A transportation entity, say A Ltd., is in the business of transports goods from one place to another as per customer’s request. As per the contract of A Ltd. with customers, once the goods are loaded on conveyance, the contract can’t be cancelled. The average time to reach the destinations varies from 30 to 45 days.
As per Ind AS 115, whether the performance obligation of A Ltd. is satisfied over time or at a point in time?
If the performance obligation is satisfied over time then whether the revenue can be recognised on the basis of number of days the conveyance takes to reach destination?
Para 31 of Ind AS 115 Revenue from Contracts with Customers provides that revenue shall be recognised as (over the time) and when (at a point in time) the control of goods or services promised under the contract are transferred. At the inception of contract, an entity shall determine whether each performance obligation in a contract will be satisfied over a period of time or at a point in time.
If any of the following condition is satisfied then revenue is recognised over a period of time:
1. Customer simultaneously receives & consumes benefits arising from goods supplied or service rendered by an entity;
2. Contract is for creation or enhancement of an asset that the customer controls as the asset is created or enhanced; or
3. Contract is for creation of an asset without alternative use to an entity and the entity has enforceable right to collect the payment for the works completed till date.
If none of the above conditions are met then revenue shall be recognised at point in time.
Analysing condition 1 against the query
As per para B3 of Ind AS 115, determination of whether the customer simultaneously receives and consumes benefits arising from good supplied or services rendered by an entity can be straightforward and simple in some cases. However, in other cases it may not be simple. In such cases, performance obligation is satisfied over time if the entity determines that another entity would not be required to substantially re-perform the work an entity has already performed before termination of the contract and hiring of another entity is to fulfill the remaining performance obligation.
In the given case, this condition shall be considered as fulfilled by A ltd. if another entity would not be required to substantially re-transport the goods from one place to the transit place upto which A lt.d has already transported the goods. If there is no need by another entity to substantially reperform the services A ltd. has already rendered then revenue can be recognized over a period of time.
Analysing condition 2 against the query
In this case, A Ltd. is engaged in the business of transportation of goods from one place to another, and not in creation or enhancement of any asset. So, second condition is not required to be analysed in this case.
Analysing condition 3 against the query
Considering the nature of business of A Ltd., third condition is also not required to be analysed.
Referring to above provisions of Ind AS 115, in the given case, the performance obligation shall be considered to be satisfied over time and hence revenue may be recognized over a period of time only when condition 1 is met. Otherwise, performance obligation shall be considered to be satisfied at a point in time.
When the performance obligation is satisfied over time, then the percentage of progress shall be determined considering the nature of goods or services. The percentage may be calculated using input or output methods. So, there is no specific method is given under Ind AS 115 for determination of percentage of completion.
Para 35 of Ind AS 115: An entity transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognises revenue over time, if one of the following criteria is met:
(a) the customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs (see paragraphs B3-B4);
(b) the entity’s performance creates or enhances an asset (for example, work in progress) that the customer controls as the asset is created or enhanced (see paragraph B5); or
(c) the entity’s performance does not create an asset with an alternative use to the entity (see paragraph 36) and the entity has an enforceable right to payment for performance completed to date (see paragraph 37).
Para B3 of Ind AS 115: For some types of performance obligations, the assessment of whether a customer receives the benefits of an entity’s performance as the entity performs and simultaneously consumes those benefits as they are received will be straightforward. Examples include routine or recurring services (such as a cleaning service) in which the receipt and simultaneous consumption by the customer of the benefits of the entity’s performance can be readily identified.
Para B4 of Ind AS 115: For other types of performance obligations, an entity may not be able to readily identify whether a customer simultaneously receives and consumes the benefits from the entity’s performance as the entity performs. In those circumstances, a performance obligation is satisfied over time if an entity determines that another entity would not need to substantially re-perform the work that the entity has completed to date if that other entity were to fulfil the remaining performance obligation to the customer. In determining whether another entity would not need to substantially re-perform the work the entity has completed to date, an entity shall make both of the following assumptions:
(a) disregard potential contractual restrictions or practical limitations that otherwise would prevent the entity from transferring the remaining performance obligation to another entity; and
(b) presume that another entity fulfilling the remainder of the performance obligation would not have the benefit of any asset that is presently controlled by the entity and that would remain controlled by the entity if the performance obligation were to transfer to another entity.
– Issue 2 of Ind AS Technical Facilitation Group Clarification Bulletin 19
Source : Financial Express