Ind AS 115 | Revenue Recognition in Pharma Collaboration Agreements

1. Facts

Zenova Pharma Limited (hereinafter referred to as “the Company”) is an Indian pharmaceutical entity engaged in the research, development, and licensing of innovative drug compounds. During the Financial Year 2025–26, the Company entered into a collaboration agreement with Healix Therapeutics Inc. (hereinafter referred to as “the Customer”), a global biotechnology company, for the development and commercialisation of a drug compound intended for the treatment of autoimmune disorders.

Pursuant to the agreement effective 1st April 2025, the Company granted to the Customer a licence to intellectual property (IP) relating to the drug compound, which is currently undergoing Phase III clinical trials. In addition to granting the licence, the Company undertook to perform “Research and Development” (R&D) activities necessary to complete Phase III clinical trials and to support the process of obtaining regulatory approval. The R&D activities include patient enrolment, monitoring of clinical sites, statistical validation, and preparation of regulatory documentation. These services are not specialised in nature and may be performed by other pharmaceutical or contract research organisations. Further, the R&D services are not expected to significantly modify or customise the underlying IP.

Under the terms of the arrangement, the Company is entitled to receive a non-refundable upfront payment of Rs. 50 crore upon execution of the contract. In addition, the Company will be compensated for R&D services at Rs. 25,000 per hour. The total estimated effort required to complete Phase III clinical trials is 40,000 hours over a two-year period, resulting in an estimated consideration of Rs. 100 crore for R&D services. Further, the Company is entitled to receive a milestone payment of ₹80 crore upon receipt of regulatory approval from the Drug Controller General of India (DCGI) or any equivalent foreign regulatory authority.

The standalone selling price of the licence, if sold separately, is estimated at Rs. 60 crore, while the standalone selling price of the R&D services is estimated at Rs. 120 crore based on observable market benchmarks.

As at 31 March 2026, the Company has completed 12,000 hours of R&D services and has received the full upfront payment of Rs. 50 crore along with Rs. 30 crore towards R&D services performed. Regulatory approval remains uncertain as at the reporting date and, based on management’s assessment and past experience, there is an estimated 40% probability of obtaining such approval.

While finalising its financial statements for the year ended 31 March 2026, management is required to determine the appropriate accounting treatment of the arrangement under Ind AS 115, including identification of performance obligations, determination of the transaction price?

2. Relevant Provisions

Ind AS 115 – Revenue from Contracts with Customers

Para 22 of Ind AS 115

At contract inception, an entity shall assess the goods or services promised in a contract with a customer and shall identify as a performance obligation each promise to transfer to the customer either:

(a) a good or service (or a bundle of goods or services) that is distinct; or

(b) a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer

Para 50 of Ind AS 115

If the consideration promised in a contract includes a variable amount, an entity shall estimate the amount of consideration to which the entity will be entitled in exchange for transferring the promised goods or services to a customer.

Para 56 of Ind AS 115

An entity shall include in the transaction price some or all of an amount of variable consideration estimated only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

Para B58 of Ind AS 115

The nature of an entity’s promise in granting a licence is a promise to provide a right to access the entity’s intellectual property if all of the following criteria are met:

(a) the contract requires, or the customer reasonably expects, that the entity will undertake activities that significantly affect the intellectual property to which the customer has rights

(b) the rights granted by the licence directly expose the customer to any positive or negative effects of the entity’s activities identified and

(c) those activities do not result in the transfer of a good or a service to the customer, as those activities occur

Para B60 of Ind AS 115

If the criteria in paragraph B58 are met, an entity shall account for the promise to grant a licence as a performance obligation satisfied over time because the customer will simultaneously receive and consume the benefit from the entity’s performance of providing access to its intellectual property as the performance occurs. An entity shall apply paragraphs 39–45 to select an appropriate method to measure its progress towards complete satisfaction of that performance obligation to provide access.

Para B61 of Ind AS 115

If the criteria in paragraph B58 are not met, the nature of an entity’s promise is to provide a right to use the entity’s intellectual property as that intellectual property exists (in terms of form and functionality) at the point in time at which the licence is granted to the customer….

3. Analysis

The collaboration arrangement shall be accounted for in accordance with Ind AS 115 as a contract containing two distinct performance obligations, namely

(i) grant of licence to intellectual property and

(ii) provision of R&D services.

The accounting treatment involves the determination of transaction price, allocation of consideration, and recognition of revenue based on the nature of each performance obligation.