International Corporate Reporting

IFRS 13- defines fair value as a price that would be received to sell an asset or paid to transfer liabilities
in the orderly (обычный) transaction between market participations at the measurement date.

Objectives:

1. What FV is?
2. Rules for fair value
3. What should be included in notes?

Scope:

 Assets, equity, liabilities

 Applies for initial and subsequent measurement
 Applies for groups of assets, liabilities, equities
 Applies when another IFRS requires fair value management or disclosure about fair value

Fair value price is a current market-based price

In favor of Fair value In favor of value in use or fulfilment value

 Current exit price is relevant to decision  Emphasis a measurement as a going
makers and investors concern
 Could be applied when an entity wants to 
extinguish a liability or refinance it in
another way
 Makes enable to investors to evaluate
alternative investment options

When transaction price not the same as fair value

1. Principle market or not (If principle use this price without Transaction costs)
2. Not, most advantageous market without transaction costs

Highest and the best use

HBU of a non-financial asset must be
 physically possible,
 financially feasible (does the use produce adequate cash flows to provide an
investment return required by market participants) and
 legally permissible

nputs used for valuation techniques are categorized into:

Level 1 inputs: Unadjusted quoted prices in active markets for identical assets or

liabilities that the entity can access at the measurement date.  Observable prices.

(Most reliable indication of FV)

Level 2 inputs: All inputs other than quoted prices included in level 1 that are

observable, either directly or indirectly, for the asset or liability, e.g. quoted prices for

similar assets in active markets.

Level 3 inputs: Unobservable inputs used to measure FV to the extent that relevant

observable inputs are not available. Might include the entity ‘s own data.

IFRS 15

Revenue

Recognition, measurement

Stand-alone selling price: The price at which an entity would sell a promised good or

service separately to a customer.

Revenue: Income arising in the course of an entity‘s ordinary activities.

Objectives

1. principles that an entity must apply to report information about a contract with a customer
2. information should include
o nature of revenue
o amount of revenue
o timing of revenue
o uncertainty (неопределенность) of revenue

Scope of IFRS 15

An entity has to apply IFRS 15 to all contracts with customers, except the

following:

 Lease contracts
 Insurance contracts
 Contracts that are financial instruments

IFRS 15 also does not apply to non-monetary exchanges between entities

in the same line of business to facilitate sales to customers or potential

customers.

For example, IFRS 15 does not apply to a contract between two oil companies

that agree to an exchange of oil to fulfil demand from their customers in different

specified locations on a timely basis.

Income - increase in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in increases in equity, other than those
relating to contributions from equity participants.

Includes both: revenue and gains

Revenue - is connected to economic activity involving exchange with a customer.

The core principle of IFRS 15 is to recognise revenue to show the transfer of goods or services in an
amount that reflects the consideration that an entity expects to receive.

Revenue is recognised using a 5-step model.

5-step model

1 Step Identify the contract with a customer

2 Step Identify the performance obligation in the contract Recognition

3 Step Determine the transaction price

Step 4 Allocate the transaction price to the performance obligations in the contract Measurement

Step 5 Recognize revenue when (or as) the entity satisfies a performance obligation.

1 Step Identifying of a contract:

Contract = agreement between 2 or more parties that creates enforceable rights and obligations

A contract should

 be approved
 parties should be able to identify their rights
 payment terms should be identifiable
 has commercial substance (коммерческое содержание существует если риск, сроки, суммы
будущих потоков в результате договора изменятся)
 an entity will receive a consideration to which it is entitled in exchange for good and services

Combination of contracts
 The contracts are negotiated as a package with a single commercial objective.
 Amount of consideration to be paid in one contract depends on the price or
performance of the other contract.
 The goods or services promised in the contracts (or some goods or services promised in
each of the contracts) are a single performance obligation.

Contract modification
Changes scope or a price or both
A contract modification needs to be accounted for as a separate contract if both of the following
conditions exist:
 Scope of the contract increases because of the addition of promised goods or services that are
distinct.
 Price of the contract increases by an amount of consideration that reflects the entity‘s stand-
alone prices of the additional promised goods or services.

4. Identification of the Contract – Contract Modifications: IFRS 15.18-15.21

Entity Morty promises to sell 120 products to a customer for EUR 12,000 (EUR 100 per
 product). The products are transferred to the customer over a 6-month-period. After the entity
has transferred 60 products, the contract is modified to require the delivery of an additional 30
products (a total of 150 identical products).
TASK:
How would you evaluate this contract modification and what would be the effect on revenue
recognition in the following cases:
Case A:
The price of the additional 30 products is EUR 95 per product. The pricing reflects the
standalone price of the additional products.
Case B:
The price of the additional 30 products was initially agreed to be EUR 80 per product,
which is not the stand-alone price. But before modification, the customer had identified
minor defects in the 60 units already delivered. Parties agreed that for this reason a
credit will be given for EUR 15 per product. The total credit of EUR 900
(60 x EUR 15) results in a price for the 30 additional units of EUR 50 (EUR 80 – (EUR
900/30)).

Solution:
Case A:
95 is a stand-alone price that leads to the creation of a new contract, not a modification
Case B:
80 is not a stand-alone price and the product is the same that means modification
The price of the remaining products should be reviewed
(100*60+ 30*80)/90= 93.33
900 is a reduction of the revenue

2 Step identifying of an obligation

A performance obligation is a promise in a contract with a customer to
transfer to the customer either:
 A good or service that is distinct (separate goods)
 A bundle of goods or services that is distinct (a bundle)
 A series of distinct goods or services that are substantially the same and that have
the same pattern of transfer to the customer.

A good or service is distinct if both of the following criteria are met:

 The good or service is capable of being distinct, i.e. the customer can benefit from the
good or service either on its own or together with other resources that are readily
available to the customer.
 The promise to transfer the good or service is distinct within the context of the
contract, i.e. the entity‘s promise to transfer the good or service to the customer is
separately identifiable from other promises in the contract.

Obligations NOT distinct

1 A firm provides significant services to integrate the g&s with other g&s (Buildings construction)
2 The entity significantly customizes g&s to fulfil the contractual obligations (Customization of the
software)
3 G&s are highly interrelated (designing a new machine and testing a prototypes)
 3 Step (determination of the price)

Elements of the transaction price:

1 Variable consideration (оплата)

2 Significant financing components

3 Non-cash considerations

4 Consideration payable to customer

The expected value—The expected value is the sum of probability weighted amounts in a range of
possible consideration amounts. This method is best used when an entity has a large number of
contracts with similar characteristics.

The most likely amount—The most likely amount is the single most likely amount in a range of possible
consideration amounts. This method is best used when the amount of variable consideration has only
two possible outcomes.

Customers rebate method

Consideration payable to customers should be deducted from the selling price multiplied with the
probability

Expected value method

The same method as above

Fix+ prob. * Bonus

Example Most Likely Amount Method

The easiest one, only calculate the most probable price

4 Step (Allocate a transaction price)

Principle: Allocation based on relative stand-alone selling prices

5 Step (Recognize revenue)

Performance obligations can be satisfied at a point in time or over time:
 At a point in time: Typically for promises to transfer goods to a customer. Revenue
recognition is based on the transfer of control of the good or service from the entity to
the customer.
 Over time: Typically for promises to transfer services to a customer. Revenue is
recognized over time by measuring an entity ‘s progress towards complete satisfaction
of the performance obligation.

Performance obligation is satisfied over time if one of the following criteria is

met:
1 Customer simultaneously receives and consumes the benefits provided by the
entity‘s performance as the entity performs, e.g. cleaning services or payroll
processing services.
2 Entity‘s performance creates or enhances an asset that the customer controls as
 the asset is created or enhanced.
3 Entity‘s performance does not create an asset with an alternative use to the entity
and the entity has an enforceable right to payment for performance completed to
date. This criterion is important for accounting for construction contracts.
Assessment of whether an asset has an alternative use to the entity is made at
contract inception.

Benefit

Control

No alternetive use+ right to a payment

Measure of progress:

Output method Input method

Direct measure of value to customer Based on entity‘s effort
• Surveys or appraisals
• Milestones (веха)
• Time elapsed
• Units produced