IFRS 16 treatment of Income Financial or Investment

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This query is : Resolved

CA Mohan Jain (Querist)

24 March 2023 If a German Company is providing Construction service to a Indian Company under Lease Operate and Maintain Model (LOM) model, then the revenue from such contract will be recognised as Financial Income or Operational income.

Aashok Kumar Sharma

Aashok Kumar Sharma

(Expert)

09 July 2024 In the context of a German company providing construction services to an Indian company under a Lease Operate and Maintain (LOM) model, how the revenue is recognized depends on the nature of the contract and the specific terms agreed upon. Here are some considerations:

1. **Construction Services under LOM Model:**
- **Financial Income vs. Operational Income:** The classification of revenue as financial income or operational income typically depends on how the contract is structured and the substance of the underlying transaction.
- **Operational Income:** If the German company is primarily engaged in providing construction services (such as building infrastructure or facilities), the revenue would generally be considered operational income. This is because the company is deriving income from its core operational activities of construction and related services.

2. **Lease Operate and Maintain (LOM) Model:**
- **Lease Component:** In an LOM model, there might be a lease component where the German company leases the constructed infrastructure to the Indian company. The lease payments would then typically be recognized as financial income, reflecting the return on the investment in the infrastructure.

3. **Recognition Criteria:**
- **IFRS/IAS Standards:** Under International Financial Reporting Standards (IFRS) or Indian Accounting Standards (Ind AS), revenue recognition depends on when control of the goods or services transfers to the customer and the amount of revenue that can be reliably measured.
- **Construction Contracts:** Revenue from construction contracts is generally recognized based on the percentage of completion method or upon completion, depending on the stage of completion and the terms of the contract.

4. **Consultation with Financial Experts:**
- Given the complexity and potential impact on financial reporting, it's advisable for the German company to consult with financial experts or auditors familiar with international accounting standards and local regulations in both Germany and India.
- They can provide specific guidance tailored to the company's situation, ensuring compliance with applicable accounting standards and proper classification of revenue based on the contract terms and economic substance.

By understanding the specific terms of the LOM model contract and applying the relevant accounting standards, the German company can determine whether the revenue from providing construction services should be recognized as operational income, financial income (such as lease income), or a combination thereof.

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