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IFRS 15
Scope
IFRS 15
Effective for annual periods beginning on or after January 1, 2018, the revenue recognition criteria for
IFRS financial statements will be under IFRS 15.
The IFRS 15 focuses on a contract-based approach. As the name implies, the contract-based approach
focuses on the contracts with customers.
It is important to note that this section (IFRS 15) does NOT apply to the following customer contracts:
Lease contracts
Insurance contracts
Definition
Customer Contract: The IFRS 15 focuses on customer contracts. As such there has to be a
customer in the contract for the IFRS 15 to be applicable. To be considered a customer entity, it
has to obtain goods or services in exchange for consideration.
A contract doesn’t exist if each of the parties in the contract has the right to terminate
an unperformed contract without an approval from another party and without the
compensation to the other party
There are individual criteria’s in each of these steps above and discussed below.
i) The contract has been approved by all parties and parties are committed to perform their obligations
ii) The rights regarding goods or services to be transferred to buying party can be identified.
Commercial substance = means that the risk, timing, or amount of company’s current or future cash
flows is expected to change as a result of the contract. Commercial substance exists if the terms of the
contract is consistent with the selling parties line of business.
v) Collection is considered probable i.e. “More likely than not” the seller will get cash after assessing the
customers creditworthiness, financial resources and intentions to pay.
Key points:
a. If each party to the contract has the right to terminate an unperformed contract without paying any
compensation to the other party, then a contract does not exist.
b. If the criteria above is not met and there is no contract then you can still recognize revenue ONLY if
one of the following two things happen.
o All or substantially all of consideration is received from the customer and there is no further
obligation to perform services or deliver goods and it’s non-refundable; or
o Consideration is received from the customer that is non-refundable and the contract has been
terminated.
c. Modifications to the original contract: Treat the modified contract as a separate contract it the two
conditions are present:
o The change in the scope of the contract is due to the addition of distinct goods or services; and
o The price of the contract is increased by the amount of the seller’s stand-alone selling price of
the additional goods or services and any appropriate adjustments to price to reflect the
circumstances of the particular contract.
c.1 – If a contract modification is not considered to be a separate contract: In that case, the seller has
to account for additional goods or services as below:
o Termination approach i.e. replace the original contract with a new contract: Only if the
remaining goods or services are distinct from goods or services transferred on or before
modification.
o Continuation approach i.e. treat the modification as part of the original contract and adjust
revenue accordingly: Only if remaining foods or services are not distinct.
d. Combining two or more contracts. A seller should combine two ore more contracts at or near the
same time with the same customer or someone related to the customer, if any of the following
criteria are met:
o Amount of consideration to be paid in one contract depends on the price or performance of the
other contract;
o The goods or services promised in the contracts (or some goods or services promised in each of
the contracts) are a single performance obligation.
2. a series of distinct goods or services that are substantially the same and that have the same
pattern of transfer to the customer
Good or service is considered to be distinct if both of the following criteria’s are met.
i) The customer can benefit from the good or services on its own or with other readily available
resources (by using, consuming, or selling it); and
ii) The promise to transfer the good or service is separate from the other promised good or service
in the contract. That is this good or service is being purchased as separate item as opposed to be part
of a larger good or service. You need to consider the following factors in assessing this point:
o Good or service does not significantly modify another good or service promised in the contract
o Good or service is not highly dependent on, or interrelated with, other goods or services
promised in the contract
o The entity does not provide significant integration of the good or service with other goods or
services promised in the contract
If the two criteria are not met, then the goods or services are not considered to be distinct and are
bundled with other goods and services to be provided under a contract until a distinct performance
obligation is created.
The transaction price is the amount of consideration the company expects to receive in
exchange for providing the goods or services, excluding amounts collected on behalf of third
parties such as sales tax.
2/10, n/30, means a customer will get a 2% discussion if they pay within 10 days
of purchase but the regular due date is 30 days
Refunds or sale with a right of return: The expected amount is set up when sale is
recognized as a reduction in revenue with an offsetting liability and is reassessed at the
end of each year.
Other points:
The non-cash consideration is measured at fair value and included in the transaction
price.
If the payment and date of transfer of the goods or services is more than one year apart
then you should discount the payment and recognize interest revenue separately.
If in step#2, only a single performance obligation was identified, then this step is not required.
Otherwise the transaction price is allocated among multiple produces based on their relative
stand alone selling price.
If a stand-alone selling price is not directly available from other sales, the seller will need to
estimate an appropriate allocation considering all available information that is available.
Adjusted market assessment approach: The seller will evaluate the same price
for similar good or service sold in the market. This may include referring to
competitor’s prices and adjusting as necessary.
Expected cost + margin approach: The seller will estimate its costs and then ads
an appropriate margin.
The entity sells the same good or service to different customers for a
wide range of amounts; or
The entity has not yet established a price for that good or service and it
hasn’t previously been sold on a stand-alone basis
The bundles are usually at a lower price that the individual standalone selling prices. The general rule is
to allocate the discount proportionately to all performance obligations unless the following criteria are
met, in which case the discount is allocated entirely to one or more, but not all, performance
obligations:
The seller also regularly sells some of those distinct goods or services at a discount;
The discount being attributed to the goods or services is substantially the same as what
the seller regularly offers on the good or service.
Allocate only to the performance obligation(s) to which the variable consideration is attributable i.e. it is
attributable to one or more, but not all, performance obligations.
The change in the transaction price should be adjusted to the performance obligations
on the same basis as at contract inception. This means that the seller should not update
or reallocate the transaction price to reflect changes in standalone selling prices after
contract inception.
The seller should recognize revenue when it has satisfied its performance obligation. This could
be satisfied over time or at a point in time.
Performance obligation is satisfied when control of the goods or services are transferred to the
customer.
The customer receives or consumes the benefits provided by the seller simultaneously for e.g.
monthly subscription of netflix
The sellers performance enhances or creates an asset that the customer controls as the asset is
created or enhanced for e.g. work-in-progress
The sellers performance does not create an asset with an alternative use to the seller and the
seller has an enforceable right to payment for performance completed to date for e.g. a custom
equipment that is in work in progress and the seller cannot sell to a third party because it is
customized.
Once any of the criteria above is met, the revenue needs to be recognized over time.
The seller need to recognize revenue at the end of each period by comparing how much work has been
completed in relation to the total amount of work to be performed under the contract. The calculation is
is same as % of completion method in the old IAS11. Refer to our notes in IAS 11 for example on % of
completion.
IFRS 15 allows for the following two methods. Once the method is chosen then the seller must use the
same method of measuring progress consistently.
1. Output method:
Recognize revenue by prorating the value of the goods or services transferred to date relative to
the remaining goods or services promised under the contract i.e. the proportion of the good or
service that has been delivered compared with the proportion that still has to be delivered.
1. Input method:
Recognize revenue by prorating the total inputs used relative to the total expected input.
If the seller is unable to use one of the two methods because you can’t reasonably measure progress
to completion, then seller should only recognize revenue to the extent of costs incurred until you can
reasonably measure.
If a performance obligation is not satisfied over time, then the seller satisfies the performance
obligation at a point in time.
Indicators that performance obligation is satisfied at a point in time includes the customer
having:
o Legal title or
Warranties
Licensing
Repurchase arrangements
Consignment arrangements
Bill-and-hold arrangements
Customer acceptance
Changes to ASPE