IFRS 15 – Revenue from contracts with customers

Dr. Trinh Hiep Thien, MPAcc (Usyd), MBA, ACMA, CGMA

When and how to recognize revenue

Before the After the
change change

IAS 18 Revenue

Effective date:
IAS 11 Construction Contract IFRS 15 1 Jan 2018
(Equivalent
SIC 31 Revenue – Barter transactions US GAAP – ASC 606)
involving with Advertising Services

IFRIC 13 Customer loyalty Programs

IFRIC 15 Agreement for the Construction of

Real Estate

IFRIC 18 Transfers of Assets from Customers

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 IFRS 15 Revenue from contracts with customers
= apply to ALL CONTRACTS with CUSTOMERS except for:
Lease contracts (IFRS 16) “as a party that has contracted with an entity to obtain
goods or services that are an output of the entity’s
Insurance contracts (IFRS 4) ordinary activities in exchange for consideration”
Purchaser of PPE (IAS 16), Intangible asset (IAS 38)

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

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

Complex contract = part of contract is under IFRS 15 and part is under different IFRS

Mortgage at fair value under IFRS 9

Remaining amount to assistance services under IFRS 15

Mortgage Assistance services 3

The 5-step Revenue Model

Step 2: Step 4:
Identify the performance Allocate transaction
obligations (PO) in the Variable consideration price to the PO in
contract Non-cash consideration the contract
Contract attributes Significant financing component Over time or a point in time
Contract modification Consideration payable to customer Contract costs

Promises
Stand-alone selling price
Distinct criteria
Principle vs. agent considerations
Step 1: Step 3: Step 5:
Identify the contract Determine the Recognize revenue
with customer transaction price when (or as) an entity
satisfies a PO
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 Example
Free handset +
12-month network
services
Handset
= $300
ABC

Network service
= $80/ month without handset
12  $100

Step 1: Identify the contract

with the customer
Contract attributes
Contract modification

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 Contract attributes
= agreement between 2 more parties creating
enforceable rights + obligations
Contract Written contract Oral contract

Attributes
Parties have approved the contract and are committed to perform
1,000 units
Each party’s rights to goods/ services can be identified
Supplier $1,000,000 Client
The payment terms for goods/ services can be identified
The contract have commercial substance $400,000

It is probable that an entity will collect the consideration (evaluate customer’s ability and intention
to pay)
IFRS “More likely than not” (>55%)
US GAAP “Likely to occur” (>70%)
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Failure to meet contract criteria

If a seller does not satisfy all of the five Step 1 criteria, then it should recognize revenue when it
has received the consideration and when one or more of the following have occurred:
 The seller has no remaining obligations to transfer goods or services and substantially all (or
all) of the consideration has been received by the seller and is nonrefundable, or
 The contract has been terminated and any consideration already received from the customer
is nonrefundable, or
Otherwise, shall recognize consideration as liability until performance obligation is met.

A traveler failed to check in

before the deadline timing. Can
airline recognize revenue of the
air ticket paid ?

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 Contracts combination vs. Contract modification
Combination of contracts

When 1 or more is met: Contract

 The contracts are negotiated as a package with a single commercial objective; OR
 The amount of consideration to be paid in one contract depends on the price or performance of the other contract; OR
 The goods or services promised in the contracts are a single performance obligation.

Contract modifications

= change in the scope, or price or both => must be a approved by the parties Contract
Prior approval => Based on enforceability
Access to land within 30 days

Compensation for delays

Constructor Customer
Made a CLAIM
Access provided after 90 days => = contract modification even if not approved (enforceable)
Constructor 9

Contract modification – Decision tree

Contract modification

II. CM = PART OF EXISTING

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

YES

I. CM = SEPERATE Consideration allocated to the remaining performance obligation:

CONTRACT = Consideration from the old contract not yet recognized

+ Consideration in the contract modification

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 Contract modification – Example

Ball PC, computer manufacturer, enters into contract with Forward University to
deliver 300 computers for total price of CU 600 000 (CU 2 000 per computer). Due
to necessary preparation works, Forward University agrees to deliver computers in
3 separate deliveries during the forthcoming 3 months (100 computers in each
delivery). Forward University takes control over the computers at delivery.
After the first delivery is made, Forward University and Ball PC amend the
contract. Ball PC will supply 200 additional computers (500 in total).
How should Ball PC account for the revenue from this contract under IFRS 15 if:
The price for additional 200 computers was agreed at CU 388 000, being CU 1
940 per computer. Ball PC provided a volume discount of 3% for additional
delivery which reflects the normal volume discounts provided in similar contracts
with other customers.
As of 31 December 20X1, Ball PC delivered 400 computers (300 as agreed initially
and 100 under the contract amendment).

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Contract modification – Example

Ball PC, computer manufacturer, enters into contract with Forward University to deliver 300 computers for total price of CU 600 000 (CU
2 000 per computer). Due to necessary preparation works, Forward University agrees to deliver computers in 3 separate deliveries during
the forthcoming 3 months (100 computers in each delivery). Forward University takes control over the computers at delivery.
After the first delivery is made, Forward University and Ball PC amend the contract. Ball PC will supply 200 additional computers (500 in
total).
How should Ball PC account for the revenue from this contract under IFRS 15 if:
The price for additional 200 computers was agreed at CU 268 000, being CU 1 340 per computer. The price for additional computers
was reduced significantly due to the following:
- Ball PC provided a discount of 30% for additional delivery because it hopes for the future cooperation with Forward University (nothing
even discussed yet). As a result, initial price for additional products was set at CU 1 400 per computer.
- After initial delivery, Forward University discovered minor defects on 50 computers and as a result, Ball PC agreed to provide partial
credit of CU 240 per computer. This credit is incorporated into the new agreed price for additional 200 computers (resulting price of (1
400*200-240*50)/200 = 1 340/computer).
Note: contract amendment was made after the first delivery.
As of 31 December 20X1, Ball PC delivered 400 computers (300 as agreed initially and 100 under the contract amendment).
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 Step 2: Identify the
performance obligation(s)
in the contract
Explicit and implicit promises
Distinct criteria
Principle vs. agent considerations

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Performance obligations

Performance = promise in a contract with a customer to

obligations transfer to the customer either:
1 2

Series of distinct goods/

A good/ service (or
services that are substantially
bundle) that is
the same and have the same
distinct
pattern of transfer
Series of
A good/ service
goods/ services = 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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 Performance obligations – Examples
ABC Corp., producer of cleaning machines, sells their cleaning machines to various companies. Determine the
performance obligations in the following contracts:

In contract with the client A, ABC promises to deliver 10 cleaning machines

for total price of CU 200 000. The contract A contains a clause about free
repair and maintenance service within 2 years after purchase.

In contract with the client B, ABC promises to deliver 5 cleaning machines

for total price of CU 100 000. No warranty is promised in the contract,
however, ABC Corp. is well-known for its perfect customer services and
providing 1-year free repair services in the past.

In contract with the client C, ABC promises to deliver 50 cleaning machines

for total price of CU 1 000 000. No warranty is promised in the contract, and
ABC usually does not provide any free services in the country of client C.
However, after the contract is signed, ABC offers free maintenance service to
a client C as a bonus for big order.
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What is “DISTINCT”?
Resale of goods purchased by entity

Sale of goods produced by entity

Resale of rights purchased by
an entity

Performing contractually
Examples: agreed-upon tasks

Granting licenses
Manufacturing, developing an
asset on behalf of a customer

Constructing on behalf of a customer

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 What is “DISTINCT”?
Performance obligations => What is “DISTINCT”?

A customer should be able to benefit from the good

or service
Nature of
Goods/ services are • on its own; or
goods/ capable of being distinct.
services • in combination with other available in-hand
resources.

• Entity is NOT using goods/services as an input

to produce or deliver combined output.
Business Goods/ services are
separately identifiable • The good/ service does not significantly modify
model of from other goods/ or customize another good/ service.
entity services in the contract. • The good/ service is not highly dependent with
other goods/ services in the contract.

M Co. enters into a contract to sell a pool filter system and a filter cartridge that is delivered two weeks later.
 The pool filter system cannot filter without the filter cartridge.
 Both the pool filter system manufacturer and sellers of generic filter cartridges sell the pool filter system and filter
cartridges separately. 17

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Performance obligations – Examples

Software license

Contract Installation

Software updates

Technical support
Customer Software developer

Scenario 1 Scenario 2

 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

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 Not distinct performance obligation
Goods/ services that are NOT distinct:
=> Combine until you get a bundle that is distinct

PC = Not distinct, must be combined

IT service = distinct

IT services sold either

PC only sold
separately, or with PC as
with IT services
a package

The government contracted a construction company to build a hospital.

There are many steps from laying down foundation, construct wards,
surgery rooms, etc.
How many POs in this project?
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Principal vs. agent considerations

Indicators
Principal To provide goods/ services itself  Primary responsibility for
fulfilling the contract
Revenue = gross amount
 Inventory risk
 Establishing prices

To arrange for another party to  Consideration =

Agent commission
provide goods/ services
 Customer’s credit risk
Revenue = net amount (commission)

Lazada operates a website on which Customers purchases goods from a range of suppliers. Lazada entitles a commission of
10% of sales price. The website facilitates payment, but the suppliers set the prices of products. Lazada requires non-
refundable payments from customers before orders are processed. A customer bought a dress at $500. How to account for it?
Is the online platform principal or agent?
How to recognize revenue in the book of the online platform?
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 Step 3: Determine the
transaction price

Variable consideration
Constraining estimates in variable consideration
Significant financing component
Non-cash consideration
Consideration payable to customer
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Transaction price
Amount of consideration 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 (i.e. VAT).
How to determine transaction price ?

Consideration payable to Variable consideration

a customer

Non-cash consideration Constraining estimates in

variable consideration

Existence of significant financing component 22

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 Variable consideration
Transaction price can be fixed or variable.
Why variable? Bonus discount rebate

Large number of
Expected value
similar transaction
Estimate variable
consideration
Only 2 possible
Most likely amount
outcomes

Ai Quoc Construction company is contracted to build an office building on or before a deadline. If Ai Quoc meets the
deadline, the contract price is $100m. Every 10 days delay, the contractor is required to compensate the customer by $5m.
There is 70% chance that the deadline can be met. 15% chance delay 10 days, 10% chance delay 20 days and 5% chance
delay 30 days.
Required
a. What should be the estimated contract price?
b. In year one, Ai Quoc completed 60% of the job. How much revenue should be recognised?
c. By the end of year two, Ai Quoc completed 90% of the job, and re-estimated that 95% that it can meet the deadline
and only 5% chance that it would delay by 10 days. How much revenue should be recognised in year 2?
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Constraining estimate in variable consideration

BigBooks Corp. is a company providing centralized accounting services for corporations. It
enters into a 3-year contract with client A. The contract states: Entities must also assess the contract to
 BigBooks will maintain all bookkeeping and document processing activities for client A, determine if there are any constraints to
including preparing annual financial statements, monthly reports and tax returns. BigBooks
prepare monthly reports and annual financial statements only in conjunction with
variable consideration.
bookkeeping and data processing performed by BigBooks' team.
 The annual fee is CU 272,000 per year , consisting of: CU 250,000 per year for up to 50,000
accounting entries, CU 1,000 per month for monthly reports and and CU 10,000 per year for
For the entity to include variable
annual financial statements and tax return. BigBooks is entitled to CU 5 per accounting entry consideration in the estimated
in excess of 50,000 entries per year.
transaction price, it has to conclude that
 BigBooks is entitled to an annual bonus payment of CU 12,000 if the average processing
time of 1 batch of 1,000 documents is less than 1 week in the particular year.
it is probable (70 to 75%) that a
Careful analysis of client's A activities and past accounting records show that in the first year,
significant revenue reversal will not
number of accounting entries is assumed at 48,000, in the second year at 50,000 and in the third occur in future periods.
year at 53,000.
Based on past work records and delivery times BigBooks Corp. assumes that the probability of
processing time of 1,000 documents in less than 1 week is 30%.
Required:
1. Identify individual performance obligations in the contract and determine the transaction price.
2. How would the transaction price change if the contract states that BigBooks is entitled to an
annual bonus amounting to CU 0-12,000 and its precise amount depends on number of times
when the batch processing time for 1,000 docs fell below 1 week during the year?

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 Existence of significant financing component
when delivery of the goods or services occurs in advance of the payment, the seller is
providing financing to the buyer.

Contract when delivery occurs well after payment, the buyer is providing financing to the seller.

When the time lapse between payment and delivery is more than one year, entities are required to separate the revenue
generated from the contract from the financing component if the financing component is significant at the individual contract
level.

Before After

The entity discounts the promised consideration amount back to the

present value, using the same discount rate it would use if it entered into
a separate financing arrangement.

The entity determines the future value of the payment, using the same
discount rate it would use if it entered into a separate financing
arrangement.

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Variable consideration
Significant Financing Component – Delivery before Payment Before After

KMR Enterprises enters into a sales contract with a new customer. Delivery occurs at
the date of contract inception. However, payment of the contract price of $1 million
will not occur until two years later. The interest rate charged in similar arrangements
in the industry is 10%.
Does a significant financing component exist? If so, what amount should KMR
record as sales revenue and what amount should KMR record as interest revenue?

Significant Financing Component – Delivery after Payment Before After

KMR Enterprises enters into a sales contract with a new customer. Payment of the
contract price of $1 million occurs at the date of contract inception. However,
delivery of the product will not occur until two years later. The interest rate charged
in similar arrangements in the industry is 10%.
Does a significant financing component exist? If so, what amount should KMR
record as sales revenue and what amount should KMR record as interest expense?
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 Non-cash consideration
PAYMENT =
Example
TrueTech provides laptop-related maintenance
services to Shemco. In exchange, TrueTech
received 100 shares of Shemco no-par common
stock. Determine the transaction price in the
contract for the following scenarios:
(a) 100 shares of Shemco’s stock is traded on an
active market for $55,000. The standalone
value of the maintenance services is
The transaction price should be measured at the fair $56,000.
value at contract inception of the noncash consideration (b) (b) Shemco is privately held, making it
received by the seller. difficult to estimate the fair value of the
shares given in exchange for the
maintenance services.
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Consideration payable to a customer

Example
Clever Company enters into a
contract with a customer in
which it promises to deliver For distinct goods or Not for distinct goods or
products for a price of $10 services, account for an services, e.g. discount, or
million. The contract also added obligation. refund, reduce the
stipulates a slotting fee of transaction price.
$250,000 that Clever Company
will pay to the buyer.
Manufacturers commonly pay a
slotting fee to retailers to have
their goods displayed
prominently in the retailers’
stores. What is the transaction
price in this contract?
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 Step 4: Allocate the
transaction price to the
performance obligations
Stand-alone selling price

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Allocate the transaction price to the PO

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

How to allocate the transaction price ?

=> Based on relative stand-alone selling price, except for:
Entity regularly sell each distinct each good/
service on a stand-alone basis
A bundle of some of these goods/services at a
Allocating discount to the sum of the standalone selling
discounts prices of the separate goods/services.
Discount attributable to each bundle is
substantially the same as discount in the
contract + analysis provide evidence.
Allocating
consideration
with variable
amounts
Example
GW Company is a wholesaler that sells hockey
equipment. It regularly sells the following
products separately at the following standalone
selling prices:
Sticks: $100; Helmets: $75; Skates: 300
GW also regularly bundles helmets and skates
together for $350. GW signs a contract with
Hockey Equipment Retailers to sell 100 sticks,
helmets, and skates for $45,000. GW determines
that each product is a separate performance
obligation.
How should GW allocate the transaction price to
each product?

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

How to allocate the transaction price ?

=> Based on relative stand-alone selling price, except for:
Allocating
discounts
The terms of the variable amount relate to
one or more, but not all, of the specific
performance obligations.
Allocating
consideration Allocating the variable amount entirely to
with variable one or more, but not all, of the specific
amounts performance obligations is consistent with
the objective of performing the allocation in a
way that reflects a reasonable allocation of
the transaction price on the basis of the
standalone selling prices.
Example
Franklin Inventors sells two of its patents in a contract
with a retailer that sells toys and other children’s
products. The first is a patent for a super absorbent
diaper and the second is a patent for a new digital toy.
Franklin determines that each of these patents
comprises a separate performance obligation. The
estimated standalone selling prices are $5 million for
the diaper patent and $2 million for the digital toy
patent. The stated price in the contract for the diaper
patent is a fixed payment of $5 million. The stated
price for the digital toy patent is 5% of the customer’s
future sales of the toys. Franklin estimates the variable
consideration for this patent to be $2 million.
What amount of the transaction price should Franklin
allocate to each performance obligation?
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How to estimate the stand-alone selling price?

Combination Adjusted market
assessment approach

01
Stand-alone selling price I. Take observable selling price
= the price at which the entity would sell 04 02 II. If observable selling prices
promised good or service separately to not available => make estimate
the customer at the contract inception. 03

Expected cost plus

Residual approach margin approach

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 Estimate stand-alone selling price

Adjusted market Expected cost

Residual
assessment plus margin
allocate the remaining
forecasted fulfilment
transaction price to the
Available exchange price costs, adds margin at the
goods or services that do
on a market amount the market would
not have observable
be willing to pay
standalone selling prices

Suitable in situations
suitable in situations
where a competitor Suitable where the other
where the direct
offers similar goods or two approaches are not
fulfilment costs are
services to use as a basis applicable
clearly identifiable
in the analysis

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Estimate stand-alone
selling price – Example
Bord Industries enters into a contract with a customer to sell three
products for a total transaction price of $650,000. Each product is
appropriately classified as a separate performance obligation. Bord
Industries sells products A and B only on an individual basis, so it
must estimate the standalone selling price for product C.
Information related to these three products is provided in the
following table.

Product Stand‐alone Selling Price  Market Competitor Prices  Forecasted cost

A $175,000 $133,000 $120,000
B $300,000 $312,000 $250,000
C Not available $200,000 $130,000
Total $645,000 $500,000
How should Bord Industries allocate the transaction price to the 3 products under each of the following 3 approaches?

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 Step 5: Recognize revenue
when (or as) an entity
satisfies a PO
Over time or at the point of time
Contract costs

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Recognize revenue when (or as) satisfies a PO

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

Control

- direct use of and obtain substantially all remaining benefit from assets, and
- prevent others from directing the use of, and obtaining the benefits from, an asset.

How can a performance obligation be satisfied?

At the point
Over time
of time
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 Recognize revenue when (or as) satisfies a PO

Performance obligation is satisfied if 1 of the following is met:

Over time

• 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 + an enforceable right to payment.

How to measure progress towards completion ?

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

Output Input
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Recognize revenue when (or as) satisfies a PO

RE Construct, property developer, builds a residential complex consisting of 50 apartments. Apartments have a similar size and
proportions - however, they can be customized to clients’ needs. RE Construct enters into 2 contracts with 2 different clients (A
and B). Both clients want to buy almost identical apartments and agree with total price of CU 100 000 per apartment. The
payment schedule is as follows:
- Upon the signature of a contract, clients pay deposit of CU 10 000 each.
- Milestone: 1 year prior planned completion, RE Construct will deliver progress reports to clients and clients need to pay CU
50 000 each.
- Completion: Upon the completion of the construction, the legal ownership to apartments is transferred to clients and they pay
the remaining amount of CU 40 000 each.
Assumed period of construction is 2 years from the date of contract. RE Construct has the right to retain the payments from any
client in the situation when that client defaults on the contract before its completion. The contracts with clients A and B are
NOT identical. Further contractual terms specify that:
- No other specific terms in the contract with client A.
- The contract with client B specifies that RE Construct cannot transfer or direct the apartment to another client and in return,
the client B cannot terminate the contract. If the client B defaults on the contract before its completion, RE Construct has the
right for all contractual price if RE Construct decides to complete the contract.
Total assumed cost of construction is CU 80 000, thereof CU 35 000 in the first year of construction and CU 45 000 in the
second year of construction.
When and how shall RE Construct recognize revenue from contract A and contract B? 38

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 Recognize revenue when (or as) satisfies a PO

Performance obligation is satisfied if control not transferred overtime:

At the point
of time

Indicators

• The seller has a present right to payment for the asset.

• The customer has legal title to the asset.
• The seller has transferred physical possession of 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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Contract costs
IFRS 15: Contract costs

Costs to obtain the contract Costs to fulfill the contract

If not within IAS2, IAS 16 and IAS 38

Capitalize if:
Sales Legal fees Bonuses to  Costs relate directly to contract
commissions employees  Cost generate/ enhance resources used in
satisfying performance obligations in the future
 Costs are expected to be recovered

 
Direct labor General + admin costs
Capitalize Direct material Wasted costs
Allocated costs Costs of past performance
+ Amortize
Chargeable costs Indistinguishable costs
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 BigBooks Corp. is a company providing centralized
accounting services for corporations. It enters into a 3-
year contract with client A to provide all bookkeeping
and data processing activities for the period of 3 years.
Before providing the services, BigBooks incurs the
following expenses:
 commission to a sales representative for arranging
the contract: CU 5 000
 fee to a lawyer for drafting and finalizing sales
contract: CU 3 500
 investment into additional 10 computers dedicated
to contract with client A: CU 4 000
 customization of existing accounting software to
BigBook's needs, preparing new chart of accounts

Contract costs - and data flows, testing: CU 13 000

 payroll expenses of 3 employees dedicated to

Example contract A for 3 years: CU 30 000.

How should BigBooks recognize these expenses in its
financial statements?

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The end! Address:

279 Nguyen Tri Phuong St., District
10, HCMC

Lecturer:
Dr. Trinh Hiep Thien, ACMA, CGMA

Email Address:
trinhhiepthien@ueh.edu.vn

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