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Ind-AS, which will be a reality from 2016-17, will impact the automotive sector. India will be the first country to apply the principles of the new revenue standard which proposes a five-step approach for revenue recognition.
Revenue recognition
As part of the sale of a car, it is common for auto manufacturers to provide customers additional benefits such as free maintenance services, additional warranty (free of cost), and road side assistance. Ind-AS requires these additional benefits to be identified as separate performance obligations.
This will result in a split of the total consideration into multiple components which can be recognised as revenue only once they are satisfied at a point in time or over a period of time. Under Indian GAAP currently, revenue on the sale of a car is recognised once it is dispatched from the factory.
Auto manufacturers (original equipment manufacturers) widely engage with multiple ancillary units to produce automobile parts. The prototypes/castings/moulds are manufactured by the suppliers, keeping in mind the OEM’s specification.
These are now accounted by the supplier as its assets. However, under Ind-AS, one should analyse 1) who bears the risk and rewards associated with the tools as the supplier would hold the legal title while the beneficial owner would be the OEM; 2) how the cost and revenue from tooling should be recognised, as the master supply agreements between the OEM and supplier would factor the supplier’s investment in the tools as part of the price charged by the supplier for products manufactured using the tools; and 3) how the contribution made by the OEM should be accounted as it could be a pure financing arrangement or could be either for the purchase of the tool or towards the commitment made by the supplier for continuous supply of the products.
Consolidation model Lastly, the consolidation model provided under Ind-AS focuses on the concept of control. Since there could be ancillary units working exclusively for the OEM, they may be, in substance, controlled by the OEM, manufacturing solely for a single OEM, supported substantially on the working capital with no equity stake and hence may need to be consolidated if residual risks lie with the OEM.
Similarly, since the assets of the ancillary unit may be customised to manufacture products for the OEM, they may come under the purview of the embedded lease concept. Hence, they could be deemed to be on a finance lease to the OEM bringing the assets of the ancillary on to the books of OEM.
The writer is Director at KPMG in India
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