REVENUE FROM CONTRACTS

WITH CUSTOMERS
(IFRS 15)

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 Definition of terms
• Income - increase in economic benefits during the accounting
period in the form of inflows or enhancements of assets or
decease of liabilities that result in an increase in equity, other than
those relating to contributions from equity participants

• Revenue - income arising in the course of an entity’s ordinary

activities.

• Contract - an agreement between two or more parties that

creates enforceable rights and obligations

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• Contract Asset - an entity’s right to consideration
in exchange for goods or services that the entity
has transferred to a customer when that right is
conditioned on something other than the passage
of time (for example the entity’s future
performance)
• Receivable - an entity’s right to consideration that
is unconditional- i.e. only the passage of time is
required before payment is due.
• Note: where revenue has been invoiced a
receivable is recognized. Where revenue has been
earned but not invoiced, it is recognized as a
contract asset.
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 Definitions…(Cont’d)
• 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
• 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.
• Performance obligation - a promise in a contract with a customer
to transfer to the customer either
 A good or service ( or a bundle of goods or services) that is
distinct; or
 A series of distinct goods or services that are substantially the
same and that have the same pattern of transfer to the
customer.
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 Definitions…(Cont’d)
• Stand- alone selling price - the price at which an entity
would sell a promised good or service separately to a
customer.
• Transaction price - 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.
Note: Revenue doesn’t include sales tax , value added
taxes or goods and service taxes which are only
collected for third parties, because these do not
represent an economic benefit flowing to the entity.
 
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 Revenue Recognition

• Recognize revenue when (or as) the seller

satisfies a performance obligation (point in time
or over time) by transferring a promised good or
service (i.e. an asset) to a customer (i.e. when the
customer obtains control of the asset)
• However, recognize expected loss immediately.
(onerous contract)

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 Revenue Measurement
• Measure revenue at:
- customer consideration adjusted for the
financial effects of significant financing
components.
- measure non-cash consideration at its fair
value.

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 IFRS 15’s Five-step Revenue Recognition model

• Identify the contract(s) with a customer

Step 1

• Identify the performance obligation(s) in the contract

Step 2

• Determine the transaction price

Step 3

• Allocate the transaction price to the performance obligations

Step 4 in the contract
• Recognize revenue when (or as) the entity satisfies a
Step 5 performance obligation
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 Step 1: Identify the contract with the customer

A contract with a customer is within the scope of IFRS 15 only

when:
• The parties have approved the contract and are committed to
carrying it out.
• Each party’s rights regarding the goods and services to be
transferred can be identified.
• The payment terms for the goods and services can be
identified
• The contract has commercial substance
• It is probable that the entity will collect the consideration to
which it will be entitled
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The contract can be written, verbal or implied. 9
 Step 2: Identify the performance obligations

A performance obligation is 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.

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Step 2: Identify the performance…(Cont’d)

• A company would account for a

performance obligation separately only if
the promised goods or services is distinct.
• A good or service is distinct:
– if it is sold separately, or
– if it could be sold separately because it has a
distinct function and a distinct profit margin.

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 Test Your Understanding

ChinaNet IT Solution Plc has developed an

accounting software package called ChinaNet. It
has entered into a contract with African Union to
supply the following:
a. Licence to use ChinaNet accounting software
b. Installation service. This may require an update to
the computer operating system, but the software
package does not need to be customised.
c. Technical support for the years
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 Test your understanding….(Cont’d)
d. Three years of updates for the software package
ChinaNet IT solution Plc is not the only company able to
install this software, and the technical support can also
be provided by other companies. The software can
function without the updates and technical support.
Required:
Explain whether the goods or services provided to African
Union are distinct in accordance with IFRS 15 Revenue
from contracts with customers

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 Step 3: Determine the Transaction price
• The transaction price is 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 (for
example, some sales taxes).
• Issues in determining transaction price:
a. Variable consideration
b. Existence of significant financing component
c. Non-cash consideration
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 Variable consideration
• Amount of consideration can vary because
of discounts, rebates, incentives, etc.
• Estimate the amount of variable
consideration using:
 Expected Value or
 Most likely amount

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 Expected value method

• The expected value is the sum of probability-

weighted amounts in a range of possible
consideration amounts.
• An expected value may be an appropriate
estimate of the amount of variable
consideration if an entity has a large number
of contracts with similar characteristics.

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 The most likely amount
• The most likely amount is the single most likely amount
in a range of possible consideration amounts (i.e. the
single most likely outcome of the contract).
• The most likely amount may be an appropriate estimate
of the amount of variable consideration if the contract
has only two possible outcomes (for example, an entity
either achieves a performance bonus or does not).

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 Variable consideration(Example)

Top Co. Supplies Laptop Computers to large businesses.

On July 1, 2005, the Co. entered in to a contract with HH Co. under
which HH to purchase Laptops at Br500 per unit. The contract
states that if HH Co. purchases more than 500 laptops in the
year, the price per unit is reduced retrospectively to Br450/unit.
Top Co’s year end is June 30.
a) At September 30,2005, HH Co. had bought 70 laptops from Top
Co. Therefore, Top Co. estimated that HH Co’s purchase would
not exceed 500 in the year up to June 30, 2006, and HH Co.
would not be entitled to the volume discount.

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 Variable consideration(Example)….

b) During the quarter ended December 31, 2005, HH Co.

expanded rapidly and purchased additional 250 laptops from
Top. Co. Top then estimated that HH Co’s purchase would
exceed the threshold (500) for the volume discount in the
year up to June 30, 2006.
Required: Compute revenue recognized by Top Co. for the
quarter ended
a) September 30, 2005
b) December 31, 2005

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 Variable consideration (Example)…
Solution:
a)Revenue for the quarter ended September 30,2005
70 laptops sold x Br500/unit=Br35,000
This is because the purchasing pattern shows the Co. may not buy
more than 500 during the year, so not entitled to volume discount,
not appropriate to reduce price to Br450/unit
b)Revenue for the quarter ended December 30,2005
250 additional laptops sold x Br450/unit………………….Br112,500
Less:70 laptops x50/unit (discount on earlier sale) ……….(3,500)
Revenue for the quarter ended Dec. 31,2005…Br109,000
This is because the purchasing pattern shows the Co. may buy more
than 500 during the year, so entitled to volume discount. It is
appropriate to reduce price to Br450/unit

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 b. Existence of significant financing component

• Adjust consideration - if timing provides

customer or entity with significant benefit
of financing
• Practical expedient – no adjustment if the
period between consideration and transfer
of good and service is one year or less

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 Test your understanding
On Sene 27, 2008 Ethiochina plc sold a truck to Bale
Construction Co. for Birr 1.21m. As Bale has shortage of cash to
pay on this date, the two parties agreed the payment date to
be Sene 30, 2010. Currently the cash selling price is Birr 1m
per truck. Ethiochina’s internal rate of return is 10%.
Required:
a. Does the transaction have a significant financing component?
b. What is the amount of revenue from this transaction as of
Sene 30,2008.
c. Show the accounting treatment If there is a significant
financing component

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 Solution
a. The cash selling price is Bir1m
promised consideration is Birr 1.21m
This indicates that there is a significant financing
component
b. The amount of revenue as of Sene 30, 2008
is Birr 1m
Receivable………….1m
Sales………………..1m

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 Solution….(cont’d)

c. Sene 30,2009
Receivables…………. 0.1m
Finance income……………0.1m
( 0.1x 1m= 0.1m)
Sene 30, 2010
cash 1.21m
Receivables…………….1.1m
Finance income…….. 0 .11m*
* 0.11 = 1.1m x 0.1

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 c. Non-cash consideration
• Measure at fair value
• If fair value cannot be estimated, measure
consideration indirectly by reference to stand-
alone selling price of the goods or services
transferred.

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 Step 4: Allocate the transaction price to
performance obligations

Allocate revenue between elements based on standalone

selling price of each separate performance obligation

Observable price at which an entity would

Standalone sell a promised good or service separately to
selling price a customer

If not directly observable, standalone

selling price shall be estimated

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 Test Your Understanding

Ethiotelecom gives a free wireless apparatus when

they sign a two-year contract for provision of
network services. The apparatus has a stand-
alone price of Birr 500 and the contract is for Birr
44 per month.
Required:
a. Identify the performance obligations
b. Identify the transaction price
c. Compute the annual revenue for each year
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 Answer
a. Provide the Apparatus and
provide network service
b. Br 1056 (Br 44 x 24)
c. Price Allocation:
Birr %
Apparatus 500 32%
Service for 2 years 1056 68%
1556 100%
Revenue Year 1:
Apparatus ( 1056 x 32%) 337.92
Network Service( 1056-337.92)/2 359.04
696.96
Revenue (Network Service) Year 2: 359.04
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Step 5: Recognize Revenue when ( or as) a performance obligation is
satisfied

• Revenue is recognised when (or as) an entity

satisfies a performance obligation by
transferring a promised good or service (i.e.
an asset) to a customer.
• An asset is transferred when (or as) the
customer obtains control of that asset (i.e.
point in time or over time)

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 Recognition of revenue (over time)

• The customer simultaneously receives and consumes

the benefits provided by the entity’s performance as
the entity performs
• The entity’s performance creates or enhances an asset
that the customer controls as the asset is created or
enhanced
• The 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.
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 Recognition of revenue (point in time)

 Recognise revenue when control transfers

 Indicators of the transfer of control of a good or service
include:
– The entity has a present right to payment
– The customer has legal title
– The entity has transferred physical possession
– The customer has the significant risks and rewards of
ownership
– The customer has accepted the asset

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 Test Your understanding
• Alem enters in to a 24-month telecom plan with the local
mobile operator, Tele PLC. The terms of the plan are as
follows:
• Alem’s monthly fixed fee is Br 500 per month.
• Alem receives a free handset at the inception of the plan.
• Tele PLC sells the same handsets for Br 3000 and the
same monthly prepayment plans without handset for Br
500 per month.
Required:
How should Tele PLC recognize the revenues from this plan
in years 1 and 2 in line with IFRS 15?
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 Test Your Understanding
Zoma Construction PLC has the following information about a building that it is
constructing for a client as at June 30, 2019.
Date started October 2018
Total contract revenue Birr 450 million
Costs Incurred to 30/06/2019 230 million
Value of performance obligation satisfied to 30/06/2019 315 million
Amount invoice for work certified to 30/06/2019 270 million
Cash received to 30/06/2019 250 million
Estimated cost to complete 120 million

Zoma calculates satisfaction of performance obligations based on work certified

as a percentage of contract price.
Required:
Prepare calculation showing the amount to be included in the statement of
profit or loss and statement of financial position at sene 30,2008
AAU School of Commerece
 THE END

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