Page 20 - 19. COMPILER QB - INDAS 115

believes the most likely amount of the quality bonus is Rs. 2 crore (because it is 60% likely to receive the
bonus).
Total variable consideration = 4.125 crore (2.125 crore + 2 crore).

Q18. (APRIL 21)

Entity AB Ltd. enters into a three-year service contract with a customer CD Ltd. for Rs. 4,50,000
(Rs.1,50,000 per year). The standalone selling price for one year of service at inception of the contract is
Rs.1,50,000 per year. AB Ltd. accounts for the contract as a series of distinct services.
At the beginning of the third year, the parties agree to modify the contract as follows:
(i) the fee for the third year is reduced to Rs.1,20,000; and

(ii) CD Ltd. agrees to extend the contract for another three years for Rs.3,00,000 (Rs.1,00,000 per year).
The standalone selling price for one year of service at the time of modification is Rs. 1,20,000. How should AB
Ltd. account for the modification? Analyze
SOLUTION

Ind AS 115, inter alia, states that, “An entity shall account for a contract modification as a separate contract
if both of the following conditions are present:
(a) the scope of the contract increases because of the addition of promised goods or services that are

distinct; AND
(b) the price of the contract increases by an amount of consideration that reflects the entity‖s stand-alone
selling prices of the additional promised goods or services and any appropriate adjustments to that price
to reflect the circumstances of the particular contract.
In accordance with the above, it may be noted that a contract modification should be accounted for
prospectively if the additional promised goods or services are distinct and the pricing for those goods or

services reflects their stand-alone selling price.
In the given case, even though the remaining services to be provided are distinct, the modification should not
be accounted for as a separate contract because the price of the contract did not increase by an amount of
consideration that reflects the standalone selling price of the additional services. The modification would be
accounted for, from the date of the modification, as if the existing arrangement was terminated and a new

contract created (i.e. on a prospective basis) because the remaining services to be provided are distinct.
AB Ltd. should reallocate the remaining consideration to all of the remaining services to be provided (i.e. the
obligations remaining from the original contract and the new obligations). AB Ltd. will recognise a total of
Rs.4,20,000 (Rs.1,20,000 + Rs.3,00,000) over the remaining four-year service period (one year remaining under
the original contract plus three additional years) or Rs.1,05,000 per year.

Q19. (APRIL 21)

A construction services company enters into a contract with a customer to build a water purification plant.
The company is responsible for all aspects of the plant including overall project management, engineering and
design services, site preparation, physical construction of the plant, procurement of pumps and equipment for
measuring and testing flow volumes and water quality, and the integration of all components.
Determine whether the company has a single or multiple performance obligations under the contract?

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