REVENUE RECOGNITION:

Revenue from Contracts with Customer (IFRS15)

IFRS (PFRS) 15 replaced the following standards and interpretations:

PAS 18 Revenue
PAS 11 Construction Contracts
SIC 31 Revenue–Barter Transactions Involving Advertising Services
PFRIC 13 Customer Loyalty Programs
PFRIC 15 Agreement for the Construction of Real Estate and
PFRIC 18 Transfer of Assets from Customers

OBJECTIVE of REVENUE RECOGNITION

The core principle of IFRS (PFRS) 15is that an entity will recognize revenue to
depict the transfer of promised goods or services to customers in an amount that
reflects the consideration (payment) to which the entity expects to be entitled in
exchange for those goods or services.

PFRS 15 contains guidance for transactions not previously addressed (service

revenue, contract modifications)

PFRS 15 improves guidance for multiple-element arrangements;

PFRS 15 requires enhanced disclosures about revenue.

REVENUE FROM CONTRACTS WITH CUSTOMERS adopts an asset-liability

approach.

Companies:
Account for revenue based on the asset or liability arising from contracts with
customers.

Are required to analyze contracts with customers

 Contracts indicate terms and measurement of consideration
 Without contracts, companies cannot know whether promises will
be met.

The FIVE-STEP process for REVENUE RECOGNITION

1. Identify the contract with customers. PFRS 15 defines a contract as an agreement
between two or more parties that creates enforceable rights and obligations and sets
out the criteria for every contract that must be met.

2. Identify the separate performance obligations in the contract. A performance

obligation is a promise in a contract with a customer to transfer a good or service to
the customer

3. Determine the transaction price. The transaction price is the amount of

consideration (for example, payment) to which 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.

4. Allocate the transaction price to the separate performance obligations. For a

contract that has more than one performance obligation, an entity should allocate
the transaction price to each performance obligation in an amount that depicts the
amount of consideration to which the entity expects to be entitled in exchange for
satisfying each performance obligation.

5. Recognize revenue when each performance obligation is satisfied.

REVENUE RECOGNITION SITUATIONS:

Types of Sale of Product Performing Permitting Sale of

Transaction from Inventory a Service use of an asset asset other than
inventory

Description Revenue from Revenue from Revenue from Gain or loss

of Revenue Sales Fees or interest, rents, on disposition
Services and royalties

Timing of Date of Sale Services As time passes Date of sale

Revenue or delivery performed or assets or trade-in
Recognition or billable are used
Collectability is only a gating question IFRS 15.

Under the revenue standard, the collectability criterion is included as a gating

question designed to prevent entities from applying the revenue model to
problematic contracts and recognising revenue and a large impairment loss at
the same time. The collectability criteria are likely to be met for many routine
customer contracts.

Collectability is assessed based on the amount that the entity expects to

receive in exchange for goods or services

The collectability threshold is applied to the amount to which the entity

expects to be entitled in exchange for the goods and services that will be
transferred to the customer, which may not be the stated contract price. The
assessment considers:
– the entity’s legal rights;
– past practice;
– how the entity intends to manage its exposure to credit risk throughout the
contract; and
– the customer’s ability and intention to pay.

The collectability assessment is limited to the consideration attributable to the

goods or services to be transferred to the customer for the non-cancellable
term of the contract. For example, if a contract has a two-year term but either
party can terminate it after one year without penalty, then an entity assesses
the collectability of the consideration promised in the first year of the contract
(i.e. the non-cancellable term of the contract)

Judgement is required to differentiate between a collectability issue and

a price concession IFRS 15.52, IE7–IE13, BC45

Judgement is required in evaluating whether the likelihood that an entity will

not receive the full amount of stated consideration in a contract gives rise to a
collectability issue or a price concession. In some situations, an entity may
use a portfolio of historical data to estimate the amounts that it expects to
collect. This type of analysis may be appropriate when an entity has a high
volume of homogeneous transactions. These estimates are then used as an
input into the overall assessment of collectability for a specific contract.

For example, if on average a vendor collects 60 percent of amounts billed for

a homogeneous class of customer transactions and does not intend to offer a
price concession, then this may be an indicator that collection of the full
contract amount for a contract with a customer within that class is not
probable.
Therefore, the criterion requiring collection of the consideration under the
contract to be probable may not be met. Conversely, if on average a vendor
collects 90 percent of amounts billed for a homogeneous class of contracts
with customers, then this may indicate that collection of the full contract
amount for a contract with a customer within that class is probable. Therefore,
the criterion requiring collection of the consideration under the contract to be
probable may be met. However, if the average collections were 90 percent
because the vendor generally collected only 90 percent from each individual
contract, then this may indicate that the vendor has granted a 10 percent price
concession to its customer.