Revenue from

contracts with
customers
IFRS 15
Scope of IFRS 15

• Applicable to all contracts with customers, except

the following:
• Lease contracts
• Insurance contracts
• Financial instruments
• Exchange of non-monetary items between entities in the
same line of business to facilitate sales to customers or
potential customers
Outline
• Recognition of Revenue ( Step 1 ,2 & 5)
• Measurement of Revenue ( Step 2 & 4)
• Specific transactions
• Presentation and Disclosure
Definitions
Contract is an agreement between two or more parties that creates
enforceable rights and obligations.
• Contract asset = entity’s right to consideration for transferred G / S
• Contract liability = obligation to transfer G / S to customer

Customer = party that has contracted with entity to obtain G /S that are an
output of entity’s ordinary activities in exchange for consideration

Income = increases in economic benefits during accounting period in form of

inflows or enhancements of assets or decreases of liabilities that result in an
increase in equity, other than those relating to contributions from equity
participants
Definitions
Performance obligation = promise in a contract with customer to transfer either:
• good or service (or bundle of G / S) that is distinct; or
• series of distinct goods or services that are substantially the same and that have
same pattern of transfer to a customer.

Transaction price = amount of consideration to which entity expects to be entitled

in exchange for transferring promised goods or services to a customer, excluding
amounts collected on behalf of third parties

Revenue = income arising in course of entity’s ordinary activities

5-Step Revenue Model

Step 1: Identify a contract Contract

Step 2:Identify a
performance obligation
PO 1 PO 2
Step 3: Determine a
transaction price
Contract transaction price
Step 4: Allocate the
transaction price to the
performance obligation to PO 1- portion PO 2 –
the contracts of TP portion of TP

Step 5: Recognise revenue

when/ as the entity satisfies
Revenue on Revenue
PO
PO 1 PO2
Step 1: Identify a contract with a customer

Account for a contract if all 5 criteria are met:

• Contract must be Approved by all parties who are committed to fulfil obligations;
• All rights to goods and/or services are identifiable;
• Payments terms are identifiable;
• Contract has commercial substance;
• It’s probable that consideration will be collected.

Contract does not exist Contract does exist

• All the 5 criteria are not met • If rights and obligations in the
• If all parties are equally entitled to contract are enforceable by law
terminate the contract that is wholly Recognise receipts as revenue
unperformed [no transfer of any
promised goods/service] without
providing any compensation to the other
Recognise receipts as liability
Step 2: Identify performance obligations
A performance obligation is a promise in a contract 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.
Performance obligation could be explicitly stated or be
implicit
• Explicit: stated in contract
• Implicit: Entity’s normal business practice that when
entering into a contract that result in valid expectation of
transfer of good/service.
 KEY STEP
The promised transfer must be distinct
Both criteria must be met for a good/service to be distinct:

The good or service is

capable of being distinct.
AND
when it can generate
economic benefits for the
customer on it’s own or
with other resources that
are readily available.
Entity’s promise to
transfer the good or
service to the customer
is separately identifiable
from other promises in
the contract

YES: Separate performance NO : Combine with other

obligation distinct PO
Separately identifiable
• The promise must be separately identifiable from other promises in the
contract.
Factors indicating that G/S is not distinct in the context of the contract:
• The entity is using the G/S as an input to produce or deliver the
combined output specified by the customer.
• The G/S significantly modifies or customises another G/S or significantly
modifies the promised G/S.
• The G/S is highly dependent or highly interrelated with other G/S in the
contract.
Example 1: Performance obligations
• Aquelle Ltd, a software developer, entered into a two year contract
with AA Ltd to
-transfer a software licence
-perform an installation service
-provide unspecified software updates and
-technical (online and telephonic) support
Aquelle sells the license, installation service and technical support
separately.
Installation service includes changing the web screen for each type of
user (for example, marketing, inventory management, and
information technology).
• Installation service is routinely performed by other entities and it
does not significantly modify software.
• Software remains functional without updates and technical support.
Step 3: Determining the transaction Price
Transaction Price: amount an entity expects to be entitled in exchange for
transferring promised G/S to a customer, excluding amounts collected on
behalf of 3rd parties.

TP = fixed amounts + variable amounts

Variable considerations
Consideration may be considered variable due to:
• Contractual terms (explicit)
• The customer’s valid expectation of a price
concession (implicit)
• Other facts and circumstances suggesting the
entity’s intention to give a price concession e.g.
risk of customer default on payment (implicit)
• Includes: Discounts, rebates, refunds, credits, price concessions,
incentives, penalties, and any other contingent amounts.
Examples 2
Example 2.1
Entity X sold inventory to a customer for R100 000, on credit. This
customer qualified for a trade discount of 10%.
Example 2.2
Entity entered into another contract to build a customised asset. The
promise to transfer a building is satisfied over time. Consideration is
R2,5M but the amount will be reduced or increased depending on timing
of completion.
For each day after 31 March 2019 the asset is incomplete, the
consideration will be reduced by R10 000.
For each day before 31 March 2019 that the asset is complete, the
promised consideration will increase by R10 000.
The entity estimates that they will finish 29 March 2019 if weather
permits.
Step 4: Allocate the transaction price
• Allocate the transaction price on performance
obligation is based on relative stand alone prices
• A stand alone price is an observable price the G/S
is sold for under similar circumstances.
• Identify a discount: A discount exists if the
promised consideration is less than the sum of the
stand alone prices.
• Allocate discount to the performance obligation (s).

At inception
of the
contract
Examples 3
• Entity A entered into a contract with a customer to
sell product A,B and C for R12 000.
• The entity sells product A for R5 000, product B for
R2 500 and product C for R5 500.
• Product A, B and C are separate performance
obligation.
Allocate the transaction price to the performance
obligation identified.
 Step 5: Recognise revenue as PO are satisfied
• Recognise revenue as and when the performance obligations are
satisfied.
• Performance obligation can be satisfied over time or at a point in
time.
• Classifying overtime or point in time

Does the customer simultaneously receives

& consumes benefits as entity performs? NO Point in time

YES

Performance obligation is satisfied

overtime e.g. recurring services
Assessing when the performance obligation is satisfied

• Performance obligation is satisfied when G/S are

transferred & control passes to the customer.
• Control includes ability to prevent other entities
from directing use of, and obtaining benefits from
asset.
• Control is passed when:
Obtain
Ability to
substantially
direct the use
all remaining
of the asset
benefits
Assessing when the performance obligation is satisfied

• At a point in time (if not over time)

• Access whether the customer obtained control:
• Customer having a present obligation to pay
• Physical possession
• Legal tittle
• Risk & rewards of ownership
• Customer has accepted the asset
Measuring the performance obligation satisfied
over time
Input method
Calculating the progress based on entity’s
efforts/inputs towards completing the performance
obligation.
Efforts/ inputs: resources consumed, labour hours
expended, costs incurred, time elapsed or machine
hours used. Exclude inputs that don’t contribute to
progress. Could be straight line if effort evenly spread.
Example 35-37
Ignore outputs methods (ACC2)
Pre-reading
• Differentiate between Input and output method
• What is a contract liability?
• When to recognise the contract liability?
• Differentiate between a contract asset and a
receivable.
Specific revenue transaction: Warranty

Sale with a warranty

Two kinds of warranties:
• Assurance-type warranty: assures the customer
that the product will function as intended or it
meets the agreed-upon specifications [IAS 37
Contingent Liability] e.g. buying an iron at shoprite
• Service-type warranty: offers the customer a
service in addition to the mere assurance that the
product will function as intended [IFRS 15 Separate
Performance Obligation] e.g. buying a VW car
Presentation
As an asset:
• 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.
• Receivable – unconditional right (only the passage of time before
consideration is due)

As a liability:
• 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.
• Refund liability - if the entity receives consideration from a customer
and expects to refund some or all of that consideration to the customer.
Disclosure
Entity must provides users of financial statements with
comprehensive information about the nature, amount,
timing and uncertainty of revenue and cash flows arising
from contracts with customers.
Disclose qualitative and quantitative factors regading
Contracts with customers
Significant judgements relating to IFRS 15
Assets recognised relating to costs to obtain and
fulfil the contracts
See section 13.2