Page 5 - 19. COMPILER QB - INDAS 115

Q2 (NOV 19)

An entity G Ltd. enters into a contract with a customer P Ltd. for the sale of machinery for Rs.20,00,000. P
Ltd. intends to use the said machinery to start a food processing unit. The food processing industry is highly
competitive and P Ltd. has very little experience in the said industry.
P Ltd. pays a non-refundable deposit of Rs.1,00,000 at inception of the contract and enters into a long-term

financing agreement with G Ltd. for the remaining 95 percent of the agreed consideration which it intends to
pay primarily from income derived from its food processing unit as it lacks any other major source of income.
The financing arrangement is provided on a non-recourse basis, which means that if P Ltd. defaults then G
Ltd. can repossess the machinery but cannot seek further compensation from P Ltd., even if the full value of
the amount owed is not recovered from the machinery. The cost of the machinery for G Ltd. is Rs. 12,00,000.

P Ltd. obtains control of the machinery at contract inception.
When should G Ltd. recognise revenue from sale of machinery to P Ltd. in accordance with Ind AS 115?
SOLUTION

As per Ind AS 115, “An entity shall account for a contract with a customer that is within the scope of this
Standard only when all of the following criteria are met:
(a) the parties to the contract have approved the contract (in writing, orally or in accordance with other
customary business practices) and are committed to perform their respective obligations;

(b) the entity can identify each party‖s rights regarding the goods or services to be transferred;
(c) the entity can identify the payment terms for the goods or services to be transferred;
(d) the contract has commercial substance (ie the risk, timing or amount of the entity‖s future cash flows is
expected to change as a result of the contract); and
(e) it is probable that the entity will collect the consideration to which it will be entitled in exchange for the
goods or services that will be transferred to the customer. In evaluating whether collectability of an

amount of consideration is probable, an entity shall consider only the customer‖s ability and intention to
pay that amount of consideration when it is due. The amount of consideration to which the entity will be
entitled may be less than the price stated in the contract if the consideration is variable because the
entity may offer the customer a price concession”.
In the given case, it is not probable that G Ltd. will collect the consideration to which it is entitled in

exchange for the transfer of the machinery. P Ltd.‖s ability to pay may be uncertain due to the following
reasons:
(a) P Ltd. intends to pay the remaining consideration (which has a significant balance) primarily from
income derived from its food processing unit (which is a business involving significant risk because of
high competition in the said industry and P Ltd.'s little experience);

(b) P Ltd. lacks sources of other income or assets that could be used to repay the balance consideration; and
(c) P Ltd.'s liability is limited because the financing arrangement is provided on a non- recourse basis.
In accordance with the above, the criteria of Ind AS 115 are not met.
Further, the Ind AS states that when a contract with a customer does not meet the criteria in paragraph 9
and an entity receives consideration from the customer, the entity shall recognise the consideration received as

revenue only when either of the following events has occurred:
(a) The entity has no remaining obligations to transfer goods or services to the customer and all, or
substantially all, of the consideration promised by the customer has been received by the entity and is
non-refundable; or
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