On February 16, 2015, the Ministry of Corporate Affairs notified 39 Indian accounting standards. Ind AS 115, which was converged with the International Financial Reporting Standards 15, is one of these standards.

Following the postponement of IFRS 15 to January 1, 2018, the MCA also postponed the implementation of Ind AS 115 on March 30, 2016, and released Ind AS 11 (construction contract) and Ind AS 18 (revenue recognition)

The MCA notified Ind AS 115, a revised revenue recognition requirement that replaced the current Ind AS 11 and Ind AS 18, on March 28, 2018. The updated norm also superseded the existing guidelines on real estate income identification.

Ind AS 115 came into effect on April 1, 2018. Its core principle is that the revenue recognition under AS must be equal to the amount of which the entity claims to be entitled, whenever the ownership/control of goods and services is transferred from the entity to consumers.

Ind AS applicability is based on a five-step model:

1. Identification of the Contract with the Customer 

It deals with determining if the contract falls under the purview of Ind AS 115. The following conditions must be followed in order to qualify a contract under this standard:

• The contract has been accepted by the contract's parties.
• The parties are committed to carrying out their respective responsibilities.
• The contract's rights and payout are defined for each party.
• A deal has economic value.
• The entity has probably collected the consideration

2. Combination of Contracts 

Contracts entered into at or around the same time and with the same client will be treated as a single contract if one or more of the following conditions are met:

• If different contracts are negotiated as a package and have the same commercial objective
• If the consideration of one project is dependent on the performance or price of the other contract
• The promised goods and services are a single performance obligation

3. Determination of Contract Modifications 

A change in scope or price that is agreed to by the contract parties is considered as contract modification (E.g. Change order, variation or an amendment). If both the following provisions are met, contract modification should be seen as a separate contract:

• The contract's reach expands due to the inclusion of different promised products or services.
• The contract price rises by a sum representing the entity's stand-alone sale price of the added products or services, plus all other modifications.

4. Identifying Performance Obligations 

An agency should evaluate the goods or services promised in a contract and recognize each obligation to transfer either:

• A product or service
• A set of distinct goods or services that are identical and transferred in the same way.
• A contract with a customer may contain guarantees that are suggested by an entity's contractual practices in addition to those that are exclusively specified in the contract.

5. Recognition of Revenue After the Performance Obligations are Satisfied  

Revenue Recognition under Ind AS deals with recognizing revenue at a certain moment in time or overtime depending on performance commitments/obligations. Revenue recognition under Ind AS must take place with each performance obligation fulfilled over time by calculating the progress towards satisfaction on the completion of each reporting cycle. For such measurements, an organization can consistently use a single method.

Exceptions Under Ind AS 115

Ind AS applicability is valid for all the contracts with customers, except:

• The lease contracts that are within the scope of Ind AS 17
• The insurance contracts which are in the scope of Ind AS 104
• Contractual rights or obligations or financial instruments which are within the scope of Ind AS 109 (deals with financial instruments), Ind AS 110, (deals with consolidated financial statements), Ind AS 111, (deals with joint arrangements, Ind AS 27, (deals with separate financial statements) and Ind AS 28, (which deals with investments in associates and joint ventures)
• Non-monetary transactions between businesses of the same industry to promote sales to consumers or prospective customers. For example, this Standard does not apply to a deal between two oil companies that plan to swap oil in order to meet the demand of their customers in various specified locations on a timely basis.

Tax Implications: Transition to Ind AS 115 

• For Those Entities which Incorporated Ind AS 115 on or After April 1 2018  

The change to retained earnings would be a part of the "transition amount," and book profit will be raised or reduced by one-fifth of the amount of each year beginning with the convergence year and continuing for the next four years, subject to some exceptions.

• For those entities which incorporated Ind AS 115 before April 1 2018 

The current reporting period covered under an entity's "first Ind AS financial statement" is defined by the "First Ind AS reporting period" stated under Ind AS 101. Therefore, when an entity incorporates Ind AS applicability, the "convergence date" will occur only once in the company's lifetime. Therefore, the substitution of one Ind AS with another, subject to the new Ind AS notification, is different from the 'convergence date'. Hence, the changes and adjustment made to retained earnings after adopting Ind AS 115 will not be the transition amount's part.

The implications discussed above can result in double taxation or double non-taxation. Therefore, a representation should be made to the Central Board of Direct Taxes to obtain clarity.

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