Revenue Recognition in India: Ind AS 115 Complete Guide

Introduction: When is Revenue Really Earned?

Anjali’s software company signed a ₹50 lakh contract in March to deliver a customized ERP system by December. The client paid ₹25 lakhs upfront. At year-end in March, her accountant booked the full ₹50 lakhs as revenue.

When the statutory auditor reviewed the accounts, he raised a red flag: “You’ve only completed 30% of the project. You can’t recognize revenue you haven’t earned yet.”

The correction reduced their reported revenue by ₹35 lakhs, converting a profitable year into a loss. “We looked so good on paper, but it was all phantom profit,” Anjali realized.

This scenario plays out across Indian businesses every day. Revenue recognition isn’t about when cash comes in—it’s about when you’ve truly earned it.

What is Revenue Recognition?

Revenue recognition determines when and how much revenue a company records in its financial statements. Getting it wrong can:

• Overstate profits and assets
• Mislead investors and lenders
• Create tax complications
• Result in audit qualifications
• Lead to regulatory action

The Evolution in India

Before Ind AS:

• AS 9 (Revenue Recognition) - Simple accrual basis
• Industry-specific practices
• Limited guidance on complex transactions

After Ind AS 115:

• Single comprehensive standard
• Principle-based 5-step model
• Detailed guidance for multiple scenarios
• Alignment with global IFRS 15

Applicability:

• Mandatory for companies under Ind AS framework
• Listed companies and their subsidiaries
• Large unlisted companies (net worth >₹250 crores or turnover >₹50 crores)

The 5-Step Revenue Recognition Model

Overview

Step 1: Identify the Contract
    ↓
Step 2: Identify Performance Obligations
    ↓
Step 3: Determine Transaction Price
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Step 4: Allocate Transaction Price
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Step 5: Recognize Revenue

Step 1: Identify the Contract

A contract exists when ALL criteria are met:

1. Contract is approved

• Written, oral, or implied by customary business practices
• Both parties are committed

2. Rights are identifiable

• Each party’s rights regarding goods/services are clear

3. Payment terms are identifiable

• When, how, and how much the customer will pay

4. Commercial substance

• Future cash flows are expected to change

5. Collection is probable

• Customer has ability and intention to pay

Example: When Contract Doesn’t Exist

A furniture retailer receives an order for ₹5 lakhs from a customer who has a history of not paying. Despite a signed order, collection isn’t probable. No contract exists under Ind AS 115—revenue can’t be recognized until cash is received.

Contract Modifications:

When contracts change, they’re treated as either:

• Separate contract (additional goods at standalone price)
• Modification of existing contract (adjust remaining performance)

Step 2: Identify Performance Obligations

A performance obligation is a promise to transfer a distinct good or service.

Distinct if:

1. Customer can benefit from it on its own, AND
2. It’s separately identifiable in the contract

Example: IT Services Contract

Contract includes:

• Software license: ₹20,00,000
• Implementation: ₹8,00,000
• Training: ₹2,00,000
• Annual support (3 years): ₹9,00,000

Analysis:

Result: 4 separate performance obligations

Example: Bundled Mobile Phone

Telecom operator offers:

• Smartphone worth ₹15,000
• 2-year service plan worth ₹12,000
• Total package: ₹20,000

Both phone and service are distinct—two performance obligations exist.

Step 3: Determine Transaction Price

Transaction price is the amount the entity expects to receive for transferring goods/services.

Considerations:

1. Variable Consideration

When price varies based on performance, estimate using:

• Expected value method (probability-weighted amounts)
• Most likely amount (single most likely outcome)

Example: Construction Contract

Contract value: ₹10 crores Early completion bonus: ₹50 lakhs Delay penalty: ₹25 lakhs

Based on historical performance and project status:

• 70% probability of early completion: Bonus expected
• 20% probability of on-time: No adjustment
• 10% probability of delay: Penalty applies

Expected value: = (70% × 50) + (20% × 0) - (10% × 25) = 35 + 0 - 2.5 = ₹32.5 lakhs additional

Constraint: Include variable consideration only if it’s highly probable the amount won’t significantly reverse.

2. Significant Financing Component

If payment timing differs significantly from delivery, adjust for time value of money.

Example: Customer pays ₹10 lakhs today for equipment to be delivered in 2 years.

If market interest rate is 10%, the transaction price is the present value, not ₹10 lakhs.

3. Non-Cash Consideration

Measure at fair value. Example: A software company receives shares in a startup as payment—value at share’s fair value.

4. Consideration Payable to Customer

Deduct from transaction price unless it’s for a distinct good/service.

Step 4: Allocate Transaction Price

When multiple performance obligations exist, allocate based on relative standalone selling prices.

Methods to Determine Standalone Price:

1. Adjusted market assessment – Market price for similar goods
2. Expected cost plus margin – Cost to fulfill plus reasonable margin
3. Residual approach – When price is highly variable (restricted use)

Example: Software Bundle

Total contract: ₹30,00,000

Note: Discount of ₹10 lakhs is proportionally allocated across all obligations.

Step 5: Recognize Revenue

Revenue is recognized when (or as) performance obligations are satisfied—when control transfers to customer.

Control Transfer Indicators:

• Entity has present right to payment
• Customer has legal title
• Physical possession transferred
• Customer has significant risks and rewards
• Customer has accepted the asset

Recognition Patterns:

A. Point in Time

For goods delivered at a specific moment.

Example: Retail sale—revenue recognized at point of sale when customer takes possession.

B. Over Time

When ANY of these criteria is met:

1. Customer receives and consumes benefits simultaneously
2. Entity’s performance creates/enhances customer-controlled asset
3. Entity’s performance creates asset with no alternative use, and entity has right to payment for work completed

Examples of Over Time Recognition:

Measuring Progress:

Input Methods:

• Costs incurred to date
• Labor hours expended
• Resources consumed

Output Methods:

• Units delivered
• Milestones achieved
• Surveys of work performed

Practical Examples Across Industries

Example 1: Manufacturing Company

Scenario: Vijay Textiles sells fabric to a retailer.

• Invoice date: March 15
• Dispatch: March 20
• Delivery: March 25
• Payment terms: 45 days

Analysis:

• Single performance obligation (deliver fabric)
• Point in time recognition
• Control transfers on delivery (March 25)

Revenue recognized: March 25

Example 2: Construction Contract

Scenario: Sharma Builders signs ₹5 crore contract for commercial building.

• Contract signed: April 1
• Completion expected: March 31 (next year)
• By December 31, costs incurred: ₹3 crores
• Total expected cost: ₹4 crores

Analysis:

• Performance obligation satisfied over time
• Use cost-to-cost method: 3/4 = 75% complete
• Revenue by December 31: 75% × ₹5 crores = ₹3.75 crores

Journal Entry (December 31):

Contract Asset A/c          Dr.    3,75,00,000
    To Revenue A/c                              3,75,00,000

Example 3: Annual Maintenance Contract (AMC)

Scenario: Tech Solutions provides 1-year AMC for ₹1,20,000 starting October 1.

Analysis:

• Single performance obligation (support service)
• Satisfied over time (customer consumes benefit continuously)
• Straight-line recognition: ₹10,000/month

Revenue by March 31:

• 6 months × ₹10,000 = ₹60,000

Balance in Unearned Revenue: ₹60,000

Example 4: Software License + Services

Scenario: Cloud Solutions sells:

• Perpetual software license: ₹15,00,000
• Implementation services: ₹5,00,000
• 3-year support: ₹6,00,000

Total: ₹26,00,000

License transferred in October. Implementation completed in December. Support begins January.

Analysis:

Example 5: E-commerce Platform

Scenario: Online retailer sells products with:

• 30-day return policy
• 10% estimated return rate
• March sales: ₹10,00,000

Analysis:

• Variable consideration due to expected returns
• Recognize: ₹10,00,000 × 90% = ₹9,00,000
• Create refund liability: ₹1,00,000
• Create return asset (inventory expected back)

Special Topics

Bill and Hold Arrangements

Customer is billed but goods remain with seller.

Recognize revenue only if:

1. Bill and hold is requested by customer
2. There’s substantive reason for arrangement
3. Product is separately identified
4. Product is ready for transfer
5. Seller can’t use the product or direct it elsewhere

Consignment Sales

Goods sent to consignee (retailer) but seller retains control.

Revenue recognized when: Consignee sells to end customer, NOT when goods shipped to consignee.

Principal vs Agent

Principal: Controls goods/services before transfer

• Recognizes gross revenue

Agent: Arranges for another party to provide goods/services

• Recognizes commission only

Example: E-commerce marketplace

• If platform controls inventory: Principal (gross revenue)
• If platform only facilitates: Agent (commission revenue)

Disclosures Required

Qualitative Disclosures

• Performance obligations
• Significant judgments
• Methods used to recognize revenue

Quantitative Disclosures

• Disaggregation of revenue
• Contract balances
• Transaction price allocated to remaining obligations

Example Disclosure:

Common Mistakes and How to Avoid Them

Mistake 1: Recognizing Revenue on Shipment

Problem: Assuming revenue is earned when goods leave warehouse.

Solution: Analyze when control actually transfers—often at delivery, not dispatch.

Mistake 2: Ignoring Variable Consideration

Problem: Recording full contract value without considering refunds, discounts, penalties.

Solution: Estimate variable amounts and apply constraint test.

Mistake 3: Bundled Contracts

Problem: Recognizing entire contract revenue when only one component is delivered.

Solution: Identify all performance obligations and allocate price appropriately.

Mistake 4: Milestone Payments vs. Revenue

Problem: Equating cash receipts with revenue.

Solution: Cash receipts ≠ Revenue. Match to performance completion.

Mistake 5: Long-term Contracts

Problem: Recognizing revenue only at completion.

Solution: If criteria for over-time recognition are met, recognize progressively.

Key Takeaways

1. Revenue follows control transfer, not cash receipt
2. Apply the 5-step model systematically for every contract
3. Identify all performance obligations - don’t bundle different promises
4. Estimate variable consideration conservatively
5. Allocate price based on standalone values
6. Choose appropriate recognition pattern - point in time or over time
7. Document judgments for audit trail
8. Disclose adequately in financial statements

Disclaimer

This article is for educational purposes only and does not constitute professional accounting advice. Ind AS 115 involves complex judgments that require professional expertise. Consult a qualified Chartered Accountant for implementing revenue recognition policies for your specific business.

Quick Reference Checklist

Before Recognizing Revenue:

• Does a valid contract exist?
• Have I identified all performance obligations?
• Is the transaction price determined correctly?
• Is price allocated to each obligation?
• Has control transferred to customer?
• Have I applied the correct recognition pattern?
• Are variable elements properly estimated?
• Are disclosures adequate?

Revenue recognition might seem like accounting technicality, but getting it right is fundamental to understanding whether a business is truly creating value or just moving numbers around.