IFRS 15: REVENUE FROM

CONTRACTS WITH
CUSTOMERS
ALFONSO SOLOMON R. MAGNO, CPA
INTRODUCTION

• Effective for annual periods beginning on or after January 1, 2018

• Replaces/supersedes the following standards:
• IAS 18, Revenue
• IAS 11, Construction Contracts
• IFRIC 13, Customer Loyalty Programmes
• IFRIC 15, Agreements for the Construction of Real Estate
• IFRIC 18, Transfers of Assets from Customers
• SIC-31, Revenue—Barter Transactions Involving Advertising Services
OBJECTIVE
To establish principles to report useful information to users of financial
statements about the nature, amount, timing and uncertainty of revenue
and cash flows arising from a contract with a customer

CORE PRINCIPLE
An entity should recognize revenue to depict the transfer of promised
goods or services to the customer in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for
those goods or services
SCOPE

• Applies to all contracts with customers except the following:

• Leases
• Insurance contracts
• Financial instruments
• Guarantees
• Certain non-monetary exchanges

• Only applies if the counterparty to the contract is a customer

• A customer is defined as 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.

• A contract with a customer may be partially within the scope of IFRS 15 and within the scope of another IFRS
standard.
THE REVENUE MODEL

• To recognize revenue, five steps should be applied at contract inception:

• Step 1: Identify the contract with customers
• Step 2: Identify the performance obligations in the contract
• Step 3: Determine the transaction price
• Step 4: Allocate the transaction price
• Step 5: Recognize revenue when a performance obligation is satisfied
APPLYING IFRS 15 AT A PORTFOLIO LEVEL

• IFRS 15.4 introduces a practical expedient that allows applying IFRS 15 to a portfolio of
contracts provided that the entity reasonably expects that the effects of adopting portfolio
approach would not differ materially from applying IFRS 15 to the individual contracts.
• Portfolio approach can be particularly useful for entities with large number of fairly
homogeneous contracts (e.g. telecommunications and entertainment industries).
STEP 1: IDENTIFY THE CONTRACT
WITH CUSTOMERS
 IDENTIFYING THE CONTRACT

• A contract is defined as an agreement between two or more parties that creates enforceable rights and
obligations.
• A contract can be oral, written or implied by business practice (e.g. by e-mail if allowed by local law).
• IFRS 15 only applies to valid contracts with customers that meet all the following criteria:
• The parties to the contract have approved the contract and are committed to perform their obligations;
• Each party’s rights in relation to the goods or services to be transferred can be identified;
• The payment terms and conditions for the goods or services to be transferred can be identified;
• The contract has commercial substance i.e. the risk, timing or amount of the entity’s future cash flows is
expected to change as a result of the contract; and
• The collection of an amount of consideration to which the entity is entitled in exchange for the goods or
services is probable.
 IDENTIFYING THE CONTRACT

• Cancellable contract: A contract does not exist if all parties to the contract have a unilateral
enforceable right to terminate the contract without compensating other parties (substantially
committed to the contract).
• Contract duration: IFRS 15 should be applied to the duration of the contract (i.e. the contractual
period) in which the parties to the contract have present enforceable rights and obligations. If there
are early termination provisions without penalty (or with only nominal penalty) entities must
carefully assess which rights and obligations are enforceable. It is possible that a long-term
contract will be treated as a monthly contract if substantive early termination options exist.
IDENTIFYING THE CONTRACT

• When a contract with a customer does not meet the criteria to identify a valid contract and
consideration is received from the customer, revenue shall only be recognized for the
consideration received when either of the following events happens:
• No remaining obligations to transfer goods or services to the customer exist and substantially all of
the consideration promised by the customer has been received and is non-refundable; or
• The contract has been terminated and the consideration received from the customer is non-refundable

• The consideration received for invalid contracts shall be recognized as a liability until one of
the events above happens or the contract becomes a valid contract. The liability is measured at
the amount received.
SAMPLE EXERCISE: COLLECTABILITY
CRITERION
A real estate developer (RED) enters into a contract with a customer for the sale of a building for USD 1
million. The customer intends to open a restaurant in the building. The building is located in an area
where new restaurants face high levels of competition and the customer has little experience in the
restaurant industry.
The customer pays a non-refundable deposit of USD 50,000 at inception of the contract and enters into a
long-term financing agreement with the RED for the remaining 95% of the promised consideration. The
financing arrangement is provided on a non-recourse basis, which means that if the customer defaults,
the RED can repossess the building, but cannot seek further compensation from the customer, even if the
collateral does not cover the full value of the amount owed. The RED’s cost of the building is €600,000.
The customer obtains control of the building at contract inception.
COMBINATION OF CONTRACTS

Contracts are combined and treated as a single contract for the purpose of IFRS 15 if they
are entered into at or near the same time with the same customer (or related parties of the
customer) in any one of the following cases:
• The contracts are negotiated as a package with a single commercial objective.
• The amount of consideration to be paid in one contract depends on the price or performance of
the other contract.
• The goods or services promised in the contracts (or some goods or services promised in each
of the contracts) are a single performance obligation.
CONTRACT MODIFICATIONS

• Change in the scope or price (or both) in a contract that is approved by the parties of the
contract that creates new, or changes existing, rights or obligations
• If the parties to a contract have approved a change in the scope of the contract but have not
yet determined the corresponding change in price, the change in the transaction price shall
be estimated by applying the guidance in step 3 regarding the estimation of variable
consideration and constraining estimates of variable consideration.
• To determine the accounting treatment of contract modifications, an assessment is made to
determine whether the modification is a separate contract or a change in an existing contract.
CONTRACT MODIFICATIONS

• A contract modification is accounted for as a separate contract when both the following
conditions are met:
• An addition of promised goods or services exists that is distinct and increases the scope of the contract;
and
• The price increase of the additional goods or services reflects the stand-alone selling prices of the
additional goods or services, with appropriate adjustments to reflect the circumstances of the particular
contract.

• If the above conditions are not met, the contract modification is treated as a change of the existing
contract. Changes of existing contracts are accounted for either prospectively or retrospectively.
CONTRACT MODIFICATIONS

• The contract modification is treated as a termination of the existing contract and the
creation of a new contract, if the remaining goods or services are distinct from the
goods or services transferred on or before the date of the contract modification.
• The amount of consideration to be allocated to the remaining performance obligations is
then the sum of:
• The portion of the transaction price of the contract before modification not yet recognized as
revenue.
• The additional consideration promised as part of the contract modification
SAMPLE EXERCISE: CONTRACT MODIFICATIONS

• Entity X promises to sell 120 products to a customer for USD12,000 (USD100 per
product). The products are transferred to the customer over a six-month period. Entity X
transfers control of each product at a point in time.
• After Entity X has transferred control of 60 products to the customer, the contract is
modified to require the delivery of an additional 30 products (a total of 150 identical
products) to the customer. The additional 30 products were not included in the initial
contract.
SAMPLE EXERCISE: CONTRACT MODIFICATIONS

Case B: Additional products for a price that does not reflect the stand-alone selling price
• During the process of negotiating the purchase of an additional 30 products, the parties agree on a
price of USD 80 per product.
• In accounting for the sale of the additional 30 products, the entity determines that the negotiated
price of USD 80 per product does not reflect the stand-alone selling price of the additional
products.
• As a result, the amount recognized as revenue for each of the remaining products is a blended price
of USD 93.33 {[(USD 100 × 60 products not yet transferred under the original contract) + (USD 80
× 30 products to be transferred under the contract modification)] ÷ 90 remaining products}.
CONTRACT MODIFICATIONS

• The contract modification is treated as part of the existing contract if the remaining
goods or services are not distinct. The modification is then treated on a cumulative catch-
up basis.
• Under the cumulative catch-up basis, the effect of the contract modification on both the
total transaction price and the measure of progress towards completion are recognized as
an adjustment to revenue at the date of the contract modification.
CONTRACT MODIFICATIONS

• When the remaining goods or services are a combination of creating a new contract and
adjusting an existing contract, the effects of the modification on the unsatisfied (including
partially unsatisfied) performance obligations are separated by following the principles of
both options 1 and 2.
• IFRS 15 does not specifically state how the separation between the creation of a new
contract and the adjustment of an existing contract (cumulative catch-up basis) should be
done and a logical application of the principles is needed.
STEP 2: IDENTIFY THE PERFORMANCE
OBLIGATIONS IN THE CONTRACT
OVERVIEW

• A performance obligation is a promise to transfer to the customer a good or service (or a bundle
of goods or services) that is distinct.
• At contract inception, goods or services promised in a contract are identified as separate
performance obligations (POs) when the goods or services are distinct.
• A series of distinct goods or services is also identified as a performance obligation when the
goods or services are substantially the same and have the same pattern of transfer to the customer.
• Performance obligations only include activities in a contract that transfers goods and services to
the customer.
DISTINCT GOODS OR SERVICES

• A good or service is regarded as distinct if the following two criteria are met:
• The customer can benefit from the good or service on its own or together with other readily
available resources; and
• The promise to transfer the good or service to the customer is separately identifiable from
other promises in the contract, which means that the promised goods and services are distinct
in the context of the contract.

• When promised goods or services are not distinct, they are combined until a bundle of
goods or services is identified that is distinct.
SEPARABILITY

The following factors identify whether goods and services are not separately identifiable:
• A significant service of integrating the good or service with other goods or services promised
in the contract is provided and therefore a combined output is provided.
• The good or service does significantly modify or customize another good or service promised
in the contract (or is modified or customized by other goods and services).
• The good or service is highly interdependent on or highly interrelated with other goods or
services promised in the contract.
NON-REFUNDABLE UPFRONT FEES

• Usually, the upfront fee does not result in the transfer of a distinct good or service to the
customer and therefore it is not treated as a separate performance obligation. Instead, it is
allocated to other performance obligations identified in the contract.
• When the up-front fees are deemed to be a compensation for set-up costs incurred by the
entity, those costs can be recognized as costs to fulfil a contract (assets)
SERIES OF DISTINCT GOODS AND SERVICES

A series of distinct goods or services has the same pattern of transfer to the customer if both
of the following criteria are met:
• Each distinct good or service in the series of goods and services is regarded to be a
performance obligation satisfied over time; and
• The same method would be used to measure the progress to completion of each distinct
good or service in the series to the customer.
A SERIES OF DISTINCT GOODS OR SERVICES
THAT ARE SUBSTANTIALLY THE SAME
• Entity A is a company manufacturing car parts. It contracts with a car producer to
manufacture 1 million car seats over the next three years. Each car seat is a distinct good,
but Entity A treats the whole contract as one performance obligation. It does so, because
in concludes that conditions in paragraph PFRS 15.35(c) are met (more on performance
obligations satisfied over time below). It does not matter whether the production will be
spread evenly over time or not.
STEP 3: DETERMINE THE
TRANSACTION PRICE
OVERVIEW

• The transaction price is the amount of consideration that an entity expects to be entitled to
in exchange for transferring promised goods or services to a customer. The transaction
price excludes amounts collected on behalf of others.
• The amount of consideration could be a fixed or variable amount and could be paid in
cash or otherwise.
VARIABLE CONSIDERATION

• Variable fees arise when an entity provides goods or services for a consideration that
varies based on the occurrence or non-occurrence of a future event.
• Variable amounts in a contract are estimated to determine the amount entitled under the
contract, including consideration contingent on the occurrence of a future uncertain event.
• A variable consideration is, however, not included in the transaction price if the
uncertainty regarding the amount is too uncertain (refer to constraining estimates of
variable consideration below).
ESTIMATING VARIABLE CONSIDERATION

The amount of variable consideration is estimated by using the following two methods
depending on which method better predicts the amount of consideration entitled to:
1. The expected value: the sum of probability-weighted amounts in a range of possible
consideration amounts. This method could be used to estimate the amount of variable
consideration for contracts with similar characteristics.
2. The most likely amount: the single most likely amount in a range of possible outcomes. This
method could be used to estimate the amount of variable consideration if only two possible
outcomes exist.
 ESTIMATING VARIABLE CONSIDERATION

• Entity A is a renovation company that provides renovation services for individual customers. It
entered into a contract with a customer for renovation of an old house. The contract has a fixed fee
of $50,000 plus the following performance bonuses: $20,000 if the work is completed in no more
than 6 months or $10,000 if the work is completed in 6 to 8 months. There is no performance
bonus if the work takes longer than 8 months. Entity A has considerable experience in similar
contracts and concludes that the probabilities of achieving a performance bonus are as follows:
• $20,000: probability 50%
• $10,000: probability 30%
• $0: probability 20%
CONSTRAINING ESTIMATES OF VARIABLE
CONSIDERATION
• Variable consideration is only included in the transaction price if, and to the extent that, it
is highly probable that its inclusion will not result in a significant revenue reversal in the
future when the uncertainty has been subsequently resolved.
• Both the likelihood and the magnitude of the revenue reversal should be considered in
assessing the constraint.
SAMPLE EXERCISE: VARIABLE CONSIDERATION

• Big Bed enters into a contract with a customer to sell beds for €400 per bed on January 1,
20XX. If the customer purchases more than 1,000 beds in a calendar year, the contract
states that the price per unit is retrospectively reduced to €380 per unit. As a result of this
the consideration in the contract is variable.
• As at March 31, 20XX, Big Bed sells 80 beds to the customer, therefore Big Bed
estimates that the customer’s purchase will not exceed the 1,000-bed threshold required
for the volume discount in the calendar year.
SAMPLE EXERCISE: VARIABLE CONSIDERATION

• At the beginning of June 20XX, the customer acquires another company and at the end of
the second quarter, June 30, 20XX, Big Bed sells an additional 500 beds to the customer.
• In light of the new fact, Big Bed estimates that the customer’s purchases will exceed the
1,000-bed threshold for the calendar year and therefore it would have to retrospectively
reduce the price per unit.
SIGNIFICANT FINANCING COMPONENT

• An adjustment for the time value of money is made to a transaction price for significant
effects of financing.
• The objective of adjusting the amount of consideration for a significant financing
component is to recognize revenue at an amount that reflects the cash price on the date of
transfer.
• As a practical expedient, a finance component need not be identified when the period
between the transfer of promised goods or services and the payment therefor is expected
to be less than 12 months.
SIGNIFICANT FINANCING COMPONENT

A significant financing component would not exist in the following cases:

• The goods or services are paid in advance and the timing of the transfer of those goods or services is
at the discretion of the customer.
• A substantial amount of the consideration is variable, and the amount or timing of that consideration
varies based on the occurrence or non-occurrence of a future event that is not substantially within the
control of the customer or the entity.
• The difference between the promised consideration and the cash selling price arises for reasons other
than the provision of financing and the difference between those amounts is proportional to the
reason for the difference. An example is a construction contract where a deposit is paid upfront to
protect the risk of non-performance by the customer.
NON-CASH CONSIDERATION

• Non-cash consideration is measured at fair value. However, when the fair value cannot
reasonably be estimated, the non-cash consideration is measured indirectly by reference
to the stand-alone selling price of the goods or services provided.
• When a customer contributes goods or services (such as materials, equipment or labor) to
facilitate the fulfilment of the contract, an assessment is made whether the entity obtains
control of the contributed goods or services. If control is obtained, the contributed goods
and services are accounted for as non-cash consideration received from the customer.
CONSIDERATION PAYABLE TO A CUSTOMER

• Consideration payable to a customer is normally regarded as a reduction of the

transaction price and resultant revenue, unless the payment to the customer is for a
distinct good or service transferred from the customer.
• When the consideration payable to a customer is for a distinct good or service from the
customer it is regarded as a normal purchase transaction. Any excess of the consideration
payable to the customer over the fair value of the distinct good or service is accounted for
as a reduction of the original transaction price.
CHANGES IN THE TRANSACTION PRICE

• A change in the transaction price after contract inception is allocated to performance

obligations on the same basis as at contract inception. The transaction price is therefore
not reallocated to subsequent changes in stand-alone selling prices. This is regarded as a
change in accounting estimates that is recognized when the change happens.
• A change in the transaction price from a contract modification is accounted for as a
contract modification discussed in step 1.
RIGHT OF RETURN AND OTHER REFUND
LIABILITIES
• For the sake of simplicity, right of return is not accounted for as a separate performance
obligation (e.g. there is no need to estimate a stand-alone selling price). Instead, the
following approach should be applied for contracts with a right of return:
• Revenue is recognized excluding the amount attributable to products expected to be returned.
• Unrecognized revenue from point 1. is recognized as a refund liability.
• Cost of sales is decreased and a corresponding asset is recognized for the products expected to
be returned. Value of this asset should take into account expected costs to recover returned
products and decrease in value, if applicable.
STEP 4: ALLOCATE THE TRANSACTION
PRICE
OVERVIEW

• The transaction price is allocated to different performance obligations in the contract by

reference to their relative stand-alone selling prices. If a stand-alone selling price is not
directly observable, it needs to be estimated.
• The stand-alone selling price is the price at which an entity would sell a promised good or
service separately to a customer.
• The best evidence of a stand-alone selling price is the observable price used in similar
circumstances to similar customers. Alternatively, a contractually stated price or a list
price for goods and services may be an indication of the standalone selling price.
ESTIMATING STAND-ALONE SELLING PRICE

Suitable methods for estimating the stand-alone selling price might include the following:
• Adjusted market approach: Evaluate the market in which the goods or services are sold and estimate
the price that a customer in that market would be willing to pay for those goods or services. This
approach might also include using prices of competitors for similar goods or services and adjusting
those prices as necessary to reflect the entity’s costs and margins.
• Expected cost plus a margin approach: Forecast the expected costs of satisfying a performance
obligation and adding an appropriate margin for that good or service.
• Residual approach: Estimate the stand-alone selling price by reference to the total transaction price
less the sum of the observable stand-alone selling prices of other goods or services promised in the
contract.
ESTIMATING STAND-ALONE SELLING PRICE

The use of the residual approach is limited to cases of uncertainty. Therefore, the residual
approach may only be used in any of the following cases:
• The same good or service is sold to different customers for a broad range of amounts
resulting in the selling price being highly variable and the stand-alone selling price not
being determinable from past transactions or other observable evidence.
• The selling price is not established for that good or service that has not previously been
sold on a stand-alone basis.
ALLOCATION OF A DISCOUNT

• A discount is granted for a bundle of goods or services if the sum of the stand-alone
selling prices of the promised goods or services in the contract exceeds the promised
consideration in a contract.
• Normally the overall discount is allocated between the performance obligations in a
contract on a relative stand-alone selling price basis. However, in some circumstances it
may be appropriate to allocate the discount to certain performance obligations in the
contract when there is observable evidence that the discount relates to specific
performance obligations in the contract.
ALLOCATION OF A DISCOUNT

A discount is allocated to only specific performance obligations in the contract if all of the
following criteria are met:
• Each distinct good or service in the contract is sold regularly on a stand-alone basis.
• A bundle (or bundles) of some of those distinct goods or services is also regularly sold on a
stand-alone basis at a discount.
• The discount attributable to each bundle of goods or services is substantially the same as the
discount in the contract and provides observable evidence of the performance obligation(s) to
which the discount belongs.
SAMPLE EXERCISE: ALLOCATING DISCOUNT

• An entity typically sells a phone, a 24-month service contract and 24-month phone
insurance together as a package for €25 per month. (Total: 600)
• The entity also sells the phone, the 24-month contract and the 24-month phone insurance
independently at €408, €15 per month for 24 months and €4 per month for 24 months,
respectively. (Total: 864)
• Lastly, the entity also sells the phone and the 24-month phone insurance as a package for
€480 (Total SSP 504).
ALLOCATION OF VARIABLE CONSIDERATION

• Variable consideration that is promised in a contract may be attributable to the entire

contract or to a specific part of the contract.
• A variable amount is allocated to a specific part of a contract if the terms of a variable
payment relate specifically to the satisfaction of specific performance obligation.
• The allocation of the variable must also meet the objective of depicting the amount of
consideration expected to be entitled to for transferring the promised goods or services to
the customer.
STEP 5: RECOGNIZE REVENUE WHEN
PERFORMANCE OBLIGATIONS ARE
SATISFIED
OVERVIEW

• Based on the principle of control, revenue is recognized when an entity’s performance

obligation is satisfied by transferring a promised good or service to a customer.
• A performance obligation could either be satisfied over time or at a point in time.
• The assessment of over time or at a point in time must be done at contract inception for
each performance obligation by first assessing the application of over time. If the
performance obligation is not satisfied over time it defaults to point in time.
PERFORMANCE OBLIGATIONS SATISFIED OVER
TIME
IFRS 15 determines that revenue is recognized over time if one of the following three
criteria is met:
• The customer simultaneously receives and consumes the benefit provided by the entity as the
entity performs; or
• The entity’s performance creates or enhances an asset that the customer controls as the asset is
created or enhanced; or
• 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 the performance completed to date.
CRITERION 1: SIMULTANEOUS RECEIPT AND
CONSUMPTION OF BENEFITS
• Pure service
• A performance obligation is regarded as a “pure service” satisfied over time if another
entity would not need to substantially reperform the work the entity has completed to date
if that other entity were to fulfil the remaining performance obligation to the customer.
SATISFACTION OF PERFORMANCE OBLIGATION
IN A TRANSPORTATION SERVICE
• Entity A contracts to transport a package from Madrid to Moscow. At the reporting
period, the package has already been transported to Berlin. Entity A should recogniize
revenue for the transportation completed to date (i.e. from Madrid to Berlin) as another
entity would not need to substantially re-perform the work that Entity A has completed to
date if that other entity were to fulfil the remaining performance obligation to the
customer and transport the package from Berlin to Moscow.
CRITERION 2: CUSTOMER CONTROLS THE ASSET
AS IT IS CREATED OR ENHANCED
• If the customer controls the asset, the customer could protect others from using the asset
and therefore indirectly receive the benefits the asset has created or enhanced.
• In certain instances, such as a construction contract that is fulfilled on the premises of the
customer, it could be easy to determine that the customer can restrict others from using
the asset as it is created or enhanced.
CRITERION 3: ENTITY’S PERFORMANCE DOES NOT
CREATE AN ASSET WITH AN ALTERNATIVE USE
• Two requirements must be present:
• The performance does not create an asset with an alternative use to the entity; and
• An enforceable right to payment exists for the performance completed to date.
CRITERION 3: ENTITY’S PERFORMANCE DOES NOT
CREATE AN ASSET WITH AN ALTERNATIVE USE
• In assessing the alternative use requirement, the effects of contractual restrictions and
practical limitations on the ability to readily direct that asset for another use should be
considered.
• A contractual restriction on the ability to direct an asset for another use must be
substantive for the asset not to have an alternative use to the entity.
• A contractual restriction is not regarded to be substantive if both:
• The asset is largely interchangeable with another asset without breaching the contract; and
• Significant cost will not be incurred to interchange the asset.
CRITERION 3: ENTITY’S PERFORMANCE DOES NOT
CREATE AN ASSET WITH AN ALTERNATIVE USE
• The second requirement, the right to payment for performance completed to date,
represents an entitlement to compensation for performance completed to date if the
customer or another party terminates the contract for reasons other than the failure to
perform as promised.
• The compensation should be an amount that approximates the selling price of the goods
or services transferred to date, being a recovery of the costs incurred to date plus a
reasonable profit margin.
STAND-READY OBLIGATION

• The substance of some performance obligations is to stand-ready to serve the customer

and not to deliver the underlying goods/services. Such performance obligations are
usually treated as satisfied over time with straight-line revenue recognition.
MEASURING PROGRESS TOWARDS COMPLETE
SATISFACTION OF A PERFORMANCE OBLIGATION
• If a performance obligation is satisfied over time, an entity should select an appropriate
measure of progress to recognize revenue over time.
• Determining the appropriate method for measuring progress considers the nature of the
good or service promised in the contract.
• Both input and output methods may be used to measure progress to completion.
• Progress towards completion should be remeasured at the end of each reporting period.
Such changes to an entity’s measure of progress shall be accounted for as a change in
accounting estimate in accordance with IAS 8.
OUTPUT METHOD

• Output methods recognize revenue based on a direct measurement of the value to the customer
of the goods or services transferred to date relative to the remaining goods or services promised
under the contract.
• Output methods include methods such as surveys of performance completed to date, appraisals
of results achieved, milestones reached, time elapsed and units produced, or units delivered.
• A practical expedient exists for using invoiced amounts if the amounts correspond directly with
the value to the customer of the entity’s performance completed to date. An example is service
contracts where fixed amounts are billed for each hour of service or unit delivered.
INPUT METHOD

• Input methods recognize revenue based on efforts or inputs to the satisfaction of a

performance obligation relative to the total expected inputs to satisfy the performance
obligation.
• Examples of inputs are resources consumed, labour hours used, costs incurred, time
elapsed or machine hours used.
• For practical reasons revenue might be recognized on a straight-line basis if the efforts or
inputs are incurred evenly throughout the performance period.
INPUT METHOD

• An issue with input methods is that there may not be a direct relationship between inputs
and the transfer of control of goods or services to a customer.
• Specifically excluded from an input method are efforts that do not depict the entity’s
performance in transferring control of goods or services to the customer.
REASONABLE MEASURE OF PROGRESS

• Revenue is only recognized based on performance obligation satisfied over time only if a
reasonable measure of progress towards complete satisfaction of the performance
obligation could be made.
• A reasonable measure would not be made if reliable information to apply an appropriate
method of measuring progress is not available. This could especially be applicable at the
early stage of a contract.
• If, however, the costs are recoverable, revenue is only recognized to the extent of the
costs incurred until a reasonable measure of progress could be made.
PERFORMANCE OBLIGATIONS SATISFIED AT A
POINT IN TIME
• If a performance obligation is not satisfied over time, the performance obligation is by default satisfied at a
point in time.
• To determine the point in time when revenue should be recognized, the requirements of control are
considered.
• Factors which may indicate that control is passed to the customer at a point in time are:
• The present right to payment for the asset exists
• The customer has legal title to the asset
• Physical possession of the asset is transferred
• The customer has the significant risks and rewards of ownership of the asset
• The customer has accepted the asset
ONEROUS CONTRACTS

• IFRS 15 does not have any specific provisions on onerous (loss-making) contracts,
therefore these IAS 37 requirements apply. When there are several performance obligations
in a contract, a provision is recognized only when the contract as a whole is onerous.
• IAS 37 is silent on the treatment of variable consideration, which can make a difference in
assessing whether a contract is onerous or not. IFRS 15 is prudent when it comes to
recognition of variable consideration, but we don’t have to follow the same approach in
assessing whether a contract is onerous. Variable consideration can be included in projected
cash inflow based on e.g. the expected value.
INCREMENTAL COSTS OF OBTAINING A
CONTRACT
• Recognized as an asset only when it is expected that the cost will be recovered through
the contract.
• A practical expedient, however, exists, allowing the incremental costs of obtaining a
contract to be expensed if the amortization period would be one year or less.
• Costs to obtain a contract that would have been incurred regardless of whether the
contract was obtained or not are expensed, unless those costs are explicitly chargeable to
a customer.
SAMPLE EXERCISE: INCREMENTAL COSTS OF
OBTAINING A CONTRACT
• A consulting services entity wins a competition bid to provide consulting services to a
new customer. The following costs were incurred by the entity to obtain the contract:
External legal fees for due diligence 15,000
Travel costs to deliver the proposal 25,000
Commissions paid to sales employees 10,000
Total costs incurred 50,000

• The entity also pays discretionary annual bonuses to sales employees based on annual
sales targets, overall profitability and individual performance.
COSTS TO FULFIL A CONTRACT

• Costs incurred to fulfil a contract are in the scope of IFRS 15 if it is not in the scope of
another IFRS standard (such as IAS 2 or IAS 16).
• Fulfilment costs in the scope of IFRS 15 are recognized as an asset only if all the following
criteria are met:
• The costs relate directly to a contract or to an anticipated contract that can specifically be
identified.
• The costs generate or enhance resources that will be used in satisfying performance obligations
in the future.
• The costs are expected to be recovered.
COSTS TO FULFIL A CONTRACT

The following costs are, however, expenses as incurred:

• General and administrative costs.
• Costs of wasted materials, labor or other resources to fulfil the contract that were not
reflected in the price of the contract.
• Costs that relate to past performance being satisfied performance obligations or partially
satisfied performance obligations.
• Costs which cannot be distinguished whether they relate to satisfied or unsatisfied
performance obligations
AMORTIZATION

• A contract asset recognized is amortized on a systematic basis consistent with the transfer
to the customer of the goods or services to which the asset relates.
• The amortization is updated to reflect significant changes in the expected timing of
transfer to the customer of the goods or services. Such a change is regarded as a change
in accounting estimate in accordance with IAS 8.
IMPAIRMENT

• An impairment loss is recognized in profit or loss to the extent that the carrying amount of a contract
asset recognized exceeds:
• The remaining amount of consideration expected to be received in exchange for the goods or services; less
• The costs that relate directly to providing those goods or services that have not been recognized already as
an expense.

• Any later reversal of an impairment loss is recognized in profit or loss when the impairment
conditions no longer exist or have improved. The new increased carrying amount of the contract
asset shall not exceed the amount that would have been determined (net of amortization) if no
impairment loss had been recognized previously.
PRESENTATION

• A contract liability normally represents prepayments on a contract, such a revenue being

received in advance. The contract liability represents the obligation to transfer goods or
services to a customer. A contract liability is also recognized when a right to an amount of
consideration exists that is unconditional (a receivable), before the entity transfers a good
or service to the customer. Then a contract liability and a receivable are recognized.
• A contract asset is recognized for transfer of goods and services that are still conditional
and separately receivable for unconditional rights. Contract assets are assessed for
impairment in terms of IFRS 9.
PRESENTATION

• A receivable is the right to consideration that is unconditional. A right to consideration is

unconditional if only the passage of time is required before payment of that consideration
is due.
• A receivable is accounted for in accordance with IFRS 9. Upon initial recognition of a
receivable from a revenue contract any difference between the measurement of the
receivable and the corresponding amount of revenue recognized is recognized as an
expense.