Ind AS 115 and Ind AS 116: Revenue from Contracts with Customers & Leases

Comprehensive vocabulary flashcards covering the recognition, measurement, journal entries, and complex cases for Ind AS 115 (Revenue from Contracts with Customers) and Ind AS 116 (Leases).

Ind AS 115 Scope and Applicability

An accounting standard that governs revenue arising from an entity's ordinary course of business with customers. It specifically excludes interest income (governed by Ind AS 109), lease income (governed by Ind AS 116), and insurance contracts.

Contract Liability

An entity's obligation to transfer goods or services to a customer for which the entity has received consideration (or an advance payment) before performance and before the transfer of control.

Non-Monetary Exchange Exception

A rule under Ind AS 115 stating that non-monetary exchanges between entities in the same line of business to facilitate sales to customers (such as mutual oil transfers between IOCL and HPCL) are not accounted for as revenue contracts.

Performance Obligation (PO)

A promise in a contract with a customer to transfer either a distinct good or service, or a series of distinct goods or services that are substantially the same.

Transaction Price (TP)

The total 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.

Calculation of Transaction Price Format

The structured framework under Ind AS 115 to compute the total consideration: Agreed Price $\pm$ Variable Consideration / Bonus / Incentive $-$ Payment to Customer = Total Transaction Price.

Non-Cash Consideration

Consideration received from a customer in a form other than cash (such as equity shares), which must be measured at Fair Value (FV) on the date of the contract agreement.

Most Likely Amount Method

An estimation technique for variable consideration used when the contract has only two possible outcomes (e.g., receiving a bonus or receiving nothing). The transaction price includes the single amount with the highest probability.

Expected Value Method

An estimation technique for variable consideration used when a contract has multiple possible outcomes. It is computed as the probability-weighted sum of possible amounts: $\sum (\text{Amount}_i \times \text{Probability}_i)$.

Stand-Alone Selling Price (SSP)

The price at which an entity would sell a promised good or service separately to a customer, used as the basis for allocating the transaction price across multiple performance obligations.

Contract Completion Percentage Formula

A formula applied for revenue recognized over a period of time: $\text{Contract Completion \%} = \left(\frac{\text{Cost incurred till date}}{\text{Total expected cost}}\right) \times 100$. Revenue-distorting ready-made items (such as elevators or centralized air conditioning units) are excluded from both numerator and denominator.

Assurance Warranty

A built-in warranty that provides legal or quality assurance that the product will function as specified. It is accounted for as an expense with a provision under Ind AS 37 rather than a separate performance obligation.

Service Warranty

An optional warranty that provides an additional service beyond ensuring compliance with agreed-upon specifications. It represents a distinct performance obligation and requires allocation of the transaction price on a relative SSP basis.

Accounting for Customer Loyalty Points and Rewards

A multi-step accounting process allocating transaction price between products and rewards based on relative standalone selling prices, recognizing contract liability on the sale date and revenue as points are redeemed or expired.

Material Right

An option or benefit granted to a customer (such as deep discounts on membership renewals or discount vouchers) that the customer would not receive without entering into the contract, requiring allocation of consideration to a contract liability.

Bill and Hold Arrangement

A contract under which an entity bills a customer for a product but retains physical possession until delivery at a future point in time. It requires bifurcation into a product sale and a separate custodial/storage service obligation.

Principal vs. Agent Assessment

A classification test based on control: an entity is a Principal (recognizing gross revenue) if it is primarily responsible for contract fulfillment, bears inventory risk, or has pricing discretion; otherwise, it is an Agent (recognizing net commission).

Repurchase Agreement

A contract where an entity sells an asset and promises (or has the option) to repurchase it. It is treated as a financing arrangement (Ind AS 109) if the repurchase price is greater than the sale price, or as a lease (Ind AS 116) if the repurchase price is less than the sale price.

Incremental Cost to Obtain a Contract

Costs that an entity incurs to secure a contract with a customer that would not have been incurred if the contract had not been obtained (e.g., sales commission/brokerage). These are capitalized as an asset and amortized over the contract period.

Lease (Ind AS 116)

A contract, or part of a contract, that conveys the right to use an identified asset for a period of time in exchange for consideration.

Lease Inception Date vs. Lease Commencement Date

Lease Inception Date is the earlier of the date of the lease agreement and commitment, used solely for lease classification. Lease Commencement Date is the date the lessor makes the underlying asset available for use, triggering all initial accounting recognition.

Lease Term

The non-cancellable period of a lease, plus periods covered by an option to extend if reasonably certain to be exercised, minus periods covered by an option to terminate if reasonably certain to be exercised.

Guaranteed Residual Value (GRV)

A guarantee made to the lessor by the lessee (or an unrelated party) that the value of the underlying asset at the end of the lease will be at least a specified amount.

Unguaranteed Residual Value (URV)

The portion of the residual value of the underlying asset whose realization by the lessor is not assured or is guaranteed solely by a party related to the lessor: $\text{URV} = \text{Total Estimated Residual Value} - \text{GRV}$.

Right-of-Use (ROU) Asset

An asset recognized by a lessee representing its right to use an underlying asset over the lease term, measured initially as the lease liability plus advance payments and initial direct costs minus lease incentives.

Lease Liability

A financial liability recognized by a lessee at the commencement date, initially measured at the present value of the future lease payments discounted using the interest rate implicit in the lease or the incremental borrowing rate.

Significant Remeasurement

A reassessment of lease liability arising from changes in lessee intentions (such as lease term or purchase option exercise), requiring discounting of revised lease payments using a revised discount rate.

Insignificant Remeasurement

A lease liability update caused solely by changes in floating market indices (like CPI/inflation rates) or estimated guaranteed residual value (GRV), calculated using the original discount rate.

Lease Modification (Decrease in Scope)

A change in a lease contract reducing leased area or duration. It requires partial derecognition of the ROU asset and lease liability, with any proportionate net difference immediately recognized in Profit or Loss (P&L).

Practical Expedient (Ind AS 116)

An accounting relief option permitting a lessee to elect not to separate non-lease components (such as maintenance or service charges) from lease components, instead accounting for the combined contract as a single lease.

Finance Lease (Lessor)

A lease that transfers substantially all the risks and rewards incidental to ownership of an underlying asset. Indicators include lease term covering a major part of the asset's useful life ($> 50\%$) or present value of lease payments covering substantially all the fair value ($> 90\%$).

Operating Lease (Lessor)

A lease that does not transfer substantially all the risks and rewards incidental to ownership. The asset remains on the lessor's balance sheet, and lease income is recognized on a straight-line basis over the lease term.

Net Investment in Lease

The gross investment in a finance lease discounted at the interest rate implicit in the lease, equal to the present value of lease payments plus the present value of any unguaranteed residual value (URV).

Sale and Leaseback

A transaction where an entity transfers an asset to a buyer-lessor and leases that same asset back. If qualifying as a sale under Ind AS 115, the seller-lessee recognizes gain or loss limited to the rights transferred to the buyer-lessor.

Intermediate Lessor (Sub-Lease)

An entity that acts as a lessee under a head lease and simultaneously acts as a lessor to a sub-lessee under a sublease. The intermediate lessor classifies the sublease by reference to the ROU asset of the head lease, not the underlying asset.