This document discusses IFRS 15, the new revenue recognition standard. It outlines the 5-step model for recognizing revenue: 1) identify contracts; 2) identify performance obligations; 3) determine transaction price; 4) allocate price to obligations; 5) recognize revenue when obligations are satisfied. Revenue is recognized when control of goods/services transfers. It provides examples of applying the standard to sales of goods and services over time.

2. 11.1 Introduction and scope
11.2 Measurement of Revenue
11.3 Identification of a transactions
11.4 Sale of goods
11.5 Rendering of Services
11.6 Interest, royalties and dividends
11.7 Disclosures

3. • IFRS 15 has replaced the previous IFRS on revenue recognition, IAS 18 Revenue and IAS
11 Construction Contracts.
Introduction

26. It uses a principles-based 5-step approach to apply to contact with customers.
The five steps are as follows:
1. Identification of contracts
2. Identification of performance obligations (goods, services or a bundle of goods
and services)
3. Determination of transaction price
4. Allocation of the price to performance obligations
5. Recognition of revenue when/as performance obligations are satisfied

27. Identification of contracts
 The contract does not have to be a written one, it can be verbal or implied. In order for
IFRS 15 to apply the following must all be met:
1. The contract is approved by all parties
2. The rights and payment terms can be identified
3. The contract has commercial substance
4. It is probable that revenue will be collected

28. Contract combination
• Two or more similar contracts with the same customer can be combined if the following
apply:
1. the contracts are negotiated as a single package with a single commercial objective
2. the amount of consideration to be paid in one contract depends on the price or
performance of the other contract; or
3. 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 paragraphs
22–30.

29. Contract modification
• If during the contract duration both parties approve a change in the scope,
price or both then there is a modification of the contract.
• The treatment of the modification will either be that of a separate contract
or accounting as part of the original contract.

31. Identification of performance obligations
• If the goods or services that have agreed to be exchanged under the contract
are distinct could be sold alone) then they should be accounted for separately.
• If a series of goods or services are substantially the same they are treated as a
single performance obligation.

32. Example:
Liver Tech is a computer business that primarily sells computer hardware. As well as selling
computers, it also supplies and installs the software to its customers and provides a technical
support package over a number of years. The business commonly sells the supply and
installation, and technical support in a combined goods and services contract. The combined
goods and services contract has two separate performance obligations, which would need to
be separated out and recognised separately. The installation of software would be recognised
once complete and the provision of technical services over the period of the support service.

33. Determination of transaction price
The amount the selling party expects to receive is the transaction price.
This should consider the following:
1. Significant financing components
2. Variable consideration
3. Refunds ad rebates (paid to the customer!)

34. Allocation of the price
The price is allocated proportionately to the separate performance obligations
based upon the stand-alone selling price.

35. Recognition of revenue
• Once control of goods or services transfers to the customer, the performance obligation is
satisfied and revenue is recognised.
• This may occur at a single point in time, or over a period of time.
• If a performance obligation is satisfied at a single point in time, we should consider the
following in assessing the transfer of control:
1. Present right to payment for the asset
2. Transferred legal title to the asset
3. Transferred physical possession of the asset
4. Transferred the risks and rewards of ownership to the customer
5. Customer has accepted the asset.

36. If a performance obligation is transferred over time, the completion of the performance
obligation is measured using either of the following methods:
1. Output method
revenue is recognised based upon the value to the customer, i.e. work certified.

37. 2. Input method
revenue is recognised based upon the amounts the entity has used, i.e. costs
incurred or labour hours.

38. As contracts that span more than one accounting period progress, the company
is creating an asset for the customer that needs to be recognised in the statement
of financial position. The amount to be recognised is as follows:

39. Specifics
• Principal vs agent - When a third party is involved in providing goods or
services to a customer the seller is required to determine whether the nature of
its promise is a performance obligation to:
o Provide the specified goods or services itself (principal) or
o Arrange for a third party to provide those goods or services (agent)

40. Repurchase agreements - When a vendor sells an asset to a customer and is
either required, or has an option, to repurchase the asset.
o The legal form here is always a sale followed by a purchase at a later date.
o The economic substance is more likely to be a loan secured against an asset
that is never actually being sold.

41. Consignments
• arises where a vendor delivers a product to another party, such as a dealer or
retailer, for sale to end customers.
• The inventory is recognised in the books of the entity that bears the
significant risk and reward of ownership (e.g. risk of damage, obsolescence,
lack of demand for vehicles, no opportunity to return them, the showroom-
owner must buy within a specified time if not sold to public)

42. Bill and hold arrangements
an entity bills a customer for a product but the entity retains physical
possession of the product until it is transferred to the customer at a point in
time in the future

44. In this scenario, the business initially sells 120 products at $100 each, transferring control at a
point in time. After 60 products have been transferred, the business agrees to produce and sell
an additional 30 identical products at a reduced price of $95 each.
The revenue recognition will depend on the principles of the revenue recognition standard,
which is typically based on the transfer of control, and the specific terms of the agreement.
1. **Initial Sale of 120 Products at $100 each:**
• Revenue recognition occurs at the point in time when control of the products is transferred
to the customer.
• As each product is transferred, revenue is recognized. This is likely to happen over the six-
month period.
• By the time 60 products have been transferred, revenue would have been recognized for
those 60 products.

45. 2. **Additional 30 Products at $95 each:**
• Since control of the additional 30 products is transferred at a point in time, revenue for
these products will be recognized when control is transferred.
• The reduced price of $95 each for these additional products should be considered in
determining the total revenue for these 30 units.
In summary, revenue recognition would occur as follows:
• For the initial 120 products, revenue is recognized over the six-month period as control is
transferred.
• For the additional 30 products, revenue is recognized at the point in time when control is
transferred, and the revenue should reflect the agreed-upon price of $95 for each of these
additional units.

46. 1. **Original Contract for 120 Units:**
- Selling price per unit: $100
- Total value of the original contract: 120 units * $100 = $12,000
2. **Compensation Discount for Defective Products (60 units):**
- Discount per unit: $15
- Total compensation for 60 units: 60 units * $15 = $900
3. **Adjusted Revenue for the First 60 Units:**
- Adjusted total value of the original contract for the transferred units: $6,000 -
$900 = $5,100.Adjusted price per unit: $5,100 / 60 units = $85 per unit
Therefore, the business should use $85 per unit to recognize revenue for the first 60
units, taking into account the compensation discount for the defective products and
considering only the units that were actually transferred.