Practical Insights on Ind AS and SAs Transition Provisions Under Ind As 115 For First-Time Adoption Of Ind As
CA Prajwal Jha
CA Bhawna Grover
Associate - Research and Advisory, Taxmann
Manager - Research and Advisory, Taxmann
Practical Insights on Ind AS and SAs Transition Provisions Under Ind As 115 For First-Time Adoption Of Ind As
CA Prajwal Jha
CA Bhawna Grover
Associate - Research and Advisory, Taxmann
Manager - Research and Advisory, Taxmann
Contents 1.
Introduction
5
2.
Application of Ind AS 115 by a First-time Adopter
5
3.
Two Approaches for Transition to Ind AS 115
6
4.
Transition Relief Available to a First-time Adopter under Ind AS 101
6
5.
Transition Relief for Contract Modifications
8
6.
Relief from Disclosure of Remaining Performance Obligations
9
7.
Consistency in Applying Practical Expedients
9
8.
Disclosure of Practical Expedients Used
9
9.
Cumulative Effect Approach – Accounting for the Transition Adjustment
10
10.
Practical Expedient for Contract Modifications under the Cumulative-effect Approach
10
11.
Overall Impact of the Transition Provisions
11
12.
Conclusion
11
1.
Introduction
Revenue recognition represents one of the areas where the transition from previous Indian GAAP to Ind AS can result in significant changes in the timing and measurement. Under the previous Indian GAAP, revenue from construction contracts and other customer arrangements was primarily governed by AS 7, Construction Contracts, and AS 9, Revenue Recognition. Under Indian Accounting Standard (Ind AS), Ind AS 115, Revenue from Contracts with Customers, provides a comprehensive framework for accounting of revenue. The recognition of revenue under Ind AS 115 is primarily based on the identification of contracts, performance obligations, transaction price and allocation of consideration to those performance obligations. For a first-time adopter, the transition to Ind AS 115 can therefore require reassessment of contracts that were entered into or partially completed before the date of transition. Recognising the practical difficulty of reconstructing historical information for every contract, Ind AS 101, First Time Adoption of Ind AS provides specific relief by permitting a first-time adopter to use the transition provisions contained in Ind AS 115. These provisions provide practical expedients relating to completed contracts, variable consideration, contract modifications and disclosure of remaining performance obligations. The manner in which these expedients are applied can have a direct impact on the amounts recognised in the Opening Ind AS Balance Sheet and comparative financial statements.
2. Application of Ind AS 115 by a First-time Adopter A first-time adopter is required to apply Ind AS 115 from the date of transition to Ind AS. However, Ind AS 101, through Paragraph D34, provides a specific transition relief under which a first-time adopter may apply the transition provisions contained in Paragraph C5 of Ind AS 115. For this purpose, the reference to the “date of initial application” in Ind AS 115 is interpreted as the beginning of the first Ind AS reporting period. Accordingly, the first-time adopter can use the practical expedients prescribed in Paragraph C5 of Ind AS 115 while applying the standard retrospectively. This is particularly relevant because contracts existing before the transition date may contain multiple performance obligations, variable consideration or modifications that occurred several years before the transition. Reconstructing the information required under Ind AS 115 for each historical reporting period may involve significant cost and the use of hindsight. The transition provisions are therefore designed to reduce this burden while maintaining consistency in the application of the revenue recognition principles.
Practical Insights on Ind AS and SAs
Transition Provisions under Ind AS 115 for First-time Adoption of Ind AS
5
3. Two Approaches for Transition to Ind AS 115 Ind AS 115 provides two alternative approaches for applying the standard on transition.
3.1.
Approach 1 – Full Retrospective Application
Under the first approach, Ind AS 115 is applied retrospectively to each prior reporting period presented in accordance with Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors. This approach requires the entity to restate the comparative information as though Ind AS 115 had always been applied. However, the entity may use the practical expedients specified in Paragraph C5 of Ind AS 115. Therefore, under this approach: Ind AS 115 → applied retrospectively → comparative periods restated → practical expedients under Paragraph C5 may be used.
3.2. Approach 2 – Modified Retrospective Application Under the second approach, the entity applies Ind AS 115 retrospectively with the cumulative effect of initially applying the standard recognised at the date of initial application. The cumulative adjustment is recognised in the opening balance of retained earnings or another appropriate component of equity for the accounting period in which Ind AS 115 is initially applied. Under this approach, the entity may elect to apply Ind AS 115 retrospectively only to contracts that are not completed contracts at the date of initial application. Accordingly, the principal distinction between the two approaches is the treatment of comparative information. Under the first approach, comparative periods are restated, whereas under the second approach, the cumulative transition adjustment is recognised in equity at the date of initial application.
4. Transition Relief Available to a First-time Adopter under Ind AS 101 Paragraph D34 of Ind AS 101 permits a first-time adopter to apply the transition provisions prescribed under Paragraph C5 of Ind AS 115. The practical expedients available under Paragraph C5 are discussed below.
4.1. Completed Contracts A first-time adopter applying the retrospective approach is not required to restate completed contracts that:
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Practical Insights on Ind AS and SAs Transition Provisions under Ind AS 115 for First-time Adoption of Ind AS
a)
began and ended within the same annual reporting period; or
b)
were completed contracts at the beginning of the earliest period presented.
A completed contract is a contract for which the entity has transferred all the goods or services identified in accordance with the previous GAAP. This exemption is particularly useful because contracts that have already been completed generally have no continuing performance obligations at the transition date. Reconstructing the transaction price, performance obligations and revenue recognition pattern for such contracts may therefore provide limited additional benefit compared with the cost and effort involved. Illustration – Contract Completed Before Earliest Comparative Period Alpha Limited is transitioning to Ind AS and presents one comparative year along with its first Ind AS financial statements. A customer contract was entered into on 1st July 2020 and all goods and services under the contract were transferred to the customer by 31st December 2020. The contract was therefore completed before the beginning of the earliest period presented in the Ind AS financial statements. Alpha Limited is not required to restate this contract under Ind AS 115. Consequently, it need not reconstruct the revenue recognition accounting for the contract under Ind AS 115 merely because the entity is transitioning to Ind AS.
4.2. Completed Contracts with Variable Consideration Variable consideration is an important component of the transaction price under Ind AS 115. Consideration may vary because of discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses or other similar items. Under Paragraphs 50 and 51 of Ind AS 115, an entity estimates the amount of variable consideration to which it expects to be entitled. Depending upon the circumstances, the entity may use either the expected value method or the most likely amount method, subject to the requirements relating to the constraint on variable consideration. However, for completed contracts, a first-time adopter applying the retrospective approach may use the transaction price at the date on which the contract was completed, rather than estimating the variable consideration amounts for the earlier comparative periods. This provides significant practical relief because, by the time the contract is completed, the actual amount of variable consideration may already be known. Illustration – Performance Bonus in a Completed Contract Delta Limited entered into a contract to provide engineering services for ₹100 crore. The contract also provided for a performance bonus of ₹10 crore if the project was completed before a specified date.
Practical Insights on Ind AS and SAs
Transition Provisions under Ind AS 115 for First-time Adoption of Ind AS
7
The project was completed in March 2023 and Delta Limited ultimately became entitled to the ₹10 crore bonus. While applying Ind AS 115 retrospectively on transition, Delta Limited may use the transaction price known at the date of completion rather than reconstructing the estimate of the variable consideration that would have been made at each earlier reporting date. Thus, for the completed contract, the entity can use the consideration determined at the completion date for purposes of applying the transition provisions.
5. Transition Relief for Contract Modifications Contracts with customers are often modified during their life. A modification may involve a change in the scope, price, or both. Ind AS 115 contains specific requirements in Paragraphs 20 and 21 for accounting for contract modifications. However, retrospectively applying these requirements to every modification made before the beginning of the earliest period presented may be complex. Accordingly, Paragraph C5(c) provides a practical expedient. Where a contract was modified before the beginning of the earliest period presented, the first-time adopter is not required to retrospectively restate each individual modification in accordance with Paragraphs 20 and 21. Instead, the entity reflects the aggregate effect of all modifications occurring before the beginning of the earliest period presented by: a)
identifying the satisfied and unsatisfied performance obligations;
b)
determining the transaction price; and
c)
allocating the transaction price to the satisfied and unsatisfied performance obligations.
Illustration – Multiple Contract Modifications Zenova Limited entered into a five-year technology services contract with a customer in 2019. During the period before the beginning of the earliest comparative period, the contract was modified several times. The modifications involved additional services, changes in consideration and changes in the scope of services. Zenova Limited is transitioning to Ind AS and elects to use the practical expedient for contract modifications. Instead of going back and separately reassessing each modification under Paragraphs 20 and 21 of Ind AS 115, Zenova Limited considers the cumulative effect of all modifications made before the beginning of the earliest period presented. The company identifies the performance obligations that have already been satisfied and
8
Practical Insights on Ind AS and SAs Transition Provisions under Ind AS 115 for First-time Adoption of Ind AS
those that remain unsatisfied, determines the transaction price applicable to the modified arrangement and allocates that transaction price between the satisfied and unsatisfied performance obligations. This provides a practical mechanism for determining the revenue position at the transition date without reconstructing every historical modification separately.
6. Relief from Disclosure of Remaining Performance Obligations Paragraph 120 of Ind AS 115 requires an entity to disclose information regarding the transaction price allocated to remaining performance obligations and explain when it expects to recognise that amount as revenue. However, a first-time adopter applying the retrospective approach is not required to provide these disclosures for reporting periods presented before the date of initial application. Thus, the entity is relieved from reconstructing and presenting historical information concerning remaining performance obligations for those earlier periods. This practical expedient is particularly relevant for long-term contracts because the entity may otherwise be required to determine the transaction price allocated to performance obligations that remained unsatisfied at each historical reporting date.
7. Consistency in Applying Practical Expedients The practical expedients under Paragraph C5 are not intended to be applied selectively from contract to contract merely to achieve a particular accounting outcome. Paragraph C6 requires an entity using these expedients to apply the relevant expedient consistently to all contracts within all reporting periods presented. Therefore, if an entity elects to use the completed-contract relief for contracts meeting the specified conditions, it must apply that expedient consistently rather than selecting individual contracts based on their financial impact. This requirement enhances comparability and prevents entities from using the transition relief selectively.
8. Disclosure of Practical Expedients Used A first-time adopter that uses the practical expedients is required to disclose: a)
the practical expedients that have been used; and
Practical Insights on Ind AS and SAs
Transition Provisions under Ind AS 115 for First-time Adoption of Ind AS
9
b)
to the extent reasonably possible, a qualitative assessment of the estimated effect of applying each practical expedient.
These disclosures allow users of financial statements to understand the extent to which historical revenue information has been affected by the transition relief.
9. Cumulative Effect Approach – Accounting for the Transition Adjustment Where an entity adopts Ind AS 115 using the cumulative-effect approach under Paragraph C3(b), the cumulative effect of initially applying the standard is recognised as an adjustment to the opening balance of retained earnings or another appropriate component of equity at the date of initial application. Under this method, the entity may elect to apply Ind AS 115 retrospectively only to contracts that are not completed contracts at the date of initial application. Illustration – Transition Adjustment under Cumulative-effect Approach Assume that on the date of initial application, Nova Limited has an ongoing contract for which revenue recognised under previous GAAP up to the date of initial application is ₹80 lakh; and revenue that would have been recognised under Ind AS 115 is ₹65 lakh. The cumulative difference of ₹15 lakh represents the effect of applying Ind AS 115 to the contract. Under the cumulative-effect approach, Nova Limited recognises the ₹15 lakh adjustment in the opening balance of retained earnings at the date of initial application, subject to the applicable tax effects. The comparative financial statements are not restated under this approach.
10. Practical Expedient for Contract Modifications under the Cumulative-effect Approach An entity applying Ind AS 115 using the cumulative-effect approach may also use the practical expedient relating to contract modifications. The entity may apply this expedient either to: a)
all contract modifications occurring before the beginning of the earliest period presented; or
b) all contract modifications occurring before the date of initial application. However, once selected, the expedient must be applied consistently to all relevant contracts. The entity must also provide the relevant disclosures as required under Paragraph C6.
10
Practical Insights on Ind AS and SAs Transition Provisions under Ind AS 115 for First-time Adoption of Ind AS
11. Overall Impact of the Transition Provisions The transition provisions under Ind AS 115 provide a structured mechanism for moving from the revenue recognition principles of previous Indian GAAP to the comprehensive model prescribed by Ind AS 115. The first-time adopter needs to determine the transition approach adopted and then assess the contracts existing during the relevant periods. Where the retrospective approach is selected, the practical expedients relating to completed contracts, variable consideration, contract modifications and historical disclosure requirements can significantly reduce the information and reconstruction burden. At the same time, the requirement to apply the selected expedients consistently and disclose their use ensures that the relief does not compromise transparency.
12. Conclusion The transition to Ind AS 115 involves more than simply changing the revenue recognition policy; it requires an entity to reconsider historical customer contracts in the context of performance obligations, transaction price and allocation of consideration. Recognising the practical difficulties associated with reconstructing historical contract information, Ind AS 101 permits first-time adopters to use the transition provisions of Ind AS 115. The available reliefs for completed contracts, variable consideration, contract modifications and disclosure of remaining performance obligations can substantially simplify the transition process. At the same time, the choice between full retrospective application and the cumulative-effect approach determines how the transition impact is reflected in comparative financial statements and opening equity. Consequently, careful identification of the transition method and consistent application of the available practical expedients are essential for presenting a reliable and transparent first set of Ind AS financial statements.
Practical Insights on Ind AS and SAs
Transition Provisions under Ind AS 115 for First-time Adoption of Ind AS
11
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