REVENUE RECOGNITION

CHAPTER 12 - PFRS 15

Revenue from Contracts with

Customers

Simplified Presentation
 Introduction
Revenue is the income that a business has from its normal business
activities or income from ‘ordinary activities’ (means
normal trading or ordinary activities).
Ex. Sales, fees, interest, dividends, royalties, service income

A contract is an agreement between two or more parties that creates

enforceable rights and obligations. It can be
written, oral or implied.

A customer is the 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 considerations.
Issue date
 Issued May 2014.
 Sets out the requirements for recognizing revenue
that apply to all contracts with customers except for
contracts within the scope of;
 leases,

 insurance contracts and

 financial instruments.

 Effective from 1 January 2017.

 Earlier application is permitted.
 Supersedes
 IFRS 15 replaces the previous revenue Standards:
 PAS 18 Revenue
 PAS 11 Construction Contracts
 Revenue – Barter Transaction Involving Advertising Services
 PFRIC 13 Customer Loyalty Programs
 PFRIC 15 Agreements for the Construction of Real Estate
 PFRIC 18 Transfer of Assets from Customers
 Brief comparison
PAS 18 /11 PFRS 15

Separate models for: Single model for

• Construction contracts performance obligations:
• Goods • Satisfied over time
• Services • Satisfied at a point in time

Focus on risk and rewards Focus on control

Limited guidance on: More guidance:

• Multiple element Separating elements, allocating the
transaction price, variable
arrangements
consideration, licences, options,
• Variable consideration repurchase arrangements
• Licences and so on….
 PFRS 15 Core Principle
“a company should recognise revenue to
depict the transfer of promised goods or
services to the customer in an amount
that reflects the consideration to which
the company expects to be entitled in
exchange for those goods or services”
 The framework’s five steps in RR
Identify the contract(s) with the customer

Identify the performance obligations in the contract

Determine the transaction price

Allocate the transaction price

Recognize revenue when a performance obligation is satisfied

 Order of application
Core principle
Revenue recognised to depict transfer of goods or services

Step 1 - Identify the contract with the customer

Step 2 - Identify the performance obligations in the contract

Step 3 - Determine the transaction price

Step 4 - Allocate the transaction price

Step 5 - Recognise revenue when (or as) a performance obligation is

satisfied
Step 1- Identify the contract with the customer
 A contract is an agreement between two or more parties that
creates enforceable rights and obligations
 Can be agreed in writing, orally or through customary business
practices.
 An entity recognizes revenue if the contract meets ALL of the
following criteria:
 Both parties approved the contract and committed to perform their
respective obligations
 The entity can identify each party’s rights
 The entity can identify the payment terms
 The contract has commercial substance
 It is probable that the entity will collect the consideration it is
entitled to.
Step 2: Identify Performance obligation(s)

 Performance obligations are promises to transfer

goods or services to a customer that are:
 explicit,
 implicit, or
 arise from customary business practices
 Identifying performance obligations is critical to
measurement and timing of recognition. These
obligations should be distinct and identifiable to be
considered as one.
Step 3 – Determining the transaction price
 Transaction price is the amount of consideration that a
company expects to receive from a customer in exchange for
transferring a good or service to a customer. This does not
include the amount collected for 3rd parties such as business
taxes.
 Considerations in determining the transaction price:
 time value of money –length of the contract
 Estimates of Variable considerations – embodied in the contract
 non-cash consideration – at FMV
 consideration payable to customers: reduction to transaction price unless
for a distinct good or service.
 Step 4: Allocation of price to Separate POs

Allocation is possible when there are two or more (multiple)

performance obligations in a single transaction price.

 Allocate transaction price to separate performance

obligations based on relative standalone selling price:
 Adjusted market assessment approach
 Estimated Cost-Plus a margin approach
 Residual approach
Step 5: Revenue recognition

Recognize revenue when a PO is satisfied by

transferring a promised good or service to the
customer.

Recognition of Revenue could either:

 A Point in Time

 Overtime ( over a period of time)

 Contract Costs
 Costs incurred in direct relation to the PO in a contract.
 Should be recognized after recognizing revenue.

IFRS 15 provides a guidance about two types of costs related to the contract:
1. Costs to obtain a contract
Those are the incremental costs to obtain a contract. In other words, these costs
would not have been incurred without an effort to obtain a contract – for example,
legal fees, sales commissions and similar. These costs are not expensed in profit or
loss, but instead, they are recognized as an asset if they are expected to be
recovered.
2. Costs to fulfill a contract. If these costs are within the scope of IAS 2, IAS 16, IAS 38,
then we should treat them in line with the appropriate standard. If not, then we
should capitalize them only if certain criteria are met.
Disclosures
 Both qualitative and quantitative information including;
 Disaggregated information
 Contract balances and a description of significant changes
 Amount of revenue related to remaining performance
obligations and an explanation of when revenue is expected
to be recognised
 Significant judgments and changes in judgments
Other Revenue Recognition Issues
 Right of Return
 Bill and Hold
 Principal-Agent Relationship
 Warranties
 Repurchase Agreements
Right of Return
According to revenue recognition regulations, when a Right
of Return exists, a seller may or may not be able to
recognize all of the revenue at the time of sale. Generally,
the seller can record the sales revenue at the time of sale if
the seller is able to estimate the rate of product returns.

The estimated product return allowances should then be

recorded at the time of sale as well. However, if the seller is
unable to make a reasonable estimate of the amount of
future product returns, the seller should wait to record
revenue until the loss can be estimated or the return privilege
expires.
Bill and Hold Arrangement
Bill-and-hold basis is a method of revenue
recognition whereby revenue is recognized at
the point of sale, but the goods aren't delivered to
the buyer until a later date.

For example, a customer may request a company to

enter into such a contract because of the
customer’s lack of available space for the product
or because of delays in the customer’s production
schedules.
Principal-Agent Relationship
The principal-agent relationship is an arrangement in
which one entity legally appoints another to act on
its behalf. In a principal-agent relationship, the
agent acts on behalf of the principal and should not
have a conflict of interest in carrying out the act.

Under IFRS 15, a principal recognizes revenue and

expenses in gross amounts, and an agent
recognizes only fees or commissions
Repurchase Agreement
A repurchase agreement is a contract in
which an entity sells an asset and also
promises or has the option (either in
the same contract or in another
contract) to repurchase the asset.
Repurchase Agreement
Forward contracts and call options If an entity has an
obligation or a right to repurchase the asset (a forward
contract or a call option), a customer does not obtain control
of the asset because the customer is limited in its ability to
direct the use of, and obtain substantially all of the
remaining benefits from, the asset even though the
customer may have physical possession of the asset.
Therefore, the contract is accounted for as either:

(a) a lease in accordance with IFRS 16

(b) a financing arrangement
Repurchase Agreement
(a) a lease in accordance with IFRS 16 if the entity has an
obligation or a right to repurchase the asset for an amount
that is less than its original selling price, unless the
contract is part of a sale and leaseback transaction. If the
contract is part of a sale and leaseback transaction, the
entity continues to recognize the asset and recognizes a
financial liability for any consideration received from the
customer.

(b) a financing arrangement if the entity has an obligation or a

right to repurchase the asset for an amount that is equal to
or more than its original selling price
Repurchase Agreement
Put Option If an entity has an obligation to
repurchase the asset at the customer’s request (a
put option) at a price that is lower than the original
selling price of the asset.
(a) lease in accordance with IFRS 16 the customer has
a significant economic incentive to exercise the put
option, the agreement is accounted for as a lease
(b) Sale with a right of return - if the customer does
not have the significant economic incentive to
exercise the right.
 Thank you

have a great day always!