1. Scope and Applicability

Ind AS 115 applies to all contracts with customers for the transfer of goods or services — except for:

• Lease contracts (Ind AS 116)
• Insurance contracts (Ind AS 104 / forthcoming Ind AS 117)
• Financial instruments (Ind AS 109, 32, 107)
• Non-monetary exchanges between entities in the same line of business

A customer is defined as a party that has contracted with an entity to obtain goods or services in exchange for consideration. This definition excludes collaborative arrangements where both parties share risks and benefits (those may fall under other standards).

2. The 5-Step Revenue Recognition Model

All revenue under Ind AS 115 flows through a five-step model. Revenue is recognised when (or as) the entity satisfies a performance obligation by transferring control of a promised good or service to a customer.

Step	Question to Answer	Output
Step 1	Is there an enforceable contract with a customer?	Contract identified (or not)
Step 2	What has the entity promised to deliver?	Distinct performance obligations identified
Step 3	How much will the entity receive?	Transaction price determined (including variable consideration)
Step 4	How is that price split across obligations?	Transaction price allocated to each PO
Step 5	When is each obligation satisfied?	Revenue recognised at point in time or over time

3. Step 1: Identify the Contract

A contract exists (and is accounted under Ind AS 115) only when ALL five criteria are met:

1. The parties have approved the contract and are committed to perform
2. Each party's rights can be identified
3. Payment terms can be identified
4. The contract has commercial substance
5. It is probable that the entity will collect the consideration to which it is entitled

The collectability criterion (#5) has been a major change for real estate and infrastructure companies in India — where historically revenue was sometimes recognised before there was reasonable certainty of collection. Under Ind AS 115, if collectability is not probable at inception, revenue cannot be recognised until either the contract criteria are met or the contract is terminated with consideration retained by the entity.

Contract Combinations

Multiple contracts entered at or around the same time with the same customer must be combined if they are economically interdependent — negotiated as a package, prices are interrelated, or the goods/services are a single performance obligation.

4. Step 2: Identify Performance Obligations

A performance obligation (PO) is a promise to transfer either:

• A distinct good or service (or bundle of goods/services), OR
• A series of distinct goods/services that are substantially the same and have the same pattern of transfer to the customer

A good or service is distinct if it meets BOTH criteria:

• Capable of being distinct: The customer can benefit from the good/service on its own or together with other readily available resources
• Distinct within the context of the contract: The entity's promise to transfer it is separately identifiable from other promises in the contract (i.e., it is not highly interrelated with other goods/services in the contract)

5. Step 3: Determine the Transaction Price

Transaction price = amount of consideration the entity expects to be entitled to in exchange for transferring goods/services. Key considerations:

Variable Consideration

If consideration includes variable amounts (bonuses, penalties, price concessions, volume rebates, returns), the entity must estimate the amount using:

• Expected Value method: Probability-weighted sum of possible amounts (best for large number of contracts)
• Most Likely Amount method: Single most likely outcome (best for binary outcomes — either achieve the bonus or not)

The estimated variable consideration is included only to the extent it is highly probable that a significant revenue reversal will NOT occur when the uncertainty resolves — the variable consideration constraint.

Significant Financing Component

If the timing between payment and transfer of goods creates a significant financing benefit (more than 12 months), the transaction price must be adjusted to reflect the time value of money. Interest income/expense is recognised separately from revenue.

Non-Cash Consideration

If a customer pays in non-cash form (shares, property, rights), the fair value of the non-cash consideration is included in the transaction price.

6. Step 4: Allocate the Transaction Price

The transaction price is allocated to each performance obligation in proportion to its standalone selling price (SSP) — the price at which the entity would sell the good/service separately.

If SSP is not directly observable, it must be estimated using:

• Adjusted market assessment approach
• Expected cost plus margin approach
• Residual approach (only for SSPs that are highly variable or uncertain, after allocating to other POs)

7. Step 5: Recognise Revenue — Over Time vs At a Point in Time

Revenue is recognised either over time or at a point in time depending on when control is transferred.

Over Time — if ANY one criterion is met:

• The customer simultaneously receives and consumes the benefits as the entity performs (e.g., cleaning services, routine IT maintenance)
• The entity's performance creates or enhances an asset that the customer controls (e.g., constructing on customer's land)
• The entity's performance creates an asset with no alternative use and the entity has an enforceable right to payment for performance completed to date

At a Point in Time — for all other performance obligations

Indicators that control has passed at a point in time include: present right to payment, legal title transferred, physical possession transferred, significant risks and rewards of ownership transferred, customer acceptance.

8. Variable Consideration & The Constraint

Variable consideration must be estimated and constrained to amounts where it is highly probable a significant revenue reversal won't occur. Factors that increase likelihood of reversal:

• High susceptibility to factors outside the entity's control (weather, market conditions)
• Long time before uncertainty resolves
• Entity has limited experience with similar contracts
• Contract has a wide range of possible amounts

Common examples in India: volume rebates for FMCG distributors, construction milestones bonuses for EPC contractors, performance bonuses for IT services contracts.

9. Contract Modifications

When a contract is modified (scope change, price change), it is treated as:

• A new separate contract: If the modification adds distinct goods/services at prices that reflect standalone selling prices
• Termination of old + creation of new: If remaining goods/services are distinct but price is not commensurate with SSP
• A modification of existing contract: If remaining goods/services are not distinct — prospective or cumulative catch-up adjustment

10. Contract Costs

Incremental Costs of Obtaining a Contract

Sales commissions paid only if a contract is won (incremental costs) are capitalised as a "Contract Cost Asset" and amortised over the expected benefit period. Practical expedient: if amortisation period would be ≤12 months, expense immediately.

Costs to Fulfil a Contract

Setup costs (e.g., cost to mobilise before a construction project starts) are capitalised if they: relate directly to a specific contract, generate resources that will be used to satisfy POs, and are expected to be recovered.

11. Key Disclosure Requirements

Ind AS 115 requires extensive disclosures in financial statements:

Disclosure Category	Key Items Required
Revenue disaggregation	Revenue by geography, product/service type, customer type, contract type (fixed/variable), timing (point/over time)
Contract balances	Opening and closing balances of Contract Assets, Contract Liabilities, Receivables; revenue recognised from opening Contract Liability
Performance obligations	Description of each PO, significant payment terms, obligations for returns/refunds
Significant judgements	Methods used to determine transaction price and allocation; over time vs point in time determination
Contract costs	Closing balances of capitalised contract costs; amortisation and impairment
Remaining performance obligations	Aggregate transaction price allocated to unsatisfied/partially satisfied POs, and when recognition expected (practical expedient if ≤1 year)

12. Common Errors & Audit Focus Areas