MFRS 15

REVENUE FROM
CONTRACT WITH
CUSTOMERS
TOPIC 7
LEARNING OBJECTIVES

AT THE END OF THE TOPIC, YOU SHOULD BE ABLE TO:

i) Describe and explain the principle of accounting for
revenue recognition.
ii) Explain and apply the five steps of revenue
recognition.
iii) Explain and apply the criteria of contract costs.
iv) Describe presentation and disclosure of revenue.
What Is Revenue?
Supersedes
 Definition terms
• MFRS 15 defines the following terms:;
• Contract – An agreement between two or more parties that creates enforceable rights and obligations.
• Customer – A party that has contracted with an entity to obtain goods or services that are an output of
the entity’s ordinary activities in exchange for consideration.
• Income – Increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in an increase in equity, other than those
relating to contributions from equity participants.
• Performance obligation – A promise in a contract with a customer to transfer to the customer either:
• a) A good or service (or a bundle of goods or services) that is distinct; or
• b) A series of distinct goods or services that are substantially the same and that have the same
pattern of transfer to the customer.
• Revenue – Income arising in the course of an entity’s ordinary activities.
• Transaction price (for a contract with a customer) – The amount of consideration 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.
5 Step Model for Revenue Recognition
• To recognise revenue the following five steps should be applied:
 STEP 1: Identify the Contract With A Customer
• A contract is defined in the MFRS as “an agreement between two or more parties that creates
enforceable right and obligations”
• A contract can be oral, written or implied by an entity’s business practice. A contract with a customer
will fall when all the following criteria are met:
i) The parties to the contract have approved the contract;
ii) Each party’s rights in relation to the goods or services to be transferred can be identified;
iii) The payment terms and conditions for the goods or services to be transferred can be identified;
iv) The contract has commercial substance; and
v) The collection of an amount of consideration to which the entity is entitled to in exchange for the
goods or services is probable.
• This requirement is necessary to prevent entities from recognizing revenue in the early stage of long--
term executory contracts when there are still terms or precedent condition not yet finalized.
 Contract
Combination of Contracts
• An entity should combine two or more contracts
entered into at or near the same time with the
same customer (or related parties of the
customer) and account for the contracts as a
single contract, if one or more of the following
criteria are met:
i) The contracts are negotiated as a package
with a single commercial objective.
ii) The consideration to be paid in one contract
depends on the price or performance of the
other contract; or
iii) The goods or services promised are a single
performance obligation
Contract of Modification
• A contract modification shall be accounted for
as a separate contract if the following
conditions are met:
i) There is an addition of promised goods or
services that are distinct, and which
increases the scope of the contract; and
ii) The price of the goods of the contract
increases by an amount of consideration that
reflects the entity’s stand-alone selling prices
of the additional goods or services and any
appropriate adjustments to that price to
reflect the circumstances of the particular
contract.
STEP 2: Identify the Performance Obligations

• At contract inception, an entity shall assess the goods or services that have been promised to
the customer, and shall identify as a performance obligation:
1) A good or a service (or a bundle of goods or services) that is distinct; or
2) A series of distinct goods or services that are substantially the same and that have the same
pattern of transfer to the customer.
 Determine the Transaction Price
• The transaction price would be the amount of consideration that an entity expects to be entitled
to in exchange for transferring promised goods or services to a customer. An entity will consider
the terms of the contract and past customary business practices when making this determination.
• Variable consideration - If a contract contains a variable amount, the entity will estimate the
amount to which it will be entitled under the contract. The consideration can also vary if an
entity’s right to consideration is contingent on the occurrence of a future event
• An entity should estimate an amount of variable consideration based on either of:
 Determine the Transaction Price (cont.)
• Constraint on variable consideration estimates - estimate of variable consideration can only be
recognised to the extent it is highly probable that a significant revenue reversal will not occur in
future periods.
• Existence significant financing component - if the timing of the payments provides a significant
benefit of financing to either the customer or the entity.
• Non-cash consideration - any non-cash consideration is measured at fair value. If its fair value is not
reasonably measurable, the entity is required to measure the consideration by reference to the
stand-alone selling price of the goods or services promised to the customer in exchange for the
consideration.
• Consideration payable to a customer –
i. cash amounts that an entity pays, or expects to pay, to the customer or to other parties that purchase the
entity’s goods or services from the customer
ii. or credit or other items (e.g., a coupon or voucher) that can be applied against amounts owed to the
entity or to the customer’s customer
• An entity shall 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 transferring the promised goods or services to the customer.
• Where a contract has many performance obligations, an entity shall allocate the
transaction price to the performance obligations in the contract by reference to their
relative stand-alone selling prices. If a standalone selling price is not directly observable,
an entity will need to estimate it.
• IFRS 15 suggests various methods that may be used, including:
i. Adjusted market assessment approach;
ii. Expected cost plus a margin approach; or
iii. Residual approach (only permissible in limited circumstances).
Recognize Revenue When A Performance Obligation
Is Satisfied
• An entity shall recognize revenue when (or as) it satisfies a performance obligation by
transferring a promised good or service to a customer, which is when control is passed, either
over time or at a point in time.
• Control of an asset means having the ability to direct the use of, and obtain substantially all of
the remaining benefits from, the asset.
 Contract Costs
If the entity expects to recover incremental costs of obtaining a contract with a customer, the entity shall
recognise those costs as an asset.
Costs of obtaining a contract
• costs that an entity incurs to obtain a
contract that it would not have incurred if
the contract had not been successfully
obtained, for example, a sales
commission. A practical expedient
however exists, allowing the incremental
costs of obtaining a contract to be
expensed if the amortisation period would
be one year or less.
Costs to fulfil a contract
• Costs incurred to fulfil a contract with a customer
are recognised as an asset only if all the following
criteria are met:
i. The costs relate directly to a contract or to an
anticipated contract that the entity can
specifically identify;
ii. The costs generate or enhance resources of
the entity that will be used in satisfying
performance obligations in the future; and
iii. The costs are expected to be recovered.
• An asset recognised with regard to the above cost
shall be amortised on a systematic basis that is
consistent with the pattern of transfer of the
goods or services to which the asset relates.
Disclosure
• Sufficient information to enable users of financial statements to
understand the nature, amount, timing and uncertainty of revenue and
cash flows arising from contract with customers shall be disclosed. To
achieve this, an entity shall disclose the qualitative and quantitative
information about all of the following:
➢ its contracts with customers;
➢ the significant judgments, and
➢ changes in the judgments, made in applying the guidance to those
contracts; and any assets recognised from the costs to obtain or fulfil a
contract with a customer.
Example 1:
Thank You