IFRS 15 - Presentation (Notes)

IFRS 15: Revenue from
Contract with Customers

Compiled by: Murtaza Quaid, ACA
IFRS 15: Revenue from Contract with Customers
In this video:
 The Five Step Model
 Step 1: Identify the Contract with Customers
 Step 2: Identify the Performance Obligation
 Step 3: Determine the Transaction Price
 Step 4: Allocate the Transaction Price to each
Performance Obligation
 Step 5: Recognize Revenue as each Performance
Obligation is satisfied
Compiled by: Murtaza Quaid, ACA IFRS 15: Revenue from Contract with Customers
When & How to recognize Revenue
Before the change After the change
 IAS 18: Revenue

 IAS 11: Construction Contracts IFRS 15:
 SIC 31: Revenue – Barter Transactions Revenue from Contract with
involving Advertisement Services Customers
 IFRIC 13: Customer Loyalty Programs
 IFRIC 15: Agreements for the Effective date: 1 January 2018
Construction of Real Estate
 IFRIC 18: Transfers of Assets from
Customer
The Five Step Model
 Step 1: Identify the Contract with Customers

 Oral / Written  Enforceable
 Step 2: Identify the Performance Obligation

 Distinct goods and services in the contract
 Step 3: Determine the Transaction Price

 Consideration for goods and services
 Step 4: Allocate the Transaction Price to each Performance Obligation

 On the basis of standalone selling price of each performance obligation
 Step 5: Recognize Revenue as each Performance Obligation is satisfied

 At a point of time or over the period of time
Step 1: Identify the Contract with Customers
 Contract is an agreement between two or more parties that creates

enforceable rights and obligations.
Contract
 Contracts can be written, oral or implied by an entity’s customary
business practices.
IFRS 15 requires contracts to have following attributes:

 Parties approved the contract and committed to perform their
Attributes respective obligations.
 Each party’s rights to goods/services can be identified.
 Payment terms for goods/services can be identified.
 Contract has commercial substance. and
 It is probable that the consideration will be received (Evaluate
customer’s ability and intention to pay).
If a contract does not meet any of the above condition, revenue is

recorded only when either:
If any
 the entity’s performance is complete and substantially all of the
attribute consideration (cash) has been collected and it is non-refundable; or
is missing  the contract has been terminated and the consideration received is
non-refundable.
 If each party to the contract has a unilateral enforceable right to

No terminate a wholly unperformed contract without compensating
Contract the other party (or parties), no contract exists under IFRS 15.
Contract Modification
A change in enforceable rights and obligations (i.e. scope and/or price) is only
accounted for as a contract modification if
 it has been approved by the parties, and
 creates new or changes existing enforceable rights & obligations.
Contract Modification
No
Are additional goods / services in CM Adjust the existing contract
distinct? [Catch-up Adjustment]
Yes
No  Terminate old contract & create new
Does consideration for added
contract
goods/services reflect stand-alone price of
distinct goods/services  Allocation of consideration :
 Consideration allocated to remaining PO =
Yes consideration from old contract not yet
recognized + consideration in the contract
Treat as “SEPARATE CONTRACT” modification
Step 2: Identify the Performance Obligation
Performance Obligation
 Promise in a contract to transfer to the customer either:
Good/service (or bundle of Series of distinct goods/services that

good/service) that is distinct are substantially same & have same
pattern of transfer to customer.
 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 internal approval)
What is DISTINCT?  2 criteria to met:
On its own; or
1. Customer can benefit from good or service either
together with other
AND resources that are readily
available to the customer
2. Promise to transfer good or service is separable from other promises in the contract.
 Entity is not using good / service as an input to produce or deliver combined output
 The good / service does not significantly modify or customize another good / service
 The good / service is not highly dependent with other good / service in the contract
[Assessment requires judgment & consideration of all relevant facts and circumstances]
What is DISTINCT?  2 criteria to met:
On its own; or
1. Customer can benefit from good or service either
together with other
AND resources that are readily
available to the customer
2. Promise to transfer good or service is separable from other promises in the contract.
 Entity is not using good / service as an input to produce or deliver combined output
 The good / service does not significantly modify or customize another good / service
 The good / service is not highly dependent with other good / service in the contract
[Assessment requires judgment & consideration of all relevant facts and circumstances]
Step 3: Determine the Transaction Price
Transaction Price
 Transaction price is the amount of consideration an entity expects to be entitled

to in exchange for goods or services (not amounts collected on behalf of 3rd
parties, e.g. sales taxes etc.)
 Transaction price may be affected by nature, timing, and amount of

consideration. Consider the following:
 Non-cash Consideration  Significant Financing Component
 Consideration Payable to a Customer  Variable Consideration
Non-cash Consideration
 Non-cash consideration is accounted for at its FV.
 If FV is not reliably determinable, it is measured at stand-alone selling price of

goods/services.
Consideration Payable to a Customer
 It includes cash paid / payable to customer as well as credits or other items such
as coupons and vouchers.
 It is a/c for as a reduction in TP, unless payment is in exchange for a good or
service received from customer. However, where:
 Consideration paid > FV of goods / services received from customer
 Difference is accounted for as reduction in TP
 FV of goods or services cannot be reliably determined
 Full amount is accounted for as reduction in TP
Significant Financing Component
 If timing of payments specified in contract provides either customer or entity

with significant benefit of financing the transfer of goods / services, TP is
adjusted to reflect financing component of contract.
 Significant financing component can either be explicitly stated in the contract
or implied by payment terms agreed between parties.
 Adjustment for effect of significant financing component is not required if
period b/w transfer and payment is 12 months or less.
Significant Financing Component
 Factors to consider in determining  A significant financing component does not exist

whether a contract contains a when:
significant financing component are:  Timing of transfer of control of goods/services is
 Difference between promised at customer’s discretion
consideration & cash selling  Consideration is variable and the amount or
price. timing of consideration is based on factors
 Length of time between transfer outside of control of parties.
of control of the goods or  Difference between consideration and cash
services and payment. selling price arises for other non-financing
reasons (i.e. performance protection e.g.
completion of post completion remedial work
on a building).
Variable Consideration
 Examples are discounts, rebates, refunds, concessions, incentives,

performance bonuses, penalties & contingent payments.
 Variable consideration must be estimated using either:
 Expected value method: based on probability weighted amounts within a
range (for large number of similar contracts)
 Single most likely amount: Amount within a range that is most likely to
eventuate (where there are few amounts to consider)
 TP can include variable consideration only if it is highly probable that
subsequent change in estimate would not result in reversal of revenue.
Step 4: Allocate Transaction Price to each Performance Obligation
Whether stand-alone selling price of each performance obligation is directly observable or not?
Yes No
 Allocate TP to each PO based on  Estimate stand-alone selling price of each
stand-alone selling price of each PO. PO by considering all available information
 Stand-alone selling price should including market conditions, entity-specific
be determined at contract factors and information about customer or
inception and represents the class of customers.
price at which an entity would
sell a good or service separately to a customer.  Use of observable inputs to be maximized
to the extent possible.
 Ideally, this will be an observable price at which an
entity sells similar goods or services under similar  Approaches that might be used to estimate
circumstances and to similar customers the standalone selling price are discussed in
next slide.
How to estimate the stand-alone selling price?
1) Market Assessment Approach

 Evaluate the market in which goods or services
are sold. 3) Residual Approach
 Estimate the price that customers in that market
would be willing to pay.  Total transaction price less the sum of the
observable stand-alone selling prices.
 Refer to prices from competitors for similar
goods or services adjusted for entity-specific  This method may only be used when:
costs and margins.  Selling price is highly variable; or
 Selling price is uncertain (price has not been
2) Expected Cost Plus Markup / Margin established yet or good/service has not been
previously sold).
 Estimate the expected costs of satisfying a PO
adjusted for an appropriate markup / margin.
Allocation of Discounts
 A discount exists if the sum of stand-alone

selling prices of each PO in the contract
exceeds the total consideration for the
contract.
 A discount is allocated on a proportionate
basis to all PO in the contract, UNLESS there is
observable evidence that the discount relate
to only some performance obligations in a
contract.
Allocation of Variable Consideration
 Variable consideration should be allocated

proportionately to all PO.
 However, variable consideration is allocated entirely to a
single PO if :
 Terms of a VC relate specifically to satisfy that PO; and
 Allocation of VC to a single PO is consistent with the
allocation objective.
Step 5: Recognize Revenue as each Performance Obligation is satisfied
 Performance obligation is satisfied when control of the promised goods or services

is transferred to the customer.
Performance obligation is satisfied (Control is transferred), and

hence revenue is recognized:
Over time At a point time
 For e.g. Construction  For e.g. the provision

services of a meal.
Performance Obligation is satisfied (Control is transferred) over

time if any one of the following is met:
 Entity’s performance does

not create an asset with
Customer an alternative use to the
Entity’s performance
simultaneously receives entity
OR creates or enhances OR
and consumes all of the AND
an asset controlled
benefits as the entity  Entity has an enforceable
by the customer
performs right to payment for
performance completed
to date
Performance obligation is satisfied (Control is transferred)
Over time At a point time

Recognize revenue in a way that depicts the entity’s Consider following indicators in evaluating the point
performance in transferring control of goods or services to in time at which control of asset has transferred to
customers. Methods include: customer:
 Output methods: For e.g.
 Entity has transferred title to the asset;
 Surveys of performance completed to date,
 Appraisals of results achieved,  Entity has transferred physical possession of asset;
 Milestones reached,  Entity has a present right to payment for asset;
 Units produced/delivered.
 Customer has accepted the asset; and
 Input methods: For e.g.
 Resources consumed,  Customer has the significant risks and rewards of
 Labour / Machine hours, ownership of the asset.
 Costs incurred,
 Time lapsed.
Contract Cost
Cost to obtain a Contract Cost to fulfill a Contract

 Only incremental costs of obtaining a contract that  If costs to fulfil a contract are within the scope of
are expected to be recovered can be recognized as other IFRSs (e.g. IAS 2, IAS 16, IAS 38 etc.) apply
asset. those IFRSs.
 Incremental costs are costs incurred in obtaining a  If not, a contract asset is recognized under IFRS 15
contract that would not have been incurred if the if, and only if:
contract is not obtained. Such as sales commission i. Costs relate directly to a contract (e.g. direct
that is only paid if a specified contract is obtained. labour, materials, overhead allocations etc;
 Incremental costs of acquiring a contract can be ii. Costs generate or enhance resources of entity
expense out if amortization period is equal to or that will be used to satisfy performance
less than 1 year. obligations in future; and
iii. Costs are expected to be recovered.
Contract cost to be amortized on a systematic basis that reflects the transfer of goods or services to the customer.
Contract Liability
 An entity’s obligation to transfer goods or services to a customer

for which the entity has received consideration (or the amount is
due) from the customer.
 A contract might require payment in advance or allow the supplier a right to

consideration that is unconditional (i.e. a receivable), before it transfers a good
or service to the customer.
 In these cases, the supplier presents the contract as a contract liability when the
payment is made or the payment is due (whichever is earlier).
Contract Asset & Receivable
Contract Asset Receivable
 An entity’s right to consideration in  An entity’s right to consideration

exchange for goods or services that it that is unconditional –i.e. only the
has transferred to a customer when that passage of time is required before
right is conditioned on something other payment is due.
than the passage of time (for example
the entity’s future performance).  In practice, where revenue has
been invoiced a receivable is
 A contract asset is reclassified as a recognized. Where revenue has
receivable when the supplier’s right to been earned but not invoiced, it is
consideration becomes unconditional. recognized as a contract asset.
Additional Consideration: Sales-based or Usage-based Royalties
 When consideration takes the form of a

sales-based or usage-based royalty for a
license of intellectual property, the entity
recognizes revenue only when (or as) the
later of the following events occurs:
 Subsequent sale or usage occurs; and
 PO to which some or all of sales or
usage-based royalty has been allocated
has been satisfied (or partially
satisfied).
Additional Consideration: Sale with a Right of Return
 When product are transferred with a right of return, revenue should not
be recognized for goods that are expected to be returned.
 Calculate the level of returns using
 Expected value method(probability-weighted sum of amounts); or
 Single most likely amount.
 Refund liability (rather than revenue) is recognized for any consideration
received to which vendor does not expect to be entitled (which relates to
goods expected to be returned). Any refund liability is reassessed and
updated at each reporting date.
 Asset is also recognized for vendor’s right to recover goods from
customers on settling the liability. Such asset is measured at carrying
amount of goods less any expected costs to recover such goods.
 Asset is presented separately from refund liability.
 If value is less than amount recorded in inventory, inventory is reduced
with a corresponding adjustment to cost of goods sold.
PRINCIPAL VERSUS AGENT
 In any transaction, the entity must establish whether it is acting as

principal or agent.
PRINCIPAL AGENT
 Entity is principal if it controls the promised  Entity is agent if its PO is to arrange for
good or service before it is transferred to the provision of goods or services by another
customer. party.
 When PO is satisfied, the entity recognizes  When PO is satisfied, the entity recognizes
revenue in the gross amount of the revenue in the amount of any fee or
consideration for those goods or services. commission to which it expects to be
entitled in exchange for arranging to
provide its goods or services for the other
party .
PRINCIPAL VERSUS AGENT
Indicators that an entity is agent rather than principal include:

 Another party is primarily responsible for fulfilling the contract.
 The entity does not have inventory risk before or after the goods have been ordered
by a customer, during shipping or on return.
 The entity does not have discretion in establishing prices for the other party’s goods or
services and, therefore, the benefit that the entity can receive from those goods or
services is limited.
 The entity’s consideration is in the form of a commission.
 The entity is not exposed to credit risk for receivable from a customer in exchange for
the other party’s goods or services.
WARRANTIES
Service type warranty Assurance type warranty

 That provides a customer with a services in  That provides a customer with the
addition to assurance that product will assurance that product will function as
function as specified. specified.
 For e.g: 2 years free repairs  For e.g: 15 days money back guarantee
 Customer can also purchase this warranty  Customer cannot purchase this warranty
separately. separately.
 Account for such warranty as separate  Account for such warranty as per IAS 37.
performance obligation and allocate a portion
of transaction price to it.
WARRANTIES
Classification of warranty
1) Whether warranty is required by law?

 If Yes --> Generally Assurance type
(For e.g. Quality control on food items/medicines, opening of parachute, )
 If No --> Generally Service type
(For e.g. Warranty on electronic appliances)
2) Length of the warranty period?

 Longer the period, additional services would be provided.
- Generally, Service type. For e.g: 1 year free repair and maintenance
 Shorter the period, additional services would not be provided
- Generally, Assurance type. For e.g: 3 days checking warranty in case of purchase of used mobile
phone
LICENCING
A license establishes customer’s rights over the intellectual property of a entity such as software &
technology, media & entertainment (e.g. motion pictures), franchises, patents, trademarks & copyrights.
 Whether license is integral component to the functionality of tangible good?

OR
 Whether customer can only benefit from the license in conjunction with a related service?
License is NOT distinct from other goods / services License is distinct from other goods / services
 Such license and other goods or services are

 Such license is a/c for as separate performance
accounted for together as a single performance
obligation (PO).
obligation.
LICENCING
License is distinct from other goods / services
Whether
(a) The entity can make changes to the intellectual property throughout the license period;
(b) The customer is exposed to the effects of these changes; and
(c) The changes do not constitute transfer of good/service to customer
Right to access Right to use
The customer has right to access the entity’s The customer has right to use the entity’s
intellectual property as it exists throughout the intellectual property as it exists at the point in
license period time at which the license is granted.
 The promise to grant a licence is treated as a  The promise to grant a license is treated as a
PO satisfied over time. PO satisfied at the point in time

IFRS 15 - Presentation (Notes)

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IFRS 15: Revenue from

Contract with Customers

Before the change After the change

 IAS 18: Revenue

 Step 1: Identify the Contract with Customers

 Step 2: Identify the Performance Obligation

 Step 3: Determine the Transaction Price

 Step 4: Allocate the Transaction Price to each Performance Obligation

 Step 5: Recognize Revenue as each Performance Obligation is satisfied

 Contract is an agreement between two or more parties that creates

IFRS 15 requires contracts to have following attributes:

If a contract does not meet any of the above condition, revenue is

 If each party to the contract has a unilateral enforceable right to

 Promise in a contract to transfer to the customer either:

Good/service (or bundle of Series of distinct goods/services that

What is DISTINCT?  2 criteria to met:

What is DISTINCT?  2 criteria to met:

 Transaction price is the amount of consideration an entity expects to be entitled

 Transaction price may be affected by nature, timing, and amount of

 Non-cash consideration is accounted for at its FV.

 If FV is not reliably determinable, it is measured at stand-alone selling price of

Consideration Payable to a Customer

Significant Financing Component

 If timing of payments specified in contract provides either customer or entity

Significant Financing Component

 Factors to consider in determining  A significant financing component does not exist

 Examples are discounts, rebates, refunds, concessions, incentives,

How to estimate the stand-alone selling price?

1) Market Assessment Approach

 A discount exists if the sum of stand-alone

Allocation of Variable Consideration

 Variable consideration should be allocated

 Performance obligation is satisfied when control of the promised goods or services

Performance obligation is satisfied (Control is transferred), and

Over time At a point time

 For e.g. Construction  For e.g. the provision

Performance Obligation is satisfied (Control is transferred) over

 Entity’s performance does

Performance obligation is satisfied (Control is transferred)

Over time At a point time

Cost to obtain a Contract Cost to fulfill a Contract

 An entity’s obligation to transfer goods or services to a customer

 A contract might require payment in advance or allow the supplier a right to

Contract Asset Receivable

 An entity’s right to consideration in  An entity’s right to consideration

 When consideration takes the form of a

 In any transaction, the entity must establish whether it is acting as

Indicators that an entity is agent rather than principal include:

 The entity’s consideration is in the form of a commission.

Service type warranty Assurance type warranty

1) Whether warranty is required by law?

2) Length of the warranty period?

 Whether license is integral component to the functionality of tangible good?

 Such license and other goods or services are

License is distinct from other goods / services

Right to access Right to use

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