Transport Services provided to Customers in addition to Goods transferred under Ind AS & IFRS

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Many manufacturing and trading entities provide transportation services to their customers in addition to the goods supplied. In this case, will the transport services be treated as a separate performance obligation? How will the revenue be recognised for the transport services – “at a point in time” or “over the period of time”?

Let us understand the accounting for the transport services provided to the customer under Ind AS 115: Revenue from Contracts with Customers, through a case study:

A. Facts of the case:

An entity ABC Ltd is in the paper manufacturing industry. Paper products are designed and manufactured by ABC Ltd and have a large customer base and varied uses. Their customers are the wholesalers and retailers in each state. ABC Limited in addition to providing various paper products also ensures that it transports the goods to the customer's location. The cost incurred to transport is then added to the invoice (margin maybe 0% to 3%) to the customer.

B. Query:

Will the transport services provided be treated as a separate performance obligation and how will the revenue be recognised in the following situations:

(i) Control of the goods is transferred to the customer once the goods move out of ABC Ltd.’s factory/warehouse gate.

(ii) Control of the goods is transferred to the customer only when it reaches the customer's location.

In both the above cases ABC Ltd takes travel insurance to protect against the damage/theft of goods in transit.

C. Analysis and Conclusions:

An entity shall recognize revenue when the entity satisfies a performance obligation by transferring a promised good or service to a customer. An asset is transferred when the customer obtains control of that asset.

Control of an asset (good or a service) is transferred to the customer when:

1. The customer has the right to direct the use of the asset,

2. Obtain substantially all the remaining economic benefits from the asset, and

3. Has the ability to prevent another entity to direct the use of the asset and obtain economic benefits from the asset.

For each performance obligation identified, an entity shall determine whether it satisfies the performance obligation over time or satisfies the performance obligation at a point in time based on when the control is transferred to the customer.

Query B(i):

The control of the paper products has been transferred to the customer once the goods move out of the factory/warehouse gates of ABC Ltd.

In this case, the control for the goods is transferred to the customer before the transport service is provided. The promise of transfer of goods is distinct from the transport services as the customer can get the benefit from the goods on their own or when combined with the resources they already have: they can sell the goods to another party when they are in transit and the customer can potentially use another transport carrier at its disposal.

The fact that ABC Ltd takes insurance for the goods in transit would not impact the above analysis as the control has been transferred to the customer once the goods leave the factory/warehouse gates.

Performance obligations:

1. Provide paper products

2. Transport of paper products

Revenue recognition: Provide paper products:

Analysis based on the paragraph 35 of Ind AS 115 dealing with recognizing revenue over the period of time:

• Customer does not simultaneously receive and consume the benefits provided by ABC Ltd.’s performance as it performs i.e., during the manufacturing of the paper products; This clause is generally applicable to services provided.

• ABC Ltd.’s performance does not create or enhance the asset which the customer controls as and when the asset is created or enhanced, as the goods are fully manufactured (during which the customer has no control over the paper products) and then sold to the customer.

• ABC Ltd has alternative use for its products.

All the three cases mentioned in paragraph 35 of Ind AS 115 to recognize revenue over time are not be applicable and thus the revenue will be recognized at a point in time when the control is transferred i.e., when the goods leave the factory / warehouse gate.

Revenue Recognition: Transport of paper products:

Customer consumes the benefits of the transport service as and when ABC Ltd provides it i.e., as and when the transport vehicle covers distance, it comes closer to the customer location.

As per para B4 of Ind AS 115 (also in IFRS 15) a performance obligation is satisfied over time if an entity determines that another entity would not need to substantially re-perform the work that the entity has completed to date if that other entity were to fulfil the remaining performance obligation to the customer.

In determining whether another entity would not need to substantially re-perform the work the entity has completed to date, an entity shall make both of the following assumptions:

• disregard potential contractual restrictions or practical limitations

• presume that another entity fulfilling the remainder of the performance obligation would not have the benefit of any asset that is presently controlled by the entity and that would remain controlled by the entity if the performance obligation were to transfer to another entity.

Thus, for the transport service which is treated as a separate performance obligation, revenue will be recognized over the period of time.

Query B(ii):

The control of the paper products has been transferred to the customer only when it reaches the customer's location. The promise of providing goods is not distinct from the promise of providing transport services as the control of the goods will be transferred only at the customer location and the customer cannot get the benefit from the goods on its own until it is transported to its location.

Performance obligations:

1. Provide and transport paper products

Revenue recognition: Provide and transport paper products:

Analysis based on paragraph 35 of Ind AS 115 dealing with recognizing revenue over the period of time:

• Customer does not simultaneously receive and consume the benefits provided by ABC Ltd.’s performance as the entity performs i.e., during the manufacturing of the paper products; This clause is generally applicable to services provided.

• ABC Ltd.’s performance does not create or enhance.

• the asset which the customer controls as and when the asset is created or enhanced as the goods are fully manufactured (during which the customer has no control over the paper products) and then sold to the customer.

• ABC Ltd. has an alternative use for its products.

All the three cases mentioned in paragraph 35 of Ind AS 115 to recognize revenue over time will not be applicable and thus the revenue (for both the goods and transport services) will be recognized at a point in time when the control is transferred i.e., when the goods reach the customer location.

Relevant paragraphs in Ind AS 115 (also IFRS 15) for the article and the case study: 24 to 40; 31 to 38, B3 & B4.

This article has been published in the Chartered Accountant Study Circle ("CASC") Bulletin.