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Combining contractsAn entity is required to combine two or more contracts and account for them as a single contract if they are entered into at ornear the same time and meet any one of the following criteria:Were contracts negotiated as a packagewith a single commercial objective?YesNoDoes consideration in one contractdepends on the price or performance ofanother contract?YesTreat as a singlecontractNoDo contracts constitute a singleperformance obligation?YesNoTreat as separate contractsContract modificationsA contract modification arises when the parties approve a change in the scope and/or the price of a contract (e.g. a changeorder). The accounting for a contract modification depends on whether the modification is deemed to be a separate contractor not.An entity accounts for a modification as a separate contract, if both:The scope increases due tothe addition of ‘distinct’ goodsor services.andThe price increase reflects the goods’or services’ stand-alone selling pricesunder the circumstances of themodified contract.In this case, only future revenue is impacted as the entity will continue to account for the pre-modification contract as before.Accounting for revenue - the new normal: Ind AS 115 09

The accounting for a contract modification that is not aseparate contract depends on whether the remaining goodsand services to be delivered under the modified contract are‘distinct’ from those already transferred to the customer atthe modification date. It will be accounted for in one of thefollowing ways: If the remaining goods or services are distinct, then themodification is treated as a termination of the originalcontract and the creation of a new contract. The transactionprice to be allocated to the remaining separate performanceobligations is the (modified) total consideration promisedby the customer less the amount already recognised asrevenue. No adjustments are made to the amount of revenuerecognised for separate performance obligations satisfiedon or before the modification date. If a change to an amountof variable consideration arises subsequently and relates toperformance prior to the modification, the entity applies theguidance of variable consideration. If the remaining goods or services are not distinct and arepart of a single performance obligation that is partiallysatisfied as of the modification date, the entity adjustsboth the transaction price and the measure of progresstowards completion of the performance obligation. Revenuerecognised to date is adjusted for the contract modificationon a ‘cumulative catch-up’ basis. If the remaining goods or services are a combination ofabove two scenarios the entity accounts for the effects ofthe modification on the unsatisfied or partially satisfiedperformance obligations consistently with the guidanceabove. No adjustments are made to the amount of revenuerecognised for separate performance obligations satisfiedon or before the modification date.If the parties approve a change in scope, but the price changehas not yet been determined, the entity applies the relevantguidance to the modified contract using an estimate of thechange in transaction price arising from the modification. Theguidance on variable consideration applies in such cases - seeStep 3.Contract modificationsStartAre all the newly-addedgoods or services distinct?NoAre at least some of theremaining goods andservices distinct?YesTreat as separate contract[Ind AS 115.20]10 Accounting for revenue - the new normal: Ind AS 115NoYesYesDoes the additional price/unit stand-alone sellingprices?Treat as part of existingcontract [Ind AS 115.21(b)]Are all remaining goods andservices distinct?NoNoYesTreat as termination ofold and creation of newcontract [Ind AS 115.21(a)]Combination - judgementneeded [Ind AS 115.21(c)]

Step 2: Identify the performance obligationsHaving identified a contract, the entity next identifies theperformance obligations within that contract. A performanceobligation is a promise in a contract with a customer to transfereither (1) a good or service, or a bundle of goods or services,that is ‘distinct’ (see below); or (2) a series of distinct goods orservices that are substantially the same and have the samepattern of transfer to the customer.A series of distinct goods or services will be considered havingthe same pattern of transfer to the customer if both of thefollowing criteria are met: Each distinct good or service in the series that the entitypromises to transfer to the customer would meet the criteriato be a performance obligation satisfied over time The same method would be used to measure the entity’sprogress towards complete satisfaction of the performanceobligation to transfer each distinct good or service in theseries to the customer.produce or deliver the specific combined output called forin the contract).–– the good or service does not significantly modify orcustomise other promised goods or services in thecontract.–– the good or service is not highly inter-dependent on, orinter-related with, other promised goods or services in thecontract.Performance obligations are normally specified in thecontract, but could also include promises implied by an entity’scustomary business practices, published policies or specificstatements that create a valid customer expectation that goodsor services will be transferred under the contract.Performance obligations do not include administrative-typetasks that do not result in a transfer of a good or service to acustomer (e.g. some set-up activities).A promised good or service is ‘distinct’ if both of the followingcriteria are met: The customer can benefit from the good or service either onits own or with other resources readily available to them. Areadily available resource is a good or service that is soldseparately (by the entity or by another entity) or that thecustomer has already obtained from the entity or from othertransactions or events It is separately identifiable from other promises in thecontract. Factors that indicate that two or more promisesto transfer goods or services to a customer are separatelyidentifiable include, but are not limited to, the following:–– Significant integration services are not provided (i.e.the entity is not using the good or service as an input toAccounting for revenue - the new normal: Ind AS 115 11

DistinctCustomer can benefit eitheralone or with other readilyavailable resourcesReadily available resource Sold separately orcustomer has alreadyobtained Significantintegration servicesnot providedSeparately identifiableNo significantcustomisation ormodificationNot highly interdependent or interrelatedPractical insight - Performance obligationsThe concept of performance obligations is a cornerstone of the Ind AS 115 revenue recognition model. The timing of revenuerecognition is based on satisfaction of performance obligations rather than the contract as a whole. This area is sometimesreferred to as ‘multiple element arrangements’ - a topic on which Ind AS 18 and Ind AS 11 were lacking in guidance. Practicehas therefore been somewhat mixed under current Ind ASs and previous GAAP in India and in some industries, such assoftware, many entities may have formulated policies based on industry practices or turned to much more detailed US GAAPfor guidance.Entities applying Ind AS 115 will now need to analyse all but the simplest customer contracts to identify whether they includemore than one performance obligation, based on the ‘distinct’ principle described above. That said, we expect that manylong-term construction and service contracts will be identified as single performance obligations because they often includea significant integration service. By contrast, the calculation of revenue attributable to free maintenance services providedalong with software license and installation may change by applying the guidance under the standard. Ind AS 115 alsoincludes specific guidance on some contract elements such as warranties and customer loyalty schemes.12 Accounting for revenue - the new normal: Ind AS 115

Step 3: Determine the transaction priceUnder Ind AS 115, the ‘transaction price’ is defined as theamount of consideration an entity expects to be entitled to inexchange for the goods or services promised under a contractto a customer, excluding any amounts collected on behalf ofthird parties (for example, sales taxes). The transaction priceis not adjusted for effects of the customer’s credit risk, but isadjusted if the entity (e.g. based on its customary businesspractices) has created a valid expectation that it will enforce itsrights for only a portion of the contract price.Variable considerationThe amount of consideration received under a contractmight vary due to discounts, rebates, refunds, credits, priceconcessions, incentives, performance bonuses and similaritems. Ind AS 115’s guidance on variable consideration alsoapplies if: The amount of promised consideration under a contract iscontingent on the occurrence or non-occurrence of a futureevent (e.g. a fixed-price contract would be variable if thecontract included a return right) The facts and circumstances at contract inception indicatethat the entity intends to offer a price concession.An entity must consider the effects of all the following factorswhen determining the transaction price: variable consideration the constraint on variable consideration time value of money non-cash consideration consideration payable to the customer.An entity should use one method consistently to estimate thetransaction price throughout the life of a contract.An entity that expects to refund a portion of the considerationto the customer would recognise a liability for the amount ofconsideration it reasonably expects to refund. The entity wouldupdate the refund liability each reporting period based oncurrent facts and circumstances.To estimate the transaction price in a contract that includesvariable consideration, an entity determines either: The expected value (the sum of probability-weightedamounts) or The most likely amountof consideration to be received, whichever better predicts theamount of consideration to which the entity will be entitled.The expected value might be the appropriate estimate of theamount of variable consideration in situations where an entityhas a large number of similar contracts. The most likely amountmight be appropriate in situations where a contract has onlytwo possible outcomes (for example, a bonus for early deliverythat either would be fully received or not at all).Accounting for revenue - the new normal: Ind AS 115 13

Practical insight - Customer credit riskUnder Ind AS 18 and Ind AS 11, collectability is a recognition principle because an entity cannot recognise revenue until it isprobable that the economic benefits will flow to it. Ind AS 115 is somewhat similar in that the model applies only if collectionis probable.Once the entity has determined that the Ind AS 115 model applies, the transaction price is based on the contractualentitlement such that expected losses are not treated as variable consideration for revenue recognition purposes (althoughan expectation of granting a price concession may arise in circumstances of high customer credit risk). Instead Ind AS 115requires that an entity would measure credit losses under the financial instruments standards.Ind AS 109, Financial Instruments, require immediate recognition of lifetime expected losses on both contract assets andshort-term trade receivables.Under Ind AS 115 credit losses (initial and subsequent) on both contract assets and receivables must either be presentedon the face of the statement of profit and loss or disclosed in the footnotes, but need not be presented adjacent to revenue.However, impairment losses recognised on contract assets and receivables shall be disclosed separately from impairmentlosses from other contracts.Constraint on variable considerationIf the amount of consideration from a customer contractis variable, an entity is required to evaluate whether thecumulative amount of revenue recognised should beconstrained. The objective of the constraint is for an entity torecognise revenue only to the extent that it is highly probablethat there will not be a significant reversal (i.e. significantdownward adjustment) when the uncertainty associated withthe variable consideration subsequently resolves.An entity should consider both the likelihood and themagnitude of the revenue reversal in making such assessment.Factors that could increase the likelihood or the magnitude ofa revenue reversal include, but are not limited to, the following: The amount of consideration is highly susceptible to factorsoutside the entity’s influence The uncertainty is not expected to be resolved for a longtime The entity’s experience with similar types of contracts islimited The entity has a practice of either offering a broad rangeof price concessions or changing the payment terms andconditions of similar contracts in similar circumstances There are a large number and wide range of possibleconsideration amounts in the contract.14 Accounting for revenue - the new normal: Ind AS 115Variable consideration and the revenue constraint1. E stimate variableconsiderationand include intransaction price2. Apply constraintExpected valueorMost likely amount Limited to the extentthat it is ‘highlyprobable’ that therewill not be a significantrevenue reversal whenuncertainties resolves

Practical insight: Uncertainty in the transaction priceUnder Ind ASs 18 and 11, uncertainty in the transaction price is partly a recognition issue. If the revenue amount cannotbe measured reliably then no revenue can be recognised (or revenue is limited to the costs incurred when their recovery isprobable). If a reliable estimate is available, then the uncertain consideration would typically be measured at fair value.Assessing reliability may involve considerable judgement.Ind AS 115 has more specific and detailed guidance and will change some current practices. That said, in highly uncertainsituations (e.g. some success fee-type arrangements when the outcome of the relevant contingency is unpredictable) thepractical effect is likely to be the same - i.e. revenue is recognised only when the uncertainty is resolved. In situations involvingmultiple similar transactions, such that the entity has relevant, predictive experience, Ind AS 115 could lead to earlierrecognition in some cases.Sales-based or usage-based royaltiesAn exception to the general principles on variable considerationapplies to revenue for a sales-based or usage-based royaltypromised in exchange for a license of intellectual property.Revenue is recognised only on the later of the following eventsoccurs: When the customer makes the subsequent sales or use thattriggers the royalty The performance obligation to which some or all of the salesbased or usage-based royalty has been allocated has beensatisfied (or partially satisfied).Accounting for revenue - the new normal: Ind AS 115 15

Time value of moneyUnder Ind AS 115, an entity must reflect the time value of money in its estimate of the transaction price if the contract includesa significant financing component. The objective in adjusting the transaction price for the time value of money is to reflect anamount for the selling price as though the customer had paid cash for the goods or services when they were transferred.To determine whether a financing component is significant, anentity considers several factors, including, but not limited to,the following: The difference, if any, between the promised considerationand the cash selling price The combined effect of:–– the expected length of time between delivery of the goodsor services and receipt of payment–– the prevailing interest rates in the relevant market.A contract may not have a significant financing component if: Advance payments have been made but the transfer of thegood or service is at the customer’s discretion The consideration is variable based on factors outside thevendor’s and customer’s control (e.g. a sales-based royalty) A difference between the promised consideration and thecash selling price arises for reasons other than financingsuch as protecting one of the parties from non-performanceby the other (e.g. retentions).16 Accounting for revenue - the new normal: Ind AS 115As a practical expedient, an entity can ignore the impact ofthe time value of money on a contract if it expects, at contractinception, that the period between the delivery of goods orservices and customer payment will be one year or less.To adjust the amount of consideration for the time value ofmoney, an entity applies the discount rate that would be usedin a separate financing transaction between the entity andthe customer at contract inception. That rate reflects the creditrisk of the party receiving financing in the contract (i.e. thecustomer if payment is deferred and the vendor if paymentis in advance) and any collateral or security provided by thecustomer or the entity, including assets transferred in thecontract. An entity presents the effects of financing separatelyfrom revenue as interest expense or interest income in thestatement of profit and loss.

Non-cash considerationIf a customer promises consideration in a form other than cash,an entity measures the non-cash consideration at fair value indetermining the transaction price. This include arrangements inwhich the customer transfers control of goods or services (e.g.materials, equipment, labour) to facilitate the entity’s fulfilmentof the contract.If an entity is unable to reasonably measure the fair valueof non-cash consideration, it indirectly measures theconsideration by referring to the stand-alone selling price of thegoods or services promised under the contract.Consideration payable to a customerConsideration payable to a customer includes amounts thatan entity pays or expects to pay to a customer in the form ofcash or in-substance cash (for example, a coupon or voucherthat can be applied against amounts owed to the entity or toother parties). An entity reduces the transaction price by theamount it owes to the customer, unless the consideration owedis in exchange for distinct goods or services transferred fromthe customer to the entity.If the customer transfers distinct goods or services to an entityin exchange for payment, the entity accounts for the purchaseof these goods or services similarly to other purchases fromsuppliers. If the amount of consideration owed to the customerexceeds the fair value of those goods or services, the entityreduces the transaction price by such excess amount. If theentity cannot estimate the fair value of the goods or services itreceives from the customer, it reduces the transaction price bythe total consideration owed to the customer.An entity recognises any reduction in revenue associated withadjusting the transaction price for consideration payable to acustomer at the later of the following dates: The date the entity recognises revenue for the tran

IFRS and U.S. GAAP revenue recognition guidance, including industry-specific guidance, and affect almost every revenue-generating entity. New revenue recognition standard will apply to most revenue contracts, including construction contracts. Among other things, it changes the criteria for determining whether revenue is recognised at a point in .