,00,000 − ₹24,00,000 = ₹6,00,000.
The right to this ₹6,00,000 depends on completion of the project, not only on passage of time. It is therefore not unconditional, so it is a contract asset, not a receivable.
The receivable is nil, as all invoices raised are collected. There is no contract liability, as cash received is less than revenue recognised.
Disclose opening and closing contract asset balances and explain significant changes, such as a cumulative catch-up adjustment or a change in the time for the right to become unconditional (paras 116 and 118).

Answer: Contract asset of ₹6,00,000; receivable nil; contract liability nil. Disclose opening and closing balances and explain significant changes.

Exam tips

In MCQs, the words 'incremental' and 'only because the contract was obtained' signal a cost that can be capitalised. 'Would have been incurred anyway' signals expense.
Always write the para 95 criteria in full when asked whether fulfilment costs are capitalised. Link each to the facts in the case.
Check the one-year period first for commission questions. If the benefit period is one year or less, the expedient allows expensing.
For balance classification, ask whether the right to payment depends only on time. Use that single test to separate receivable from contract asset.
In disclosure questions, split your answer into contract balances (para 116 and 118) and cost assets (paras 127 and 128) and give both sets of points.

Practice questions from Revenue from Contracts with Customers (Ind AS 115)

Contract Costs, Contract Balances and Presentation 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 Balances and Presentation: frequently asked questions

Can I capitalise sales commission under Ind AS 115?

Yes, if it is an incremental cost of obtaining the contract and you expect to recover it. If the amortisation period is one year or less, you may instead expense it when incurred as a practical expedient under para 94.

What is the difference between a contract asset and a receivable?

A receivable is an unconditional right to consideration, where only time must pass before payment is due. A contract asset is a right for work done that is conditional on something else, such as completing other obligations in the contract.

When is a contract liability recognised?

When the customer has paid, or payment is due, before you transfer the goods or services. It is released to revenue as you perform.

Do I have to use the terms contract asset and contract liability in the balance sheet?

No. Para 109 allows alternative descriptions. If you use another label for a contract asset, you must give enough information for users to tell receivables and contract assets apart.