What is the five-step model of revenue recognition under Ind AS 115?

Question

Ind AS 115 is huge in CA Final FR. Can someone explain the five steps in simple terms with an example so I can apply it in case studies?

GradeHunt_Team · Answer

Under Ind AS 115, an entity recognises revenue when (or as) control of promised goods or services passes to the customer. It works in five steps:

1. Identify the contract with the customer. The parties must have approved it and be committed to their obligations, each party's rights and the payment terms must be identifiable, the contract must have commercial substance, and collection of the consideration must be probable.
2. Identify the performance obligations: each promise to transfer a distinct good or service (or bundle), or a series of distinct goods or services that are substantially the same and transfer in the same pattern.
3. Determine the transaction price: the consideration to which the entity expects to be entitled, excluding amounts collected on behalf of third parties (such as GST), after considering variable consideration (discounts, rebates, bonuses and similar items, subject to the constraint), significant financing components, non-cash consideration and consideration payable to the customer. Unlike IFRS 15, Ind AS 115 drops penalties from the variable consideration list: under para 51AA a penalty is treated as per the substance of the contract and forms part of variable consideration only where it is inherent in determining the price.
4. Allocate the transaction price to each performance obligation in proportion to stand-alone selling prices.
5. Recognise revenue when (or as) each performance obligation is satisfied, either at a point in time or over time.

Short example:
A company sells a machine with 2 years of maintenance for Rs 11 lakh (ignore any financing component for simplicity). Stand-alone prices: machine Rs 10 lakh, maintenance Rs 2 lakh (total Rs 12 lakh).
- Performance obligations: machine and maintenance.
- Allocation: machine 11 x 10/12 = Rs 9.17 lakh; maintenance 11 x 2/12 = Rs 1.83 lakh.
- Recognition: Rs 9.17 lakh on delivery of the machine; Rs 1.83 lakh spread over 2 years as service is given (about Rs 0.92 lakh a year).

Exam tip: in case studies, show all five steps as headings even when a step is simple. A correct final figure on its own does not show how you reached it, so set out the working under each step.

What is the five-step model of revenue recognition under Ind AS 115?

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