IFRS 115/IND AS 115 — Revenue from Contracts with Customers -Customers unexercised rights(Relevant Extract)

IFRS 115/IND AS 115 is very elaborate and have covered lot of different scenarios. And wisely so, considering the complexities of the business model in this 21st century.

Let’s see into one of them which is known as “Customers unexercised rights” under the standard.

1. What do you mean by unexercised rights?
   Prepayment for the goods/services is very common norm specially in case of subscription based business models. However, customers may or may not use/redeem those goods/services in future. Hence, this unutilised portion of goods/services which are not required to be transferred/provided by the seller to customer due to its expiry/time limit lapse is known as unexercised rights.
   For instance, 100 mins for 30 days @ INR 150
   It is possible that you will utilize only 80 mins in 30 days.
   What about balance 20 mins?
   It is breakage/unexercised rights as per the standard.
2. What is breakage in the standard?
   Unexercised rights are also referred as breakage under the standard.
3. Does it means this particular guidance is applicable in case of prepayment/advance receipts of money from customer?
   Yes correct.

4. How does it makes a difference to know about this breakage/ unexercised rights, when in anyway those rights/goods/services which are not utilized are ultimately going to be transferred to the profit and loss statement?
Yes you are right, ultimately all the amount/transaction price is going to be recognized in the profit and loss statement.

However, the CRUX lies here?

Timing of revenue recognition will change.
Really, How?
If entity can study its data and estimate the breakage percentage then entity can recognize the expected breakage amount as revenue in proportion to the pattern of rights exercised by the customer.

5. So How to calculate this breakage revenue to be recognized?
1 Overall transaction price received in ADVANCE (For instance 1000 for 60 days)
2 Estimate of breakage from previous data of the company (for instance, 10% of the customer never exercise their rights)
3 (Step 1 * Step 2)=100 is the breakage amount or amount for which goods/service will not be required to be transferred in the future
4 First 30 days actual utilization 500
5 Revenue to be recognized 500 + 55.56 (breakage amount)=555.56 Breakage amount=500/(1000–100)*100 = 55.56%
Apply this percentage to total expected breakage amount (100*55.56%)=55.56
6 The entity shall recognise the expected breakage amount as revenue in proportion to the pattern of rights exercised by the customer

Please note here we are not recognizing all breakage amount at one into profit and loss statement. We are recognizing breakage portion in proportion to the goods/ services transferred by the seller.

6. Accounting Entries?

A. Prepayment
Cash/Bank Dr
Contract Liability Cr

B. Performance obligation satisfied /Goods/services transferred — As and when
Contract Liability Dr
Revenue from goods sold Cr
Revenue from Breakage, if Cr

C. On lapse of contract duration remaining unexercised rights expires
Contract Liability Dr
Revenue from Breakage Cr

D. On lapse of contract duration remaining amount as per contract needs to be transferred to 3rd party then
Contract Liability Dr
3rd Party Liability/Payable Cr

7. What if unexercised rights needs to be transferred to 3rd party?
In that case, don’t recognize revenue for unexercised rights. On breakage, recognize liability for remittance to the third party.

8. What if I’m not sure on whether customer’s breakage/unexercised rights?
Then recognize revenue when customers’s exercising its remaining rights becomes remote or lapses. Some sort of surety is very important because otherwise you will end up recognizing revenue and then reversing revenue at the end of the period which is not the idea of the standard at all. The idea of the standard is recognition at the most appropriate time.

Key/simple things to note :
1. Unexercised rights —
Impacts timing of revenue recognition.
It doesn’t impact transaction price.
The only point of discussion is WHEN should we recognize revenue.

Thank you👍✔