Library / Technical Accounting Manual: IFRS, IAS and Ind AS Equivalents

IFRS 15 - Revenue from Contracts with Customers

Indian equivalent: Ind AS 115 - Revenue from Contracts with Customers

Objective and scope

IFRS 15 sets one universal method for recognising revenue - the closely watched 'top line' - using a clear five-step model, so all companies decide when and how much revenue to record on a consistent basis, based on the transfer of control to the customer.

Core principle

Revenue is the most watched - and most manipulated - number in any account. IFRS 15 nails it down with a five-step model: revenue is recognised when the company transfers control of goods or services to the customer, in the amount it expects to be entitled to - not simply when cash arrives.

Defined terms and technical terminology

Term	Technical meaning
Revenue	Income from an entity's ordinary activities - its core sales.
Contract	An agreement creating enforceable rights and obligations between entity and customer.
Performance obligation	Each distinct promise to transfer a good or service to the customer.
Transaction price	The consideration the entity expects to be entitled to for satisfying the contract (net of discounts, refunds, variable amounts).
Transfer of control	When the customer can direct the use of, and obtain substantially all the benefits from, the good/service - the trigger for revenue.
Variable consideration	Amounts that may change (discounts, rebates, bonuses, penalties), estimated and constrained.

Application and worked illustrations

The five-step model

Step 1 - Identify the contract with the customer. Step 2 - Identify the performance obligations (the distinct promises). Step 3 - Determine the transaction price (including variable consideration, constrained so revenue isn't overstated). Step 4 - Allocate the price to each obligation, usually by stand-alone selling prices. Step 5 - Recognise revenue as (or when) each obligation is satisfied - over time if the customer benefits as you perform, otherwise at a point in time.

Worked example 1 - a bundle (phone + service)

ConnectTel sells a smartphone plus 12 months of service for ₹36,000 total. There are two performance obligations: the phone (delivered now) and the service (over 12 months). Sold separately, the phone is ₹24,000 and the service ₹12,000. IFRS 15 allocates the ₹36,000: ₹24,000 to the phone, recognised immediately on handover, and ₹12,000 to the service, at ₹1,000 per month. Even though the customer pays upfront, ConnectTel can't book all ₹36,000 on day one.

Journal entry - At contract start (customer pays ₹36,000)
Account	Debit (₹)	Credit (₹)
Bank	36,000
Revenue - phone		24,000
Contract liability (deferred service)		12,000

Worked example 2 - over time (construction)

A builder contracted to construct a bridge over 3 years recognises revenue over time as work progresses (measured, say, by costs incurred to date as a percentage of total expected costs), because the customer controls the asset as it is built. This prevents years of zero revenue followed by one giant spike.

Variable consideration

If a contract includes a performance bonus or a volume rebate, that variable consideration is estimated and included in the transaction price - but constrained so revenue is only recognised to the extent it is highly probable not to reverse. This stops optimistic over-recognition.

Common mistake: recognising all revenue when cash is received. Revenue follows the transfer of control, which may be earlier (accrued) or later (deferred) than payment.

IND AS LINK

Ind AS 115 is the Indian equivalent and is fully converged with IFRS 15 - same five-step model and principles.

Further worked illustrations

Extra numeric example - a discount spread across a bundle

A company sells Product A (stand-alone ₹60,000) and Product B (stand-alone ₹40,000) together for a bundled ₹90,000 - a ₹10,000 discount. IFRS 15 allocates the discount proportionately: A gets 60% → ₹54,000; B gets 40% → ₹36,000. Revenue is recognised at those allocated amounts as each product's control transfers - you don't arbitrarily load all the discount onto one item.

INDIAN REGULATORY CONTEXT

Indian real-estate developers were significantly affected by Ind AS 115. Many projects that previously used percentage-of-completion now recognise revenue only at a point in time (on handover of the flat) unless the strict over-time criteria are met - often deferring revenue to completion and materially changing developers' reported profits.

TECHNICAL EDGE CASE

An online marketplace lists a third party's product for ₹1,000 and keeps ₹150 commission. Is its revenue ₹1,000 or ₹150? If the marketplace never controls the goods (the seller ships directly, sets the price, bears returns), it's an agent → revenue is only the ₹150 commission. If it does control the goods before transfer, it's a principal → revenue is the full ₹1,000 with ₹850 as cost. Getting this wrong can inflate reported revenue several-fold.

Extended technical analysis

The five-step model - technical application

IFRS 15 establishes a single, control-based revenue model. Its analytical rigour lies in identifying distinct performance obligations, constraining variable consideration, and determining whether control transfers over time or at a point in time.

IFRS 15 - Five-Step Revenue Recognition Model
■ STEP 1: Identify the contract - approval, rights identifiable, payment terms, commercial substance, collectability probable (IFRS 15.9)
▼
◆ STEP 2: Identify performance obligations - is each promised good/service DISTINCT?
▼
▸ Distinct = (a) customer benefits on its own or with readily available resources AND (b) separately identifiable within the contract
▼
✖ NOT distinct → Combine with other promises until a distinct bundle is identified
▼
▸ STEP 3: Determine transaction price - fixed + variable (constrained) + significant financing + non-cash + consideration payable to customer
▼
▸ STEP 4: Allocate transaction price on relative STAND-ALONE SELLING PRICE basis
▼
◆ STEP 5: Does control transfer OVER TIME? (any of the three IFRS 15.35 criteria met?)
▼
✔ YES → Recognise revenue OVER TIME using an input or output measure of progress
▼
■ NO → Recognise revenue AT A POINT IN TIME when control transfers (indicators in IFRS 15.38)

The over-time criteria (IFRS 15.35)

Revenue is recognised over time if any one of the following is met: (a) the customer simultaneously receives and consumes the benefits as the entity performs (routine services, cleaning contracts); (b) the entity's performance creates or enhances an asset the customer controls as it is created (construction on the customer's land); or (c) the entity's performance creates an asset with no alternative use to the entity and the entity has an enforceable right to payment for performance completed to date. Criterion (c) is the decisive test in real estate and bespoke manufacturing, and turns critically on the enforceability of the right to payment including a reasonable profit margin.

Variable consideration and the constraint

Variable consideration is estimated using either the expected value (probability-weighted, appropriate for large populations of similar contracts) or the most likely amount (appropriate for binary outcomes). It is then subject to the constraint: included only to the extent it is highly probable that a significant reversal of cumulative revenue will not occur when the uncertainty resolves. Indicators that the constraint should bite include susceptibility to factors outside the entity's influence, long periods before resolution, limited relevant experience, and a broad range of possible outcomes.

Principal versus agent

Principal vs Agent - Control Indicators (IFRS 15.B37)
Indicator	Suggests PRINCIPAL (gross)	Suggests AGENT (net)
Primary responsibility for fulfilment	Entity is responsible for acceptability of the good/service	Third party is responsible
Inventory risk	Entity bears risk before transfer, or on return	No inventory risk borne
Pricing discretion	Entity establishes the price	Price set by the third party
Nature of promise	To provide the specified good/service itself	To arrange for another party to provide it
Revenue recognised	Gross consideration	Net commission or fee

Contract balances and costs

IFRS 15 introduces contract assets (a right to consideration conditional on something other than the passage of time) distinguished from receivables (an unconditional right), and contract liabilities (consideration received or due before performance). Separately, incremental costs of obtaining a contract (e.g., sales commissions that would not have been incurred had the contract not been won) are capitalised and amortised over the period of benefit, unless the amortisation period would be one year or less, in which case a practical expedient permits immediate expensing.

Journal entry - Capitalising incremental costs of obtaining a contract
Account	Debit (₹)	Credit (₹)
Contract cost asset	5,00,000
Bank / Commission payable		5,00,000

IFRS vs Ind AS - Comparative Analysis
Aspect	IFRS / IAS position	Ind AS position (carve-out / carve-in)
Core model	Five-step control-based model.	Ind AS 115 - fully converged. No carve-out.
Real estate	Percentage-of-completion only if over-time criteria met.	Major Indian impact: the Guidance Note on Real Estate approach was superseded; many developers moved to point-in-time recognition on possession, materially deferring revenue.
Effective date	IFRS 15 effective 1 January 2018.	Ind AS 115 effective 1 April 2018, using the modified retrospective or full retrospective approach.
Disclosure	Extensive disaggregation and contract balance disclosures.	Identical; Indian regulators focus on disaggregation of revenue by segment, geography and timing of transfer.