Revenue Recognition of Forfeited Booking Advances Under Ind AS 115

1. Facts

Skyline Developers Limited, hereinafter referred to as “the company”, is a real estate developer. In the year 2024, the company enters into an agreement with a customer for the sale of a residential flat in a project currently under construction. The agreed sale price of the flat is Rs. 1,00,00,000. Under a 10:90 payment scheme, the customer is required to pay 10% of the consideration, i.e. Rs. 10,00,000 at the time of booking, while the remaining 90%, i.e. Rs. 90,00,000, is payable upon delivery of the completed flat.

As per applicable local real estate regulations, the customer has the legal right to withdraw from the transaction at any time before delivery, regardless of the contractual arrangement. However, in such cases, the developer is entitled to forfeit the booking amount of Rs. 10,00,000.

During the construction period, real estate prices decline significantly. Consequently, the customer decides not to proceed with the purchase and refuses to take delivery of the flat. Under the law of the land, the company cannot legally compel the customer to complete the purchase or recover the remaining Rs. 90,00,000.

In 2026, the customer formally cancels the booking, and in accordance with the agreement and applicable regulations, the Rs. 10,00,000 booking amount becomes non-refundable and is forfeited by the developer.

While finalising the financial statements, the management of the company is faced with uncertainty regarding the appropriate accounting treatment of the forfeited booking amount of Rs. 10,00,000 under Ind AS 115,Revenue from Contracts with Customers, particularly whether such forfeited amount should be recognised as revenue and, if so, the appropriate timing of its recognition in the books of account.

2. Relevant Provisions

Ind AS 115 – Revenue from Contracts with Customers

Para 106 of Ind AS 115

If a customer pays consideration, or an entity has a right to an amount of consideration that is unconditional (i.e. a receivable), before the entity transfers a good or service to the customer, the entity shall present the contract as a contract liability when the payment is made or the payment is due (whichever is earlier). A contract liability is an entity’s obligation to transfer goods or services to a customer for which the entity has received consideration (or an amount of consideration is due) from the customer.

Para 15 of Ind AS 115

When a contract with a customer does not meet the criteria in paragraph 9 and an entity receives consideration from the customer, the entity shall recognise the consideration received as revenue only when either of the following events has occurred:

(a) the entity has no remaining obligations to transfer goods or services to the customer and all, or substantially all, of the consideration promised by the customer has been received by the entity and is non-refundable; or

(b) the contract has been terminated, and the consideration received from the customer is non-refundable

Para B44 of Ind AS 115

In accordance with paragraph 106, upon receipt of a prepayment from a customer, an entity shall recognise a contract liability in the amount of the prepayment for its performance obligation to transfer, or to stand ready to transfer, goods or services in the future. An entity shall derecognise that contract liability (and recognise revenue) when it transfers those goods or services and, therefore, satisfies its performance obligation.