IFRS 15 - Presentation.docx

IFRS 15: Revenue from
Contract with Customers
Compiled by: Murtaza Quaid, ACA

Compiled by: Murtaza Quaid, ACA IFRS 15: Revenue from Contract with Customers
IFRS 15: Revenue from Contract with Customers
In this video:
▶ The Five Step Model
▶ Step 1: Identify the Contract with Customers
▶ Step 2: Identify the Performance Obligation
▶ Step 3: Determine the Transaction Price
▶ Step 4: Allocate the Transaction Price to each
Performance Obligation
▶ Step 5: Recognize Revenue as each Performance
Obligation is satisfied

▶ IAS 18: Revenue
▶ IAS 11: Construction Contracts
▶ SIC 31: Revenue – Barter Transactions
involving Advertisement Services
▶ IFRIC 13: Customer Loyalty Programs
▶ IFRIC 15: Agreements for the
Construction of Real Estate
▶ IFRIC 18: Transfers of Assets from
Customer
IFRS 15:
Revenue from Contract with
Customers
Effective date: 1 January 2018
When & How to recognize Revenue
Before the change After the change

▶ Step 1: Identify the Contract with Customers
 Oral / Written  Enforceable
▶ Step 2: Identify the Performance Obligation
 Distinct goods and services in the contract
▶ Step 3: Determine the Transaction Price
 Consideration for goods and services
▶ Step 4: Allocate the Transaction Price to each Performance Obligation
 On the basis of standalone selling price of each performance obligation
▶ Step 5: Recognize Revenue as each Performance Obligation is satisfied
 At a point of time or over the period of time
The Five Step Model

respective obligations.
▶ Contract is an agreement between two or more parties that creates
enforceable rights and obligations.
▶ Contracts can be written, oral or implied by an entity’s customary
business practices.
IFRS 15 requires contracts to have following attributes:
▶ Parties approved the contract and committed to perform their
▶ Each party’s rights to goods/services can be identified.
▶ Payment terms for goods/services can be identified.
▶ Contract has commercial substance. and
▶ It is probable that the consideration will be received (Evaluate
customer’s ability and intention to pay).
Step 1: Identify the Contract with Customers
Contract
Attributes

If a contract does not meet any of the above condition, revenue is
recorded only when either:
▶ the entity’s performance is complete and substantially all of the
consideration (cash) has been collected and it is non-refundable; or
▶ the contract has been terminated and the consideration received is
non-refundable.
▶ If each party to the contract has a unilateral enforceable right to
terminate a wholly unperformed contract without compensating
the other party (or parties), no contract exists under IFRS 15.
If any
attribute
is missing
No
Contract

A change in enforceable rights and obligations (i.e. scope and/or price) is only
accounted for as a contract modification if
▶ it has been approved by the parties, and
▶ creates new or changes existing enforceable rights & obligations.
Contract Modification

Contract Modification
Are additional goods / services in CM
distinct?
Yes
Does consideration for added
goods/services reflect stand-alone price of
distinct goods/services
Yes
Treat as “SEPARATE CONTRACT”
No
Adjust the existing contract
[Catch-up Adjustment]
No  Terminate old contract & create new
contract
 Allocation of consideration :
 Consideration allocated to remaining PO =
consideration from old contract not yet
recognized + consideration in the contract
modification

Performance Obligation
▶ Promise in a contract to transfer to the customer either:
Good/service (or bundle of
good/service) that is distinct
Series of distinct goods/services that
are substantially same & have same
pattern of transfer to customer.
▶ PO can be both explicit (in the contract) and implicit (based on practices or policies)
▶ If no transfer to customer  No PO (e.g. admin or internal approval)
Step 2: Identify the Performance Obligation

▶ 2 criteria to met:
On its own; or
1. Customer can benefit from good or service either
AND
together with other
resources that are readily
available to the customer
2. Promise to transfer good or service is separable from other promises in the contract.
 Entity is not using good / service as an input to produce or deliver combined output
 The good / service does not significantly modify or customize another good / service
 The good / service is not highly dependent with other good / service in the contract
[Assessment requires judgment & consideration of all relevant facts and circumstances]
Step 2: Identify the Performance Obligation
What is DISTINCT?

Step 3: Determine the Transaction Price
▶ Transaction price is the amount of consideration an entity expects to be entitled
to in exchange for goods or services (not amounts collected on behalf of 3rd
parties, e.g. sales taxes etc.)
▶ Transaction price may be affected by nature, timing, and amount of
consideration. Consider the following:
 Non-cash Consideration
 Consideration Payable to a Customer
 Significant Financing Component
 Variable Consideration
Transaction Price

Non-cash Consideration
▶ Non-cash consideration is accounted for at its FV.
▶ If FV is not reliably determinable, it is measured at stand-alone selling price of
goods/services.

Consideration Payable to a Customer
▶ It includes cash paid / payable to customer as well as credits or other items such
as coupons and vouchers.
▶ It is a/c for as a reduction in TP, unless payment is in exchange for a good or
service received from customer. However, where:
 Consideration paid > FV of goods / services received from customer
 Difference is accounted for as reduction in TP
 FV of goods or services cannot be reliably determined
 Full amount is accounted for as reduction in TP

▶ If timing of payments specified in contract provides either customer or entity
with significant benefit of financing the transfer of goods / services, TP is
adjusted to reflect financing component of contract.
▶ Significant financing component can either be explicitly stated in the contract
or implied by payment terms agreed between parties.
▶ Adjustment for effect of significant financing component is not required if
period b/w transfer and payment is 12 months or less.
Significant Financing Component

Significant Financing Component
▶ Factors to consider in determining
whether a contract contains a
significant financing component are:
 Difference between promised
consideration & cash selling
price.
 Length of time between transfer
of control of the goods or
services and payment.
▶ A significant financing component does not exist
when:
 Timing of transfer of control of goods/services is
at customer’s discretion
 Consideration is variable and the amount or
timing of consideration is based on factors
outside of control of parties.
 Difference between consideration and cash
selling price arises for other non-financing
reasons (i.e. performance protection e.g.
completion of post completion remedial work
on a building).

Variable Consideration
▶ Examples are discounts, rebates, refunds, concessions, incentives,
performance bonuses, penalties & contingent payments.
▶ Variable consideration must be estimated using either:
 Expected value method: based on probability weighted amounts within a
range (for large number of similar contracts)
 Single most likely amount: Amount within a range that is most likely to
eventuate (where there are few amounts to consider)
▶ TP can include variable consideration only if it is highly probable that
subsequent change in estimate would not result in reversal of revenue.

Whether stand-alone selling price of each performance obligation is directly observable or not?
Yes No
▶ Allocate TP to each PO based on
stand-alone selling price of each PO.
▶ Stand-alone selling price should
be determined at contract
inception and represents the
price at which an entity would
sell a good or service separately to a customer.
▶ Ideally, this will be an observable price at which an
entity sells similar goods or services under similar
circumstances and to similar customers
▶ Estimate stand-alone selling price of each
PO by considering all available information
including market conditions, entity-specific
factors and information about customer or
class of customers.
▶ Use of observable inputs to be maximized
to the extent possible.
▶ Approaches that might be used to estimate
the standalone selling price are discussed in
next slide.
Step 4: Allocate Transaction Price to each Performance Obligation

1) Market Assessment Approach
How to estimate the stand-alone selling price?
▶ Evaluate the market in which goods or services
are sold.
▶ Estimate the price that customers in that market
would be willing to pay.
▶ Refer to prices from competitors for similar
goods or services adjusted for entity-specific
costs and margins.
▶ Estimate the expected costs of satisfying a PO
adjusted for an appropriate markup / margin.
▶ Total transaction price less the sum of the
observable stand-alone selling prices.
▶ This method may only be used when:
 Selling price is highly variable; or
 Selling price is uncertain (price has not been
established yet or good/service has not been
previously sold).
3) Residual Approach
2) Expected Cost Plus Markup / Margin

Allocation of Discounts
▶ A discount exists if the sum of stand-alone
selling prices of each PO in the contract
exceeds the total consideration for the
contract.
▶ A discount is allocated on a proportionate
basis to all PO in the contract, UNLESS there is
observable evidence that the discount relate
to only some performance obligations in a
contract.

Allocation of Variable Consideration
▶ Variable consideration should be allocated
proportionately to all PO.
▶ However, variable consideration is allocated entirely to a
single PO if :
 Terms of a VC relate specifically to satisfy that PO; and
 Allocation of VC to a single PO is consistent with the
allocation objective.

Performance obligation is satisfied (Control is transferred), and
hence revenue is recognized:
Over time
▶ Performance obligation is satisfied when control of the promised goods or services
is transferred to the customer.
▶ For e.g. Construction
services
Step 5: Recognize Revenue as each Performance Obligation is satisfied
At a point time
▶ For e.g. the provision
of a meal.

Performance Obligation is satisfied (Control is transferred) over
time if any one of the following is met:
Customer
simultaneously receives
and consumes all of the
benefits as the entity
performs
Entity’s performance
OR creates or enhances
an asset controlled
by the customer
 Entity’s performance does
not create an asset with
an alternative use to the
entity
OR AND
 Entity has an enforceable
right to payment for
performance completed
to date

Performance obligation is satisfied (Control is transferred)
Over time At a point time
Recognize revenue in a way that depicts the entity’s
performance in transferring control of goods or services to
customers. Methods include:
▶ Output methods: For e.g.
 Surveys of performance completed to date,
 Appraisals of results achieved,
 Milestones reached,
 Units produced/delivered.
▶ Input methods: For e.g.
 Resources consumed,
 Labour / Machine hours,
 Costs incurred,
 Time lapsed.
Consider following indicators in evaluating the point
in time at which control of asset has transferred to
customer:
▶ Entity has transferred title to the asset;
▶ Entity has transferred physical possession of asset;
▶ Entity has a present right to payment for asset;
▶ Customer has accepted the asset; and
▶ Customer has the significant risks and rewards of
ownership of the asset.

▶ Only incremental costs of obtaining a contract that
are expected to be recovered can be recognized as
asset.
▶ Incremental costs are costs incurred in obtaining a
contract that would not have been incurred if the
contract is not obtained. Such as sales commission
that is only paid if a specified contract is obtained.
▶ Incremental costs of acquiring a contract can be
expense out if amortization period is equal to or
less than 1 year.
▶ If costs to fulfil a contract are within the scope of
other IFRSs (e.g. IAS 2, IAS 16, IAS 38 etc.) apply
those IFRSs.
▶ If not, a contract asset is recognized under IFRS 15
if, and only if:
i. Costs relate directly to a contract (e.g. direct
labour, materials, overhead allocations etc;
ii. Costs generate or enhance resources of entity
that will be used to satisfy performance
obligations in future; and
Contract cost to be amortized on a systematic basis that reflects the transfer of goods or services to the customer.
iii. Costs are expected to be recovered.
Contract Cost
Cost to obtain a Contract Cost to fulfill a Contract

▶ An entity’s obligation to transfer goods or services to a customer
for which the entity has received consideration (or the amount is
due) from the customer.
▶ A contract might require payment in advance or allow the supplier a right to
consideration that is unconditional (i.e. a receivable), before it transfers a good
or service to the customer.
▶ In these cases, the supplier presents the contract as a contract liability when the
payment is made or the payment is due (whichever is earlier).
Contract Liability

▶ An entity’s right to consideration in
exchange for goods or services that it
has transferred to a customer when that
right is conditioned on something other
than the passage of time (for example
the entity’s future performance).
▶ A contract asset is reclassified as a
receivable when the supplier’s right to
consideration becomes unconditional.
▶ An entity’s right to consideration
that is unconditional –i.e. only the
passage of time is required before
payment is due.
▶ In practice, where revenue has
been invoiced a receivable is
recognized. Where revenue has
been earned but not invoiced, it is
recognized as a contract asset.
Contract Asset & Receivable
Contract Asset Receivable

▶ When consideration takes the form of a
sales-based or usage-based royalty for a
license of intellectual property, the entity
recognizes revenue only when (or as) the
later of the following events occurs:
 Subsequent sale or usage occurs; and
 PO to which some or all of sales or
usage-based royalty has been allocated
has been satisfied (or partially
satisfied).
Additional Consideration: Sales-based or Usage-based Royalties

▶ When product are transferred with a right of return, revenue should not
be recognized for goods that are expected to be returned.
▶ Calculate the level of returns using
 Expected value method(probability-weighted sum of amounts); or
 Single most likely amount.
▶ Refund liability (rather than revenue) is recognized for any consideration
received to which vendor does not expect to be entitled (which relates to
goods expected to be returned). Any refund liability is reassessed and
updated at each reporting date.
▶ Asset is also recognized for vendor’s right to recover goods from
customers on settling the liability. Such asset is measured at carrying
amount of goods less any expected costs to recover such goods.
▶ Asset is presented separately from refund liability.
▶ If value is less than amount recorded in inventory, inventory is reduced
with a corresponding adjustment to cost of goods sold.
Additional Consideration: Sale with a Right of Return

AGENT
▶ Entity is principal if it controls the promised
good or service before it is transferred to the
customer.
▶ When PO is satisfied, the entity recognizes
revenue in the gross amount of the
consideration for those goods or services.
▶ Entity is agent if its PO is to arrange for
provision of goods or services by another
party.
▶ When PO is satisfied, the entity recognizes
revenue in the amount of any fee or
commission to which it expects to be
entitled in exchange for arranging to
provide its goods or services for the other
party .
PRINCIPAL VERSUS AGENT
▶ In any transaction, the entity must establish whether it is acting as
principal or agent.
PRINCIPAL

PRINCIPAL VERSUS AGENT
Indicators that an entity is agent rather than principal include:
▶ Another party is primarily responsible for fulfilling the contract.
▶ The entity does not have inventory risk before or after the goods have been ordered
by a customer, during shipping or on return.
▶ The entity does not have discretion in establishing prices for the other party’s goods or
services and, therefore, the benefit that the entity can receive from those goods or
services is limited.
▶ The entity’s consideration is in the form of a commission.
▶ The entity is not exposed to credit risk for receivable from a customer in exchange for
the other party’s goods or services.

▶ That provides a customer with a services in
addition to assurance that product will
function as specified.
▶ For e.g: 2 years free repairs
▶ Customer can also purchase this warranty
separately.
▶ Account for such warranty as separate
performance obligation and allocate a portion
of transaction price to it.
▶ That provides a customer with the
assurance that product will function as
specified.
▶ For e.g: 15 days money back guarantee
▶ Customer cannot purchase this warranty
separately.
▶ Account for such warranty as per IAS 37.
WARRANTIES
Service type warranty Assurance type warranty

WARRANTIES
Classification of warranty
1) Whether warranty is required by law?
▶ If Yes --> Generally Assurance type
(For e.g. Quality control on food items/medicines, opening of parachute, )
▶ If No --> Generally Service type
(For e.g. Warranty on electronic appliances)
2) Length of the warranty period?
▶ Longer the period, additional services would be provided.
- Generally, Service type. For e.g: 1 year free repair and maintenance
▶ Shorter the period, additional services would not be provided
- Generally, Assurance type. For e.g: 3 days checking warranty in case of purchase of used mobile
phone

A license establishes customer’s rights over the intellectual property of a entity such as software &
technology, media & entertainment (e.g. motion pictures), franchises, patents, trademarks & copyrights.
 Whether license is integral component to the functionality of tangible good?
OR
 Whether customer can only benefit from the license in conjunction with a related service?
License is NOT distinct from other goods / services License is distinct from other goods / services
▶ Such license and other goods or services are
accounted for together as a single performance
obligation.
▶ Such license is a/c for as separate performance
obligation (PO).
LICENCING

License is distinct from other goods / services
Whether
(a)
(b)
(c)
The entity can make changes to the intellectual property throughout the license period;
The customer is exposed to the effects of these changes; and
The changes do not constitute transfer of good/service to customer
▶ The promise to grant a licence is treated as a
PO satisfied over time.
▶ The promise to grant a license is treated as a
PO satisfied at the point in time
LICENCING
The customer has right to use the entity’s
intellectual property as it exists at the point in
time at which the license is granted.
Right to use
The customer has right to access the entity’s
intellectual property as it exists throughout the
license period
Right to access

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