Case Studies on IFRS 15:

Accounting Advisory

Executive Summary

Revenue is the single most important financial metric for users of financial statements. The transition to IFRS 15 (and its Indian equivalent, Ind AS 115) marked a paradigm shift from a "risk and reward" model to a "transfer of control" model. While the standard has been effective for several years, its application remains fraught with complexities, particularly in areas involving variable consideration, contract modifications, and principal-versus-agent considerations.

1. Core Technical Analysis: Beyond the Five Steps

While most entities have mastered the basic five-step model, the real complexity lies in the nuances of Step 3 (Determine Transaction Price) and Step 5 (Recognise Revenue).

1.1. Variable Consideration & The Constraint

Variable consideration (rebates, discounts, performance bonuses) must be estimated using either the Expected Value method (for large portfolios) or the Most Likely Amount method (for binary outcomes). Crucially, this estimate is subject to a constraint: revenue can only be recognised to the extent that it is highly probable that a significant reversal will not occur.

1.2. Significant Financing Component

In long-term contracts (e.g., Infrastructure, Heavy Manufacturing), the timing of payments often provides a financing benefit to either the customer (pay later) or the entity (pay in advance). If the period between payment and transfer of goods exceeds 12 months, entities must adjust the transaction price for the time value of money, effectively separating "revenue" from "interest income/expense".

2. Industry-Specific Deep Dives & Illustrations

2.1. Manufacturing & Infrastructure: Contract Modifications

The Challenge: Scope changes are endemic to manufacturing. The accounting depends on whether the modification adds distinct goods at their standalone selling price (SSP).

• Entity A (Manufacturer) contracts to supply 1,000 specialised valves to a customer for INR 10,000,000 (INR 10,000 per valve).
• Modification: After delivering 600 valves, the contract is modified to add 200 units.
• Case 1 (Distinct @ SSP): The price for the additional 200 is INR 9,500 (current market price reflecting volume discount).
• Case 2 (Distinct but not @ SSP): The price for the additional 200 is negotiated at INR 5,000 (a deep discount to maintain the relationship).

• Case 1: Treat as a separate contract.
• Case 2: Treat as a termination of the old contract and creation of a new one (prospective application). A "blended rate" is calculated for the remaining units.

Table 1: Manufacturing Contract Modification (INR)

The Challenge: Payments to customers (retailers) for shelf space ("slotting fees") or volume rebates are often misclassified as marketing expenses. Under IFRS 15, these are a reduction of revenue unless the payment is for a distinct good/service provided by the customer.

Scenario:

• Entity B (FMCG) sells goods worth INR 50,00,000 to a Retail Chain.
• Rebate: 5% volume rebate if annual sales exceed INR 1 Cr.
• Slotting Fee: Entity B pays INR 2,00,000 to the retailer for premium shelf placement (not a distinct service).

Table 2: FMCG Net Revenue Calculation (INR)

2.3. IT Services: Distinct Performance Obligations & Licenses

The Challenge: Distinguishing between a software license and implementation services. If the software requires significant customisation to function (e.g., ERP implementation), the license is not distinct, and revenue is deferred over the implementation period.

Scenario:

• Entity C sells an ERP license for INR 20,00,000 and implementation services for INR 5,00,000.
• Analysis: The customer cannot use the software without this specific customisation.
• Conclusion: One single performance obligation. Total INR 25,00,000 recognised over the implementation period (Percentage of Completion).

 Table 3: SaaS vs. On-Premise License Recognition (INR)

2.4. Media (TV): Static vs. Dynamic Licenses

The Challenge: Television syndication involves licensing IP. The distinction lies between Functional IP (Static - e.g., a completed movie) and Symbolic IP (Dynamic - e.g., a live sports brand or character that changes).

Scenario:

• Entity D (Production House) licenses a hit TV series (Season 1, fully complete) to a Broadcaster for 2 years for INR 5,00,00,000.
• Analysis: The Broadcaster can direct the use of the content (schedule it whenever). The content does not change. This is a Right to Use (Static).
• Result: Revenue recognised at the start of the license period (when the customer can use the copy), not amortised over 2 years.

2.5. Hospitality (Hotels): Loyalty Programs & Breakage

The Challenge: Loyalty points are a Material Right. A portion of the room revenue must be allocated to the points and deferred until redemption.

Scenario:

• Hotel E receives INR 10,000 for a room night.
• Points: Customer earns 500 points.
• Fair Value of Points: Estimated at INR 1 per point (INR 500 value).
• Breakage: 10% of points are expected to expire unredeemed.

Allocation Math:

• Standalone Selling Price (Room): INR 10,000.
• Standalone Selling Price (Points): INR 500 * 90% (adj for breakage) = INR 450.
• Total Transaction Price: INR 10,000 (Cash received).
• Allocation Ratio: Room (10,000 / 10,450) vs. Points (450 / 10,450).

Table 4: Hotel Loyalty Program Revenue Allocation (INR)

 
2.6. Healthcare (Hospitals): Principal vs. Agent (Doctor Fees)

The Challenge: Hospitals often collect fees on behalf of visiting consultants. If the hospital does not control the service (doctor is independent, sets their own treatment), the hospital is an Agent.

Scenario:

• Hospital F bills a patient INR 1,00,000 for a surgery.
• Doctor's Share: INR 40,000 (Visiting Consultant).
• Hospital's Share: INR 60,000 (OT, Nursing, Room).
• Analysis: If the hospital is primarily responsible for the care and sets the price, it is Principal (Gross). If the hospital merely facilitates the doctor, it is an Agent (Net).
• Common Error: Many hospitals book INR 1,00,000 as Revenue and INR 40,000 as "Professional Fees Expense". Under IFRS 15, if acting as an agent for the doctor, Revenue should be INR 60,000 only.

 3. Emerging Area: Contract Assets vs. Trade Receivables

A subtle but critical distinction in the Balance Sheet is often "untouched" in general advisories:

• Trade Receivable: Unconditional right to cash (only passage of time is required).
• Contract Asset: Right-to-cash conditional on something other than time (e.g., meeting a milestone in a manufacturing contract).

Illustration:

• Entity G builds a specialised machine. Total Price: INR 100 Lakhs.
• Terms: Invoice 50% upon 50% completion; Balance on Delivery.
• Status: Entity G has completed 40% of the work.
• Accounting:
• Revenue Recognised: INR 40 Lakhs (40% of 100).
• Debit: Contract Asset INR 40 Lakhs (Not Receivable, because they cannot invoice yet).
• Credit: Revenue INR 40 Lakhs.

Why it matters: Contract Assets carry performance risk, whereas Receivables carry only credit risk. Mixing them misleads stakeholders about the quality of the asset.

 4. Cross-Industry Themes

4.1. Cross-Industry Themes Under IFRS 15

IFRS 15 drives convergence around four recurring themes: (a) distinct performance obligations, (b) variable consideration and constraint, (c) contract modifications and (d) contract assets vs receivables.

Key practical implications across industries include:

• More judgments and documentation in revenue policies, especially for bundles (goods plus services, loyalty programs, licenses).
• Increased use of estimates (rebates, breakage, bonuses), requiring robust data and controls.

Illustration 1 – Standalone Selling Price and Allocation (Generic Multi-Element Contract)

A customer signs a bundled contract for three elements:

• Product A (equipment) – SSP INR 8,00,000
• Service B (installation) – SSP INR 2,00,000
• Service C (2-year maintenance) – SSP INR 4,00,000
• Contract Price agreed: INR 12,00,000 (implicit discount)

Total SSP = 14,00,000. Discount = 2,00,000. IFRS 15 requires allocation of the discount pro rata unless evidence supports a different allocation.

 
5. Manufacturing & Capital Goods

5.1 Contract Modifications, Claims and Unpriced Change Orders

Manufacturing and EPC entities frequently face change orders, claims and scope creep. IFRS 15 distinguishes:

• Modifications treated as separate contracts (distinct goods at SSP).
• Prospective modifications (remaining goods distinct, blended rate).
• Cumulative catch-up (remaining goods not distinct, single performance obligation).

Illustration 2 – EPC Contract with Unpriced Change Order

• Original design-build contract: INR 100 Cr.
• Performance obligation satisfied over time (cost-to-cost).
• 50% complete; revenue recognised to date: INR 50 Cr.
• Customer requests design change; scope clearly increased, but price not yet agreed (unpriced change order).
• Expected incremental costs: INR 10 Cr; expected incremental price: INR 12 Cr (variable consideration).

The entity estimates variable consideration but applies a constraint because negotiations are ongoing.

If only INR 5 Cr of the variable consideration is considered highly probable of not reversing, the contract price is adjusted to INR 105 Cr, revising the completion profile prospectively.

5.2 Significant Financing Components

Long manufacturing projects with extended payment terms frequently embed financing.

Illustration 3 – Deferred Payment for Machinery

• Contract price on normal terms: INR 5,00,00,000, payable on delivery.
• Actual terms: payable in 3 years, no interest.
• Market borrowing rate: 9% p.a.

On delivery, revenue is recognised at the present value; the difference is interest income over the credit period.

• Revenue at delivery: INR ~3.86 Cr.
• Interest income over 3 years: ~INR 1.14 Cr.

 6. FMCG and Retail

6.1 Customer Incentives, Coupons and Return Rights

Retail and FMCG face complex forms of consideration payable to customers, rebates, slotting fees, marketing contributions – many of which reduce revenue.

Illustration 4 – Trade Promotions and Coupons

• Entity (FMCG) sells goods to a supermarket chain for INR 2 Cr.
• Volume rebate: 3% if annual sales exceed INR 5 Cr (expected to be met).
• Consumer coupons: entity funds INR 10 per coupon, expected redemptions 50,000 coupons.

Estimate of variable consideration:

6.2 Right of Return – Recognition of Refund Liability

Illustration 5 – Sale with Right of Return (Retail)

• Goods sold to customers: INR 1,00,00,000.
• Cost of goods: INR 60,00,000.
• Return window 30 days; expected returns 5%.

Retail entities must present the refund liability and right-to-recover separately from inventory.

 7. IT / Software / SaaS

7.1 Multi-Element Technology Arrangements

IFRS 15 strongly impacts technology arrangements involving licenses, implementation, upgrades and support.

Illustration 6 – On-Premise License with PCS (Post-Contract Support)

• Perpetual license fee: INR 18,00,000.
• PCS (updates + hotline) for 3 years: INR 9,00,000 (if sold separately).
• Contract price bundle: INR 24,00,000.

 Assuming the license is a distinct right to use functional IP (static), revenue allocation is:

If IP is dynamic (e.g., online platform continuously updated with new content/features), the license portion might also be recognised over time.

7.2 Usage-Based Fees and Minimums

For SaaS/platform models, usage-based fees often fall under the “sales- or usage-based royalty” constraint.

Illustration 7 – SaaS with Minimum Commitment and Overages

• Fixed annual SaaS fee: INR 30,00,000 for 12 months (includes first 10,000 API calls).
• Overage fee: INR 50 per additional API call (usage-based).

Usage-based consideration tied to a license is recognised when the subsequent usage occurs, not estimated upfront.

8. Media and Entertainment / Television

8.1 Fixed-Fee Static vs Dynamic Licenses

Media entities must classify licenses of IP as static (point in time) or dynamic (over time).

Illustration 8 – Library Content vs Ongoing Series

• Library content (old serials, films) rights sold to a broadcaster for 3 years at INR 9,00,00,000 (static IP).
• A brand-new series where storyline and characters are developed over 3 years, license fee INR 12,00,00,000 (dynamic IP).

Where royalties are based on viewership or ad revenue, the “sales- or usage-based royalty” model applies, and revenue recognised as underlying sales occurs.

8.2 Media Carrier / Distributor Relationships

Media distributors may act as principals or agents depending on control of content and pricing.

9. Hotels and Hospitality

9.1 Loyalty Programs – Enhanced Example

Building on the earlier hotel example, IFRS 15 requires deferral at customer fair value and estimation of breakage.

Illustration 9 – Chain Hotel Loyalty Program (Portfolio-Level)

• During the year, total room revenue: INR 50 Cr.
• Points issued to guests, redeemable against free nights.
• Standalone selling price of free night to customer: INR 5,000.
• Estimated cost to hotel owner: INR 3,500.
• Points issued correspond to 8,000 potential free nights; expected redemption rate: 85%.

Standalone selling price of points = 8,000 * 5,000 * 85% = INR 34 Cr equivalent points value; assume allocation at portfolio level.

High-level view (simplified):

9.2 Revenue from Ancillary Services and Packages

Hotels often sell bundled packages (room + meals + spa credits).

Illustration 10 – “Stay & Dine” Package

• Package price: INR 12,000 per night (includes room, breakfast, INR 2,000 F&B credit).
• SSP: Room INR 9,000; buffet breakfast INR 1,500; F&B voucher INR 2,000 (but historically only 70% used).

SSP of voucher (adjusted for breakage) = 2,000 * 70% = INR 1,400.

10. Hospitals and Healthcare

10.1 Bundled Procedures vs Itemised Billing

Hospitals often provide integrated services (procedure, OT, drugs, nursing). Typically, this is a single performance obligation satisfied over time (patient simultaneously receives and consumes benefits).

Illustration 11 – Single Procedure Package

• All-inclusive surgery package: INR 1,50,000 (OT, surgeon, implants, nursing, room).
• Patient stays 5 days; major service occurs on surgery day.

Revenue is generally recognised over procedure/stay; many entities adopt a pattern approximating the delivery of services (e.g., 70% on surgery day, 30% over the remaining stay).

10.2 Principal vs Agent – Doctors’ Fees

Illustration 12 – Diagnostic Hospital with Visiting Doctors

• Total bill to patient: INR 80,000.
• Hospital retains: INR 50,000.
• Doctor’s share: INR 30,000.

If the hospital merely facilitates access to the doctor and the doctor controls the medical service (pricing, patient relationship), hospital revenue = INR 50,000; the doctor’s portion is excluded from revenue.

The principal/agent conclusion affects the top-line magnitude and EBITDA margin presentation.

11. Contract Assets, Receivables and Disclosures

11.1 Balance Sheet Presentation

IFRS 15 requires disclosure of contract assets, contract liabilities and receivables, highlighting performance vs credit risk.

Illustration 13 – Generic Balance Sheet Extract (All Industries)

11.2 Incremental Costs of Obtaining Contracts

Sales commissions payable only if a contract is obtained are capitalised if recoverable, then amortised over the contract term.

Illustration 14 – Commission on Multi-Year Contract

• 3-year SaaS contract: INR 90,00,000 total (30,00,000 p.a.).
• Sales commission: 5% of total, paid up front: INR 4,50,000.

Asset “Incremental costs of obtaining a contract” of INR 4,50,000 is recognised at inception and amortised over three years.

Conclusion

Entities across Manufacturing, FMCG, IT, Media, Hotels and Hospitals must therefore embed IFRS 15 analysis into contract design, system configuration and KPI reporting, not just year-end adjustment processes. Detailed contract reviews, robust estimation processes, and enhanced disclosures are now central to high-quality financial reporting under IFRS 15.

IFRS 15 requires a granular, contract-level analysis. For Indian entities, the shift from "billing-based" revenue to "performance-based" revenue impacts not just the P&L but also tax calculations (GST vs. Accounting Revenue) and KPI reporting (EBITDA margins).