Identifying the customer
Ind AS 115 defines a customer as a
party that has contracted with an entity to obtain goods or services that are
an output of the entity’s ordinary activities in exchange for consideration.
Beyond that, Ind AS 115 does not contain any definition of a customer. In many
transactions, a customer is easily identifiable. However, in transactions
involving multiple parties, for example, in the credit card business, it may be
less clear which counterparties are customers of the entity. For some
arrangements, multiple parties could all be considered customers of the entity.
However, for other arrangements, only some of the parties involved are
considered as customers. The identification of the performance obligations in a
contract can also have a significant effect on the determination of which party
is the entity’s customer.
Identifying the customer becomes
very important under Ind AS 115, because depending on who and how many
customers are identified, it will determine, the performance obligations in a
contract, the presentation and accounting of sales incentives, determination
and presentation of negative revenue, etc. The example below shows how the
party considered to be the customer may differ, depending on the specific facts
and circumstances.
Example — Travel Agents
An entity provides internet-based
airline ticket booking services. In any transaction, there are three parties
involved, the airline is the principal, the entity is an agent, and the
end-customer who purchases the ticket on the entity’s website. The entity gets
its majority of the income from the airline, to whom it charges a commission
(say INR 500 per ticket). The entity also receives a small convenience fee from
the end-customer (INR 20). To attract customers, the entity provides a cash
back of INR 120 to each end-customer.
If the entity considers, the
airline and the end-customer as two customers in a transaction, it will
determine revenue to be INR 400 (500+20-120). On the other hand, if the entity
had not received any convenience fees from the end-customer, and reduced the
cash back to INR 100, the entity will determine revenue to be INR 500. The
entity will also present INR 100 paid to third parties (end-customers) as a
selling cost.
Consideration paid to Customers’ Customer
Consideration payable to a customer
includes cash amounts that an entity pays, or expects to pay, to the customer.
Such amounts are reduced from revenue. This requirement also applies to
payments made to other parties that purchase the entity’s goods or services
from the customer. In other words, consideration paid to customers’ customer is
also reduced from revenue. For example, if a lubricant entity pays a
consideration to mechanics that purchases lubricants from the entity’s customer
(distributor), that amount will be reduced from the revenue of the lubricant
entity.
In some cases, entities provide
cash or other incentives to end consumers that are neither their direct
customers nor purchase the entities’ goods or services within the distribution
chain. One such example is depicted below. In such cases, the entity will need
to identify whether the end consumer is the entity’s customer under Ind AS 115.
This assessment could require significant judgment. The management should also
consider whether a payment to an end consumer is contractually required
pursuant to the arrangement between the entity and its customer (e.g., the
merchant in the example below) in the transaction. If this is the case, the
payment to the end consumer is treated as consideration payable to a customer
as it is being made on the customer’s behalf.
Example – Consideration paid to other
than customers
An entity provides internet-based
airline ticket booking services. In any transaction, there are three parties
involved, the airline is the principal, the entity is an agent, and the
end-customer who purchases the ticket on the entity’s website. The entity gets
its income from the airline, to whom it charges a commission (say INR 500 per
ticket). To attract users, the entity provides a cash back of INR 100 to each
end-customer on its own (i.e. without any contractual requirement from the
airline company).
If the entity considers, the
airline and the end-customer as two customers in a transaction, it will
determine revenue to be INR 400 (500-100). On the other hand, if the entity
determines that the end-customer is not its customer (because convenience fee is
not charge to the end-customer), the entity will determine revenue to be INR
500 and present INR 100 paid to third parties (end-customers) as a selling
cost. In case, the cash back to end user is paid because of a contractual
requirement between the airline and the entity, then such cash back paid will
be deducted from revenue, even when it is concluded that the end-user is not a
customer. This is because, the entity is
making a payment on behalf of the customer as per agreement.
Both examples in the article are economically
the same; however, they provide different accounting consequences, based on how
a customer is identified. In the second example, a convenience fee is not paid
to end-customer, and hence it is concluded that the end-customer is not the
customer of the entity.
