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Accounting Standards 11

Exposure Draft Accounting Standard (AS) 9 (Revised 20XX) (Corresponding to IAS 18) Revenue (Last date for Comments: June 07, 2010) Issued by Accounting Standards Board The Institute of Chartered Accountants of India 2 Exposure Draft Accounting Standard 9 (Revised 20XX) (Corresponding to IAS 18) Revenue Contents Objective Scope Definitions Measurement of revenue Identification of the transaction Sale of goods Rendering of services Interest, royalties and dividends Disclosure Effective date 1–6 7–8 9–12 13 14–19 20–28 29–34 35–36 37–39 Paragraphs

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Appendices A Revenue—Barter Transactions Involving Advertising Services (Corresponding to SIC 31) Customer Loyalty Programmes (Corresponding to IFRIC 13) Agreements for the Construction of Real Estate (Corresponding to IFRIC 15) Transfers of Assets from Customers (Corresponding to IFRIC 18) B C D 3 E References to matters contained in other Accounting Standards F Illustrative examples Sale of goods Rendering of services Interest, royalties and dividends Recognition and measurement G H Comparison with IAS 18, Revenue Major differences between the Exposure Draft of AS 9 (Revised 20XX), Revenue, and the existing AS 9 (Issued 1985) INVITATION TO COMMENT The Accounting Standards Board of the Institute of Chartered Accountants of India invites comments on any aspect of this Exposure Draft of the Accounting Standard (AS) 9 (Revised 20XX), Revenue. The Board would particularly welcome answers to the questions set out below. Comments are most helpful if they indicate the specific paragraph or group of paragraphs to which they relate, contain a clear rationale and, where applicable, provide a suggestion for alternative wording. Comments should be submitted in writing to the Secretary, Accounting Standards Board.

The Institute of Chartered Accountants of India, ICAI Bhawan, Post Box No. 7100, Indraprastha Marg, New Delhi – 110 002, so as to be received not later June 07, 2010. Comments can also be sent by e-mail at [email protected] org or [email protected] org. The principles proposed to be laid down in Appendix C of the Exposure Draft AS 9 (Revised 20XX) are different from the guidance provided in the Guidance Note on Recognition of Revenue by Real Estate Developers issued by the Council of the Institute of Chartered Accountants of India. It is proposed that the said Guidance Note will be withdrawn on AS 9 (Revised 20XX) coming into force.

Appendix C of the Exposure Draft of AS 9 (Revised 20XX) provides guidance on how to determine whether an agreement for the construction of real estate is within the scope of AS 7 (Revised 20XX) Construction Contracts or Exposure Draft of AS 9 (Revised 20XX) Revenue and, accordingly, when revenue from the construction of real estate should be recognised. This Appendix provides that an agreement for the construction of real estate is a construction contract within the scope of AS 7 (Revised 20XX) only when the buyer is able to specify the major structural elements of the design of the real estate before construction begins and/or specify ajor structural changes once construction is in progress (whether it exercises that ability or not). In case, an agreement for the construction of real estate in which buyers have no or only limited ability to influence the design of the real estate, it is within the scope of AS 9 (Revised 20XX). If AS 7 (Revised 20XX) applies: Revenue is recognised on a percentage-of-completion basis provided that reliable estimates of construction progress and future costs can be made. If Exposure Draft of AS 9 (Revised 20XX) applies: The agreement can be for rendering services and it can be for sale of goods.

If the entity is not required to acquire and supply construction materials, it is an agreement for rendering services. If the entity is required to provide services together with construction materials in order to perform its contractual obligation to deliver real estate to the buyer, the agreement is accounted for as the sale of goods as per the Exposure Draft AS 9 (Revised 20XX). Likely impact of the proposed Appendix C of the Exposure Draft of AS 9 (Revised 20XX) when an agreement is treated as agreement for sale of goods, is the deferment of revenue recognition as construction progresses to the point of time of completion of the agreement On the basis of the above, comments are invited on the following questions: Question 1 Do you agree with the proposed guidance that there is a need to determine whether an agreement for the construction of real estate is within the scope of AS 7 (Revised 20XX) or Exposure Draft of AS 9 (Revised 20XX) distinguishing a construction contract from a contract for sale of goods or a contract for rendering of construction services? Why or why not?

Question 2 Do you agree with the proposed guidance on how to determine whether an agreement for the construction of real estate is within the scope of AS 7 (Revised 20XX) or Exposure Draft of AS 9 (Revised 20XX) distinguishing a construction contract from a contract for sale of goods or a contract for rendering of construction services? Why or why not? Question 3 Do you observe any conceptual issues in determining whether an agreement for the construction of real estate is an agreement for the sale of goods within the scope of Exposure Draft AS 9 (Revised 20XX)?

Question 4 Do you observe any legal issues in applying the proposed guidance? Why or why not? Question 5 Do you agree that the Illustrative Examples contained in the proposed guidance provide an adequate guidance on the application of the new principles? Why or why not? Question 6 Do you agree that the proposed guidance will improve the accounting in respect of agreements for the construction of real estate as compared to guidance given under the ‘Guidance Note on Recognition of Revenue by Real Estate Developers’? Why or why not?

Question 7 Do you agree that the resulting changes from the proposed guidance should be applied retrospectively? Why or why not? Question 8 Do you have any other comments? 6 Exposure Draft Accounting Standard (AS) 9 (Revised 20XX)1 (Corresponding to IAS 18) Revenue (This Exposure Draft of the revised Accounting Standard includes paragraphs set in bold type and plain type, which have equal authority. Paragraphs in bold type indicate the main principles. This Exposure Draft of the revised Accounting Standard should be read in the context of its objective and the Preface to the Statements of Accounting Standards2) Objective

Income is defined in the Framework for the Preparation and Presentation of Financial Statements issued by the Institute of Chartered Accountants of India as increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants. Income encompasses both revenue and gains. Revenue is income that arises in the course of ordinary activities of an entity and is referred to by a variety of different names including sales, fees, interest, dividends and royalties.

The objective of this Standard is to prescribe the accounting treatment of revenue arising from certain types of transactions and events. The primary issue in accounting for revenue is determining when to recognise revenue. Revenue is recognised when it is probable that future economic benefits will flow to the entity and these benefits can be measured reliably. This Standard identifies the circumstances in which these criteria will be met and, therefore, revenue will be recognised. It also provides practical guidance on the application of these criteria. Scope This Standard shall be applied in accounting for revenue arising from the following transactions and events: 1 This Exposure Draft is issued pursuant to the decision to converge with IFRSs in respect of accounting periods commencing on or after April 1, 2011. All existing Accounting Standards and new Accounting Standards which are referred to in this Exposure Draft are also being revised or formulated, as the case may be, to converge with IFRSs from the aforesaid date. References to the other standards may be viewed accordingly. 2 Attention is specifically drawn to paragraph 4. of the Preface, according to which accounting standards are intended to apply only to items which are material. 7 (a) (b) (c) 2 3 the sale of goods; the rendering of services; and the use by others of entity assets yielding interest, royalties and dividends. This Standard supersedes AS 9 (Issued 1985) Revenue Recognition in respect of the entities to which this Accounting Standard is applicable.. Goods includes goods produced by the entity for the purpose of sale and goods purchased for resale, such as merchandise purchased by a retailer or land and other property held for resale.

The rendering of services typically involves the performance by the entity of a contractually agreed task over an agreed period of time. The services may be rendered within a single period or over more than one period. Some contracts for the rendering of services are directly related to construction contracts, for example, those for the services of project managers and architects. Revenue arising from these contracts is not dealt with in this Standard but is dealt with in accordance with the requirements for construction contracts as specified in AS 7 (Revised 20XX) Construction Contracts.

The use by others of entity assets gives rise to revenue in the form of: (a) (b) (c) interest—charges for the use of cash or cash equivalents or amounts due to the entity; royalties—charges for the use of long-term assets of the entity, for example, patents, trademarks, copyrights and computer software; and dividends—distributions of profits to holders of equity investments in proportion to their holdings of a particular class of capital. 4 5 6

This Standard does not deal with revenue arising from: (a) (b) (c) (d) lease agreements (see AS 19 (Revised 20XX) Leases); dividends arising from investments which are accounted for under the equity method (see AS 23 (Revised 20XX) Investments in Associates); insurance contracts within the scope of AS 39 (Issued 20XX) Insurance Contracts; changes in the fair value of financial assets and financial liabilities or their disposal (see AS 30 (Revised 20XX) Financial Instruments: Recognition and Measurement); changes in the value of other current assets; initial recognition and from changes in the fair value of biological assets related to agricultural activity (see AS 38 (Issued 20XX) Agriculture); initial recognition of agricultural produce (see AS 38(Issued 20XX)); and the extraction of mineral ores. (e) (f) (g) (h) 8 Definitions 7 The following terms are used in this Standard with the meanings specified: Revenue is the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants. Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. Revenue includes only the gross inflows of economic benefits received and receivable by the entity on its own account. Amounts collected on behalf of third parties such as sales taxes, goods and services taxes and value added taxes are not economic benefits which flow to the entity and do not result in increases in equity. Therefore, they are excluded from revenue. Similarly, in an agency relationship, the gross inflows of economic benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity. The amounts collected on behalf of the principal are not revenue. Instead, revenue is the amount of commission. Measurement of revenue 10 Revenue shall be measured at the fair value of the consideration received or receivable. 3 The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset. It is measured at the fair value of the consideration received or receivable taking into account the amount of any trade discounts and volume rebates allowed by the entity. In most cases, the consideration is in the form of cash or cash equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable. However, when the inflow of cash or cash equivalents is deferred, the fair value of the consideration may be less than the nominal amount of cash received or receivable.

For example, an entity may provide interest-free credit to the buyer or accept a note receivable bearing a below-market interest rate from the buyer as consideration for the sale of goods. When the arrangement effectively constitutes a financing transaction, the fair value of the consideration is determined by discounting all future receipts using an imputed rate of interest. The imputed rate of interest is the more clearly determinable of either: (a) (b) the prevailing rate for a similar instrument of an issuer with a similar credit rating; or a rate of interest that discounts the nominal amount of the instrument to the current cash sales price of the goods or services. 11 3 See also Appendix A of this standard, Revenue—Barter Transactions Involving Advertising Services (corresponding to SIC 31) 9

The difference between the fair value and the nominal amount of the consideration is recognised as interest revenue in accordance with paragraphs 29 and 30 and in accordance with AS 30 (Revised 20XX). 12 When goods or services are exchanged or swapped for goods or services which are of a similar nature and value, the exchange is not regarded as a transaction which generates revenue. This is often the case with commodities like oil or milk where suppliers exchange or swap inventories in various locations to fulfil demand on a timely basis in a particular location. When goods are sold or services are rendered in exchange for dissimilar goods or services, the exchange is regarded as a transaction which generates revenue.

The revenue is measured at the fair value of the goods or services received, adjusted by the amount of any cash or cash equivalents transferred. When the fair value of the goods or services received cannot be measured reliably, the revenue is measured at the fair value of the goods or services given up, adjusted by the amount of any cash or cash equivalents transferred. Identification of the transaction 13 The recognition criteria in this Standard are usually applied separately to each transaction. However, in certain circumstances, it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction.

For example, when the selling price of a product includes an identifiable amount for subsequent servicing, that amount is deferred and recognised as revenue over the period during which the service is performed. Conversely, the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series of transactions as a whole. For example, an entity may sell goods and, at the same time, enter into a separate agreement to repurchase the goods at a later date, thus negating the substantive effect of the transaction; in such a case, the two transactions are dealt with together. Sale of goods 4 Revenue from the sale of goods shall be recognised when all the following conditions have been satisfied: (a) (b) the entity has transferred to the buyer the significant risks and rewards of ownership of the goods; the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; the amount of revenue can be measured reliably; it is probable that the economic benefits associated with the transaction will flow to the entity; and (c) (d) 10 (e) 15 the costs incurred or to be incurred in respect of the transaction can be measured reliably. The assessment of when an entity has transferred the significant risks and rewards of ownership to the buyer requires an examination of the circumstances of the transaction. In most cases, the transfer of the risks and rewards of ownership coincides with the transfer of the legal title or the passing of possession to the buyer. This is the case for most retail sales. In other cases, the transfer of risks and rewards of ownership occurs at a different time from the transfer of legal title or the passing of possession.

If the entity retains significant risks of ownership, the transaction is not a sale and revenue is not recognised. An entity may retain a significant risk of ownership in a number of ways. Examples of situations in which the entity may retain the significant risks and rewards of ownership are: (a) (b) (c) when the entity retains an obligation for unsatisfactory performance not covered by normal warranty provisions; when the receipt of the revenue from a particular sale is contingent on the derivation of revenue by the buyer from its sale of the goods; when the goods are shipped subject to installation and the installation is a significant part of the contract which has not yet been completed by the entity; and 16 (d) 17 hen the buyer has the right to rescind the purchase for a reason specified in the sales contract and the entity is uncertain about the probability of return. If an entity retains only an insignificant risk of ownership, the transaction is a sale and revenue is recognised. For example, a seller may retain the legal title to the goods solely to protect the collectibility of the amount due. In such a case, if the entity has transferred the significant risks and rewards of ownership, the transaction is a sale and revenue is recognised. Another example of an entity retaining only an insignificant risk of ownership may be a retail sale when a refund is offered if the customer is not satisfied.

Revenue in such cases is recognised at the time of sale provided the seller can reliably estimate future returns and recognises a liability for returns based on previous experience and other relevant factors. Revenue is recognised only when it is probable that the economic benefits associated with the transaction will flow to the entity. In some cases, this may not be probable until the consideration is received or until an uncertainty is removed. For example, it may be uncertain that a foreign governmental authority will grant permission to remit the consideration from a sale in a foreign country. When the permission is granted, the uncertainty is removed and revenue is recognised.

However, when an uncertainty arises about the collectibility of an amount already included in revenue, the uncollectible amount or the amount in respect of which recovery has ceased to be probable is recognised as an expense, rather than as an adjustment of the amount of revenue originally recognised. Revenue and expenses that relate to the same transaction or other event are recognised simultaneously; this process is commonly referred to as the matching 18 19 11 of revenues and expenses. Expenses, including warranties and other costs to be incurred after the shipment of the goods can normally be measured reliably when the other conditions for the recognition of revenue have been satisfied.

However, revenue cannot be recognised when the expenses cannot be measured reliably; in such circumstances, any consideration already received for the sale of the goods is recognised as a liability. Rendering of services 20 When the outcome of a transaction involving the rendering of services can be estimated reliably, revenue associated with the transaction shall be recognised by reference to the stage of completion of the transaction at the end of the reporting period. The outcome of a transaction can be estimated reliably when all the following conditions are satisfied: (a) (b) (c) (d) the amount of revenue can be measured reliably; it is probable that the economic benefits associated with the transaction will flow to the entity; the stage of completion of the transaction at the end of the reporting eriod can be measured reliably; and the costs incurred for the transaction and the costs to complete the transaction can be measured reliably. 4 21 The recognition of revenue by reference to the stage of completion of a transaction is often referred to as the percentage of completion method. Under this method, revenue is recognised in the accounting periods in which the services are rendered. The recognition of revenue on this basis provides useful information on the extent of service activity and performance during a period. AS 7 (Revised 20XX) also requires the recognition of revenue on this basis. The requirements of that Standard are generally applicable to the recognition of revenue and the associated expenses for a transaction involving the rendering of services.

Revenue is recognised only when it is probable that the economic benefits associated with the transaction will flow to the entity. However, when an uncertainty arises about the collectibility of an amount already included in revenue, the uncollectible amount, or the amount in respect of which recovery has ceased to be probable, is recognised as an expense, rather than as an adjustment of the amount of revenue originally recognised. An entity is generally able to make reliable estimates after it has agreed to the following with the other parties to the transaction: (a) each party’s enforceable rights regarding the service to be provided and received by the parties; 22 23 4

See also Appendix A of this standard, Revenue—Barter Transactions Involving Advertising Services (Corresponding to SIC 31) and Appendix B of AS 17 (Revised 20XX), Evaluating the Substance of Transactions Involving the Legal Form of a Lease (Corresponding to SIC 27) . 12 (b) (c) the consideration to be exchanged; and the manner and terms of settlement. It is also usually necessary for the entity to have an effective internal financial budgeting and reporting system. The entity reviews and, when necessary, revises the estimates of revenue as the service is performed. The need for such revisions does not necessarily indicate that the outcome of the transaction cannot be estimated reliably. 24 The stage of completion of a transaction may be determined by a variety of methods. An entity uses the method that measures reliably the services performed.

Depending on the nature of the transaction, the methods may include: (a) (b) (c) surveys of work performed; services performed to date as a percentage of total services to be performed; or the proportion that costs incurred to date bear to the estimated total costs of the transaction. Only costs that reflect services performed to date are included in costs incurred to date. Only costs that reflect services performed or to be performed are included in the estimated total costs of the transaction. Progress payments and advances received from customers often do not reflect the services performed. 25 For practical purposes, when services are performed by an indeterminate number of acts over a specified period of time, revenue is recognised on a straight-line basis over the specified period unless there is evidence that some other method better represents the stage of completion.

When a specific act is much more significant than any other acts, the recognition of revenue is postponed until the significant act is executed. When the outcome of the transaction involving the rendering of services cannot be estimated reliably, revenue shall be recognised only to the extent of the expenses recognised that are recoverable. During the early stages of a transaction, it is often the case that the outcome of the transaction cannot be estimated reliably. Nevertheless, it may be probable that the entity will recover the transaction costs incurred. Therefore, revenue is recognised only to the extent of costs incurred that are expected to be recoverable. As the outcome of the transaction cannot be estimated reliably, no profit is recognised.

When the outcome of a transaction cannot be estimated reliably and it is not probable that the costs incurred will be recovered, revenue is not recognised and the costs incurred are recognised as an expense. When the uncertainties that prevented the outcome of the contract being estimated reliably no longer exist, revenue is recognised in accordance with paragraph 20 rather than in accordance with paragraph 26. 26 27 28 13 Interest, royalties and dividends 29 Revenue arising from the use by others of entity assets yielding interest, royalties and dividends shall be recognised on the bases set out in paragraph 30 when: (a) (b) 30 it is probable that the economic benefits associated with the transaction will flow to the entity; and the amount of the revenue can be measured reliably.

Revenue shall be recognised on the following bases: (a) (b) (c) interest shall be recognised using the effective interest method as set out in AS 30 (Revised 20XX); royalties shall be recognised on an accrual basis in accordance with the substance of the relevant agreement; and dividends shall be recognised when the shareholder’s right to receive payment is established. 31 32 [Deleted] When unpaid interest has accrued before the acquisition of an interest-bearing investment, the subsequent receipt of interest is allocated between preacquisition and post-acquisition periods; only the post-acquisition portion is recognised as revenue. Royalties accrue in ccordance with the terms of the relevant agreement and are usually recognised on that basis unless, having regard to the substance of the agreement, it is more appropriate to recognise revenue on some other systematic and rational basis. Revenue is recognised only when it is probable that the economic benefits associated with the transaction will flow to the entity. However, when an uncertainty arises about the collectibility of an amount already included in revenue, the uncollectible amount, or the amount in respect of which recovery has ceased to be probable, is recognised as an expense, rather than as an adjustment of the amount of revenue originally recognised. 33 34 Disclosure ________________________________________________ 5 An entity shall disclose: (a) the accounting policies adopted for the recognition of revenue, including the methods adopted to determine the stage of completion of transactions involving the rendering of services; the amount of each significant category of revenue recognised during the period, including revenue arising from: (b) 14 (i) (ii) the sale of goods; the rendering of services; (iii) interest; (iv) royalties; (v) (c) 36 dividends; and the amount of revenue arising from exchanges of goods or services included in each significant category of revenue. An entity discloses any contingent liabilities and contingent assets in accordance with AS 29 (Revised 20XX) Provisions, Contingent Liabilities and Contingent Assets. Contingent liabilities and contingent assets may arise from items such as warranty costs, claims, penalties or possible losses. Effective date 7 An entity to which this Accounting Standard is applicable shall apply it for accounting periods commencing on or after the date (to be announced separately) and will be mandatory in nature5 from that date. [Deleted] [Deleted] 38 39 5 This implies that, while discharging their attest function, it will be the duty of the members of the Institute to examine whether this Accounting Standard is complied with in the presentation of financial statements covered by their audit. In the event of any deviation from this Accounting Standard, it will be their duty to make adequate disclosures in their audit reports so that the users of financial statements may be aware of such deviations. 15

Appendix A Revenue—Barter Transactions Involving Advertising Services (Corresponding to SIC 31) Issue 1 An entity (Seller) may enter into a barter transaction to provide advertising services in exchange for receiving advertising services from its customer (Customer). Advertisements may be displayed on the Internet or poster sites, broadcast on the television or radio, published in magazines or journals, or presented in another medium. In some cases, no cash or other consideration is exchanged between the entities. In some other cases, equal or approximately equal amounts of cash or other consideration are also exchanged. A Seller that provides advertising services in the course of its rdinary activities recognises revenue under AS 9 (Revised 20XX) from a barter transaction involving advertising when, amongst other criteria, the services exchanged are dissimilar (paragraph 12 of AS 9 (Revised 20XX)) and the amount of revenue can be measured reliably (paragraph 20(a) of AS 9 (Revised 20XX). This Appendix only applies to an exchange of dissimilar advertising services. An exchange of similar advertising services is not a transaction that generates revenue under AS 9 (Revised 20XX). The issue is under what circumstances can a Seller reliably measure revenue at the fair value of advertising services received or provided in a barter transaction. 2 3 4 Accounting Principles 5 Revenue from a barter transaction involving advertising cannot be measured reliably at the fair value of advertising services received.

However, a Seller can reliably measure revenue at the fair value of the advertising services it provides in a barter transaction, by reference only to non-barter transactions that: (a) (b) (c) involve advertising similar to the advertising in the barter transaction; occur frequently; represent a predominant number of transactions and amount when compared to all transactions to provide advertising that is similar to the advertising in the barter transaction; involve cash and/or another form of consideration (eg marketable securities, non-monetary assets, and other services) that has a reliably measurable fair value; and do not involve the same counterparty as in the barter transaction. (d) (e) 16 Appendix B Customer Loyalty Programmes (Corresponding to IFRIC 13) Background 1 Customer loyalty programmes are used by entities to provide customers with incentives to buy their goods or services. If a customer buys goods or services, the entity grants the customer award credits (often described as ‘points’).

The customer can redeem the award credits for awards such as free or discounted goods or services. The programmes operate in a variety of ways. Customers may be required to accumulate a specified minimum number or value of award credits before they are able to redeem them. Award credits may be linked to individual purchases or groups of purchases, or to continued custom over a specified period. The entity may operate the customer loyalty programme itself or participate in a programme operated by a third party. The awards offered may include goods or services supplied by the entity itself and/or rights to claim goods or services from a third party. 2 Scope This Appendix applies to customer loyalty award credits that: (a) (b) an entity grants to its customers as part of a sales transaction, ie a sale of goods, rendering of services or use by a customer of entity assets; and subject to meeting any further qualifying conditions, the customers can redeem in the future for free or discounted goods or services. The Appendix addresses accounting by the entity that grants award credits to its customers. Issues 4 The issues addressed in this Appendix are: (a) whether the entity’s obligation to provide free or discounted goods or services (‘awards’) in the future should be recognised and measured by: (i) allocating some of the consideration received or receivable from the sales transaction to the award credits and deferring the recognition of revenue (applying paragraph 13 of AS 9 (Revised 20XX)); or providing for the estimated future costs of upplying the awards (applying paragraph 19 of AS 9 (Revised 20XX)); and (ii) (b) if consideration is allocated to the award credits: 17 (i) (ii) (iii) how much should be allocated to them; when revenue should be recognised; and if a third party supplies the awards, how revenue should be measured. Accounting Principles 5 An entity shall apply paragraph 13 of AS 9 (Revised 20XX) and account for award credits as a separately identifiable component of the sales transaction(s) in which they are granted (the ‘initial sale’). The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between the award credits and the other components of the sale.

The consideration allocated to the award credits shall be measured by reference to their fair value, ie the amount for which the award credits could be sold separately. If the entity supplies the awards itself, it shall recognise the consideration allocated to award credits as revenue when award credits are redeemed and it fulfils its obligations to supply awards. The amount of revenue recognised shall be based on the number of award credits that have been redeemed in exchange for awards, relative to the total number expected to be redeemed. If a third party supplies the awards, the entity shall assess whether it is collecting the consideration allocated to the award credits on its own account (ie as the principal in the transaction) or on behalf of the third party (ie as an agent for the third party). a) If the entity is collecting the consideration on behalf of the third party, it shall: (i) measure its revenue as the net amount retained on its own account, ie the difference between the consideration allocated to the award credits and the amount payable to the third party for supplying the awards; and recognise this net amount as revenue when the third party becomes obliged to supply the awards and entitled to receive consideration for doing so. These events may occur as soon as the award credits are granted. Alternatively, if the customer can choose to claim awards from either the entity or a third party, these events may occur only when the customer chooses to claim awards from the third party. 6 7 8 (ii) (b)

If the entity is collecting the consideration on its own account, it shall measure its revenue as the gross consideration allocated to the award credits and recognise the revenue when it fulfils its obligations in respect of the awards. 9 If at any time the unavoidable costs of meeting the obligations to supply the awards are expected to exceed the consideration received and receivable for them (ie the consideration allocated to the award credits at the time of the initial sale that has not yet been recognised as revenue plus any further consideration receivable when the customer redeems the award credits), the entity has 18 onerous contracts. A liability shall be recognised for the excess in accordance with AS 29 (Revised 20XX).

The need to recognise such a liability could arise if the expected costs of supplying awards increase, for example if the entity revises its expectations about the number of award credits that will be redeemed. Effective date and transition 10 11 [Deleted] [Deleted] 19 Application guidance on Appendix B This application guidance is an integral part of Appendix B. Measuring the fair value of award credits AG1 Paragraph 6 of Appendix B requires the consideration allocated to award credits to be measured by reference to their fair value, ie the amount for which the award credits could be sold separately. If the fair value is not directly observable, it must be estimated.

An entity may estimate the fair value of award credits by reference to the fair value of the awards for which they could be redeemed. The fair value of these awards would be reduced to take into account: (a) (b) the fair value of awards that would be offered to customers who have not earned award credits from an initial sale; and the proportion of award credits that are not expected to be redeemed by customers. AG2 If customers can choose from a range of different awards, the fair value of the award credits will reflect the fair values of the range of available awards, weighted in proportion to the frequency with which each award is expected to be selected.

AG3 In some circumstances, other estimation techniques may be available. For example, if a third party will supply the awards and the entity pays the third party for each award credit it grants, it could estimate the fair value of the award credits by reference to the amount it pays the third party, adding a reasonable profit margin. Judgement is required to select and apply the estimation technique that satisfies the requirements of paragraph 6 of Appendix B and is most appropriate in the circumstances. 20 Illustrative examples for Appendix B These examples accompany, but are not part of, Appendix B. Example 1—Awards supplied by the entity IE1 A grocery retailer operates a customer loyalty programme.

It grants programme members loyalty points when they spend a specified amount on groceries. Programme members can redeem the points for further groceries. The points have no expiry date. In one period, the entity grants 100 points. Management expects 80 of these points to be redeemed. Management estimates the fair value of each loyalty point to be Re. 1, and defers revenue of Rs. 100. Year 1 IE2 At the end of the first year, 40 of the points have been redeemed in exchange for groceries, ie half of those expected to be redeemed. The entity recognises revenue of (40 points/806 points) ? Rs. 100 = Rs. 50. Year 2 IE3 IE4 In the second year, management revises its expectations. It now expects 90 points to be redeemed altogether.

During the second year, 41 points are redeemed, bringing the total number redeemed to 407 + 41 = 81 points. The cumulative revenue that the entity recognises is (81 points/908 points) ? Rs. 100 = Rs. 90. The entity has recognised revenue of Rs. 50 in the first year, so it recognises Rs. 40 in the second year. Year 3 IE5 In the third year, a further nine points are redeemed, taking the total number of points redeemed to 81 + 9 = 90. Management continues to expect that only 90 points will ever be redeemed, ie that no more points will be redeemed after the third year. So the cumulative revenue to date is (90 points/909 points) ? Rs. 100 = Rs. 100. The entity has already recognised Rs. 0 of revenue (Rs. 50 in the first year and Rs. 40 in the second year). So it recognises the remaining Rs. 10 in the third year. All of the revenue initially deferred has now been recognised. 6 7 total number of points expected to be redeemed number of points redeemed in year 1 8 revised estimate of total number of points expected to be redeemed 9 total number of points still expected to be redeemed. 21 Example 2—Awards supplied by a third party IE6 A retailer of electrical goods participates in a customer loyalty programme operated by an airline. It grants programme members one air travel point with each Re. 1 they spend on electrical goods.

Programme members can redeem the points for air travel with the airline, subject to availability. The retailer pays the airline RS. 0. 009 for each point. In one period, the retailer sells electrical goods for consideration totalling Rs. 1 million. It grants 1 million points. IE7 Allocation of consideration to travel points IE8 The retailer estimates that the fair value of a point is Rs. 0. 01. It allocates to the points 1 million ? Rs. 0. 01 = Rs. 10,000 of the consideration it has received from the sales of its electrical goods. Revenue recognition IE9 Having granted the points, the retailer has fulfilled its obligations to the customer. The airline is obliged to supply the awards and entitled to receive consideration for doing so.

Therefore the retailer recognises revenue from the points when it sells the electrical goods. Revenue measurement IE10 If the retailer has collected the consideration allocated to the points on its own account, it measures its revenue as the gross Rs. 10,000 allocated to them. It separately recognises the Rs. 9,000 paid or payable to the airline as an expense. If the retailer has collected the consideration on behalf of the airline, ie as an agent for the airline, it measures its revenue as the net amount it retains on its own account. This amount of revenue is the difference between the Rs. 10,000 consideration allocated to the points and the Rs. 9,000 passed on to the airline. 22

Appendix C Agreements for the Construction of Real Estate (Corresponding to IFRIC 15) Background _______________________________________________ 1 In the real estate industry, entities that undertake the construction of real estate, directly or through subcontractors, may enter into agreements with one or more buyers before construction is complete. Such agreements take diverse forms. For example, entities that undertake the construction of residential real estate may start to market individual units (apartments or houses) ‘off plan’, ie while construction is still in progress, or even before it has begun. Each buyer enters into an agreement with the entity to acquire a specified unit when it is ready for occupation.

Typically, the buyer pays a deposit to the entity that is refundable only if the entity fails to deliver the completed unit in accordance with the contracted terms. The balance of the purchase price is generally paid to the entity only on contractual completion, when the buyer obtains possession of the unit. Entities that undertake the construction of commercial or industrial real estate may enter into an agreement with a single buyer. The buyer may be required to make progress payments between the time of the initial agreement and contractual completion. Construction may take place on land the buyer owns or leases before construction begins. 3 Scope ________________________________________________ 4 This Appendix applies to the accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors. Agreements in the scope of this Appendix are agreements for the construction of real estate. In addition to the construction of real estate, such agreements may include the delivery of other goods or services. 5 Issues 6 The Appendix addresses two issues: (a) (b) Is the agreement within the scope of AS 7 (Revised 20XX) or AS 9 (Revised 20XX)? When should revenue from the construction of real estate be recognised? 23

Accounting Principles ________________________________________________ 7 The following discussion assumes that the entity has previously analysed the agreement for the construction of real estate and any related agreements and concluded that it will retain neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the constructed real estate to an extent that would preclude recognition of some or all of the consideration as revenue. If recognition of some of the consideration as revenue is precluded, the following discussion applies only to the part of the agreement for which revenue will be recognised.

Within a single agreement, an entity may contract to deliver goods or services in addition to the construction of real estate (eg a sale of land or provision of property management services). In accordance with paragraph 13 of AS 9 (Revised 20XX), such an agreement may need to be split into separately identifiable components including one for the construction of real estate. The fair value of the total consideration received or receivable for the agreement shall be allocated to each component. If separate components are identified, the entity applies paragraphs 10–12 of this Appendix to the component for the construction of real estate in order to determine whether that component is within the scope of AS 7 (Revised 20XX) or AS 9(Revised 20XX).

The segmenting criteria of AS 7(Revised 20XX) then apply to any component of the agreement that is determined to be a construction contract. The following discussion refers to an agreement for the construction of real estate but it also applies to a component for the construction of real estate identified within an agreement that includes other components. 8 9 Determining whether the agreement is within the scope of AS 7(Revised 20XX) or AS 9(Revised 20XX) 10 Determining whether an agreement for the construction of real estate is within the scope of AS 7(Revised 20XX) or AS 9 (Revised 20XX) depends on the terms of the agreement and all the surrounding facts and circumstances. Such a determination requires judgement with respect to each agreement.

AS 7 (Revised 20XX) applies when the agreement meets the definition of a construction contract set out in paragraph 3 of AS 7(Revised 20XX): ‘a contract specifically negotiated for the construction of an asset or a combination of assets …’ An agreement for the construction of real estate meets the definition of a construction contract when the buyer is able to specify the major structural elements of the design of the real estate before construction begins and/or specify major structural changes once construction is in progress (whether or not it exercises that ability). When AS 7 (Revised 20XX) applies, the construction contract also includes any contracts or components for the rendering of services that are directly related to the construction of the real estate in accordance with paragraph 5(a) of AS 7 (Revised 20XX) and paragraph 4 of AS 9 (Revised 20XX). 11 24 12

In contrast, an agreement for the construction of real estate in which buyers have only limited ability to influence the design of the real estate, eg to select a design from a range of options specified by the entity, or to specify only minor variations to the basic design, is an agreement for the sale of goods within the scope of AS 9 (Revised 20XX). Accounting for revenue from the construction of real estate The agreement is a construction contract 13 When the agreement is within the scope of AS 7 (Revised 20XX) and its outcome can be estimated reliably, the entity shall recognise revenue by reference to the stage of completion of the contract activity in accordance with AS 7 (Revised 20XX). The agreement may not meet the definition of a construction contract and therefore be within the scope of AS 9 (Revised 20XX). In this case, the entity shall determine whether the agreement is for the rendering of services or for the sale of goods.

The agreement is an agreement for the rendering of services 15 If the entity is not required to acquire and supply construction materials, the agreement may be only an agreement for the rendering of services in accordance with AS 9 (Revised 20XX). In this case, if the criteria in paragraph 20 of AS 9 (Revised 20XX) are met, AS 9 (Revised 20XX) requires revenue to be recognised by reference to the stage of completion of the transaction using the percentage of completion method. The requirements of AS 7 (Revised 20XX) are generally applicable to the recognition of revenue and the associated expenses for such a transaction (AS 9 (Revised 20XX) paragraph 21).

The agreement is an agreement for the sale of goods 16 If the entity is required to provide services together with construction materials in order to perform its contractual obligation to deliver the real estate to the buyer, the agreement is an agreement for the sale of goods and the criteria for recognition of revenue set out in paragraph 14 of AS 9 (Revised 20XX) apply. The entity may transfer to the buyer control and the significant risks and rewards of ownership of the work in progress in its current state as construction progresses. In this case, if all the criteria in paragraph 14 of AS 9 (Revised 20XX) are met continuously as construction progresses, the entity shall recognise revenue by reference to the stage of completion using the percentage of completion method.

The requirements of AS 7 (Revised 20XX) are generally applicable to the recognition of revenue and the associated expenses for such a transaction. The entity may transfer to the buyer control and the significant risks and rewards of ownership of the real estate in its entirety at a single time (eg at completion, upon or after delivery). In this case, the entity shall recognise revenue only when all the criteria in paragraph 14 of AS 9 (Revised 20XX) are satisfied. 14 17 18 25 19 When the entity is required to perform further work on real estate already delivered to the buyer, it shall recognise a liability and an expense in accordance with paragraph 19 of AS 9 (Revised 20XX). The liability shall be measured in accordance with AS 29 (Revised 20XX).

When the entity is required to deliver further goods or services that are separately identifiable from the real estate already delivered to the buyer, it would have identified the remaining goods or services as a separate component of the sale, in accordance with paragraph 8 of this Appendix. Disclosures 20 When an entity recognises revenue using the percentage of completion method for agreements that meet all the criteria in paragraph 14 of AS 9 (Revised 20XX) continuously as construction progresses (see paragraph 17 of the Appendix), it shall disclose: (a) (b) (c) 21 how it determines which agreements meet all the criteria in paragraph 14 of AS 9 (Revised 20XX) continuously as construction progresses; the amount of revenue arising from uch agreements in the period; and the methods used to determine the stage of completion of agreements in progress. For the agreements described in paragraph 20 that are in progress at the reporting date, the entity shall also disclose: (a) (b) the aggregate amount of costs incurred and recognised profits (less recognised losses) to date; and the amount of advances received. 22-23 [Deleted] Effective date and transition ____________________________________________________________ ____________________________________ 24 25 [Deleted] [Deleted] 26 Information note ________________________________________________ Analysis of a single agreement for the construction of real estate This note accompanies, but is not part of, Appendix C.

Can Components other than for the construction of real estate be identified within the agreement (eg a sale of land or provision of property management services)? ( see paragraph 8 of the Appendix) Yes No A Split the agreement into separately identifiable components Allocate the fair value of the consideration received or receivable to each component Separate components Component(s) for the delivery of other goods or services Component for the construction of real estate and directly related services (in accordance with paragraph 4 of AS 9 (Revised 20XX)) (see paragraph 11 of the Appendix) A Apply AS 9 (Revised 20XX) 27 ……Continued A Revenue and costs are recognized by reference to the stage of completion (see paragraph 13 of the Appendix)

Does the agreement or component meet the definition of a construction contract ? (see paragraph 11 of the Appendix) No The agreement or component is a Yes construction contract within the scope of AS 7 (Revised 20XX)* Is the agreement or component only for the rendering of services ? (see paragraphs 14 and 15 of the Appendix) No The agreement or component is for the Yes rendering of services within the scope of AS 9 (Revised 20XX) Revenue and costs are recognized by reference to the stage of completion (see paragraph 15 of the Appendix) The agreement or component is for the sale of goods within the scope of AS 9 (Revised 20XX)@ (see paragraph 16 of the Appendix)

Are the criteria for recognizing revenue from the sale of goods met on a continuous basis? (see paragraph 17 of the Appendix) Yes Revenue and costs are recognized by reference to the stage of completion (see paragraph 17 of the Appendix) Revenue is recognized when the all conditions in paragraph 14 AS 9 (Revised 20XX) have been satisfied (see paragraph 18 of the Appendix) No * The construction contract may need to be segmented in accordance with paragraph 8 of AS 7 (Revised 20XX) @ Directly related services may need to be separated in accordance with paragraph 13 of AS 9 (Revised 20XX) 28 Illustrative examples for Appendix C These examples accompany, but are not part of, Appendix C. Example 1

IE1 An entity buys a plot of land for the construction of commercial real estate. It designs an office block to build on the land and submits the designs to planning authorities in order to obtain building permission. The entity markets the office block to potential tenants and signs conditional lease agreements. The entity markets the office block to potential buyers and signs with one of them a conditional agreement for the sale of land and the construction of the office block. The buyer cannot put the land or the incomplete office block back to the entity. The entity receives the building permission and all agreements become unconditional.

The entity is given access to the land in order to undertake the construction and then constructs the office block. In this illustrative example, the agreement should be separated into two components: a component for the sale of land and a component for the construction of the office block. The component for the sale of land is a sale of goods within the scope of AS 9 (Revised 20XX). Because all the major structural decisions were made by the entity and were included in the designs submitted to the planning authorities before the buyer signed the conditional agreement, it is assumed that there will be no major change in the designs after the construction has begun.

Consequently, the component for the construction of the office block is not a construction contract and is within the scope of AS 9 (Revised 20XX). The facts, including that the construction takes place on land the buyer owns before construction begins and that the buyer cannot put the incomplete office block back to the entity, indicate that the entity transfers to the buyer control and the significant risks and rewards of ownership of the work in progress in its current state as construction progresses. Therefore, if all the criteria in paragraph 14 of AS 9 (Revised 20XX) are met continuously as construction progresses, the entity recognises revenue from the construction of the office block by reference to the stage of completion using the percentage of completion method.

Alternatively, assume that the construction of the office block started before the entity signed the agreement with the buyer. In that event, the agreement should be separated into three components: a component for the sale of land, a component for the partially constructed office block and a component for the construction of the office block. The entity should apply the recognition criteria separately to each component. Assuming that the other facts remain unchanged, the entity recognises revenue from the component for the construction of the office block by reference to the stage of completion using the percentage of completion method as explained in paragraph IE3.

In this example, the sale of land is determined to be a separately identifiable component from the component for the construction of real estate. However, IE2 IE3 IE4 IE5 29 depending on facts and circumstances, the entity may conclude that such a component is not separately identifiable. For example, assume that a condominium is legally defined as the absolute ownership of a unit based on a legal description of the airspace the unit actually occupies, plus an undivided interest in the ownership of the common elements (that includes the land and actual building itself, all the driveways, parking, lifts, outside hallways, recreation and landscaped areas) that are owned jointly with the other condominium unit owners.

In this case, the undivided interest in the ownership of the common elements does not give the buyer control and the significant risks and rewards of the land itself. Indeed, the right to the unit itself and the interest in the common elements are not separable. Example 2 IE6 An entity is developing residential real estate and starts marketing individual units (apartments) while construction is still in progress. Buyers enter into a binding sale agreement that gives them the right to acquire a specified unit when it is ready for occupation. They pay a deposit that is refundable only if the entity fails to deliver the completed unit in accordance with the contracted terms.

Buyers are also required to make progress payments between the time of the initial agreement and contractual completion. The balance of the purchase price is paid only on contractual completion, when buyers obtain possession of their unit. Buyers are able to specify only minor variations to the basic design but they cannot specify or alter major structural elements of the design of their unit. Assume that no rights to the underlying real estate asset transfer to the buyer other than through the agreement. Consequently, the construction takes place regardless of whether sale agreements exist. In this illustrative example, the terms of the agreement and all the surrounding facts and circumstances indicate that the agreement is not a construction contract.

The agreement is a forward contract that gives the buyer an asset in the form of a right to acquire, use and sell the completed real estate at a later date and an obligation to pay the purchase price in accordance with its terms. Although the buyer might be able to transfer its interest in the forward contract to another party, the entity retains control and the significant risks and rewards of ownership of the work in progress in its current state until the completed real estate is transferred. Therefore, revenue should be recognised only when all the criteria in paragraph 14 of AS 9 (Revised 20XX) are met (at completion in this example). IE7 IE8

Alternatively, assume that the law requires the entity to transfer immediately to the buyer ownership of the real estate in its current state of completion and that any additional construction becomes the property of the buyer as construction progresses. The entity would need to consider all the terms of the agreement to determine whether this change in the timing of the transfer of ownership means that the entity transfers to the buyer control and the significant risks and rewards of ownership of the work in progress in its current state as construction progresses. For example, the fact that if the agreement is terminated before construction is complete, the buyer retains the work in progress and the entity has the 30 right to be paid for the work performed, might indicate that control is transferred along with ownership.

If it does, and if all the criteria in paragraph 14 of AS 9 (Revised 20XX) are met continuously as construction progresses, the entity recognises revenue by reference to the stage of completion using the percentage of completion method taking into account the stage of completion of the whole building and the agreements signed with individual buyers. Example 3 IE9 Determining whether the entity will retain neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the constructed real estate to an extent that would preclude recognition of some or all of the consideration as revenue depends on the terms of the agreement and all the surrounding facts and circumstances. Such a determination requires judgement. The Appendix assumes the entity has reached the conclusion that it is appropriate to recognise revenue from the agreement and discusses how to determine the appropriate pattern of revenue recognition.

Agreements for the construction of real estate may include such a degree of continuing managerial involvement by the entity undertaking the construction that control and the significant risks and rewards of ownership are not transferred even when construction is complete and the buyer obtains possession. Examples are agreements in which the entity guarantees occupancy of the property for a specified period, or guarantees a return on the buyer’s investment for a specified period. In such circumstances, recognition of revenue may be delayed or precluded altogether. Agreements for the construction of real estate may give the buyer a right to take over the work in progress (albeit with a penalty) during construction, eg to engage a different entity to complete the construction. This fact, along with others, may indicate that the entity transfers to the buyer control of the work in progress in its current state as construction progresses.

The entity that undertakes the construction of real estate will have access to the land and the work in progress in order to perform its contractual obligation to deliver to the buyer completed real estate. If control of the work in process is transferred continuously, that access does not necessarily imply that the entity undertaking the construction retains continuing managerial involvement with the real estate to the degree usually associated with ownership to an extent that would preclude recognition of some or all of the consideration as revenue. The entity may have control over the activities related to the performance of its contractual obligation but not over the real estate itself. IE10 IE11 31 Appendix D Transfers of Assets from Customers (Corresponding to IFRIC 18) Background In the utilities industry, an entity may receive from its customers items of property, plant and equipment that must be used to connect those customers to a network and provide them with ongoing access to a supply of commodities such as electricity, gas or water. Alternatively, an entity may receive cash from customers for the acquisition or construction of such items of property, plant and equipment. Typically, customers are required to pay additional amounts for the purchase of goods or services based on usage. Transfers of assets from customers may also occur in industries other than utilities. For example, an entity outsourcing its information technology functions may transfer its existing items of property, plant and equipment to the outsourcing provider.

In some cases, the transferor of the asset may not be the entity that will eventually have ongoing access to the supply of goods or services and will be the recipient of those goods or services. However, for convenience this Appendix refers to the entity transferring the asset as the customer. 2 3 Scope 4 5 This Appendix applies to the accounting for transfers of items of property, plant and equipment by entities that receive such transfers from their customers. Agreements within the scope of this Appendix are agreements in which an entity receives from a customer an item of property, plant and equipment that the entity must then use either to connect the customer to a network or to provide the customer with ongoing access to a supply of goods or services, or to do both.

This Appendix also applies to agreements in which an entity receives cash from a customer when that amount of cash must be used only to construct or acquire an item of property, plant and equipment and the entity must then use the item of property, plant and equipment either to connect the customer to a network or to provide the customer with ongoing access to a supply of goods or services, or to do both. This Appendix does not apply to agreements in which the transfer is either a government grant as defined in AS 12 (Revised 20XX) or infrastructure used in a service concession arrangement that is within the scope of Appendix A of AS 6 7 32 7 (Revised 20XX) Service Concession Arrangements (Corresponding to IFRIC 12). Issues 8 The Appendix addresses the following issues: (a) (b) (c) (d) Is the definition of an asset met?

If the definition of an asset is met, how should the transferred item of property, plant and equipment be measured on initial recognition? If the item of property, plant and equipment is measured at fair value on initial recognition, how should the resulting credit be accounted for? How should the entity account for a transfer of cash from its customer? Accounting Principles Is the definition of an asset met? 9 When an entity receives from a customer a transfer of an item of property, plant and equipment, it shall assess whether the transferred item meets the definition of an asset set out in the Framework for the Preparation and Presentation of Financial Statements issued by the Institute of Chartered Accountants of India.

Paragraph 49(a) of the Framework states that

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