Ind AS/IGAAP — Interpretation and Practical Application

Activities that represent efforts by a service provider in fulfilling the performance obligations, and which trigger revenue recognition, sometimes can be lumpy and unpredictable; whereas the cash received from the customer can be time-based, smooth and predictable. Therefore, the question is whether revenue recognition can follow a smooth pattern, rather than get recognized in a lumpy manner. Very often, stock markets reward more stable and predictable earnings per share (EPS), rather than a highly volatile EPS each quarter. Most entities, therefore, prefer to have a smooth revenue recognition pattern. The big question is whether such smoothing is possible under Ind AS 115 Revenue from Contracts with Customers. This question is addressed through a simple fact pattern.

QUERY

Repair Company Ltd (RepCo) provides repair and maintenance (R&M) services as well as overhaul and relining of crusher machines that are used in mining operations. The contract is for a period of six years. At the end of the second, fourth and sixth year, RepCo does a complete relining and overhaul of the crusher. Additionally, RepCo also provides R&M services for the crusher on a continuous basis, and for this purpose, it will have two of its mechanics located at the customer’s site on a full-time basis for a period of 6 years, along with certain stores and spares t