IFRS 15 - Presentation (notes).pdf for accounting

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

IFRS 15: Revenue from Contract with Customers
In this Part:
 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
 Contract Cost / Contract Liability / Contract Asset / Receivable
 Additional Consideration

When & How to recognize Revenue
 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
Before the change After the change
IFRS 15:
Revenue from Contract with
Customers
Effective date: 1 January 2018

The Five Step Model
Compiled by: Murtaza Quaid, ACA IFRS 15: Revenue from Contract with Customers
 Step 1: Identify the Contract with Customers
 Oral / Written  Enforceable
 Step 2: Identify the Performance Obligations in the Contract
 Promises in a contract to transfer to a customer goods or services that are distinct
 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 relative 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

Step 1: Identify the Contract with Customers
IFRS 15 requires contracts to have following attributes:
 Parties approved the contract and committed to perform their respective
obligations.
 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).
 Contract is an agreement between two or more parties
that creates enforceable rights and obligations.
 Enforceability of the rights and obligations in a contract
is a matter of law. The contract may be written, oral,
or implied by entity’s customary business practices.
Contract
Attributes

 If each party to the contract has an enforceable right to
terminate a wholly unperformed contract without
compensating the other party (or parties), no contract
exists under IFRS 15.
 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.
 An entity shall recognize the consideration received from a customer as
a liability until one of the above events occurs or until the criteria are
subsequently met. In either case, the liability shall be measured at the
amount of consideration received from the customer.
If any attribute is
missing
No
Contract

An entity shall combine two or more contracts entered into at or
near the same time with the same customer (or related parties of
the customer) and account for the contracts as a single contract if
one or more of the following criteria are met:
 the contracts are negotiated as a package with a single
commercial objective;
 the amount of consideration to be paid in one contract
depends on the price or performance of the other contract; or
 the goods or services promised in the contracts (or some goods
or services promised in each of the contracts) are a single
performance obligation in accordance with IFRS 15.
Combination of Contracts

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

Are additional goods / services in CM
distinct?
Does consideration for added
goods/services reflect stand-alone price of
distinct goods/services
Treat as “SEPARATE CONTRACT”
Adjust the existing contract
[Catch-up Adjustment]
 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
Yes
Yes
No
No
Contract Modification

Step 2: Identify the Performance Obligation
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 (specified in the contract) and implicit (implied by an
entity’s customary business practices)
 If no transfer to customer  No PO (e.g. admin or internal approval)

What is DISTINCT?  2 criteria to met:
On its own; or
1. Customer can benefit from good or service either
2. Promise to transfer good or service is separable from other promises in the contract. Factors that
indicate that two or more promises to transfer goods or services to a customer are not separately
identifiable include, but are not limited to, the following
 Entity does not provide a significant service of integrating the goods or services with other goods or
services promised in the contract into a bundle of goods or services that represent the combined output.
 The good / service does not significantly modify or customize other good / service
 The goods / services are not highly interdependent or highly interrelated.
Together with other resources that
are readily available to the customer
AND
[Assessment requires judgment & consideration of all relevant facts and circumstances]
Step 2: Identify the Performance Obligation

Step 3: Determine the Transaction Price
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

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

Significant Financing Component
 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.

 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).
Significant Financing Component

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)
 If the consideration promised in a contract includes a variable amount, an entity must estimate the amount
of consideration to which it expects to be entitled in exchange for transferring the promised goods or
services to a customer.
 However, TP can include variable consideration only if it is highly probable that subsequent change in
estimate would not result in reversal of revenue.

Step 4: Allocate Transaction Price to each Performance Obligation
Whether stand-alone selling price of each performance obligation is directly observable or not?
 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
Yes No
 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.

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.
1) Market Assessment Approach
2) Expected Cost Plus Markup / Margin
3) Residual Approach
 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).

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.

Step 5: Recognize Revenue as each Performance Obligation is satisfied
Performance obligation is satisfied (Control is transferred), and
hence revenue is recognized:
 Performance obligation is satisfied when control of the promised goods or services
is transferred to the customer.
Over time At a point time
 For e.g. Construction
services
 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:
OR
Entity’s performance does not
create an asset with an
alternative use to the entity
AND
Entity has an enforceable right
to payment for performance
completed to date
 Assessment requires judgment and consideration of all facts and circumstances.
 An asset does not have an alternate use if the entity cannot practically or contractually redirect the asset
to another customer, such as:
- Significant economic loss, i.e. through rework, or reduced sale price (practical)
- Enforceable rights held by customer to prohibit redirection of asset (contractual).
 Consider both specific contractual terms and any applicable laws or regulations.
 Except due to its own failure to perform as promised, an entity must be entitled to compensation that
approximates the selling price of goods/services transferred to date
 Profit margin does not need to equal the profit margin expected if the contract was fulfilled as promised.
Entity’s performance creates or
enhances an asset controlled by
the customer
Where terms of the contract transfer control of the asset to the customer as the asset is being built (i.e.
control of work in progress). This asset may be tangible or Intangible.
Customer simultaneously
receives and consumes all of the
benefits as the entity performs
Where another entity were to take over providing of remaining PO to a customer, it would not have to
substantially re-perform the work already completed by the initial provider. This criterion applies to service
contracts where the customer consumes the benefits of the services as they are provided (for e.g. cleaning
services etc.)
OR

Performance obligation is satisfied (Control is transferred)
Over time At a point time
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.
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.

Contract Cost
Cost to obtain a Contract Cost to fulfill a Contract
 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
iii. Costs are expected to be recovered.
 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.
Contract cost to be amortized on a systematic basis that reflects the transfer of goods or services to the customer.

Contract Liability
 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 Asset & Receivable
 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

Additional Consideration: (1) Sales-based or Usage-based Royalties
 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).

 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: (2) Sale with a Right of Return

 Customer options to acquire additional goods or services (either free of charge or at a discount)
come in many forms, including sales incentives, customer award credits (or points), contract
renewal options, or other discounts on future goods or services.
Whether the customer option
provides a "material right"
to the customer?
A "material right" is some
benefit provided to a
customer that it would NOT
receive without entering into
the contract.
Treat such material right as a separate PO and allocate a portion of
transaction price to it, which would be recognized as revenue when future
goods/services is provided to customer (or options expires)
If YES
Additional Consideration: (3) Customer Options for additional Goods or Services

 Under bill-and-hold arrangement, goods are sold but remain in the possession of the seller for a specified
period, perhaps because the customer lacks storage facilities.
 Entity will need to determine at what point the customer obtains control of the product.
 For some contracts, control will not be transferred until the goods are delivered to the customer.
 For other contracts, customer may obtain control even though the goods remain in the entity’s physical
possession. In this case the entity would be providing custodial services to the customer over the
customer’s asset.
 For a customer to have obtained control of a product in a bill and hold arrangement, following criteria must
all be met:
a) The reason for bill-and-hold must be substantive (for e.g. requested by the customer).
b) Product must be separately identified as belonging to customer.
c) The product must be ready for physical transfer to the customer.
d) The entity cannot have the ability to use the product or to transfer it to another customer.
Additional Consideration: (4) Bill-and-Hold Arrangements

 When a product is delivered to a customer under a consignment arrangement, customer (dealer)
does not obtain control of product at that point in time, so revenue is not recognized upon
delivery.
 Indicators of a consignment arrangement include:
 Product is controlled by the entity until a specified event occurs, such as the product is sold
on, or a specified period expires.
 Entity can require the return of the product, or transfer it to another party.
 Customer (dealer) does not have an unconditional obligation to pay for the product.
Additional Consideration: (5) Consignment Arrangements

 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.
PRINCIPAL AGENT
 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 .
 In any transaction, the entity must establish whether it is acting as
principal or agent.
Additional Consideration: (6) 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.
Additional Consideration: (6) Principal versus Agent

 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.
Service type warranty Assurance type warranty
 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.
Additional Consideration: (7) Warranties

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
Classification of warranty
Additional Consideration: (7) Warranties

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).
Additional Consideration: (8) Licencing

License is distinct from other goods / services
Whether
(a) The entity can make changes to the intellectual property throughout the license period;
(b) The customer is exposed to the effects of these changes; and
(c) The changes do not constitute transfer of good/service to customer
Right to access Right to use
 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
The customer has right to access the entity’s
intellectual property as it exists throughout the
license period
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.
Additional Consideration: (8) Licencing

A vendor may charge a non-refundable upfront fee at (or near) contract inception (e.g. joining fees, activation
fees, set-up fees etc.)
If fee relates to transfer of goods/services to
the customer
If fee is not related to PO but to setup
activities or other administrative tasks
Recognize revenue in accordance with IFRS 15 (as
or when goods/services transferred)
Such fee is a/c for as advance payment for future
goods/services and is recognized as revenue
when future goods/services are provided
Additional Consideration: (9) Non-refundable Upfront Fees

Under repurchase agreement, an entity sells an asset and promises, or has the option, to repurchase it. Repurchase agreements has in 3 forms:
Additional Consideration: (10) Repurchase Agreements
Forward Contract
 In Forward contract, entity has an obligation to
repurchase the asset.
 In case of forward, customer does not obtain
control of the asset, even if it has physical
possession.
Call Option
 In call option, entity has the right to repurchase
the asset.
 In case of call option, customer does not obtain
control of the asset, even if it has physical
possession.
Put Option
 In put option, entity must repurchase the asset if
requested to do so by the customer.
 It must consider whether or not the customer is
likely to exercise that option.
IF Repurchase Price < Original Selling Price
Entity will account for the contract as a lease in
accordance with IFRS 16
IF Repurchase Price ≥ Original Selling Price
Entity will account for the contract as a
financing arrangement.
Case (a) Customer has a significant economic
incentive to exercise the put option
(i.e. repurchase price > expected market price
Case (b) Customer has no significant economic
incentive to exercise the put option
(i.e. repurchase price < expected market price)
Entity will account for the contract as outright
sale, with a right of return

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IFRS 15 - Presentation (notes).pdf for accounting