Question 1

What is the objective of Ind AS 115, and what core principle underpins its approach to revenue recognition?

Accepted Answer

The objective of Ind AS 115 is to establish the principles for reporting useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Its core principle is that revenue is recognized when control of goods or services is transferred to the customer, reflecting the transfer of value.

Question 2

What are the five sequential steps in the revenue recognition model under Ind AS 115?

Accepted Answer

Under Ind AS 115, the five sequential steps in the revenue recognition model are: 1) Identify the contract with the customer, 2) Identify the performance obligations within the contract, 3) Determine the transaction price, 4) Allocate the transaction price to the performance obligations, and 5) Recognize revenue when the performance obligations are satisfied.

Question 3

What constitutes a valid contract with a customer under this standard?

Accepted Answer

A valid contract requires an offer that is accepted by the other party, consideration exchanged between both parties, and mutual consent regarding the terms. Additionally, the contract must be for a legal purpose and involve parties who have the capacity to contract.

Question 4

Under what circumstances might an entity apply Ind AS 115 to a portfolio of contracts instead of on an individual basis?

Accepted Answer

An entity may apply Ind AS 115 to a portfolio of contracts when the contracts have similar characteristics and the application of a portfolio approach would provide a more efficient and effective means of reporting revenue, particularly when individual contracts are not material.

Question 5

How does Ind AS 115 define and require identification of a performance obligation?

Accepted Answer

Ind AS 115 defines a performance obligation as a promise in a contract to transfer a distinct good or service to the customer. It requires entities to identify these obligations at contract inception to accurately recognize revenue as they are satisfied.

Question 6

What does it mean for goods or services to be “distinct,” and how should an entity treat them?

Accepted Answer

Goods or services are considered distinct if they are separately identifiable and the customer can benefit from them on their own or together with other resources. An entity should recognize revenue for each distinct good or service when control is transferred to the customer.

Question 7

When can a series of distinct goods or services be treated as a single performance obligation?

Accepted Answer

A series of distinct goods or services can be treated as a single performance obligation when they are substantially the same and are transferred to the customer over time, fulfilling the criteria of being highly interrelated and providing a combined output that the customer expects, thus simplifying revenue recognition.

Question 8

How is the timing of revenue recognition determined—at a point in time versus over time?

Accepted Answer

Revenue recognition timing is determined based on the transfer of control to the customer. If control is transferred at a specific point in time, revenue is recognized then. Conversely, if control is transferred over time, revenue is recognized based on progress towards completion, typically assessed through milestones or costs incurred.

Question 9

What factors are considered when determining the transaction price?

Accepted Answer

Transaction price is determined by considering market conditions, customer negotiations, and specific performance obligations outlined in the contract. It also includes any variable considerations and discounts that may apply.

Question 10

How should entities estimate variable consideration, and what methods can be used?

Accepted Answer

Entities should estimate variable consideration using either the expected value method or the most likely amount method, considering factors such as historical data and market conditions.

Question 11

What does “constraining estimates of variable consideration” mean, and why is it necessary?

Accepted Answer

Constraining estimates of variable consideration refers to the requirement to limit the recognition of variable amounts to those that are probable of not resulting in a significant reversal of revenue when the uncertainties are resolved. This is necessary to ensure that revenue is recognized in a manner that reflects the transfer of goods or services and provides a reliable measure of the entity's performance.

Question 12

How should non-cash consideration be measured?

Accepted Answer

Non-cash consideration should be measured at its fair value at the date of the transaction. This involves assessing market conditions and any relevant accounting standards to ensure accurate reporting.

Question 13

How should amounts payable to customers (e.g., discounts, coupons) be treated?

Accepted Answer

Amounts payable to customers like discounts and coupons should be recognized as a reduction in revenue at the point of sale. They may also be treated as a liability until redeemed, ensuring accurate financial representation and compliance with revenue recognition standards.

Question 14

How is the transaction price allocated among identified performance obligations?

Accepted Answer

Transaction price allocation among identified performance obligations involves determining the standalone selling prices of each obligation and then distributing the total transaction price based on these proportions. This ensures that revenue is recognized appropriately as each obligation is fulfilled, adhering to the principles set out in ASC 606 or IFRS 15.

Question 15

What methods are used to estimate stand-alone selling prices when they’re not directly observable?

Accepted Answer

When stand-alone selling prices are not directly observable, methods such as the cost-plus method, where costs are calculated and a margin is added, the market assessment approach, which involves comparing with competitors’ prices, and the expected cost plus margin method can be used to estimate these prices.

Question 16

How does the standard help determine whether an entity is a principal or an agent?

Accepted Answer

The standard helps determine whether an entity is a principal or an agent by evaluating who has control over the goods or services before they are transferred to the customer. Key factors include the entity's exposure to risks and rewards, as well as its involvement in the transaction, which ultimately affects how revenue is recognized in financial statements.

Question 17

When acting as an agent, how should revenue be recognized on a net basis?

Accepted Answer

When acting as an agent, revenue should be recognized on a net basis, meaning only the commission or fee earned is recorded as revenue. This reflects the agent's role in facilitating the transaction without assuming the risks and rewards of ownership.

Question 18

What methods are recommended to measure progress for performance obligations satisfied over time (input vs output)?

Accepted Answer

To measure progress on performance obligations satisfied over time, input methods like cost-to-cost are useful for capturing ongoing costs, while output methods, such as milestones achieved, provide clear indicators of deliverables completed, ensuring compliance with revenue recognition standards.

Question 19

In the early stage of a contract with unpredictable outcomes, how should revenue recognition be handled?

Accepted Answer

In the early stages of a contract with unpredictable outcomes, revenue recognition should be handled by assessing the likelihood of outcomes based on the contract terms. If the outcomes can be reasonably estimated, the percentage-of-completion method may be applied. Otherwise, revenue should be recognized only when the uncertainty is resolved.

Question 20

How are rights of return and refund obligations accounted for under Ind AS 115?

Accepted Answer

Under Ind AS 115, rights of return and refund obligations are accounted for by estimating the expected returns at the point of sale, which reduces the recognized revenue. A liability is recognized for the expected refunds, and the asset for the returned goods is also recorded.

Question 21

What guidance does the standard provide regarding performance obligations such as warranties?

Accepted Answer

The standard provides guidance that warranties are considered performance obligations if they promise to transfer a service to the customer. Entities must recognize revenue when the warranty service is provided, reflecting the transfer of control.

Question 22

How are customer options for future goods or services treated under the standard?

Accepted Answer

Customer options for future goods or services are treated as separate performance obligations if they provide a material right to the customer. Revenue is recognized when the options are exercised, and the consideration is allocated based on the standalone selling prices.

Question 23

How are contract assets and contract liabilities presented and assessed for impairment?

Accepted Answer

Contract assets are presented as receivables that represent the right to consideration in exchange for goods or services transferred. Contract liabilities are presented as obligations to transfer goods or services for which consideration has been received. Impairment is assessed based on expected credit losses, considering the collectability of the receivables.

Question 24

How should a non-refundable upfront fee be treated in the context of performance obligations?

Accepted Answer

A non-refundable upfront fee should be recognized as revenue over the period in which the related performance obligations are satisfied. This approach aligns with the revenue recognition standard, which requires that revenue be recognized when control of goods or services is transferred, reflecting the true economic activity related to the fee.

Question 25

How should revenue from licenses, especially usage- or sales-based royalties, be recognized?

Accepted Answer

Revenue from licenses, particularly usage- or sales-based royalties, should be recognized when the underlying sales occur, as this aligns with the transfer of control to the customer, following the guidelines set out in IFRS 15 or ASC 606.

Ind AS 115 – Revenue Recognition Interview Q&A

A. Objective & 5-Step Model

Q1: What is the objective of Ind AS 115, and what core principle underpins its approach to revenue recognition?

Q2: What are the five sequential steps in the revenue recognition model under Ind AS 115?

Q3: What constitutes a valid contract with a customer under this standard?

Q4: Under what circumstances might an entity apply Ind AS 115 to a portfolio of contracts instead of on an individual basis?

B. Performance Obligations & Transfer of Control

Q5: How does Ind AS 115 define and require identification of a performance obligation?

Q6: What does it mean for goods or services to be “distinct,” and how should an entity treat them?

Q7: When can a series of distinct goods or services be treated as a single performance obligation?

Q8: How is the timing of revenue recognition determined—at a point in time versus over time?

C. Transaction Price & Variable Consideration

Q9: What factors are considered when determining the transaction price?

Q10: How should entities estimate variable consideration, and what methods can be used?

Q11: What does “constraining estimates of variable consideration” mean, and why is it necessary?

Q12: How should non-cash consideration be measured?

Q13: How should amounts payable to customers (e.g., discounts, coupons) be treated?

D. Allocation & Principal vs Agent

Q14: How is the transaction price allocated among identified performance obligations?

Q15: What methods are used to estimate stand-alone selling prices when they’re not directly observable?

Q16: How does the standard help determine whether an entity is a principal or an agent?

Q17: When acting as an agent, how should revenue be recognized on a net basis?

E. Progress Methods & Additional Scenarios

Q18: What methods are recommended to measure progress for performance obligations satisfied over time (input vs output)?

Q19: In the early stage of a contract with unpredictable outcomes, how should revenue recognition be handled?

Q20: How are rights of return and refund obligations accounted for under Ind AS 115?

Q21: What guidance does the standard provide regarding performance obligations such as warranties?

Q22: How are customer options for future goods or services treated under the standard?

Q23: How are contract assets and contract liabilities presented and assessed for impairment?

Q24: How should a non-refundable upfront fee be treated in the context of performance obligations?

Q25: How should revenue from licenses, especially usage- or sales-based royalties, be recognized?