Illustrative practical application for the most common scenarios

1. IFRS 15 – application of the 5 steps revenue recognition model

Customer enters into a 12 month contract with a mobile phone provider, offering a
new handset and a sim for £65 per month. The provider sells the same mobile phone
model for £600 outright.
Identify contract Contract to deliver a mobile phone handset and a 12
month network plan

Identify performance There are two distinct obligations - obligation to deliver a

obligations handset, obligation to deliver network services

Identify transaction price £65 per month amounting to £780 over 12 months
Allocate transaction price A handset and network plan stand alone prices are
to performance
obligations Standalone prices are
Handset £450 (60%)
Call and data plan £290 (40%)
Total £740 (100%)

Transaction price allocated to performance obligations:

Handset £468 (60% x £780)
Call and data plan £312 (40% x £780)
Total £780

Recognise revenue when Handset (at a point in time) £468

performance obligations When control over handset
are satisfied passed to customer

Network plan (over 12 months) £312 pa / £26 per

month

In the first month:

Cr revenue 468
Cr revenue 26
Dr receivable 494
Dr cash 65
Cr receivable 65
559 559

Dr cash 65
Cr revenue 494
Dr receivable 429

6
2. Contract modification
During the year ended 31/12/2018 coffee machine manufacturer receives an order
for 300 coffee machines from a retailer, at £500 per coffee machine (total order value
£150k), in 3 delivery batches.
01/08/2018 the first 100 coffee machines are delivered
01/09/2018 the retailer amends the original order by ordering additional 200 units.

The manufacturer agrees a 30% discount for the additional units (£350 per unit),
hoping to encourage further orders and a long-term business relationship with the
retailer.

By 31/12/2018 the manufacturer delivers 400 coffee machines (300 of the original
order, and another 100 towards the additional order).
New contract will arise if the modification relates to distinct goods and if the price at
which the goods are sold amounts to a stand-alone price at which the goods are
normally sold on the market.

Does contract modification result in new distinct goods or services supplied?

Yes (2 conditions are met)
 Additional units will deliver economic benefits the recipient (in their own right
or together with other goods)
 Promise of goods is separate from the other goods – the new order was
placed separately and subsequently to the original order and the new units
ordered can be distinguished from those in the original contract; the additional
units are not dependent or interrelated with other goods in the contract, or
integrated with an associated service.

Are the goods sold at a standalone selling price?

No. The consideration agreed for the additional units does not reflect the normal
stand-alone selling price, due to the significant discount offered exclusively to this
customer.

Is there a new contract?

The additional units on their own do not create a new contract limited to those units.
The additional order needs to be bundled with any unfulfilled part of the original
contract. Modification causes the original order for 300 units to be extinguished at
the quantities fulfilled prior to modification event (after the delivery of the first 100
units on 01/08/2018). A new contract is created at the point of modification, for all
units to be delivered after the modification date, reflecting new price per unit, as
follows:

£
200 units per original contract at £500
per unit to be fulfilled post modification 100,000
200 additional units at £350 per unit 70,000
Total 170,000

New price per unit:

£170,000 / 400 units = £425 per unit
As at 31/12/2018 the manufacturer recognises revenue as follows:

7
 £
Contract 1: Original units delivered
before the modification 100 x£500 50,000
Contract 2: Post modification units 105,000
Total revenue in y/e 31/12/2018
(200 original + 200 new – 100 delivered)
300 x £350 155,000

If the price offered was a standalone price, for example £490 per unit (which is
different from the original price of £500 but may simply reflect demand for the
product at the time when the additional order was placed), the modification would
have resulted in a new contract from the point of modification at £490 per unit . The
original contract would have continued unchanged, recognising all units still to be
delivered at the original price of £500.

If the modification did not create a separate promise, the old contract would have
continued and no new contract would be created. For example, if no additional units
were ordered, but instead the retailer negotiated a discount on the original price
applying to units already delivered, due to unsatisfactory quality, an adjustment to
revenue already recognised would modify the old contract retrospectively.

3. Revenue recognition ‘at a point in time’ vs. ‘over time’

A property developer constructs 50 identical residential units and enters into sales
contracts as follows:
 10% Deposit payable at the date of signing
 50% payment 1 year from signing date
 40% payment on completion

1) Contract A to sell unit 1 at £200k, with no other specific terms

2) Contract B to sell unit 2 at £200k with the following terms:
a) Buyer has an exclusive right to purchase unit 2 which cannot be transferred to
any other party unless the buyer defaults
b) Buyer is legally required to exchange and complete
c) Property developer is entitled to full consideration, even if the buyer defaults
d) Buyer has requested custom-made higher spec fit-out rather than standard

Contract A – revenue recognised at a point in time

 Vendor has no enforceable right to be paid before the payment is actually
received - If the buyer withdraws from the contract after paying the deposit, the
developer is entitled to the deposit funds only but no additional consideration in
proportion to the works completed to date
 Asset may have an alternative use to the vendor – there is no contractual
provision prohibiting the vendor from selling the unit to a different buyer, the unit
is not uniquely made to the buyer’s specification
 As a result, revenue is recognised at the point cash payments received

Contract B – revenue recognised over time

 Vendor does not have an alternative use of the asset – unit cannot be transferred
to another buyer

8
 Vendor has an enforceable right to be paid - Buyer has to complete and cannot
withdraw from contract
 Revenue is recognised over time using input or output methods
 Recognition pattern and timing does not correspond to cash received as in
contract A