10-Feb-17

When and How to recognize revenue

BEFORE THE CHANGE AFTER THE CHANGE

IAS 18 Revenue
IFRS 15
IAS 11 Construction Contracts Revenue from
Contracts
SIC 31 Revenue Barter Transaction
with Customers
Involving Advertising Services

IFRIC 13 Customer Loyalty Programs 1 January 2018

IFRIC 15 Agreements for the
Construction of Real Estate
IFRIC 18 Transfers of Assets from
Customers (Similar standard issued by FASB)

IFRS 15 Revenue from Contracts with Customers

= applies to ALL CONTRACTS with CUSTOMERS except for:

Lease contracts (IAS 17) Insurance Contracts (IFRS 4)

Financial instruments and other contractual rights/obligations within the scope of
IAS 39/IFRS 9, IFRS 10, IFRS 11, IAS 27 and IAS 28

Non-monetary exchanges between entities within the same business to facilitate sales

Complex contract
Mortgage at fair value under IFRS 9

Mortgage Assistance services

Remaining amount to assistance services under IFRS 15

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IFRS 15 Revenue from Contracts with Customers

STEP 1 STEP 2 STEP 3 STEP 4 STEP 5

Identify the
Recognize
Identify the performance Determine Allocate
revenue
contract obligations the the TP to
when (or as)
with a (PO) transaction the PO in
an entity
customer in the price (TP) the contract
satisfies a PO
contract

Oral / written?
Contract Promises
modification? Are they distinct?
Fixed? Variable? Stand-alone selling prices

Over time?
At the point of time?

IFRS 15 Revenue from Contracts with Customers

Example #1: telecom co. / bundle offers

Handset = 300 CU Free handset

+ 12-month network
services

ABC Johnny

Network services = 12 x CU 100

80 CU/month
without handset

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IFRS 15 Revenue from Contracts with Customers

Example #1: telecom co. / bundle offers 12-m. monthly plan at 100 CU/month
+ Free handset

No revenue for handset (given for free)

IAS 18
Revenue for network services: CU 100 per month => CU 1 200 total

IFRS 15 => Transaction price = 1 200 (100*12)

Performance Stand-alone Allocated Revenue Billing

obligations selling price transaction
price
Handset 300 285.70 285.70 0
(300/1260*1200) when handset is delivered
Network services 960 (12 * 80) 914.30 76.20/Month 100/month
(960/1260*1200) (914.30/12)

TOTAL 1 260 1 200 1 200 1 200

Identify the contract with the customer

STEP 1
= agreement between 2 or more parties creating
enforceable rights + obligations
Contract
Written Oral

Attributes

Parties have approved the contract and are committed to perform

Each partys rights to goods/services can be identified
The payment terms for goods/services can be identified
1000 units
The contract has commercial substance
It is probable that an entity will collect the consideration CU 1 000 000 Client
(evaluate customers ability and intention to pay).
CU 400 000

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Identify the contract with the customer

STEP 1

Combination of contracts

When 1 or more is met:

The contracts are negotiated as a package with a single commercial objective; OR

The amount of consideration paid in one contract depends on the price or

performance of the other contract; OR

The goods or services in the contracts (or some of them in each contract) are
a single performance obligation.

Identify the contract with the customer

STEP 1

Contract modifications

= change in the scope, or price, or both => must be approved by the parties!
Prior approval => Based on enforceability!

Access to land within 30 days

Constructor Customer Contract

Compensation for delays

Made a CLAIM
Access provided after 90 days => Constructor
= contract modification even if not approved
(enforceable)

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Identify the contract with the customer

STEP 1

Contract modifications

NO II. CM = PART OF EXISTING

Are additional goods/services
CONTRACT
in CM distinct? IV.
(catch-up adjustment)
YES Combination of
II. and III.
Does consideration for added NO III. CM SEPARATE CONTRACT;
goods/services reflect their (termination of old contract +
stand-alone prices? creation of new contract)
YES

I. CM = SEPARATE Consideration allocated to the remaining PO:

CONTRACT
= consideration from old contract not yet recognized
+ consideration in the contract modification

Identify the performance obligations in the contract

STEP 2

Performance obligations

= promise in a contract with a customer to transfer to the customer either:

Good / service (or Series of distinct goods/services that are substantially

bundle) that is distinct the same and have the same pattern of transfer

= single performance obligation

(not small individual PO)

PO can be both explicit (in the contract) and implicit (based on practices or policies)

If no transfer to customer => No PO! (e.g. admin or setup)

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Identify the performance obligations in the contract

STEP 2

Performance obligations => What is DISTINCT?

Examples:

Sale of goods produced by entity

Resale of goods purchased by entity

Resale of rights purchased by an entity

Performing contractually agreed-upon tasks

Granting licenses

Constructing, manufacturing, developing an asset on behalf of a customer

Identify the performance obligations in the contract

STEP 2

Performance obligations => What is DISTINCT?

2. Criteria

I. Good/service is capable of being distinct

On its own
=> Customer can benefit from good/service
In conjunction with other readily
available resources

II. Separately identifiable from other goods/services in the contract

=> Entity is NOT using good/service as an input to produce or deliver combined output

=> The good/ service does NOT significantly modify or customize another good/service

=> The good/ service is not highly dependent with other goods/services in the contract

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Identify the performance obligations in the contract

STEP 2

Performance obligations Example # 4

Software license

Installation
Customer Contract Software developer
Software updates

Technical support
Scenario I

- Software remains functional during installation - Installation will customize software substantially
- Installation performed by other entities, too - Installation performed by other entities, too
- Other services sold also separately - Other services sold also separately

PO 1 = License PO 3 = Updates PO 1 = PO 2 = Updates

License +
PO 2 = Installation PO 4 = Support Installation PO 3 = Support

Identify the performance obligations in the contract

STEP 2

Performance obligations => Other considerations

Goods/services that are NOT distinct:

=> Combine until you get a bundle that is distinct

PC = Not distinct, must be combined

PC only sold IT services sold either

with IT services separately, or with PC as a IT services = distinct
package

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Identify the performance obligations in the contract

STEP 2

Performance obligations => Other considerations

Principal vs. agent considerations: => What is a performance obligation?

To provide good/service itself To arrange for another party to provide good/service

PRINCIPAL AGENT

Revenue = gross amount Revenue = net amount (commission)

Indicators
- Primary responsibility for fulfilling the contract - Consideration = commission
- Inventory risk - Customers credit risk
- Establishing prices

Determine the transaction price

STEP 3

Transaction price = amount of consideration to which the entity expects to be entitled

in exchange for transferring promised goods/services to a customer
excluding the amounts collected on behalf of third parties.

How to determine transaction price?

Variable consideration
Constraining estimates in variable consideration likelihood + magnitude of reversal
Existence of significant financing component (over 1 year)
Non-cash consideration At fair value
For distinct good/service =>as purchases
Consideration payable to a customer
Not for distinct good/service =>reduction in TP

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Allocate the transaction price to the performance obligations

STEP 4

Allocation =to allocate the transaction price to each performance obligation in an amount
objective that depicts the amount of consideration for transferring promised goods/services.

How to allocate the transaction price?

=> Based on relative stand-alone selling prices Criteria to apply the exception:
except for:
Entity regularly sells each distinct good/service on a stand-alone basis
Bundles are also sold regularly on a stand-alone basis at a discount to
Allocating discounts stand-alone selling prices of goods/services
Discount attributable to each bundle is substantially the same as
discount in the contract + analysis provides evidence

= CU 40 CU 29 (40/140*100) CU 40
Product A = CU 60 Product A Product A
= CU 55 Product B CU 39 (55/140*100) CU 33 (55/100*60)
Product B + (discount Product B Product B
= CU 45 CU 32 (45/140*100) CU 27 (45/100*60)
Product C of CU 40) Product C Product C
= CU 140 Product C CU 100 CU 100
(general) (exception)

Allocate the transaction price to the performance obligations

STEP 4

Allocation =to allocate the transaction price to each performance obligation in an amount
objective that depicts the amount of consideration for transferring promised goods/services.

How to allocate the transaction price?

=> Based on relative stand-alone selling prices Criteria to apply the exception:
except for:

Terms of variable payment relate specifically to

entitys efforts to satisfy the PO
Allocating consideration with variable amounts
Allocating variable amount entirely to the PO is
consistent with the allocation objective

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Allocate the transaction price to the performance obligations

STEP 4
= the price at which the entity would sell promised good
Stand-alone selling price
or service separately to the customer (at contract inception)

How to estimate the stand-alone selling price?

I. Take observable selling prices

II. If observable selling prices not available => make estimate

Consider all information available Adjusted market assessment approach

Expected cost plus margin approach

Consider all information available
Residual approach

Combination

Recognize revenue when (or as) an entity satisfies a PO

STEP 5
Performance obligation is satisfied when a promised good or service is transferred to a customer.

Control

How can a performance obligation be satisfied?

Over time At the point of time

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Recognize revenue when (or as) an entity satisfies a PO

STEP 5
Performance obligation is satisfied Over time if 1 of the following is met:

Customer simultaneously receives and consumes as the entity performs

Customer controls the asset enhanced or created by the entity

Entity does not create an asset with an alternative use + enforceable right to payment

How to measure progress towards completion?

=> Select single revenue recognition method + apply consistently (no change is permitted)

Over time Over time

Recognize revenue when (or as) an entity satisfies a PO

STEP 5
Performance obligation is satisfied At the point of time if control not transferred over time.

Indicators:

The entity has a present right to payment for the asset.

The customer has legal title to the asset.

The entity has transferred physical possession to the asset.

The customer has the significant risks and rewards of ownership of the asset.

The customer has accepted the asset.

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IFRS 15: Contract Costs

Costs to obtain a contract Costs to fulfill a contract

If not within IAS 2/IAS 16/IAS 38

Sales commissions Legal fees Bonuses to employees
Capitalize if:

Costs relate directly to contract

Costs generate/enhance resources used in

satisfying performance obligations in the
future

Costs are expected to be recovered

Capitalize Direct labor General + admin costs
Direct materials Wasted costs
+Amortize
Allocated costs Costs of past performance
Chargeable costs Indistinguishable costs

IFRS 15 Revenue from Contracts with Customers

Which industries are most affected?

Telecom Technology / Manufacturing Real estate

software

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IFRS 15 Revenue from Contracts with Customers

What does it mean for YOU / YOUR business?

Upgrade Amend business

accounting system contracts

Change in Key Change in Tax /

Performance Dividend policy
Indicators

IFRS 15 Other Matters?

Right to return assets sold

Warranties
Forwards and call options
Put options
Contract asset, receivables and
contract liability
Non-refundable up-front fee
Bills and hold sale
Onerous contract
Customer loyalty program

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Right of return
Not expected to be returned Expected to be returned
Recognize revenue. Revenue not recognized
The entries required The entries required
Contract asset Right to recover asset
Revenue Refund liability
Receivable
Contract asset

Warranties-Decision tree

Assess the nature of warranty

Yes Separate performance

Does the customer have the option
to purchase warranty separately ? obligation

No

Does the warranty provide a Yes Separate performance

service in addition to service obligation
already provided?
No
If the warranty is required by law the is not separate
performance obligation
Provisions
Under IAS 37 More lengthy the warrant period more likely that
there is a separate performance obligation
The tasks required to provide assurance that the product
complies agreed specification is not separate performance
obligation

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Written or purchased call options
Written or purchased call
options
Repurchase price less than original
selling price?
No
Account for contract as
financing arrangement
Obligation to repurchase at
customers request
Repurchase price lower than the
original selling price
No
Repurchase price more than the
selling price?
No
Recognize revenue under IFRS
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Account for contract as lease
Yes
When comparing re-purchase price, consider time value of
money
If the contract is financing arrangement, the entity will
continue to recognize the asset and will also recognize
the financing liability.
If the option lapses un-exercised, an entity will derecognize
the liability and will recognize the revenue.
Put option
The customer has economic Recognize revenue
Yes Yes
incentive to purchase? under IFRS 15
Yes
Lease under IFRS 16
Yes Account for the contract under
IFRS 9 as financing
arrangement
When comparing re-purchase price, consider time value of
money
If the option lapses un-exercised, an entity will derecognize
the liability and will recognize the revenue.
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Contract asset, receivable and contract liability

Did the entity receive Contract liability

Yes
consideration in advance?
No
Did the entity transfer No Does the entity has the right to No
No necessary
accounting
goods/services in advance of bill its customer?
consideration

Yes

Is the consideration conditional No Recognize revenue

other than the passage of time?

Yes

Recognize contract asset

Non- refundable up-front fee

With renewal option Extended time for revenue

Yes
recognition
No
Related to transfer of performance No Revenue recognized
obligation immediately

Yes

Revenue is recognized on
satisfaction of performance
obligation

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Bill and hold sale

Control transferred Revenue cannot be recognized

No
until the control is transferred
Yes
Consider all the following: -
Substantive reason for holding
Goods separately identified
Goods ready for physical
delivery
The entity cannot use or sell

Yes

Revenue is recognized

Licenses

Distinct? Revenue recognized with other

No
goods or services
Yes

On transfer! As it exists at the point of time

As it exists through out its life Revenue is recognized at the

point of time

Revenue is recognized over the

time

Onerous contracts are accounted fore under IAS 37

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Customer loyalty programs

Change in incentive afterwards? The change will be a new PO

Yes

No

Points redeemed by issuer! Solely by issuer

Yes
No
Yes
Solely by others The points to be redeemed is a
separate PO and revenue will
No
Yes be recognized on satisfaction of
PO
Revenue is recognized
immediately and amount
received for CLP is contract Points redeemed by issuer or
liability others, revenue relating to
CLP is deferred until the
points redeemed or expired

IFRS 15 How to implement?

1 January 2018 = mandatory effective date

How to make a transition?

Full retrospective adoption Modified retrospective adoption

= retrospectively to each prior reporting period = retrospectively with cumulative effect at the
date of initial application
Expedients:

No need to restate completed contracts Comparatives presented under prior IFRS

within the same annual period
No need to estimate variable considerations in IFRS 15 applied to existing and new contracts
the comparative periods onwards
Some relief from disclosures Adjustment to opening retained earnings

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