1. Introduction
Entities operating in the consumer goods sector commonly incur promotional expenditure to enhance brand recognition, introduce products to the market, and expand their distribution network. One such activity involves the free distribution of gifts, such as decorative items bearing the entity’s logo, along with product catalogues to potential distributors. While these activities are intended to generate future economic benefits, determining the appropriate accounting treatment requires a careful assessment of whether such transactions fall within the scope of Ind AS 115 or are governed by other Indian Accounting Standards (Ind AS).
2. Meaning of Customer Under Ind AS 115
Para 6 of Ind AS 115 states that
“A customer is a party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration.”
3. Scope of Ind AS 115 – Contracts With Customers
Ind AS 115 applies to contracts with customers that create enforceable rights and obligations and involve the transfer of goods or services in exchange for consideration. The existence of a contract is a prerequisite for the application of the standard. A contract may be written, oral, or implied by customary business practices, provided it is legally enforceable.
Further, the standard applies only when an entity transfers goods or services that are outputs of its ordinary activities to a customer for consideration. Transactions that do not involve such an exchange, or where no contractual arrangement exists, fall outside the scope of Ind AS 115.
4. Performance Obligations Under Ind AS 115
A performance obligation arises when an entity promises to transfer a distinct good or service to a customer as part of a contract. Performance obligations are identified only within the context of a contract with a customer and are satisfied when control of the promised good or service is transferred.
Transfers of goods that occur independently of any contractual promise, and which are not contingent upon the satisfaction of performance obligations, are not within the recognition and measurement framework of Ind AS 115.
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