Page 28 - 19. COMPILER QB - INDAS 115

However, each airline is responsible for fulfilling obligations associated with the ticket, including remedies to a
customer for dissatisfaction with the service.
Determine whether the entity is a principal or an agent with suitable explanation in light with the provisions

given in the relevant standard
SOLUTION

To determine whether the entity‖s performance obligation is to provide the specified goods or services itself
(i.e. the entity is a principal) or to arrange for another party to provide those goods or services (i.e. the
entity is an agent), the entity considers the nature of its promise as per Ind AS 115.
The entity determines that its promise is to provide the customer with a ticket, which provides the right to
fly on the specified flight or another flight if the specified flight is changed or canceled. The entity considers

the following indicators for assessment as principal or agent under the contract with the customers:

a) The entity is primarily responsible for fulfilling the contract, which is providing the right to fly. However,
the entity is not responsible for providing the flight itself, which will be provided by the airline.
b) The entity has inventory risk for the tickets because they are purchased before they are sold to the
entity‖s customers and the entity is exposed to any loss as a result of not being able to sell the tickets

for more than the entity‖s cost.
c) The entity has discretion in setting the sales prices for tickets to its customers.

The entity concludes that its promise is to provide a ticket (i.e. a right to fly) to the customer.

On the basis of the indicators, the entity concludes that it controls the ticket before it is transferred to the
customer. Thus, the entity concludes that it is a principal in the transaction and recognizes revenue in the
gross amount of consideration to which it is entitled in exchange for the tickets transferred.

Q27. (JAN. 21)

A Ltd. is a company which is in the business of manufacturing engineering machines and providing after sales
services. The company entered into a contract with Mr. Anik to supply and install a machine, namely 'model pi'
on 1st April 2018 and to service this machine on 30th September 2018 and 1st April 2019. The cost of

manufacturing the machine to A Ltd. was Rs. 1,60,000.
It is possible for a customer to purchase both the machine 'model pi' and the maintenance services separately.
Mr. Anik is contractually obliged to pay A Ltd Rs. 4,00,000 on 1st April, 2019.
The prevailing rate for one-year credit granted to trade customers in the industry is 5 percent per six-month
period. As per the experience, the servicing of the machine 'model pi' sold to Mr. Anik is expected to cost A

Ltd. Rs. 30,000 to perform the first service and Rs. 50,000 to perform the second service. Assume actual costs
equal expected costs. When A Ltd. provides machine services to customers in a separate transaction it earns a
margin of 50% on cost. On 1st April, 2018, the cash selling price of the machine 'model pi' sold to Mr. Anik
was Rs. 2,51,927.
The promised supply of machine 'model pi' and maintenance service obligations are satisfactorily carried out in

time by the company.
You are required to:
(i) Segregate the components of the transaction that A Ltd. shall apply to the revenue recognition criteria
separately as per Ind AS 115;
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