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A contract has the customer's UNILATERAL right to terminate a wholly unperformed contract without paying a termination penalty. Under Ind AS 115, for accounting purposes:
AThe contract exists but revenue is recognised strictly on a cash basis
BThe contract exists only after the entity has commenced performance
CNo contract exists — the unilateral termination right means there are no enforceable rights and obligations
DThe contract still exists for its full stated duration with revenue recognised over time
Answer & Solution
Correct answer: C. No contract exists — the unilateral termination right means there are no enforceable rights and obligations
Para 12 of Ind AS 115 states that if either party has a unilateral enforceable right to terminate a wholly unperformed contract without paying a penalty, there are no enforceable rights and obligations — and therefore no "contract" for Ind AS 115 purposes. The arrangement is not recognised until performance begins or the cancellation right falls away.
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