Scope of Ind-As -115 ( Revenue from contracts with customers) – ज्ञान -Gyan"IFRS"

Scope of Ind-As -115 ( Revenue from contracts with customers)

As we are all aware that Ind-As -115 starts its applicability from 01 April 2018 and there are many concepts which one needs to understand in order to evaluate its business transactions affecting revenues. In order to get the treatment right in all aspects we would be starting off very simple and crisp analysis of each important aspects of the newly effective revenue standards for the sake of our readers.

Firstly, one has to get clarity over what are the areas which have specifically been excluded by the standard and what does that means-

Para  5– An entity shall apply this Standard to all contracts with customers, except the following:

(a) lease contracts within the scope of Ind AS 17, Leases;

(b) insurance contracts within the scope of Ind AS 104, Insurance Contracts;

(c) financial instruments and other contractual rights or obligations within the scope
of Ind AS 109, Financial Instruments, Ind AS 110, Consolidated Financial
Statements, Ind AS 111, Joint Arrangements, Ind AS 27, Separate Financial
Statements and Ind AS 28, Investments in Associates and Joint Ventures; and

(d) non-monetary exchanges between entities in the same line of business to facilitate
sales to customers or potential customers. For example, this Standard would not
apply to a contract between two oil companies that agree to an exchange of oil to
fulfil demand from their customers in different specified locations on a timely
basis.

Para -6 “”…….. shall apply this Standard to a contract only if the counterparty to the contract is a customer………….””

Para -7 “” ………A contract with a customer may be partially within the scope of this Standard and partially within the scope of other Standards listed in paragraph 5…………………………….””

Para -8 “”……….This Standard specifies the accounting for the incremental costs of obtaining a contract with a customer and for the costs incurred to fulfil a contract with a customer if those costs are not within the scope of another Standard (see paragraphs 91–104)…………………………..””

Now,

Lets note down areas which need to be taken care while evaluating whether certain transaction is specifically covers in this standard or not –

1- First of all let us have a look at the principal when an entity needs to recognize its revenue which has been given under para 2 of Ind-As 115 ”  the core principle of this Standard is that an entity shall recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services “. Which means there are certain steps which are required to be fulfilled in order to apply this standard for recognizing revenue. The steps needs comprehensive understanding which would be detailing out in our next individual articles,

2- Secondly, The standard points our clearly in para 3 that all practical expedient should be considered while using this standard which means that there are certain terms and conditions which covers/ include as per the normal business practices and also basing to some practical situations, hence those conditions could be used even though these have not specifically been mentioned in this revenue standard,

3- The standard permits to use all required conditions for a transaction either at individual level or on portfolio basis which means that if you have similar character contracts/ transaction then you may use revenue recognition principal on portfolio basis rather to use individual,

4- There are certain transactions / instances which has specifically been excluded from this standard and one has to look for specific guidance referring to that specific standards. e.g. Leases, insurance, financial instruments etc will not be covered within this standard,

5- If there are certain transaction which does not have any monetary (e.g. exchange) considerations then this revenue standard will not be applied,

6- Para 6 specifically emphasizing on the definition “customer” which means “A customer is a party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration”   which means that there should not be any RISK sharing activities where both the parties agree to build some asset and share profits/ loss accordingly,

7- Revenue from transactions that does not arise from contract with a customer will not be in the scope of this standard e.g. dividends, donations, certain contributions etc and hence one has to look for specific guidance in the specific applicable standards if available,

8- If the other Standards specify how to separate and/or initially measure one or more parts of the contract, then an entity shall first apply the separation and/or measurement requirements in those Standards. An entity shall exclude from the transaction price the amount of the part (or parts) of the contract that are initially measured in accordance with other Standards and shall apply paragraphs 73–86 to allocate the amount of the transaction price that remains (if any) to each performance obligation within the scope of this Standard and to any other parts of the contract identified by paragraph 7(b) which says that If the other Standards specify how to separate and/or initially measure one or more parts of the contract, then an entity shall first apply the separation and/or measurement requirements in those Standards. An entity shall exclude from the transaction price the amount of the part (or parts) of the contract that are initially measured in accordance with other Standards and shall apply paragraphs 73–86 to allocate the amount of the transaction price that remains (if any) to each
performance obligation within the scope of this Standard and to any other parts of the contract identified by paragraph 7(b)

Any specific concerns or instance related to the scoping within this standard then please write an email to anuj@gyanifrs.com

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