IFRS UPDATES

IFRS 15
Revenue from Contracts with Customers
Objective

• Objective: To develop a single, principle-based revenue

standard for US GAAP and IFRSs

• Standards/Interpretations affected:
– IAS 18
– IAS 11
– IFRIC 13
– IFRIC 15
– IFRIC 18
– SIC 31
When to recognize revenue?

• Entities should recognise revenue to depict the transfer of promised

goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in
exchange.
Scope

• What is in scope or affected by the standard

– Contracts with customers
– Sale of some non-financial assets that are not an output of the
entity’s ordinary activities (e.g., property, plant and
equipment, intangible assets)
• What is not in scope
– Leasing contracts
– Insurance contracts
– Financial instruments and certain other contracts
– Certain non-monetary exchanges
– Certain put options on sale and repurchase agreements
• Recognize revenue when a 5
performance obligation is satisfied
• Allocate the transaction price 4
• Determine the transaction price 3
• Identify the separate performance 2
• Identify the contract with the 1
customer
Steps to apply the core principle:
Overview
Step 1: Identify the contract(s)

• A contract should meet the following criteria:

– Commercial substance
– Approval of the parties
– Rights and obligations.
– Payment terms
Step 2: Identify the separate performance
obligation(s)

Two-step model to identify which goods or services are distinct

Part 1:Focus on whether the Part 2: Focus on whether the

good or service is capable of good or service is distinct in the
being distinct context of the contract

Customer can benefit from the

individual good or service on its
own The good or service is highly
dependent on, is highly
interrelated with, or significantly
OR modifies or customizes other
promised goods or services in the
In combination with other contract
available goods or services
Step 3: Determine transaction price

• Estimate variable consideration at expected value or

most likely amount
– Use the method that is a better prediction of the amount
of consideration to which the entity will be entitled
• Adjust for time value of money only if there is a
financing component that is significant to the contract
Step 4: Allocate the transaction price

• Transaction price allocated to each separate

performance obligation in proportion to stand-alone
selling prices

• When the stand-alone selling price is not directly

observable, an entity is required to estimate the
selling price by:
– Maximising the use of observable inputs
– Applying estimation methods consistently for goods and
services and customers with similar characteristics
– Using a residual technique only when prices vary widely or
uncertain
Step 5: Recognise Revenue

• Revenue is recognised when

performance obligation is satisfied

• Revenue can be recognised:

– At a point in time; or
– Over a period of time
PFRS Updates PFRS 15

Step 5: Recognise revenue

• Revenue is recognised over a period of time when:

– The customer simultaneously receives the benefit as the
obligation is performed;
– The performance enhances the asset that the customer
controls; or
– The performance does not create an asset with alternative
use AND the entity has the right to payment for the
performance
PFRS Updates PFRS 15

Step 5: Recognise revenue

• Revenue is recognised at the point in time when the

customer obtains control of the promised asset.

– Indicators of control include:

• a present right to payment
• legal title
• physical possession
• risks and rewards of ownership
• customer acceptance
Overview and transition: adoption methods
available

*Contracts not competed in prior year as determine under legacy revenue

requirements (i.e., IAS 11, IAS 18 and related interpretations)
IASB Project Insights:
Leases
Why a Leases project?

Lessee
• Most assets and liabilities are off-balance-sheet
• Limited information about operating leases

Lessor
• Lack of transparency about residual values
• Consistency with lessee proposals and revenue
proposals
 Why a Leases project?
How the proposals address the issues

Recognition of lease
Most assets and
assets and liabilities Greater
Lessee liabilities are off-
for all leases of more transparency
balance-sheet
than 12 months about leverage,
assets used in
operations, and
Insufficient disclosure cash flows
Enhanced disclosure
Lessee about operating
requirements
leases

Separately account
Lack of transparency for residual asset Greater
Lessor about residual values transparency
of equipment and Enhanced disclosures about residual
vehicles about residual asset’s
exposure to risk values

Source: International Accounting Standards Board

 Proposed right-of-use model

A lease contract conveys the right to use an asset (the underlying

asset) for a period of time in exchange for consideration

Right-of-use asset

Lessor Lessee
Lease payments

Source: International Accounting Standards Board

18
 Dual approach

There is a wide spectrum of lease transactions

with different economics

Start of lease End of lease

Most
equipment/ Asset consumption
more than insignificant
vehicles

Most real Asset consumption not

estate more than insignificant

Source: International Accounting Standards Board

19
 Lease classification test
Leases for Leases for real
equipment are Type estate are Type B
A unless• unless • Lease term is
Lease term is
insignificant major part of
relative to total remaining
economic life of economic life of
asset asset
• Present value of • Present value of
lease payments is lease payments is
insignificant substantially all of
relative to fair fair value of asset
value of asset

Source: International Accounting Standards Board

20
 Lessee accounting model

Balance Income Cash flow

sheet statement statement

Most leases Cash paid for

Type Right-of-use Amortisation
of asset principal and
Interest
A equipment/
Lease liability expense
interest
vehicles payments

Right-of-use Single lease

Most leases of Cash paid
Type asset expense on a
for lease
real estate straight-line
B Lease liability basis
payments

Source: International Accounting Standards Board

21
 Lessor accounting model

Balance Income Cash flow

sheet statement statement

Most leases Lease Interest

Type of receivable income and Cash
A equipment/ Residual any profit on received
vehicle asset the lease

Continue to Lease income,

Type Most leases of recognise typically on a Cash
B property underlying
asset
straight-line
basis
received

Source: International Accounting Standards Board

22
FINANCIAL INSTRUMENTS
COMPLETING IFRS 9
Effective Date

• Mandatory Effective Date- January 1, 2018

• Early application is permitted
• Restatement of prior periods not required
Classification and Measurement
Financial Assets - Overview

Based on IFRS 9, the measurement basis will depend on:

 how the entity manages its financial instruments (its

business model); and,

 the contractual cashflow (characteristic of the financial

assets)
Classification and Measurement
Financial Assets - Overview

Amortized cost
 If business model is to hold instruments to collect contractual cash flows
(the ‘business model test’); AND
 The contractual terms of the financial asset give rise, on specified dates, to
cash flows that are solely payments of principal and interest
(‘characteristics of the financial asset test’)

Fair value
 FVTPL (fair value through profit or loss)  all other instruments, except
where FVTOCI option is used
 FVTOCI (fair value through OCI)  non trading equity investments (by
choice), but dividends through profit or loss
 No cost exception for unquoted equity investments
Classification and Measurement-

Is the financial asset a DEBT instrument or an EQUITY investment?

DEBT
DEBT DERIVATIVE
DERIVATIVE EQUITY
EQUITY

Meets the ‘Business model’ test? NO

YES Held for trading?

YES NO
NO
Meets the ‘Characteristics of the Fair value through OCI option
financial asset’ test? used?
NO
YES
YES YES
Fair Value Option (FVO) used?
NO

Amortized Fair value through FAIR VALUE

cost profit or loss THROUGH OCI
Amendments to IFRS 9
Classification and Measurement

• Introduction of the FVOCI category

• Clarification of Contractual Characteristic tests
• Clarification of Business Model Test
• Financial Liabilities- Own Credit
Classification and Measurement

Is the financial asset a DEBT instrument or an EQUITY investment?

DEBT
DEBT DERIVATIVE
DERIVATIVE EQUITY
EQUITY

Meets the ‘CF Characteristic’ NO

YES Held for trading?
test?
YES NO

Held to NO Held to collect NO

Fair value through OCI option
collect CCF CCF and sell? used?
only? NO
YES YES
YES YES
Fair Value Option (FVO) used?
NO NO
Amortized FVOCI Fair value through FAIR VALUE
profit or loss THROUGH OCI
cost
Business Model- To Collect and Sell

• Managing Liquidity
• Maintaining a particular interest yield profile
• Matching the duration of financial liabilities to
the duration of the assets they are funding.
Financial liabilities and own credit

• IFRS 9 requires changes in the fair value of an

entity’s own credit risk to be recognized in
other comprehensive income rather than in
profit or loss.
Classification and Measurement- Summary
• If a financial asset is a simple debt instrument and the objective
of the entity’s business model within which it is held is to
collect its contractual cash flows, the financial asset is
measured at amortized cost.

• If that asset is held in a business model the objective of which is

achieved by both collecting contractual cash flows and selling
financial assets, then the financial asset is measured at fair
value through OCI.

• If the business model is neither of these, then fair value

information is increasingly important so it is provided both in
profit or loss and in the balance sheet.
Business Model- Clarification

• Having some sales activity is not necessarily

inconsistent with this business model.
– Sales that are infrequent or insignificant in value
– Sales that occur as a result of an increase in credit
risk.
Cash flow Characteristic- Clarification

• IFRS 9 clarified that interest can comprise a

return for the
– time value of money;
– credit risk;
– return for liquidity risk;
– amounts to cover expenses; and
– a profit margin.
Impairment- Expected Loss Model

• Objective:
– To provide users of financial statements with more
useful information about an entity’s expected credit
losses on financial instruments.

• Requirement:
– Recognize expected credit losses at all times and
– Update the amount of expected credit losses
recognized at each reporting date to reflect changes in
the credit risk of financial instruments.
• There is objective evidence of impairment;
• Stage 3
Individual assessment is made;
• EIR is based on Net Receivables
• Recognize lifetime expected credit losses if
credit risk significantly increases Stage 2
• EIR is based on Gross Receivables
• Recognize 12-month expected credit loss in
P&L Stage 1
• EIR is based on Gross Receivables
OVERVIEW of Impairment Requirement
IMPAIRMENT REQUIREMENT
ACCOUNTING FOR EXPECTED CREDIT LOSS
Simplified Approach- Impairment
Thank You!!!