Download IFRS 15 Revenue from Contracts with Customers

IFRS 15 Revenue from
Contracts with Customers
Table of contents
1. Objectives
2. Overview and effective date
3. Scope and exemptions
4. The five-step model
5. Other aspects of the model
6. Disclosures
7. Transition considerations
Page 1
Objectives
Page 2
Objectives
IFRS 15: Revenue from contracts with customers
Obtain an understanding of the new revenue accounting
standard, IFRS 15 Revenue from contracts with customers,
including:
►
►
►
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Accounting framework and implications
Transition considerations
Scope and scope exemptions
Disclosure impacts
Review examples of how IFRS 15 will be applied in practice
Page 3
Overview and
effective date
Page 4
Overview
Overview
►
►
IFRS 15 Revenue from Contracts with Customers, was issued on
May 28, 2014
► Includes 63 illustrative examples
The model addresses revenue arising from contracts with
customers
► The IASB and FASB created one comprehensive revenue
recognition model for all contracts across virtually all entities and
sectors
► New standard replaces virtually all existing IFRS and US GAAP
guidance on revenue recognition
Page 5
Effective date
IFRS
Effective for annual periods beginning on or after 1 January 2018
Effective date
US GAAP
Effective for annual periods beginning on or after 15 December 2017 for
public entities. Non-public entities have an optional one-year deferral.
IFRS
Permitted
Early adoption
US GAAP
Prohibited*
*Non-public entities are permitted to adopt up to the public entity effective date.
Page 6
Scope and
exemptions
Page 7
Scope and exemptions
IFRS overview
What is in scope or affected
►
►
Contracts with customers
Sale of some non-financial assets that are not an output of the entity’s ordinary
activities (e.g., property, plant and equipment, intangible assets)
What is not in scope
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►
►
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Lease contracts within the scope of IAS 17 Leases
Insurance contracts within the scope of IFRS 4 Insurance Contracts
Financial instruments and other contractual rights or obligations within the scope
of IFRS 9 Financial Instruments (or IAS 39 Financial Instruments: Recognition and
Measurement), IFRS 10 Consolidated Financial Statements, IFRS 11 Joint
Arrangements, IAS 27 Separate Financial Statements and IAS 28 Investments in
Associates and Joint Ventures
Non-monetary exchanges between entities in the same line of business to
facilitate sales to customers or potential customers
Page 8
The five-step model
Page 9
The five-step model
Core
principle
Recognise revenue to depict the transfer of promised goods or services
to customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or services
Step 1:
Identify the contract(s) with a customer
Step 2:
Identify the performance obligations in the contract
Step 3:
Determine the transaction price
Step 4:
Allocate the transaction price to the performance obligations
Step 5:
Recognise revenue when (or as) the entity satisfies a performance
obligation
Page 10
Step 1: Identify
the contract
Page 11
Step 1: Identify the contract
Definition of a contract
A contract is defined as an agreement between two or more parties that
creates enforceable rights and obligations
Can be written, oral or implied, but must meet specific criteria
Does not exist if both parties can cancel a wholly unperformed contract without
penalty
A contract exists only if all the following criteria are met:
Parties have approved the contract and are committed to perform
Each party’s rights are identifiable
Each party’s payment terms are identifiable
Contract has commercial substance
It is probable the entity will collect the consideration it’s entitled to in exchange
for the transfer of goods/services to the customer
Page 12
Step 1: Identify the contract
Definition of a contract
These criteria are assessed at the inception of the arrangement
If the criteria are met at inception, reassessment only occurs if there is a
significant change in facts and circumstances
If the criteria are not met at inception, continue to assess
Page 13
Step 1: Identify the contract
Combining contracts
Two or more contracts entered into at or near the same time with the same
customer (or related parties) are combined if any of the following conditions
are met:
Contracts are negotiated as a package with a single commercial objective
Consideration in one contract depends on the price or performance of the
other contract
Some or all of the goods and services promised in the contracts are a
single performance obligation
Page 14
Step 1: Identify the contract
Combining contracts
Multiple contracts may be combined into a portfolio of contracts with similar
characteristics if the entity reasonably expects the effects on the financial
statements would not materially differ
What’s changing?
►
IFRS 15 provides more guidance on when to combine contracts than IAS
18, however IFRS preparers currently have a similar requirements in IAS 11
►
Overall, the criteria are generally consistent with the underlying principles in
the existing standards. However, the new standard explicitly requires an
entity to combine contracts if the criteria are met
Page 15
Step 1: Identify the contract
Combining contracts – Example
Software Co. enters into a contract to licence accounting
software to Company A
► A few days later Software Co. agrees in a separate
contract to provide consulting services to significantly
customize the licensed accounting software so that the
acquired software will work in Company A’s IT
environment
► As the two contracts were entered into at nearly the
same time with the same customer and the goods and
services represent a single performance obligation,
Software Co. determines that the two contracts have to
be combined
►
Page 16
Step 2: Identify
performance
obligations
Page 17
Step 2: Identify performance obligations
Overview
A performance obligation is a promise (explicit or implicit) to
transfer to a customer either:
Performance
obligation
Determining
performance
obligations
Marketing
incentives
►
A distinct good or service
►
A series of distinct goods or services that are substantially
the same and have the same pattern of transfer
Performance obligations are identified at contract inception and
determined based on:
►
Contractual terms
►
Customary business practices
Incidental obligations or marketing incentives may be
performance obligations (e.g., “free” maintenance provided by
automotive manufacturers, loyalty points provided by a hotel)
Does not include activities to satisfy an obligation (e.g., set-up activities) unless a
good or service is transferred
Page 18
Step 2: Identify performance obligations
Overview
What’s changing?
►
Current IFRS does not specifically address contracts with multiple
deliverables, focusing instead on identifying separate components so as to
reflect the substance of the transaction
►
As a result, many IFRS preparers have looked to US GAAP, which requires
entities to identify the ’deliverables’ within an arrangement but does not
define that term
►
IFRS 15 requires an entity to identify all promised goods and services and
determine which represent separate performance obligations (i.e., distinct
goods or services)
►
The standard makes clear that certain activities are not promised goods or
services, such as activities that an entity must perform to satisfy its obligation
to deliver the promised goods and services (e.g., administrative activities to
set up a contract)
Page 19
Step 2: Identify performance obligations
Two-step process to identify which goods or services are distinct
Step 1
Step 2
Focus on whether
the good or service is
capable of being distinct
Focus on whether
the good or service is distinct within
the context of the contract
Customer can benefit from
the individual good or service
on its own
The good or service is not
integrated with, highly dependent
on, highly interrelated with, or
significantly modifying or
customising other promised
goods or services in the contract
or
Customer can use good or
service with other readily
available resources
Page 20
Step 2: Identify performance obligations
Separately identifiable from other promises in the contract
Indicators that a good or service is separately identifiable from other promises in the
contract (i.e., distinct in the context of the contract) (Criterion 2)
Entity does not provide a significant service of integrating the good or
service into a combined item (inputs to produce a combined output)
The good or service does not significantly modify or customize other
promised goods or services
The good or service is not highly dependent on, or highly interrelated with,
other promised goods or services
Page 21
Step 2: Identify performance obligations
Example
Entity enters into a contract to manufacture and install
customized equipment and provide maintenance services
for a five-year period
► Installation services include the integration of multiple
pieces of equipment at the customer’s facility in order for
the equipment to operate as a single unit
► Equipment cannot operate without installation
► Entity sells equipment and installation services together,
does not sell installation separately
► Other vendors can provide the installation services
► The maintenance services are sold separately
►
Page 22
Step 2: Identify performance obligations
Example
Step 1
Step 2
Capable of being distinct
Distinct within the context of the
contract
Equipment
Good cannot be used without installation,
but customer can obtain installation from
another source. Good is capable of being
distinct. Move to Step 2.
Equipment and installation are highly
interrelated. Significant customisation is
required during installation. Good isn’t
distinct on its own because it must be
combined with installation.
Installation
Installation can be provided by multiple
vendors, so service is capable of being
distinct. Move to Step 2.
See discussion above. Equipment and
installation are not distinct from one
another.
Maintenance
Services have a distinct function because
they are sold separately. Move to Step 2.
Services are not highly interrelated. No
integration, modification or customisation
required. Services are distinct.
In this example, there would be two performance obligations: (1) the equipment and installation
because they are not individually distinct; (2) maintenance services because they are distinct
services in the contract.
Page 23
Step 2: Identify performance obligations
Other aspects
Rights of return
►
Does not represent a separate performance obligation
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The impact should be considered when estimating the transaction
price (as a component of variable consideration)
Consignment arrangements
►
Standard includes indicators of a consignment arrangement
►
Revenue is not recognised when the goods are delivered to the
consignee if control of the inventory has not transferred
Page 24
Step 3:
Determine the
transaction
price
Page 25
Step 3: Determine the transaction price
Overview
Transaction price
Transaction price is the amount of consideration to which an entity expects to
be entitled in exchange for transferring promised goods or services to a
customer, excluding amounts collected on behalf of third parties
Transaction price reflects the effects of the following:
Variable consideration (including application of the constraint)
Significant financing component
Non-cash consideration
Consideration paid or payable to a customer
Page 26
Step 3: Determine the transaction price
Variable consideration
►
►
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Transaction price may vary because of variable consideration
Definition of “variable consideration” is broad
Identifying variable consideration is an important step in the new model because
the constraint has to be considered for each type of variable consideration
Common types and events that cause consideration to be variable
Bonuses
Incentive payments
Penalties
Refunds
Market-based fees
Discounts
Returns
Money-back guarantees
Price concessions
Volume rebates
Service level agreements
Liquidating damages
Page 27
Step 3: Determine the transaction price
Variable consideration
Estimating
the
transaction
price
Variable consideration is estimated using the approach that better
predicts the amount to which the company is entitled based on its facts
and circumstances (i.e., not a “free choice”)
The approach should be applied consistently throughout the contract and
for similar types of contracts
Expected value
Most likely amount
►
Sum of the probability-weighted amounts in
a range of possible outcomes
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The single most likely amount in a range of
possible outcomes
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Most predictive when the transaction has a
large number of possible outcomes
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May be appropriate when the transaction will
produce only two outcomes
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Can be based on a limited number of
discrete outcomes and probabilities
Page 28
Step 3: Determine the transaction price
Price concessions
Collecting less
than the full price
Variable
consideration
Entering into a contract expecting to collect less than the full transaction price may
indicate a price concession
Price concessions (including implied price concessions) cause consideration to be
variable and should not be included in the estimated transaction price
Transaction
price
Existence of the
contract
If an entity determines it is not probable of collecting the estimated transaction
price, a valid contract does not exist
When assessing Step 1 (identify the contract), an entity also must consider Step 3 of the model
(determine the transaction price)
Distinguishing between customer credit risk (i.e., bad debt) and implied price
concessions (i.e., reductions of revenue) will require significant judgement
Page 29
Step 3: Determine the transaction price
Constraint on variable consideration
Constraining
amounts of
variable
consideration
An entity should include an amount of variable consideration in the transaction
price only to the extent that it is highly probable that a significant reversal in the
amount of cumulative revenue recognised will not occur when the uncertainty
associated with the variable consideration is resolved
IFRS constraint
threshold
Significant
Highly probable
“Significant” is relative to cumulative revenue recognised
Specific rule for licences of intellectual property
Sales- or usage-based royalties should not be included in the transaction price until
the customer’s subsequent sales/usage of a good or service occurs or performance
obligation is satisfied
An entity should update its estimate of the transaction price that includes variable consideration
at each reporting date
Page 30
Step 3: Determine the transaction price
Constraint on variable consideration
When evaluating the constraint, entities should consider both the likelihood and
magnitude of a revenue reversal
Factors that could increase the likelihood or magnitude of a revenue reversal include:
The amount is highly susceptible to factors outside the entity’s influence (e.g.,
market volatility, weather conditions)
?
The uncertainty is not expected to be resolved for a long period of time
?
The entity’s experience with similar contracts is limited or has limited
predictive value
The entity has a practice of offering price concessions or changing payments
terms and conditions
The contract has a large number and broad range of possible
consideration amounts
Page 31
Step 3: Determine the transaction price
Variable consideration
What’s changing?
►
For a number of entities, the treatment of variable consideration under the new standard
could represent a significant change from current practice
►
Under current IFRS, preparers often defer measurement of variable consideration until
revenue is reliably measurable, which could be when the uncertainty is removed or when
payment is received
►
Furthermore, current IFRS permits recognition of contingent consideration, but only if it is probable that the
economic benefits associated with the transaction will flow to the entity and the amount of revenue can
reliably measured. Some entities, therefore, defer recognition until the contingency is resolved
►
Some entities have looked to current requirements under US GAAP to develop their accounting policies in
this area. Currently, US GAAP significantly limits recognition of contingent consideration, although certain
industries have industry-specific literature that allows for recognition of contingent amounts
►
In contrast, the constraint on variable consideration in the new standard is an entirely new way of evaluating
variable consideration and is applicable to all types of variable consideration in all transactions
►
As a result, depending on the requirements entities were previously applying, some entities may recognise
revenue sooner under the new standard
Page 32
Step 3: Determine the transaction price
Variable consideration – expected value approach – Example
►
►
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Contractor M enters into a contract to construct a corporate headquarters for
Company B for CU 25 million
Contractor M will also receive a bonus or pay a penalty of CU 25,000 for each
day that the project is completed before or after 30 June 2018, respectively
Contractor M uses the expected value approach with the following possible
outcomes:
Possible outcomes
Probability
Calculated amount
Ten days early - CU250,000
50%
CU125,000
On schedule - CU0
25%
CU$0
Five days late – (CU125,000)
25%
(CU31,250)
Probability-weighted estimate
►
CU93,750
Contractor M would include CU 93,750 in the transaction price, assuming that
the amount is not limited by the constraint
Page 33
Step 3: Determine the transaction price
Variable consideration ‒ rights of return
►
Recognising
revenue
Refund
liability
Return
assets
Rights of return are a form of variable consideration
Revenue recognition is limited to amounts for which it is ‘highly probable’
a significant reversal will not occur (i.e., it is highly probable the goods will
not be returned)
A refund liability is established for the expected amount of
refunds and credits to be issued to customers
Corresponding asset and adjustment to cost of sales is
recorded for items expected to be returned, based on carrying
amount of the asset transferred less costs to recover
Return assets must be recorded separately from inventory
Return assets are subject to impairment review
Page 34
Step 3: Determine the transaction price
Variable consideration ‒ rights of return ‒ Example
►
►
►
►
Retail Corp. sells 200 laptops at a price of CU 200 each and receives
a payment of CU 40,000. The production cost for each laptop is CU
100
Under the sales contract, the customer is allowed to return any
undamaged laptop within 30 days and receive a full refund in cash
Based on the historical return rate and current estimates Retail Corp.
estimates that 10 laptops will be returned
Furthermore, it concludes that the costs of recovering the laptops will
not be significant and that the laptops can be resold at a profit
How should Retail Corp. account for this sale transaction?
Page 35
Step 3: Determine the transaction price
Variable consideration ‒ rights of return ‒ Example
►
Retail Corp. records the following entries on delivery of the laptops to the
customer
Debit
Cash
Credit
40,000
Refund liability
2,000(a)
Revenue
38,000
To record the sale excluding revenue expected to be returned
Asset
1,000 (b)
Cost of Sales
19,000
Inventory
20,000
To recognize the cost of sales and the right to recover products
from customer
(a)
CU 200 x 10 (price of the products expected to be returned)
(b)
CU 100 x 10 (cost of the products expected to be returned)
Page 36
Step 3: Determine the transaction price
Significant financing component
An entity adjusts the transaction price for the effects of the
time value of money if the timing of the payments provides
either party with a significant benefit of financing
Time value
of money
Evaluation not required if the entity expects the period between
transfer of performance obligations and receipt of payment is
one year or less
If the financing component is not significant to the individual contract, entity is not
required to adjust the transaction price
Combined
effect of:
When
assessing
significance,
entity would
consider:
The difference between promised consideration and the cash
selling price
Expected time between transfer of the promised
goods and services and payment from customer
Prevailing interest rates in the relevant market
Page 37
Step 3: Determine the transaction price
Significant financing component
A contract would not have a significant financing component if any of the following factors
exists:
The customer paid in advance and the timing of the transfer of promised goods or
services is at the discretion of the customer
A substantial amount of the consideration is variable, and the amount or timing varies
based on a future event that is not substantially within the control of the customer or
the entity
The difference between the promised consideration and the cash selling price arises for
reasons other than the provision of finance to either the customer or the entity, and the
amount of the difference is proportional to the reason for the difference
►
This indicator requires significant judgement
►
Examples in the standard include protection from risk of non-performance
Page 38
Step 3: Determine the transaction price
Significant financing component
Entity would use an interest rate that reflects the borrower’s credit risk and
expected term of the financing (rate is determined at contract inception)
Interest
rate
Effect of financing would be reflected separately from revenue
What’s changing?
►
►
Most entities are not in the business of entering into free-standing financing
arrangements with their customers. As such, it may be difficult to identify an
appropriate rate.
Most entities, however, perform some level of credit analysis before financing purchases for a
customer. Therefore, they will have some information about the customer’s credit risk. For entities
that have different pricing for products depending on the time of payment (e.g., cash discounts),
IFRS 15 indicates they may be able to determine an appropriate discount rate by identifying the rate
that discounts the nominal amount of the promised consideration to the cash sales price of the good
or service.
Page 39
Step 3: Determine the transaction price
Non-refundable upfront fees
Entities may receive payments from customers before goods or services are
provided
In many cases, upfront payments are non-refundable
Entities must evaluate whether non-refundable upfront fees relate to the transfer
of a (future) good or service
Set-up
activities
Fees charged for set-up activities – these activities do not
depict the transfer of services to a customer and should be
ignored when measuring progress of an entity’s performance
The existence of a non-refundable upfront fee may indicate the arrangement
includes an option for additional goods or services (e.g., renewal option for future
goods or services at a reduced price)
Page 40
Step 3: Determine the transaction price
Non-refundable upfront fees ‒ Example
►
►
►
►
Cloud Co. enters into a contract with a customer for a licence of its
software and a non-cancellable one-year subscription to access the
licensed application (the cloud service)
The contract amount for the software licence is an upfront, nonrefundable fee of CU 1 million
The fee for the cloud services is CU 500,000 for one year
The customer has the right to renew the cloud services each year
for CU 500,000
How should Cloud Co. account for this transaction?
Page 41
Step 3: Determine the transaction price
Non-refundable upfront fees ‒ Example
►
►
►
►
Cloud Co. determines that the software licence and cloud services are a
single performance obligation and that the upfront fee is not associated with
the transfer of any other good or service to the customer
However, Cloud Co. determines there is an implied performance obligation,
the right to renew the cloud services each year for CU 500,000. This is a
material right to the customer because that renewal rate is significantly below
the rate the customer paid for the first year of service (CU 1.5 million in total)
Cloud Co. determines that its average customer relationship is three years.
As a result, Cloud Co. determines that the performance obligations in the
contract include the right to a discounted annual contract renewal and that
the customer is likely to exercise twice
Therefore, Cloud Co. would allocate the CU 1.5 million transaction price to
the identified performance obligations (i.e., the cloud services and the
renewal options). The amount allocated to the renewal options would be
recognised over the renewal periods
Page 42
Step 4: Allocate
the transaction
price
Page 43
Step 4: Allocate the transaction price
Transaction price is allocated to each separate performance obligation in “an
amount that depicts the amount of consideration to which the entity expects to be
entitled in exchange for transferring the promised goods or services to the
customer”
Transaction price generally allocated based on relative stand-alone selling prices
Exceptions
If certain criteria are met, the new model provides two potential
exceptions, relating to:
Variable consideration
Discounts
Page 44
Step 4: Allocate the transaction price
What’s changing?
►
IAS 18 does not prescribe an allocation method for multipleelement arrangements. IFRIC 13 mentions two allocation
methodologies: allocation based on relative fair value; and
allocation using the residual method
►
However, IFRIC 13 does not prescribe a hierarchy. Therefore, currently an
entity must use its judgement to select the most appropriate methodology,
taking into consideration all relevant facts and circumstances and ensuring the
resulting allocation is consistent with IAS 18’s objective to measure revenue at
the fair value of the consideration
►
Entities that do not currently estimate stand-alone selling prices will likely need
to involve personnel beyond those in the accounting or finance departments.
Personnel responsible for an entity’s revenue recognition policies may need to
consult with operating personnel involved in pricing decisions in order to
determine estimated stand-alone selling prices, especially when there are
limited or no observable inputs
Page 45
Step 4: Allocate the transaction price
What’s changing (continued)?
►
Given the limited guidance in current IFRS on multipleelement arrangements, some entities have looked to
US GAAP to develop their accounting policies. The
requirement to estimate a stand-alone selling price will
not be a new concept for entities that have developed
their accounting policies by reference to the multipleelement arrangements requirements in ASC 605-25.
The new requirements in IFRS 15 for estimating a
stand-alone selling price are generally consistent with
ASC 605-25, except that they do not require an entity to
consider a hierarchy of evidence to make this estimate
Page 46
Step 4: Allocate the transaction price
Determine stand-alone selling price
The price at which an entity would sell a promised good or service separately to a
customer
No hierarchy like under current US GAAP multiple-element arrangement guidance
Best evidence is the observable price in a entity’s stand-alone sales of a good or service
When a stand-alone selling price is not observable, entity is required to estimate it
Maximize the use of observable inputs
Apply estimation methods consistently for goods/services and customers with similar
characteristics
Three estimation methods are described in IFRS 15, but others or a combination of
estimation methods are permitted
Use of the residual technique which is one of the three estimation methods is
allowed in limited situations
Stand-alone selling prices used to perform the initial allocation are not updated after
contract inception
Page 47
Step 4: Allocate the transaction price
Determine stand-alone selling price
Observable price
Best evidence
If not available
Possible estimation methods
Adjusted market
assessment approach
Expected cost plus
margin approach
Estimated price
Residual approach
Page 48
Step 4: Allocate the transaction price
Determine stand-alone selling price ‒ Example 1
►
►
►
►
Entity A enters into an agreement to sell hardware, professional
services and maintenance services for CU 200,000
Entity A determines that each of the promised goods or services
represents a separate performance obligation
Because Entity A frequently sells professional services and
maintenance on a stand-alone basis, it uses those transactions to
determine stand-alone selling prices of CU 25,000 and CU 15,000,
respectively
Entity A rarely sells the hardware on a stand-alone basis, so it
estimates the stand-alone selling price at CU 185,000 based on
the hardware’s underlying cost, Entity A’s targeted margin and the
amount of margin Entity A believes the market will bear (i.e., the
expected cost plus a margin approach)
Page 49
Step 4: Allocate the transaction price
Determine stand-alone selling price ‒ Example 1
Performance
obligation
Hardware
Estimated
stand-alone
selling price
% of relative
selling price
Allocated
discount
Allocation of
transaction
price
CU185,000
82.2
Professional
services
25,000
11.1
(2,800)
22,200
Maintenance
services
15,000
6.7
(1,600)
13,400
Total
CU225,000
100.0
Page 50
CU(20,600)
CU(25,000)
CU164,400
CU200,000
Step 4: Allocate the transaction price
Allocation of a discount
An entity is required to allocate a discount entirely to one or more (but not all)
performance obligation(s) if all of the following criteria are met:
The entity regularly sells each distinct good or service (or each bundle of
goods or services) in the contract on a stand-alone basis
The entity also regularly sells on a stand-alone basis a bundle (or bundles)
of some of those distinct goods or services at a discount
The discount (when comparing stand-alone sales of a bundle to standalone sales of the distinct goods or services) is substantially the same as
the discount in the contract and provides evidence that the entire discount
belongs to one (or some) distinct performance obligation(s)
Page 51
Step 4: Allocate the transaction price
Allocation of a discount
What’s changing?
►
►
The ability to allocate a discount to one or more, but not
all, performance obligations in a multiple-element
arrangement is a significant change from current practice.
This exception gives entities the ability to better reflect the
economics of the transaction in certain circumstances
However, the criteria that must be met to demonstrate that a discount
is associated with only one or more, but not all of the performance
obligations in the arrangement will likely limit the number of
transactions that will be eligible for this exception
Page 52
Step 4: Allocate the transaction price
Allocation of a discount – Example 1
►
►
►
►
►
Entity B enters into a contract with a customer to sell a television,
speakers and entertainment unit for a total of CU 2,100
The television and speakers are delivered at the same time
On a regular basis, Entity B separately sells the television for
CU1,700, the speakers for CU 300 and the entertainment unit for
CU300
In addition, Entity B regularly sells the television and speakers as a
bundle for CU 1,800
The customer purchases all three for CU 2,100, receiving a CU
200 discount for buying the products as a bundle
Page 53
Step 4: Allocate the transaction price
Allocation of a discount – Example 1
►
Allocation for the contract:
Separate performance obligations
Television and speakers (sold as a
bundle)
Entertainment unit
Allocated amounts
CU 1,800
300
Total
CU 2,100
Page 54
Step 5:
Recognise
revenue
Page 55
Step 5: Recognise revenue when (or as)
performance obligations are satisfied
Model is based on transfer of control
Control is the ability to direct the use of, and obtain substantially all of the remaining
benefits from, the asset
Control includes the ability to prevent other entities from directing the use of, and
obtaining the benefits from, an asset
The benefits of an asset are the potential cash flows that can be obtained directly
or indirectly in many ways, such as by:
Using the asset to produce goods or
provide services
Using the asset to enhance the value of
other assets
Using the asset to settle liabilities or
reduce expenses
Selling or exchanging the asset
Pledging the asset to secure a loan
Holding the asset
Page 56
Step 5: Recognise revenue
Overview
Transfer
Revenue is recognised upon satisfaction of a performance
obligation by transferring the promised good or service to a
customer. A good or service is considered to be transferred
when (or as) the customer obtains control
Performance obligations are either satisfied over time or at a
point in time
Performance
obligations
To help make this determination, the standard includes criteria for
determining when control transfers over time
If a performance obligation does not meet any of those criteria,
control transfers at a point in time
Page 57
Step 5: Recognise revenue
Performance obligations satisfied over time
Control of goods and services is transferred over time if one of the following three
criteria is met:
The entity creates or enhances an asset that the customer controls
as it is created or enhanced
Pure service contracts
Performance
obligations
satisfied over
time
The entity’s performance does not create an asset with alternative
use and the entity has an enforceable right to payment for
performance completed to date
The customer is receiving and consuming the benefits of the entity’s
performance as the entity performs
Another entity would not have to re-perform work completed to
date
►
Disregard potential limitations that would prevent the transfer of a
remaining PO to another entity
►
Assume another entity fulfilling the remaining PO would not have the
benefit of any asset the entity controls
Page 58
Step 5: Recognise revenue
Performance obligations satisfied over time
Revenue is recognised over time by measuring progress toward completion
The objective is to most faithfully depict an entity’s performance
Apply a single method of measuring progress for each performance obligation
satisfied over time
Output methods
Input methods
Apply consistent method for similar performance obligations in similar circumstances
If unable to reasonably estimate progress, revenue should not be recognised
until progress can be estimated
However, if an entity expects to recover the costs, the entity should recognise
revenue up to costs incurred
Page 59
Step 5: Recognise revenue
Performance obligations satisfied over time – Example
►
►
►
►
Audit Corp. enters into a contract with a customer to provide a consulting
service that results in the entity providing a professional opinion to the
customer
The professional opinion relates to facts and circumstances that are
specific to the customer
If the customer terminates the consulting contract for reasons other than
Audit Corp.’s failure to perform as promised, the contract requires the
customer to compensate Audit Corp. for its costs incurred plus a 15 per
cent margin
The 15 per cent margin approximates the profit margin that Audit Corp.
earns from similar contracts.
Is the performance obligation satisfied over time?
Page 60
Step 5: Recognise revenue
Performance obligations satisfied over time – Example
►
►
►
The customer does not simultaneously receive and consume the benefits of the
its performance because
► If Audit Corp. were to be unable to satisfy its obligation and the customer
hired another consulting firm to provide the opinion, the other consulting firm
would need to substantially re-perform the work that Audit Coro. had
completed to date, because the other consulting firm would not have the
benefit of any work in progress performed
► The nature of the professional opinion is such that the customer will receive
the benefits of the entity’s performance only when the customer receives the
professional opinion
However, the development of the professional opinion does not create an asset
with alternative use and Audit Corp. has an enforceable right to payment for its
performance completed to date for its costs plus a reasonable margin. Therefore
this contract is a performance obligation satisfied over time
Consequently, Audit Corp. recognises revenue over time by measuring the
progress towards complete satisfaction of the performance obligation
Page 61
Step 5: Recognise revenue
Control transferred at a point in time
The following are indicators of when control is transferred. None of the indicators are
individually determinative, and none are more important than others. Note that other factors
could be relevant.
The entity has a present right to payment for the asset
The customer has legal title to the asset
The customer has physical possession of the asset
The customer has the risks and rewards of ownership of the asset
The customer has accepted the asset
Page 62
Step 5: Recognise revenue
Transfer of control – Example 1
►
►
Software entity enters into a contract with a customer to:
► Licence software that it delivers immediately
► Perform maintenance services consisting of unspecified upgrades on a whenand-if available basis for a three-year term
Software entity determines the following:
► The performance obligations are distinct
► The software licence (delivered immediately after contract is finalised) was
transferred and is complete (assume for this example the entity determines
the licence provides a right to use the intellectual property as it exists at a
point in time)
► The maintenance services are satisfied over time
► Performance of the obligation enhances the software licence that the
customer controls
► No discernible pattern, so entity concludes recognition ratably over the
three-year period best represents satisfaction of the obligation
Page 63
Step 5: Recognise revenue
Transfer of control – Example 2
Book publisher transfers control with a restriction on
distribution
► A book publisher enters into a contract with a book store
(customer) to provide 1,000 physical copies of a highly anticipated
book for CU 10,000
► The contract stipulates that the customer cannot sell the book until
June 15th, 20X4
► The book publisher delivers the books to the customer on 5 June
5th, 20X4
When does the customer obtain control of the books?
Page 64
Step 5: Recognise revenue
Transfer of control – Example 2
The concept of a street date may indicate that control has
not transferred to the customer
► In this scenario, the book publisher may conclude that
the transfer of control of the books does not occur until
the street date of June 15th because the customer does
not have the ability to direct the use of and receive the
benefit from the books until it is permitted to sell the
product on June 15th even though the books are
delivered on June 5th
►
Page 65
Step 5: Recognise revenue
Customer acceptance
Customer acceptance clauses must be considered when determining whether a
customer has obtained control of a good or service
Determine transfer
of control
If an entity can objectively determine that control has been transferred
and the good or service meets contract specifications, it can
recognise revenue (assuming all other conditions to recognise
revenue have been met)
Recognise revenue
Determination of whether acceptance criteria are subjective and have been met
requires professional judgement (consistent with current practice)
Page 66
Step 5: Recognise revenue
Breakage
A customer may make non-refundable payments to an entity for the right to receive
future goods or services
Variable
consideration
Because breakage causes consideration to be variable, the
constraint should be applied to any estimated amounts
Unexercised rights are referred to as breakage
If an entity estimates it is
entitled to a breakage
amount
Revenue would be recognised in proportion to pattern
of rights exercised by customer
If an entity estimates it is
not entitled to a breakage
amount
Revenue would be recognised when the likelihood of
exercising rights becomes remote
Page 67
Step 5: Recognise revenue
Breakage ‒ Example
►
►
►
►
Good Toys Ltd. (GTL), a toy store, sells a CU 75 gift card to a customer. GTL’s
gift cards have no fees or expiration dates. For the purposes of this example,
assume no jurisdictional unclaimed property laws apply
GTL has sold gift cards for a number of years and has reliable historical evidence
of breakage. Using an expected value approach, it estimates that 4% of gift card
balances will not be redeemed by the customer
GTL evaluates the constraint on variable consideration and determines it is highly
probable that a significant revenue reversal will not occur for the 4% estimated
breakage amount
One week later, the customer returns to the store and uses the gift card to
purchase CU 48 worth of goods
How should GTL account for the sale of and the use of the gift card?
Page 68
Step 5: Recognise revenue
Breakage ‒ Example
►
►
►
At the point of sale of the gift card to the customer, GTL would record a contract
liability of CU 75
At the time the customer uses the gift card to purchase CU 48 worth of goods
GTL recognises CU 48 of revenue, with a corresponding decrease to the
contract liability
In addition, GTL recognises estimated breakage revenue, with an offset to the
contract liability, of CU 2 at the time of redemption, calculated, as follows:
(4% X CU 75) = CU 3 total estimated breakage to be recognised
[C U48/(CU 75 - CU3)] = 67% estimated redemption to date
(CU 3 X 67%) = CU 2 breakage to be recognised at the time of redemption
►
►
GTL will continue to recognise revenue for breakage amounts as the remaining
gift card balance is redeemed by the customer
Once GTL determines that the likelihood of the customer redeeming any
remaining balance on the gift card is remote, GTL will recognise revenue and
remove the contract liability for the remaining amount
Page 69
Other aspects
of the model
Page 70
Other aspects of the model
Contract modifications
Onerous contracts
Licences
Warranties
Contract costs
Presentation
Page 71
Other aspects of the model
Contract modifications
►
A contract modification is an approved change in the scope or price (or both) of a
contract that creates new or changes existing enforceable rights and obligations
of the parties to the contract
Distinct POs
and price =
increases by
stand-alone
selling price
►
Separate
contract
All other
modifications
Part of
original
contract
Accounting treatment would depend on the nature of the modification
Page 72
Other aspects of the model
Contract modifications
►
Modifications are accounted for differently, depending on the attributes of the
remaining goods and/or services
Is the contract modification for additional
goods and services that are distinct AND
at their stand-alone selling price?
Yes
The new goods and services should be
treated as separate contract.
No
Are the remaining goods and
services distinct from those
already provided?
No
Update the transaction price and measure of progress for the
single performance obligation (recognise change as a
cumulative catch-up to revenue)
Both yes and no
Yes
Allocate the remaining transaction price
to the remaining goods and services (transaction price for
performance obligations already satisfied is not adjusted).
Page 73
Blend of two
Other aspects of the model
Onerous contracts
Guidance on onerous contracts included in previous
drafts of the standard was removed
► Boards elected to retain the current guidance on onerous
contracts within IAS 37 Provisions, Contingent Liabilities
and Contingent Assets
► Under IFRS, the requirements in IAS 37 for onerous
contracts apply to all contracts in the scope of IFRS 15.
► The new standard states that entities that are required to
recognise a liability for expected losses on contracts
under IAS 37 will continue to be required to do so
►
Page 74
Other aspects of the model
Licences
A licence establishes a customer’s rights to intellectual property (IP) of the entity
Entity must first determine whether the licence is a distinct performance obligation in the
arrangement
For a distinct licence, assess the nature of the promise
For a licence providing a right to access the IP, revenue is recognised over time if
specific criteria are met
For a licence providing a right to use the IP as it exists when granted, revenue is
recognised at a point in time
Sales- or usage-based
royalties on licences of IP
Royalties cannot be recognised as revenue until the later of when the
sale/usage occurs or the performance obligation is satisfied
Page 75
Other aspects of the model
Licences – Example
►
►
►
►
Comic Corp., a creator of comic strips, licenses the use of the images and names
of its comic strip characters in three of its comic strips to a customer for a fouryear term. There are main characters involved in each of the comic strips.
However, newly created characters appear regularly and the images of the
characters evolve over time
The customer, an operator of cruise ships, can use the entity’s characters in
various ways, such as in shows or parades, within reasonable guidelines. The
contract requires the customer to use the latest images of the characters
In exchange for granting the licence, the entity receives a fixed payment of CU 1
million in each year of the four-year term
Comic Corp. has no other performance obligations other than the promise to
grant a licence
Does Comic Corp. grant a right to access or to use the IP?
Page 76
Other aspects of the model
Licences – Example
►
In making this determination Comic Corp. considers the following factors:
►
►
►
►
►
The customer reasonably expects that Comic Corp. will undertake activities that will
affect the intellectual property to which the customer has rights (ie the characters)
the rights granted by the licence directly expose the customer to any positive or
negative effects of Comic Corp.’s activities because the contract requires the
customer to use the latest characters
even though the customer may benefit from those activities through the rights granted
by the licence, they do not transfer a good or service to the customer as those
activities occur
Consequently, Comic Corp. concludes that the nature of its promise to transfer
the licence is to provide the customer with access to its intellectual property as it
exists throughout the licence period
Consequently, Comic Corp. accounts for the promised licence as a performance
obligation satisfied over time
Page 77
Other aspects of the model
Warranties
Types of warranties
service-type warranties
assurance-type warranties
Does the customer have the option to separately purchase the warranty?
Yes
No
Separate performance obligation
Are the services under the warranty beyond
“quality assurance” (i.e., assurance-type
warranty) services?
Yes
Service-type
warranty (separate
performance
obligation)
Page 78
No
Accrue for the
expected warranty
costs
Other aspects of the model
Warranties
Factors to consider when determining whether a warranty promise provides more
than “quality assurance” include:
Is the warranty
required by law?
A law requiring a warranty generally indicates the
promised warranty is not a performance obligation
What is the length of
the warranty
coverage period?
The longer the warranty period, the more likely it is that
the promised warranty is a separate performance
obligation
What is the nature
of the tasks that the
entity promises to
perform?
If it is necessary for an entity to perform specified tasks
to provide the assurance that a product complies with
agreed-upon specifications, then those tasks likely do
not give rise to a performance obligation
Page 79
Other aspects of the model
Product warranties – Example
Warranty – example of a separate performance obligation
► Entity A sells 100 ultra-life batteries for CU 20 each and provides
the customer with a five-year guarantee that the batteries will
withstand the elements and continue to perform to specifications
► Entity A, which normally provides a one-year guarantee to
customer purchasing ultra-life batteries, determines that years two
through five represent a separate performance obligation
► Entity A determines that CU 1,700 of the CU 2,000 transaction
price should be allocated to the batteries and CU 300 to the
service warranty (based on estimated stand-alone selling prices
and a relative selling price allocation)
► Entity A’s normal one-year warranty cost is CU 1 per battery
Page 80
Other aspects of the model
Product warranties – Example
►
Upon delivery of the batteries, Entity A records the following entries:
Debit
Cash/Receivables
CU 2,000
Revenue
CU1,700
Contract liability (service warranty)
CU 300
Warranty expense
CU 100)
Accrued warranty costs (assurance warranty)
►
►
►
Credit
CU 100
The contract liability is recognised as revenue over the service warranty period
(years two through five). The costs of providing the service warranty are
recognised as incurred
The assurance warranty obligation is relieved as defective units are replaced/
repaired during the initial year of the warranty
Upon expiration of the assurance warranty period, any remaining assurance
warranty obligation is reversed
Page 81
Other aspects of the model
Incremental costs of obtaining a contract
►
Incremental costs of obtaining a contract would be capitalised if they are expected to be
recovered
►
►
►
Incremental costs are costs that would not have been incurred if the contract had not been
obtained
Practical expedient to allow immediate expense recognition if the asset’s amortisation period is
one year or less
Assets are amortised over the period the related good or service are transferred and
subject to impairment
►
If costs are determined to relate to more than one contract (e.g., expected contract renewals),
amortisation should consider both current and anticipated contracts
What’s changing?
►
IFRS 15 represents a significant change for entities that currently expense the costs
of obtaining a contract and will be required to capitalise them under the new standard.
►
In addition, this may be a change for entities that currently capitalise costs to obtain a
contract, particularly if the amounts currently capitalised are not incremental and,
therefore, would not be eligible for capitalisation under IFRS 15.
Page 82
Other aspects of the model
Incremental costs of obtaining a contract – Example
►
►
►
Entity A has the following incentive plans:
► A bonus plan for sales employees based on new contracts
signed during the month
► A bonus plan for sales employees based on a combination of
EPS and individual performance evaluations
Entity A capitalises amounts from the plan based on new contracts
signed because the amounts are expected to be recovered and are
incremental to obtaining the contracts
► The asset is amortised over the period the services are provided
(e.g., the average term of the underlying contracts)
Entity A accrues for amounts from the plan based on EPS and
individual performance evaluations because the amounts are not
incremental and not directly attributable to identifiable contracts
Page 83
Other aspects of the model
Amortisation period – Example
►
►
►
Tech Co. enters into a three-year contract with a customer for IT
services. To fulfil the contract, Tech Co. incurred set-up costs of CU
60,000, which it capitalised and will amortise over the term of the contract
At the beginning of the third year, the customer renews the contract for
an additional two years. Because Tech Co. will benefit from the set-up
costs during the additional two-year period, it would change the
remaining amortisation period from one year to three years. It adjusts the
amortisation expense recognised in accordance with IAS 8 Accounting
Policies, Changes in Accounting Estimates and Errors on changes in
estimates
However, if Tech Co. had anticipated the contract renewal at contract
inception, Tech Co. would have amortised the set-up costs over the
anticipated term of the contract, including the expected renewal (i.e., five
years)
Page 84
Other aspects of the model
Presentation
Principle:
When either party to a contract has performed, an entity shall present the contract in the
statement of financial position as a contract asset, a contract liability or a receivable
Does the entity have a right to consideration in
exchange for goods or services that the entity has
transferred to a customer?
Does the entity have a right to consideration that
is unconditional, i.e. is only the passage of time is
required before payment of that consideration is
due?
Does the entity have an obligation to transfer
goods or services to a customer for which the
entity has received consideration (or an amount of
consideration is due) from the customer?
Page 85
Contract
asset
Receivable
Contract
liability
Other aspects of the model
Presentation
►
►
Contract assets and receivables are subject to impairment review
in accordance with IFRS 9/IAS 39
Revenue from contracts with customers is required to be presented
separately from other sources of revenue
Page 86
Disclosures
Page 87
Disclosures
Objective
To enable users to understand the nature, amount, timing and
uncertainty of revenue and cash flows arising from contracts with
customers
Qualitative and quantitative information about:
►
Contracts with customers
►
Significant judgements and changes in judgements made when
applying the standard to those contracts
►
Assets recognised from costs to obtain or fulfil a contract
Disclosures
Other sources of new disclosures:
►
Use of practical expedients
►
Transition disclosures
►
IAS 8 Accounting Policies, Changes in Accounting Estimates
Page 88
Disclosures
Overview of disclosure requirements
Disclosures
Disaggregation of revenue
Contracts with customers
Contract balances
Performance obligations
Significant judgements
Contract costs
Practical expedients
Other required disclosures
Transition
Information
type
Frequency
Quantitative/
qualitative
Interim/annual
Quantitative/
qualitative
Quantitative/
qualitative
Qualitative/
qualitative
Quantitative/
qualitative
Annual
Annual
Annual
Annual
Qualitative
Annual
Quantitative/
qualitative
Annual*
* IAS34 Interim Financial Disclosures requires, however, a statement that the same accounting policies and methods of computation are followed in the interim
financial statements as compared with the most recent annual financial statements or, if those policies or methods have been changed, a description of the
nature and effect of the change.
Page 89
Transition
considerations
Page 90
Transition considerations
IFRS transition methods
►
Assumption: the effective date will be deferred as proposed by the IASB and
FASB
2015
2016
2017
2018
Comparative period
Reporting period
Scenario A
Retrospective initial application
Preparation time: 1,5 years
R/E
IFRS 15
IFRS 15
Opening SOFP
1. January 2017
Scenario B
Modified retrospective application
IAS 11 / IAS 18
1
R/E IFRS 15
Preparation time: 2,5 years
1
Opening SOFP
1. January 2018
Comparability in terms of disclosures: quantification of transition effects
Page 91
Transition considerations
Full retrospective transition
►
Apply new revenue recognition standard to all existing contracts as of
January 1, 20171 (for calendar year-end entities)
►
►
►
►
Will have to keep two sets of books for FY 2017 if the standard creates
differences
Cumulative catch-up adjustment as of January 1, 2017 for contracts with
performance remaining under current guidance
Practical expedients
►
►
►
►
Need to inventory contracts with performance remaining as of January 1, 2017
Need not restate contracts completed before adoption that begin and end within the
same annual reporting period (practical expedient 1)
Need not estimate variable consideration for contracts completed before adoption
(i.e., use known consideration as of contract completion) (practical expedient 2)
Need not disclose the amount of the transaction price allocated to remaining
performance obligations for prior periods presented (practical expedient 3)
Disclose which expedients used and a qualitative assessment of their effects
1 Assumption:
effective date will be deferred to January 1, 2018
Page 92
Transition considerations
Modified retrospective transition
►
Apply new revenue recognition standard to all existing contracts
as of January 1, 20181
►
►
►
►
Need to inventory contracts with performance remaining as of
January 1, 2018
Cumulative catch-up adjustment as of January 1, 2018 for contracts with
performance remaining under current guidance
Present comparative period (2017 for calendar year-end entities) under current
revenue guidance
Required to report in the year of adoption (2018 for calendar year entities) under
both the new standard (on the face of the financial statements) and under
current guidance (disclosures), requiring two sets of books
►
►
Disclose the amount that each financial statement line item is affected, compared with
current accounting
Explain significant changes
1 Assumption:
effective date will be deferred to January 1, 2018
Page 93
Transition considerations
Full retrospective approach - Practical expedient 1 - Example
Practical expedient 1: Contracts that begin and complete in the same annual
reporting period
►
Entity B has the following contracts with customers, each of which runs for nine months
Contract
Starts
Completes
1
January 1, 2017
September 30, 2017
2
May 1, 2016
March 31, 2017
3
May 1, 2017
March 31, 2018
The date of initial application for IFRS 15 is January 1, 2018
Contract timelines
Comparative period
Current Period
Contract 1
Contract 2
Contract 3
Jan 1, 2017
Dec 31, 2017
Page 94
Dec 31, 2018
Transition considerations
Full retrospective approach - Practical expedient 1 - Example
The practical expedient 1:
► applies to Contract 1, because it begins and ends in an
annual reporting period before the date of initial
application, i.e. in 2017;
► does not apply to Contract 2, because even though
Contract 2 is for period of less than 12 months, it is not
completed within a single annual reporting period; and
► does not apply to Contract 3, because it is not completed
under current GAAP by the date of initial application.
Page 95
Transition considerations
Transition method summary
Key considerations
Full retrospective approach
Modified retrospective approach
Apply to which
periods presented?
All periods presented
Only the most current period presented
Apply to which
contracts?
All contracts that would have existed during all
periods presented if the new standard had been
applied from contract inception (except for
practical expedients)
Any contracts existing as of effective date (as if
new standard had been applied since inception
of contract), as well as any new contracts from
that date forward
Recognition of the
effect of adoption in
the financial
statements?
Follow requirements of IAS 8, cumulative effect
of changes to periods prior to periods presented
is reflected in opening balance of retained
earnings
Cumulative effect of changes is reflected in the
opening balance of retained earnings in the most
current period presented
Follow requirements of IAS 8, including
disclosure of the reason for the change and the
method of applying the change
In the year of adoption, disclose the amount each
financial statement line item was affected as a
result of applying the new standard and an explanation of significant changes (effectively requires
two sets of books during the year of adoption)
Adoption
disclosure
requirements?
Page 96
Close
Page 97