IFRS 15 Revenue from Contracts with Customers

Revenue recognition steps:

1. Identify the contract

2. Identify the separate performance obligation within a contract
3. Determine the transaction price
4. Allocate the transaction price to the performance obligation
5. Recognize revenue

1. Identify the contract:

A contract is an agreement between two or more parties that create enforceable

rights & obligations. It can be in writing or orally.

An entity can only account for revenue if the following criteria are met:
- The parties have approved the contract and are committed to perform their
obligations
- Party’s right can be identified regarding the transfer of goods/services
- Can identify the payment terms to be transferred
- Contract has commercial substance
- Probable that the entity will collect the consideration

2. Identifying the separate performance obligations within a contract:

Performance obligation means a promise to transfer goods/services

Some contracts has more than one performance obligation like selling of car and
after service.

The distinct performance obligation must be identified.

Agency commission: Agency must recognize the revenue based on the fee or
commission received.
3. Determining the transaction price:

The amount of consideration on behalf of exchange of goods/services. Sales tax is

excluded.

Kinds of consideration:

- Variable consideration:
Consideration received within a contract can vary due to rebates, incentives,
performance bonus.
The variable consideration must be estimated.
If the method of estimation depends on potential outcomes (two possible
outcomes) then the most likely amount will be considered.
If there a large number of contracts with similar characteristics then an expected
value will be considered.

- Financing:
If there is a financing component, then the consideration must be discounted to
PV.

- Consideration payable to a customer:

If consideration is paid to customer in exchange for goods/services, then it is the
purchase transaction and treated as purchases from suppliers.
If the consideration paid is not in exchange, then it should be reduced from the
transaction price

4. Allocate the transaction price:

Transaction price must be allocated to each performance obligation in proportion of

stand-alone selling prices.
If the stand alone price cannot be determined, then it is estimated.

Discount: The discount on sale must be allocated to each component. If a

component is separately sold at a discount, then discount must be allocated to the
specific component.
 5. Recognize revenue:
Revenue is recognized when the entity satisfies the performance obligation. It can
either be:
 Satisfying at a point in time
 Satisfying a performance obligation over time

Satisfying at a point in time:

Revenue must be recognized when the control of the asset has been transferred to
the customer.

Indicators of transfer of control:

- Entity has present right to payment for the asset
- Customer has legal title of the asset
- Entry has transferred physical possession of the asset
- Customer has risks and rewards of the asset
- Customer has accepted the asset

Satisfying a performance obligation over time:

It is satisfying a performance obligation over a time if it meets the following criteria:

 The customer simultaneously receives & consumes the benefits
 The entity’s performance creates or enhances an asset that the customer
controls as the asset is created or enhanced, OR
 Entity’s performance does not create an asset with an alternative use to the
entity

Calculation of Contract Asset:

STEP 1:

Determine profit/loss:

Contract price XXX

Less: Costs to date (XXX)
Less: Costs to complete (XXX)
Overall profit/loss XXX/(XXX)
STEP 2:

Methods of measuring progress :

 Output method:

Work certified
Total price

 Input method:
Cost
Total Cost

STEP 3:

Statement of profit/loss: (If profitable)

Revenue (Total price X progress %) XXX

Less: Revenue recognized in previous year (XXX)
Cost till date (XXX)
Cost of sale recognized in previous year XXX
Profit XXX

STEP 4:

Statement of financial position:

Revenue recognized to date XXX

Less: Amt invoiced/received to date (XXX)
Contract asset/liability XXX/(XXX)

Repurchase agreement:

A repurchase agreement is where an entity sells an asset and promises to repurchase

the asset. Then, this will not be recognized as a sale. Instead will be recognized as a
lease/secured loan.
 Repurchase
agreement

Control with Control with

the seller the customer

Put options-
Obligation to
Forward- Call options-
repurchase at
obligation to Right to
customer’s request
repurchase purchase

Call/Forward

SP- 1000 SP- 1000

Repurchase- 1200 Repurchase- 800
Treated as lease
Treated as loan

PUT

SP- 1000 SP- 1000

Repurchase- 1200 Repurchase- 800

SP- 1000
SP- 1000 SP- 1000 SP- 1000
Repurchase- 1200
Repurchase- 1200 Repurchase- 1200 Repurchase- 1200
MV-900
MV- 1400 MV- 1100 MV- 600
Sale with a right to
Sale with a right to Treated as loan Treated as lease
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