Starting Today, India Inc. Needs To Prepare For A New Way To Recognise Revenue
A revenue recognition standard may make structuring contracts a thing of the past.
Starting today, the way companies recognise revenue from contracts with their customers is set to change. The accounting body Institute of Chartered Accountants of India notified a new revenue recognition standard for customer contracts in line with the International Financial Reporting Standards.
This Indian accounting standard—Ind AS 115—will impact contracts in the real estate sector, information technology industry where there is a supply of hardware and software in a contract, royalties for intellectual property, contracts where there is variable consideration, licences, sale and return, etc, PR Ramesh, chairman of Deloitte India, explained.
The standard will apply to situations where there is bundling of transactions that requires revenue recognition to be postponed or measured differently. You’ve to understand the obligations under the contract to be able to determine what is the price and value of the individual deliverable. For revenue recognition, you’ve to then see whether each of those deliverables is a separate item through which the customer derives value.PR Ramesh, Chairman, Deloitte India
Ramesh explained this by way of an example: Let’s say there is a contract under which X has to provide a satellite connection to Y. X can structure a contract saying, I’ll put a dish antenna first, then a set-top box and then do the wiring and charge separately for all of these. But can X recognise the revenue for the antenna? Perhaps not because the antenna without the set-top box has no meaning for Y, the customer. If all of this is part of a one single deliverable, can one unbundle the contract and allocate revenue to each element independent of how it’s written in the contract? The new accounting standard gives guidance for such contracts and the days of structuring transactions will now go away because revenue recognition may get postponed, Ramesh added.
Revenue is one of the most important financial matrix that companies report, and this standard will impact that in a big way, Sai Venkateshwaran, partner and head of Accounting Advisory Services at KPMG India, told BloombergQuint. Ind AS 115 corresponds to IFRS 15 and globally companies have moved to this standard from January this year, he added.
Indian companies will need to adopt this standard now from April 1. Globally, companies got a three-year window to adopt this standard as it was put out three years ago. It does take a fair bit of time for companies to ascertain the impact, restructure their arrangements, make changes to their IT system, etc. But in India, while the exposure draft came out a few months back, since the notified standard hadn’t come out until yesterday, companies aren’t as prepared.Sai Venkateshwaran, Partner & Head -Accounting Advisory Services, KPMG India
Ind AS 115 will improve comparability of revenue across entities, industries, global capital markets, the ICAI media note pointed out. The standard prescribes only one underlying principle for revenue recognition—i.e. transfer of control over goods or services and replaces the ‘fair value’ concept with ‘transactions price’ which is better suited for measurement of revenue, the noted elaborated. It reduces scope of interpretation and requires improved disclosures to help investors and analysts better understand an entity’s revenue, it said.