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IND-AS: Impact On Top Line

Published on Wed, Apr 01,2015 | 22:48, Updated at Wed, Apr 01 at 22:48Source : Moneycontrol.com 

By: Pankaj Chadha, Partner with India member firm of EY Global

The changes brought in by introduction of Ind-AS are welcome in many ways. Whereas people involved in financial reporting and analysis understand that Ind-AS, a framework based on IASB IFRS, would improve comparability and consistency with Corporate India’s global peers, most are yet to evaluate the impact of these changes on their financial reporting and the more significant impact on business arising also due to alignment these changes would require in people, processes and systems. Interestingly, Ind-AS in India provides Indian corporates a leading advantage to be ahead of rest of the world when it comes to reporting revenue, considering implementation of Ind-AS 115 on “revenue from contracts with customers” (parallel to IFRS 15 on the same subject issued by IASB) is applicable from April 1, 2016 (and April 1, 2015 for presentation of comparative information) as against rest of the world which would apply these principles only effective January 1, 2017 or later.

Under the existing practice, the diversity of guidance relating to revenue recognition often resulted in similar transactions being accounted for differently, which led to diversity in revenue recognition practices. Ind-AS 115 attempts to address such inconsistencies by replacing those requirements with a single framework and its application shall result in contracts with customers that are economically similar accounted for on a consistent basis.  Ind-AS 115 introduces a concept of 5-step approach to determination and recognition of revenue. In simple terms, any covered revenue contract would need to be split up in different performance obligations, the transaction price carefully determined and then the transaction price of the contract would need to be allocated to each such identified performance obligation on the basis provided in the standard and in the period when the underlying performance obligation is satisfied.

The previous diversity in revenue recognition practices will mean that the nature and extent of the changes will vary between companies, industries and capital markets. For example, for many contracts, such as many straightforward retail transactions, Ind-AS 115 will have little, if any, effect on the amount and timing of revenue recognition. For other contracts, such as long-term service contracts and multiple-element arrangements, Ind-AS 115 could result in changes either to the amount or timing of the revenue recognised by a company.

Amongst others, Revenue contract in sectors like Telecommunications, Life Sciences, Technology, and Media & Entertainment are sectors that are more often seen to have long-term service or multiple element attributes.

The five step model in case of a telecommunication company would result in study of below considerations.

.   It should analyse whether the use of portfolio approach would be appropriate.

.   Evaluate to see whether free goods and services as well as options for additional goods and services for a discounted price are separate performance obligations or not.

.   Evaluate whether removal of contingent revenue cap would have implications on the estimate and the allocation of the transaction price. This will also result in a changed profile for revenue recognition (eg. more revenue for the handset).

.   Carefully review all contract modifications as the accounting for contract modifications is complex and differs significantly depending on whether a new performance obligation is created and on the pricing.

.   Extended payment terms might result in recognition of interest revenues.

.   Frequently changing selling prices (eg. for handsets) result in different amounts allocated to similar goods included in different contracts.

.   Capitalisation of subscriber acquisition costs required if incremental and recoverable.

.   Due to the variety in prices and service offerings, the divergence between billing and accounting could  lead to additional and complex system requirements.

The five step model in case of a technology company would result in study of below additional considerations

.   Thorough analysis of contracts for integrated solutions is necessary to conclude whether one or multiple performance obligations exist and what revenue recognition pattern is appropriate. The outcome is dependent on the degree of customization and integration of components as well as on the right to payment.

.   Activities of the licensor after granting the license which significantly affect the granted IP might have consequences on the timing of revenue recognition.

.   Renewal options might be separate performance obligations.

.   Estimate of variable consideration (eg. price concessions, performance bonuses) requires significant judgment and an assessment of their potential reversal. Sales- or usage-based royalties are treated differently.

The five step model in case of a Life Sciences company requires a well-studied view on

.   Thorough analysis of colloboration agreements to develop a drug is necessary to conclude whether the whole agreement or only elements of it are in the scope of Ind AS 115.

.   Activities of the licensor after granting the license which significantly affect the granted IP might have consequences on the timing of revenue recognition.

.   Detailed analysis of licensing agreements and colloboration agreements in scope is necessary to conclude whether one or multiple performance obligations exist and what revenue recognition pattern is appropriate.

.   Non-observable stand-alone selling prices need to be estimated. The estimate of variable consideration (eg. milestone payments) requires significant judgment and an assessment of their potential reversal. Sales- or usage-based royalties are treated differently.

.   Sell-through model for sales to distributors and consignment stock might no longer be appropriate.

The five step model in case of a Media & Entertainment company requires a well-studied view on

.   Thorough analysis of colloboration agreements eg. to produce a film is necessary to conclude whether the whole agreement or only elements of it are in the scope of IND AS 115.

.   Activities of the licensor after granting the license which significantly affect the granted IP might have consequences on the timing of revenue recognition.

.   Detailed analysis of licensing agreements is necessary to conclude whether one or multiple performance obligations exist (is the license distinct?) and what revenue recognition pattern is appropriate.

.   Criteria for Principal vs. Agent assessment remain unchanged.

.   The estimate of variable consideration (eg. volume discounts) requires significant judgment and an assessment of their potential reversal. Sales- or usage-based royalties are treated differently.

.   Non-cash consideration by the customer is included at its fair value in the transaction price.

.   Free goods and services as well as options for additional goods and services for a discounted price might be separate performance obligations.

Companies that enter into such contracts need to review and undertake activities to align their revenue reporting in line with requirements of Ind-AS. The impact is wide and affects areas of business beyond mere financial reporting.

 
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