Ind AS 115, Revenue from Contracts with Customers, Important Questions with Solutions for CA Final FR May & Nov 2021 Exams

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Question 1-

Mac Ltd. purchased goods on credit from Toy Ltd. for Rs.580 lakhs for export. The export order was cancelled. Mac Ltd. decided to sell the same goods in the local market with a price discount. Toy Ltd. was requested to offer a price discount of Rs.10%. Toy Ltd. wants to adjust the sales figure to the extent of the discount requested by Mac Ltd. Discuss whether such a treatment in the books of Toy Ltd. is justified as per the provisions of the relevant Ind AS.

Also, Toy Ltd. entered into a sale deed for its Land on 15th March, 20X1. But registration was done with the registrar on 20th April, 20X1. But before registration, is it possible to recognize the sale and the gain at the balance sheet date? Give reasons in support of your answer.

Solution –

Toy Ltd. had sold goods to Mac Ltd on credit worth for Rs.580 lakhs and the sale was completed in all respects. Mac Ltd.’s decision to sell the same in the domestic market at a discount does not affect the amount recorded as sales by Toy Ltd.

The price discount of 10% offered by Toy Ltd. after request of Mac Ltd. was not in the nature of a discount given during the ordinary course of trade because otherwise the same would have been given at the time of sale itself. However, there appears to be an uncertainty relating to the collectability of the debt, which has arisen subsequent to sale. Therefore, it would be appropriate to make a separate provision to reflect the uncertainty relating to collectability rather than to adjust the amount of revenue originally recorded. Hence such discount should be charged to the Statement of Profit and Loss and not shown as deduction from the sales figure.

With respect to sale of land, both sale and gain on sale of land earned by Toy Ltd. shall be recognized in the books at the balance sheet date. In substance, the land was transferred with significant risk & rewards of ownership to the buyer before the balance sheet date and what was pending was merely a formality to register the deed. The registration post the balance sheet date only confirms the condition of sale at the balance sheet date as per Ind AS 10 “Events after the Reporting Period.”

Question 2 –

An entity provides broadband services to its customers along with voice call service.

Customer buys modem from the entity. However, customer can also get the connection from the entity and modem from any other vendor. The installation activity requires limited effort and the cost involved is almost insignificant. It has various plans where it provides either broadband services or voice call services or both.

Are the performance obligations under the contract distinct?

Solution –

Entity promises to customer to provide

  • Broadband Service
  • Voice Call services
  • Modem

Entity’s promise to provide goods and services is distinct

  • if customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and
  • entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract

For broadband and voice call services –

  • Broadband and voice services are separately identifiable from other promises as company has various plans to provide the two services separately. These two services are not dependant or interrelated. Also the customer can benefit on its own from the services received.

For sale of modem –

  • Customer can either buy product from entity or third party. No significant customization or modification is required for selling product.

Based on the evaluation we can say that there are three separate performance obligation: –

  • Broadband Service
  • Voice Call services
  • Modem

Question 3 –

Growth Ltd enters into an arrangement with a customer for infrastructure outsourcing deal.

Based on its experience, Growth Ltd determines that customising the  infrastructure  will take approximately 200 hours in total to complete the project and charges Rs. 150 per hour.

After incurring 100 hours of  time, Growth Ltd and  the customer agree to change an aspect   of the project and increases the estimate of labour hours by 50  hours  at  the rate of  Rs. 100 per hour.

Determine how contract modification will be accounted as per Ind AS 115?

Solution –

Considering that the remaining goods or services are not distinct, the modification will be accounted for on a cumulative catch up basis, as given below:


Hours Rate (Rs.) Amount (Rs.)
Initial contract amount 200 150 30,000
Modification in contract 50 100 5,000
Contract amount after modification 250 140* 35,000
Revenue to be recognized 100 140 14,000
Revenue already booked 100 150 15,000
Adjustment in revenue (1000)

*35,000 / 250 = 140

Question 4

ABC is a construction contract company involved in building commercial properties. Its current policy for determining the percentage of completion of its contracts is based on the proportion of cost incurred to date compared to the total expected cost of the contract.

One of ABC’s contracts has an agreed price of Rs.250 crores and estimated total costs of Rs.200 crores. The cumulative progress of this contract is:

Year ended

31st March 20X1 31st March 20X2
Cost incurred 80 145
Work certified and billed 75 160
Amount received against bills 70 150

ABC prepared and published its financial statements for the year ended 31st March 20X1. Relevant extracts are: Crores
Revenue [(80/200) x 250] 100
Cost of sales (80)
Profit   20

Balance Sheet (Extracts)

Current assets
Amount due from customers
Contract cost to date 80
Profit recognized 20
Progress billing to date (75)
Billing to be done _25
Contract asset (amount receivable) (75-70) 5

ABC has received some adverse publicity in the financial press for taking its profit too early in the contract process, leading to disappointing profits in the later stages of contracts. Most of ABC’s competitors take profit based on the percentage of completion as determined by the work certified compared to the contract price.


(a) Assume that ABC changes its method of determining the percentage of completion of contracts to that used by its competitors, as this would represent a change in an accounting estimate. Prepare equivalent extracts to the above for the year ended 31st March 20X2.

(b) Identify, whether the above change represents a change in accounting estimate or a change in accounting policy and why?

Solution –

(a) ABC’s income statement (extracts) for the year ended:

31 March 20X2
Revenue (based on work certified) (160-100) 60
Cost of sales (balancing figure) (48)
Profit [(160/250) x (250-200)] – 20   12

 Statement of financial position (extracts) as on

31 March 20X2
Current assets
Amount due from customers
Contract cost to date 145
Profit recognized (20+12)   32
Progress billing (160)
Billing to be done   17
Contract assets (amount receivable) (160-150) 10

(b) The relevant issue here is what constitutes the accounting policy for construction contracts. Where there is uncertainty in the outcome of a contract, the appropriate accounting policy would be the completed contract basis (i.e. no profit is taken until the contract is completed). Similarly, any expected losses should be recognised immediately.

Where the outcome of a contract is reasonably foreseeable, the appropriate accounting policy is to accrue profits by the percentage of completion method. If this is accepted, it becomes clear that the different methods of determining the percentage of completion of construction contracts are different accounting estimates. Thus the change made by ABC in the year to 31 March 20X2 represents a change of accounting estimate.

Question 5 –

Deluxe bike manufactured by Zed Limited is sold with an extended warranty of 2 years for Rs.87,300 while an identical Deluxe bike without the extended warranty is sold in the market for Rs.80,000 and equivalent warranty is given in the market for Rs.10,000. How should Zed Limited recognize and measure revenue in the books on the sale of the bikes and warranty?

Solution –

As per Ind AS 115 Zed Ltd. has sold two products viz Deluxe bike and the extended warranty. Revenue earned on sale of each product should be recognised separately.

Calculation of Revenue attributable to both the components: 

Total fair value of Deluxe bike and extended warranty (80,000+10,000) Rs.90,000
Less: Sale price of the Deluxe bike with extended warranty (Rs.87,300)
Discount Rs.2,700
Discount and revenue attributable to each component of the transaction:
Proportionate discount attributable to sale of Deluxe bike (2,700 x 80,000 / 90,000) Rs.2,400
Revenue from sale of Deluxe bike (80,000 – 2,400) Rs.77,600
Proportionate discount attributable to extended warranty (2,700 x 10,000 / 90,000) Rs.300
Revenue from extended warranty (10,000 – 300) Rs.9,700

Revenue in respect of sale of Deluxe bike of Rs. 77,600 should be recognised immediately and revenue from warranty of Rs.9,700 should be recognised over the period of warranty ie. 2 years.

Question 6 –

An entity, a software developer, enters into a contract with a customer to transfer a software license, perform an installation service and provide unspecified software updates and technical support (online and telephone) for a two-year period. The entity sells the license, installation service and technical support separately. The installation service includes changing the web screen for each type of user (for example, marketing, inventory management and information technology). The installation service is routinely performed by other entities and does not significantly modify the software. The software remains functional without the updates and the technical support.

Determine how many performance obligations does the entity have?

Solution –

The entity assesses the goods and services promised to the customer to determine which goods and services are distinct. The entity observes that the software is delivered before the other  goods and services and remains functional without the updates and the technical support. Thus, the entity concludes that the customer can benefit from each of the goods and services either on their own or together with the other goods and services that are readily available.

The entity also considers the factors of Ind AS 115 and determines that the promise to transfer each good and service to the customer is separately identifiable from  each  of  the  other promises. In particular, the entity observes that the installation service does not sign ificantly modify or customise the software itself and, as such, the software and the installation service are separate outputs promised by the entity instead of inputs used  to  produce  a  combined output.

On the basis of this assessment, the entity identifies four performance obligations in the contract for the following goods or services:

  • The software license
  • An installation service
  • Software updates
  • Technical support

Question 7 –

An entity has a fixed fee contract for Rs. 1 million to develop a product that meets specified performance criteria.  Estimated cost to complete the contract is Rs. 950,000.  The entity will transfer control of the product over five years, and the entity uses the cost-to-cost input method to measure progress on the contract.  An incentive award is available if the product meets the following weight criteria:

Weight (kg) Award % of fixed fee Incentive fee
951 or greater 0%
701–950 10% Rs. 100,000
700 or less 25% Rs. 250,000

The entity has extensive experience creating products that meet the specific performance criteria. Based on its  experience, the entity has identified five engineering alternatives that will achieve the   10 percent incentive and two that will achieve the 25 percent incentive. In this case, the entity determined that it has 95 percent confidence that it will achieve the 10 percent incentive and 20 percent confidence that it will achieve the 25 percent incentive.

Based on this analysis, the entity believes 10 percent to be the most likely amount when estimating  the transaction price. Therefore, the entity includes only the 10 percent  award  in  the  transaction price when calculating revenue because the entity has concluded it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved due to its 95 percent confidence  in achieving the 10 percent award.

The entity reassesses its production status quarterly to determine whether it is on track to meet the criteria for the incentive award. At the end of the year four, it  becomes apparent that this  contract  will fully achieve the weight-based criterion. Therefore, the entity revises its estimate of variable consideration to include the entire 25 percent incentive fee in the year four because, at this point, it    is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when including the entire variable consideration in the transaction price.

Evaluate the impact of changes in variable consideration when cost incurred is as follows:

Year Rs.
1 50,000
2 1,75,000
3 4,00,000
4 2,75,000
5 50,000

Solution –

[Note: For simplification purposes, the table calculates revenue for the year independently based on costs incurred during the year divided by total expected costs, with the assumption  that  total  expected costs do not change.]



A 1,000,000
Estimated costs to complete* B 950,000
Year 1 Year 2 Year 3 Year 4 Year 5
Total  estimated variable


C 100,000 100,000 100,000 250,000 250,000
Fixed revenue D=A x H/B 52,632 184,211 421,053 289,474 52,632
Variable revenue E=C x H/B 5,263 18,421 42,105 72,368 13,158
Cumulative revenue Adjustment F        (see below) 99,370
Total revenue G=D+E+F 57,895 202,632 463,158 461,212 65,790
Costs H 50,000 175,000 400,000 275,000 50,000
Operating profit I=G–H 7,895 27,632 63,158 186,212 15,790
Margin (rounded off) J=I/G 14% 14% 14% 40% 24%

* For simplicity, it is assumed there is no change to the estimated costs to complete throughout the contract period.

* In practice, under the cost-to-cost measure of progress, total revenue for each period is determined by multiplying the total transaction price (fixed and variable) by the ratio  of  cumulative cost incurred to total estimated costs to complete, less revenue recognized to date.

Calculation of cumulative catch-up adjustment:
Updated variable consideration L 250,000
Percent complete in Year 4: (rounded off) M=N/O 95%
Cumulative costs through Year 4 N 900,000
Estimated costs to complete O 950,000
Cumulative variable revenue through Year 4: P 138,130
Cumulative catch-up adjustment F=L x M–P 99,370

Question 8 –

Future Limited undertakes a contract for construction of a Bridge on 01.04.2017. The contract was to be completed in two years. The following details are given below:

Contract Price Rs.1250 Lakh

Cost incurred up to 31.03.2018 Rs.780 Lakh

The company estimated that a further cost of Rs.520 lakh would be incurred for completing the project. What amount should be charged to revenue for the financial year 2017-18 as per the provisions of Ind AS 115 “Construction Contracts”?

Show the extracts of Profit and Loss account in the books of Future Limited.

Solution –

Statement showing the amount to be charged to Revenue as per Ind AS 115 lakh
Cost of construction incurred upto 31.03.2018 780
Add: Estimated future cost 520
Total estimated cost of construction 1,300
Degree of completion (780/1,300 x 100) 60% lakh
Revenue recognized (1,250 x 60%) 750
Total foreseeable loss (1,300 – 1,250) 50
Less: Expense for the current year (780 – 750) (30)
Loss to be provided for 20

Profit and Loss Account (Extract) lakh lakh
To Construction Costs 780 By Contract Price 750
To Provision for loss 20 By Net loss 50
800 800

Question 9 –

An entity G Ltd. enters into a contract with a customer P Ltd. for the sale of a machinery for Rs.20,00,000. P Ltd. intends to use the said machinery to start a food processing unit. The food processing industry is highly competitive and P Ltd. has very little experience in the said industry.

P Ltd. pays a non-refundable deposit of Rs.1,00,000 at inception of the contract and enters into a long-term financing agreement with G Ltd. for the remaining 95 per cent of the agreed consideration which it intends to pay primarily from income derived from its food processing unit as it lacks any other major source of income. The financing arrangement is provided on a non-recourse basis, which means that if P Ltd. defaults then G Ltd. can repossess the machinery but cannot seek further compensation from P Ltd., even if the full value of the amount owed is not recovered from the machinery. The cost of the machinery for G Ltd. is Rs.12,00,000. P Ltd. obtains control of the machinery at contract inception.

When should G Ltd. recognise revenue from sale of machinery to P Ltd. in accordance with Ind AS 115?

Solution –

As per Ind AS 115, “An entity shall account for a contract with a customer that is within the scope of this Standard only when all of the following criteria are met:

(a) the parties to the contract have approved the contract (in writing, orally or in accordance with other customary business practices) and are committed to perform their respective obligations;

(b) the entity can identify each party’s rights regarding the goods or services to be transferred;

(c) the entity can identify the payment terms for the goods or services to be transferred;

(d) the contract has commercial substance (ie the risk, timing or amount of the entity’s future cash flows is expected to change as a result of the contract); and

(e) it is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. In evaluating whether collectability of an amount of consideration is probable, an entity shall consider only the customer’s ability and intention to pay that amount of consideration when it is due. The amount of consideration to which the entity will be entitled may be less than the price stated in the contract if the consideration is variable because the entity may offer the customer a price concession”.

Paragraph (e) above, requires that for revenue to be recognised, it should be probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. In the given case, it is not probable that G Ltd. will collect the consideration to which it is entitled in exchange for the transfer of the machinery. P Ltd.’s ability to pay may be uncertain due to the following reasons:

(a) P Ltd. intends to pay the remaining consideration (which has a significant balance) primarily from income derived from its food processing unit (which is a business involving significant risk because of high competition in the said industry and P Ltd.’s little experience);

(b) P Ltd. lacks sources of other income or assets that could be used to repay the balance consideration; and P Ltd.’s liability is limited because the financing arrangement is provided on a non-recourse basis.

In accordance with the above, the criteria in Ind AS 115 are not met.

Further, it states that when a contract with a customer does not meet the criteria in paragraph 9 and an entity receives consideration from the customer, the entity shall recognise the consideration received as revenue only when either of the following events has occurred:

(a) the entity has no remaining obligations to transfer goods or services to the customer and all, or substantially all, of the consideration promised by the customer has been received by the entity and is non-refundable; or

(b) the contract has been terminated and the consideration received from the customer is non-refundable.

In accordance with the above, in the given case G Ltd. should account for the non-refundable deposit of Rs.1,00,000 payment as a deposit liability as none of the events described in paragraph 15 have occurred—that is, neither the entity has received substantially all of the consideration nor it has terminated the contract. Consequently, in accordance with paragraph 16, G Ltd. Will continue to account for the initial deposit as well as any future payments of principal and interest as a deposit liability until the criteria in paragraph 9 are met (i.e. the entity is able to conclude that it is probable that the entity will collect the consideration) or one of the events in paragraph 15 has occurred. Further, G Ltd. will continue to assess the contract in accordance with paragraph 14 to determine whether the criteria in paragraph 9 are subsequently met or whether the events in paragraph 15 of Ind AS 115 have occurred.

Question 10 –

QTV released an advertisement in Deshabandhu, a vernacular daily. Instead of paying for the same, QTV allowed Deshabandhu a  free advertisement spot, which was duly utilised by Deshabandu. How revenue for these non-monetary transactions in  the  area  of  advertising will be recognised and measured?

Solution –

Paragraph 5(d) of Ind AS 115 excludes 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.

In industries with homogenous products, it is common for entities in the same line  of  business to exchange products in order to sell them to customers or potential customers  other than parties to exchange. The current scenario, on the contrary, will be covered under Ind AS 115 since the same is exchange of  dissimilar goods or  services because both of the entities deal in different mode of media, i.e., one is print media and another  is electronic media and both parties are acting as customers and suppliers for each other.

Further, in the current scenario, it seems it  is  for consumption by  the said parties and  hence it does not fall under paragraph 5(d). It may also be noted that, even if it was to facilitate sales to customers or potential customers, it would not be scoped out since the parties are not in the same line of business.

As per paragraph 47 of  Ind AS 115, “An entity shall consider the  terms of  the contract and  its customary business  practices to determine the  transaction price. The  transaction price  is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected  on behalf of third parties (for example, some sales taxes). The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both”.

Paragraph 66 of Ind AS 115 provides that to determine the transaction price for contracts in which a customer promises consideration in a form other  than  cash,  an  entity  shall measure the non-cash consideration (or promise of non-cash consideration) at fair value.

In accordance with the above, QTV and Deshabandhu should measure the  revenue promised in the form of  non-cash consideration as per the above referred principles of Ind AS 115.

Question 11 –

Nivaan Limited commenced work on two long-term contracts during the financial year ended on 31st March, 2019.

The first contract with A & Co. commences on 1st June, 2018 and had a total sales value of Rs. 40 lakh.  It was envisaged that the contract would run for two years and that the total expected costs would be Rs. 32 lakh.  On 31st March, 2019, Nivaan Limited revised its estimate of the total expected cost to Rs. 34 lakh on the basis of the additional rectification cost of Rs. 2 lakh incurred on the contract during the current financial year.  An independent surveyor has estimated at 31st March, 2019 that the contract is 30% complete.  Nivaan Limited has incurred costs up to 31st March, 2019 of Rs. 16 lakh and has received payments on account of Rs. 13 lakh.

The second contract with B & Co. commenced on 1st September, 2018 and was for 18 months.  The total sales value of contract was Rs. 30 lakh and the total expected cost is Rs. 24 lakh.  Payments on account already received were Rs. 9.50 lakh and total costs incurred to date were Rs. 8 lakh.  Nivaan Limited has insisted on a large deposit from B & Co. because the companies had not traded together prior to the contract.  The independent surveyor estimated that on 31st March, 2019 the contract was 20% complete.

The two contracts meet the requirement of Ind AS 115 ‘Revenue from Contracts with Customers’ to recognize revenue over time as the performance obligations are satisfied over time.

The company also has several other contracts of between twelve and eighteen months in duration.  Some of these contracts fall into two accounting periods and were not completed as at 31st March, 2019.  In absence of any financial date relating to the other contracts, you are advised to ignore these other contracts while preparing the financial statements of the company for the year ended 31st March, 2019.

Prepare financial statement extracts for Nivaan Limited in respect of the two construction contracts for the year ending 31st March, 2019.

Solution –

Extracts of Balance Sheet of Nivaan Ltd. as on 31stMarch, 2019

  Rs. in lakh
Current Assets  
    Contract Assets- Work-in-progress (Refer W.N. 3) 9.0
Current Liabilities  
    Contract Liabilities (Advance from customers) (Refer W.N. 2) 4.5

 Extracts of Statement of Profit and Loss of Nivaan Ltd. as on 31stMarch, 2019

  Rs. in lakh
Revenue from contracts (Refer W.N. 1) 18
Cost of Revenue (Refer W.N. 1) (16.4)
Net Profit on Contracts (Refer W.N. 1) 1.6

 Working Notes:

1. Table showing calculation of total revenue, expenses and profit or loss on contract for the year

  A & Co. B & Co. Total
Revenue from contracts (40 x 30%) = 12 (30 x 20%) = 6 18
Expenses due for the year (34* x 30%) = 10.2 (24 x 20%) = 4.8 15
Profit or loss on contract 1.8 1.2   3

*Note:  Additional rectification cost of Rs. 2 lakh has been treated as normal cost. Hence total expected cost has been considered as Rs. 34 lakh.  However, in case this Rs. 2 lakh is treated as abnormal cost then expense due for the year would be Rs. 11.6 lakh (ie 30% of Rs. 32 lakh plus Rs. 2 lakh).  Accordingly, with respect to A & Co., the profit for the year would be Rs. 0.4 lakh and work-in-progress recognised at the end of the year would be Rs. 4.4 lakh.

2. Calculation of amount due from / (to) customers

  A & Co. B & Co. Total
Billing on the basis of revenue recognised in the books 12 6 18
Payments received from the customers 13 9.5 22.5
Advance received from the customers 1 3.5 4.5

3. Work in Progress recognised as part of contract asset at the end of the year

  A & Co. B & Co. Total
Total actual cost incurred during the year 16 8 24
Less: Cost recognised in the books for the year 31.3.2019 (10.2) (4.8) (15)
Work-in-progress recognised at the end of the year 5.8 3.2 9

Question 12 –

X Ltd. is engaged in manufacturing and selling of designer furniture. It sells goods on extended credit. X Ltd. sold furniture for Rs. 40,00,000 to a customer, the payment against which was receivable after 12 months with interest at the rate of 3% per annum. The market interest rate on the date of transaction was 8% per annum. How will X Ltd. recognise revenue for the above transaction?

Solution –

X Ltd. should determine the fair value of revenue by calculating the present value of the cash flows receivable.

Total amount receivable = Rs. 40,00,000 x 1.03 = Rs. 41,20,000.

Present Value of receivable (Revenue) = Rs. 41,20,000/1.08 = Rs. 38,14,815.

Interest income = Rs. 41,20,000 – Rs. 38,14,815 = Rs. 3,05,185.

Therefore, on transaction date Rs. 38,14,815 will be recognised as revenue from sale of goods and Rs. 3,05,185 will be recognised as interest income over the period in accordance with Ind AS 109.

Question 13 –

(a) Entity I sells a piece of machinery to the customer for Rs. 2 million, payable in 90 days. Entity I is aware at contract inception that the customer might not pay the full contract price. Entity I estimates that the customer will pay at least Rs.1.75 million, which is sufficient to cover entity I’s cost of sales (Rs. 1.5 million) and which entity I is willing to accept because it wants to grow its presence in this market. Entity I has granted similar price concessions in comparable contracts. Entity I concludes that it is highly probable that it will collect Rs.1.75 million, and such amount is not constrained under the variable consideration guidance.

What is the transaction price in this arrangement?

(b) On 1 January 20×8, entity J enters into a one-year contract with a customer to deliver water treatment chemicals. The contract stipulates that the price per container will be adjusted retroactively once the customer reaches certain sales volume, defined, as follows:

Price per container

Cumulative sales volume
Rs.100 1 – 1,000,000 containers
Rs.90 1,000,001 – 3,000,000 containers
Rs.85 3,000,001 containers and above

Volume is determined based on sales during the calendar year. There are no minimum purchase requirements. Entity J estimates that the total sales volume for the year will be 2.8 million containers, based on its experience with similar contracts and forecasted sales to the customer.  Entity J sells 700,000 containers to the customer during the first quarter ended 31 March 20X8 for a contract price of Rs.100 per container.

How should entity J determine the transaction price?

(c) Entity K sells electric razors to retailers for C 50 per unit. A rebate coupon is included inside the electric razor package that can be redeemed by the end consumers for C 10 per unit.

Entity K estimates that 20% to 25% of eligible rebates will be redeemed, based on its experience with similar programmes and rebate redemption rates available in the market for similar programmes. Entity K concludes that the transaction price should incorporate an assumption of 25% rebate redemption, as this is the amount for which it is highly probable that a significant reversal of cumulative revenue will not occur if estimates of the rebates change.

How should entity K determine the transaction price?

(d) A manufacturer enters into a contract to sell goods to a retailer for Rs.1,000. The manufacturer also offers price protection, whereby it will reimburse the retailer for any difference between the sale price and the lowest price offered to any customer during the following six months. This clause is consistent with other price protection clauses offered in the past, and the manufacturer believes that it has experience which is predictive for this contract.

Management expects that it will offer a price decrease of 5% during the price protection period. Management concludes that it is highly probable that a significant reversal of cumulative revenue will not occur if estimates change.

How should the manufacturer determine the transaction price?

Solution –

(a) Entity I is likely to provide a price concession and accept an amount less than Rs.2 million in exchange for the machinery. The consideration is therefore variable. The transaction price in this arrangement is Rs.1.75 million, as this is the amount which entity I expects to receive after providing the concession and it is not constrained under the variable consideration guidance. Entity I can also conclude that the collectability threshold is met for Rs.1.75 million and therefore contract exists.

(b) The transaction price is Rs.90 per container based on entity J’s estimate of total sales volume for the year, since the estimated cumulative sales volume of 2.8 million containers would result in a price per container of Rs.90. Entity J concludes that based on a transaction price of Rs.90 per container, it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur when the uncertainty is resolved. Revenue is therefore recognised at a selling price of Rs.90 per container as each container is sold. Entity J will recognise a liability for cash received in excess of the transaction price for the first 1 million containers sold at Rs.100 per container (that is, Rs.10 per container) until the cumulative sales volume is reached for the next pricing tier and the price is retroactively reduced.

For the quarter ended 31st March, 20X8, entity J recognizes revenue of Rs.63 million (700,000 containers x Rs.90) and a liability of Rs.7 million [700,000 containers x (Rs.100 – Rs.90)].

Entity J will update its estimate of the total sales volume at each reporting date until the uncertainty is resolved.

(c) Entity K records sales to the retailer at a transaction price of Rs.47.50 (Rs.50 less 25% of Rs.10). The difference between the per unit cash selling price to the retailers and the transaction price is recorded as a liability for cash consideration expected to be paid to the end customer. Entity K will update its estimate of the rebate and the transaction price at each reporting date if estimates of redemption rates change.

(d) The transaction price is Rs.950, because the expected reimbursement is Rs.50. The expected payment to the retailer is reflected in the transaction price at contract inception, as that is the amount of consideration to which the manufacturer expects to be entitled after the price protection. The manufacturer will recognise a liability for the difference between the invoice price and the transaction price, as this represents the cash that it expects to refund to the retailer.

The manufacturer will update its estimate of expected reimbursement at each reporting date until the uncertainty is resolved.

Question 14 –

KK Ltd. runs a departmental store which awards 10 points for every purchase of Rs. 500 which can be discounted by the customers for further shopping with the same merchant. Each point is redeemable on any future purchases of KK Ltd.’s products within 3 years. Value of each point is Rs. 0.50. During the accounting period 2017-2018, the entity awarded 1,00,00,000 points to various customers of which 18,00,000 points remained undiscounted (to be redeemed till 31st March, 2020). The management expects only 80% of the remaining will be discounted in future.

The Company has approached your firm with the following queries and has asked you to suggest the accounting treatment (Journal Entries) under the applicable Ind AS for these award points:

a. How should the recognition be done for the sale of goods worth Rs. 10,00,000 on a particular day?

b. How should the redemption transaction be recorded in the year 2017-2018? The Company has requested you to present the sale of goods and redemption as independent transaction. Total sales of the entity is Rs. 5,000 lakhs.

c. How much of the deferred revenue should be recognised at the year-end (2017-2018) because of the estimation that only 80% of the outstanding points will be redeemed?

d. In the next year 2018-2019, 60% of the outstanding points were discounted Balance 40% of the outstanding points of 2017-2018 still remained outstanding. How much of the deferred revenue should the merchant recognize in the year 2018-2019 and what will be the amount of balance deferred revenue?

e. How much revenue will the merchant recognized in the year 2019-2020, if 3,00,000 points are redeemed in the year 2019-2020?

Solution –


Points earned on Rs. 10,00,000 @ 10 points on every Rs. 500 = [(10,00,000/500) x 10] = 20,000 points.

Value of points = 20,000 points x Rs. 0.5 each point = Rs. 10,000

Revenue recognized for sale of goods Rs. 9,90,099 [10,00,000 x (10,00,000/10,10,000)]
Revenue for points deferred Rs. 9,901 [10,00,000 x (10,000/10,10,000)]

 Journal Entry

Rs. Rs.
Bank A/c Dr. 10,00,000
To Sales A/c 9,90,099
To Liability under Customer Loyalty programme 9,901

b. Points earned on Rs. 50,00,00,000 @ 10 points on every Rs. 500 = [(50,00,00,000/500) x 10] = 1,00,00,000 points.

Value of points = 1,00,00,000 points x Rs. 0.5 each point = Rs. 50,00,000

Revenue recognized for sale of goods = Rs. 49,50,49,505 [50,00,00,000 x (50,00,00,000 / 50,50,00,000)]

Revenue for points = Rs. 49,50,495 [50,00,00,000x (50,00,000 / 50,50,00,000)]

Journal Entry in the year 2017

Rs. Rs.
Bank A/c Dr. 50,00,00,000
To Sales A/c 49,50,49,505
To Liability under Customer Loyalty programme 49,50,495
(On sale of Goods)  


Liability under Customer Loyalty programme 42,11,002  
To Sales A/c   42,11,002
(On redemption of (100 lakhs -18 lakhs) points)    

 Revenue for points to be recognized

Undiscounted points estimated to be recognized next year 18,00,000 x 80%

= 14,40,000 points

Total points to be redeemed within 2 years = [(1,00,00,000-18,00,000) + 14,40,000] = 96,40,000

Revenue to be recognised with respect to discounted point = 49,50,495 x (82,00,000/96,40,000) = 42,11,002

c. Revenue to be deferred with respect to undiscounted point in 2017 -2018= 49,50,495 – 42,11,002 = 7,39,493

d. In 2018-2019, KK Ltd. would recognize revenue for discounting of 60% of outstanding points as follows:

Outstanding points = 18,00,000 x 60% = 10,80,000 points

Total points discounted till date = 82,00,000 + 10,80,000 = 92,80,000 points

Revenue to be recognized in the year 2018-2019 = [{49,50,495 x (92,80,000 / 96,40,000)} – 42,11,002] = Rs. 5,54,620.

Liability under Customer Loyalty programme Dr. 5,54,620
To Sales A/c 5,54,620
(On redemption of further 10,80,000 points)

The Liability under Customer Loyalty programme at the end of the year 2018 -2019 will be Rs. 7,39,493 – 5,54,620 = 1,84,873.

e. In the year 2019-2020, the merchant will recognized the balance revenue of Rs. 1,84,873 irrespective of the points redeemed as this is the last year for redeeming the points. Journal entry will be as follows:

Liability under Customer Loyalty programme Dr. 1,84,873
To Sales A/c 1,84,873
(On redemption of further 10,80,000 points)


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