A contract can look like a completed sale and still fail the revenue test if the seller has promised, or retained the right, to buy the asset back. Under Ind AS 115, that repurchase clause can change the substance of the transaction from a sale into a lease or a financing arrangement. The answer depends first on who holds the repurchase right and then on the repurchase price, expected market value and, for a customer put option, the customer’s economic incentive to exercise it.
The discussion below follows paragraphs B64-B76 of Ind AS 115 in ICAI’s 2025-26 compendium. It deals with repurchase agreements for assets; it does not replace the wider Ind AS 115 revenue recognition framework for identifying the contract, performance obligations, transaction price and transfer of control.
Start with the repurchase clause, not the invoice
Ind AS 115 describes a repurchase agreement as an arrangement in which an entity sells an asset and also promises, or has an option, to repurchase it. The asset bought back may be the same asset, a substantially similar asset, or another asset of which the original asset is a component.
The Standard identifies three common forms:
- Forward: the seller is obliged to repurchase the asset.
- Call option: the seller has the right to repurchase the asset.
- Put option: the seller must repurchase the asset if the customer asks it to do so.
This classification matters because physical possession is not conclusive evidence of control. A customer may physically hold an asset while the seller still controls it because of a repurchase arrangement. The opposite can also happen in bill-and-hold revenue arrangements, where the seller may retain physical possession even after control has passed to the customer.
A forward or seller call option blocks control
If the seller is obliged to repurchase the asset under a forward, or has the right to repurchase it under a call option, paragraph B66 says the customer does not obtain control. The reason is that the customer is restricted in its ability to direct the use of the asset and obtain substantially all of its remaining benefits, even if it has physical possession.
Once that point is established, compare the repurchase price with the original selling price, taking the time value of money into account:
- If the seller can or must repurchase the asset for less than the original selling price, the arrangement is accounted for as a lease under Ind AS 116, subject to the sale-and-leaseback exception described below.
- If the seller can or must repurchase the asset for an amount equal to or greater than the original selling price, the arrangement is a financing arrangement.
A simple label such as “sale with buyback” therefore does not decide the accounting. The contractual right or obligation and the economics of the repurchase price do.
Example: seller call option above the original selling price
Hypothetical example. A manufacturer transfers equipment to a customer for ₹10,00,000 and retains a call option to repurchase it after one year for ₹10,80,000. Assume the time-value-of-money comparison does not change the conclusion and the arrangement is not a sale and leaseback.
Because the seller holds the call option, the customer does not obtain control for the purpose of this repurchase guidance. The repurchase amount is also higher than the original selling price. The arrangement is therefore treated as financing rather than ordinary sale revenue.
In a financing arrangement, the seller continues to recognise the asset and recognises a financial liability for the consideration received from the customer. Ind AS 115 requires the difference between the consideration received and the amount to be paid back to be recognised as interest and, where applicable, processing or holding costs. The precise finance-cost pattern should follow the relevant accounting requirements; the ₹80,000 difference should not simply be presented as revenue merely because cash was received up front.
A customer put option needs an economic-incentive test
A put option is different because the customer, not the seller, decides whether to require repurchase. When the put price is below the original selling price, paragraph B70 requires the entity to assess at contract inception whether the customer has a significant economic incentive to exercise the put.
The Standard points to factors including the relationship between the repurchase price and the asset’s expected market value at the repurchase date, and the time until the right expires. There is no fixed percentage test in paragraphs B70-B74. The assessment therefore needs evidence about the economics of the specific contract.
- Put price below the original selling price, with significant economic incentive: account for the arrangement as a lease under Ind AS 116, unless the sale-and-leaseback exception applies.
- Put price below the original selling price, without significant economic incentive: account for it as a sale of a product with a right of return.
- Put price equal to or above the original selling price and above expected market value: the arrangement is, in effect, a financing arrangement.
- Put price equal to or above the original selling price, but not above expected market value, and the customer has no significant economic incentive to exercise: account for it as a sale with a right of return.
For the price comparisons, Ind AS 115 again requires the time value of money to be considered. A nominal repurchase amount due several years later should not be compared mechanically with today’s selling price.
Example: a put that is economically attractive to the customer
Hypothetical example. A company sells specialised equipment for ₹12,00,000. The customer can require the company to repurchase it after two years for ₹9,00,000. At contract inception, the entity reasonably expects the equipment’s market value at that date to be only ₹6,00,000. Assume the remaining facts support the conclusion that the customer has a significant economic incentive to exercise the put.
Although ₹9,00,000 is below the original ₹12,00,000 selling price, it is well above the assumed expected market value in this example. That economic advantage is relevant to the incentive assessment. On the stated assumptions, the arrangement is accounted for as a lease rather than as an outright sale.
If the expected market value and other facts instead indicated that the customer had no significant economic incentive to exercise a below-original-price put, the accounting would move to the right-of-return guidance rather than the lease outcome.
What “sale with a right of return” means here
When paragraphs B72 or B74 direct the entity to the right-of-return guidance in B20-B27, the accounting does not mean recognising the entire invoice as revenue and waiting to see whether the asset comes back. For products subject to a right of return, Ind AS 115 requires:
- revenue only for the amount of consideration to which the entity expects to be entitled, so amounts relating to products expected to be returned are excluded from revenue;
- a refund liability; and
- an asset, with a corresponding adjustment to cost of sales, for the right to recover products from customers when the refund liability is settled.
The estimates are updated as expectations change. This is why a conclusion of “sale with a right of return” is an accounting outcome in its own right, not shorthand for a normal sale with no further measurement work.
The sale-and-leaseback exception should be separated early
Paragraphs B66 and B70 contain a specific exception when the contract is part of a sale-and-leaseback transaction. In those cases covered by the exception, the seller continues to recognise the asset and recognises a financial liability for consideration received from the customer, with that financial liability accounted for under Ind AS 109.
That exception can change the answer that would otherwise follow from a below-original-price forward, call or economically compelling put. A review memo should therefore identify at the outset whether the repurchase arrangement sits inside a sale-and-leaseback transaction instead of treating that question as an afterthought.
Build the conclusion from six contract facts
A practical review can usually be made clearer by documenting the facts in this order:
- Identify the asset and the repurchase mechanism. Record whether the clause is a forward, seller call option or customer put option, including any linked contract that creates the repurchase right or obligation.
- Record the original selling price and repurchase price. Include the payment dates and consider the time value of money rather than comparing only nominal amounts.
- For a put, estimate expected market value at the repurchase date. Keep the basis for that estimate and assess whether the customer has a significant economic incentive to exercise the right.
- Check whether the contract is part of a sale and leaseback. If it is, apply the specific exception before using the ordinary lease outcome described in B66 or B70.
- Document the resulting model. State whether the arrangement is a lease, financing arrangement, or sale with a right of return, and point to the paragraph that drives that conclusion.
- Track expiry of an unexercised option. Where the repurchase guidance requires a liability and the option later lapses unexercised, paragraphs B69 and B76 require derecognition of the liability and recognition of revenue.
ICAI also provides an educational material page for Ind AS 115 explaining the Standard’s core revenue principle and implementation material. For a live contract, the operative paragraphs in the current Standard should remain the primary reference.
The key discipline is to avoid starting from the legal label “sale”. A repurchase clause can mean the customer never obtained control, or that the customer obtained control subject to a return right. Mapping the exact right, price and incentive first makes the revenue conclusion much easier to defend.
