Ind-AS 115 revenue recognition: four scenarios where startups get it wrong

Ind-AS 115 has been mandatory in India since April 2018. By now every Big Four firm has a deck explaining the five-step model. Every CFO has sat through the deck. And every audit season we still see the same four scenarios where the application breaks down — usually in startups, usually after a fundraise has already happened on revenue numbers that need restating.

The five-step model is not the problem. The problem is the judgment underneath each step.

The five steps, briefly

Identify the contract. Identify the performance obligations. Determine the transaction price. Allocate the transaction price to the performance obligations. Recognize revenue when (or as) each performance obligation is satisfied.

Steps one and three are usually straightforward. Steps two, four, and five are where the judgment lives. The four mistakes below cluster around those three steps.

Mistake one: gross versus net for marketplaces

A marketplace that connects buyers and sellers — food delivery, ride-hailing, B2B procurement, freelance services — has to decide whether it is a principal (revenue is gross of seller pay-outs) or an agent (revenue is the commission only).

Ind-AS 115 paragraph B34 onwards sets the test. The marketplace is a principal if it controls the goods or services before transfer to the customer. The indicators are: primary responsibility for fulfilment, inventory risk, discretion in setting prices, and credit risk.

We have seen one B2B procurement startup recognize ₹400 crore of GMV as revenue while their actual commission was 4% — ₹16 crore. The argument was that they took 'first leg' credit risk on a small number of transactions. The auditors disagreed. The platform did not hold inventory, did not control pricing, did not bear primary fulfilment responsibility, and the credit risk was reinsured. They were an agent. Revenue restated to ₹16 crore. The next fundraise round, already pre-marketed on gross numbers, had to be repositioned.

The startup mistake is to argue principal status to inflate top-line and worry about it later. Later is when the auditor or the diligence team reads paragraph B37 and walks through the indicators one by one. The argument collapses.

Mistake two: SaaS subscription bundled with implementation

A SaaS company sells a 24-month subscription at ₹1.2 crore plus an upfront implementation fee of ₹40 lakh. The contract says the implementation has to be completed before subscription access begins.

Question: is the implementation a separate performance obligation, or part of the same performance obligation as the subscription?

Under Ind-AS 115 paragraph 27, a good or service is distinct if the customer can benefit from it on its own and it is separately identifiable in the contract. If the implementation is necessary for the customer to use the SaaS — proprietary configuration, mandatory bundled training, integration that cannot be performed by anyone else — it is not distinct. The whole ₹1.6 crore gets recognized over the 24-month subscription period.

If the implementation is something the customer could buy from a third party or perform internally, it is distinct. The ₹40 lakh gets recognized when implementation is delivered, separately from the subscription.

Most startups default to recognizing the ₹40 lakh upfront because it improves Year 1 revenue. About half the time the contract structure supports it. The other half it does not, and the auditor reallocates it across the subscription term. We have seen ₹12-15 crore of revenue get reclassified as deferred revenue in a single audit because of this. The cash position does not change. The revenue line for Year 1 falls by 20%.

Mistake three: ad-supported revenue with usage-based pricing

Consumer apps and content platforms often have advertising contracts priced per thousand impressions (CPM) or per click (CPC). The customer commits to a minimum spend over a quarter, with overages billed monthly.

Two questions. When is the performance obligation satisfied — over time as impressions are served, or at a point in time? And how is the variable consideration (overages) estimated?

Paragraph 35 of Ind-AS 115 says revenue is recognized over time if the customer simultaneously receives and consumes the benefits. Impressions delivered against an ad campaign are consumed as they are served. So revenue is recognized over time, measured by impressions actually served, not by invoices raised or by the spread of the contract term.

The mistake startups make is to recognize revenue ratably across the contract period. A three-month campaign with ₹90 lakh committed spend gets recognized at ₹30 lakh per month, regardless of whether the impressions were delivered in month one or month three. Under Ind-AS 115 that is wrong. Revenue should follow impressions. If 70% of impressions are delivered in month one because of a launch push, 70% of revenue is recognized in month one.

Variable consideration — the overage component — has to be estimated and included in the transaction price at contract inception under paragraph 50, with a constraint under paragraph 56 to the extent it is highly probable that a significant reversal will not occur. Most startups simply ignore variable consideration until the invoice is raised. The auditor will require an estimation methodology.

Mistake four: refunds and credit treatment

Refund policies, service credits, free-month extensions, satisfaction guarantees — these are variable consideration. Paragraph 51 requires you to estimate the amount of consideration you expect to be entitled to, net of expected refunds.

An edtech company offering a 30-day money-back guarantee with a historical 8% refund rate has variable consideration of approximately 8% of the gross fee. Revenue should be recognized net of that 8%, with the refund liability sitting on the balance sheet. Most companies recognize 100% and book the refund as a P&L hit when it occurs. The net effect over a year may be similar, but the timing is wrong and the disclosures are wrong.

Service credits for SLA breaches on B2B SaaS contracts work the same way. If your contracts include credit rights for downtime and your historical data shows 2% of fees end up as credits, that 2% is variable consideration. Revenue gets recognized at 98%.

Variable consideration is not optional. Ind-AS 115 requires the estimate at contract inception, and the auditor will ask for the methodology and the historical data behind it.

What good revenue-recognition documentation looks like

Before fieldwork starts, prepare a revenue-recognition memo per material contract type. For each type: the performance obligation identification with reasoning, the timing of satisfaction (over time or point in time) with the basis, the transaction-price determination including variable consideration, and the allocation method if multiple obligations exist.

The memo should be one page per contract type, signed off by the controller, with cross-references to the actual contract terms. Auditors read this in 20 minutes and walk away with most of their revenue-recognition questions answered. Without it, the same questions take three weeks of back-and-forth and usually end with a restatement.

The four mistakes are predictable. The audit response to each one is predictable. The only variable is whether you handle the conversation before the fundraise or after.