Page 16 - 19. COMPILER QB - INDAS 115

Licence B is in the form of a sales-based royalty. Therefore, the entity recognises revenue for the sales-
based royalty when those subsequent sales occur.
When Licence A is transferred, the entity recognises as revenue the Rs. 1,600,000 allocated to Licence A.

Case B—Variable consideration allocated on the basis of stand-alone selling prices
To allocate the transaction price, the entity applies the criteria in paragraph 85 of Ind AS 115 to determine
whether to allocate the variable consideration (ie the sales-based royalties) entirely to Licence B.
In applying the criteria, the entity concludes that even though the variable payments relate specifically to an

outcome from the performance obligation to transfer Licence B (ie the customer's subsequent sales of
products that use Licence B), allocating the variable consideration entirely to Licence B would be inconsistent
with the principle for allocating the transaction price. Allocating Rs. 600,000 to Licence A and Rs. 3,000,000
to Licence B does not reflect a reasonable allocation of the transaction price on the basis of the stand-alone
selling prices of Licences A and B of Rs. 1,600,000 and Rs. 2,000,000, respectively. Consequently, the entity

applies the general allocation requirements of Ind AS 115.
The entity allocates the transaction price of Rs. 600,000 to Licences A and B on the basis of relative stand-
alone selling prices of Rs. 1,600,000 and Rs. 2,000,000, respectively. The entity also allocates the consideration
related to the sales-based royalty on a relative stand-alone selling price basis. However, when an entity
licenses intellectual property in which the consideration is in the form of a sales-based royalty, the entity
cannot recognise revenue until the later of the following events: the subsequent sales occur or the performance

obligation is satisfied (or partially satisfied).
Licence B is transferred to the customer at the inception of the contract and Licence A is transferred three
months later. When Licence B is transferred, the entity recognises as revenue Rs. 333,333 [(Rs. 2,000,000 ÷
Rs. 3,600,000) × Rs. 600,000] allocated to Licence B. When Licence A is transferred, the entity recognises as

revenue Rs. 266,667 [(Rs. 1,600,000 ÷ Rs. 3,600,000) × Rs. 600,000] allocated to Licence A.
In the first month, the royalty due from the customer's first month of sales is Rs. 400,000. Consequently, the
entity recognises as revenue Rs. 222,222 (Rs. 2,000,000 ÷ Rs. 3,600,000 × Rs. 400,000) allocated to Licence
B (which has been transferred to the customer and is therefore a satisfied performance obligation). The
entity recognises a contract liability for the Rs. 177,778 (Rs. 1,600,000 ÷ Rs. 3,600,000 × Rs. 400,000)
allocated to Licence A. This is because although the subsequent sale by the entity's customer has occurred,

the performance obligation to which the royalty has been allocated has not been satisfied.

Q14. (APRIL 19 & May 20)

An entity enters into 1,000 contracts with customers. Each contract includes the sale of one product for Rs.
50 (1,000 total products × Rs. 50 = Rs. 50,000 total consideration). Cash is received when control of a product
transfers. The entity's customary business practice is to allow a customer to return any unused product within
30 days and receive a full refund. The entity's cost of each product is Rs. 30.
The entity applies the requirements in Ind AS 115 to the portfolio of 1,000 contracts because it reasonably

expects that, in accordance with paragraph 4, the effects on the financial statements from applying these
requirements to the portfolio would not differ materially from applying the requirements to the individual
contracts within the portfolio. Since the contract allows a customer to return the products, the consideration
received from the customer is variable. To estimate the variable consideration to which the entity will be

entitled, the entity decides to use the expected value method (see paragraph 53(a) of Ind AS 115) because it
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