Revenue

The Association of Chartered Certified Accountants

Contents
• Learning objectives
• Introduction
• Identifying the contract
• Identifying the separate performance obligation within a contract
• Determining the transaction price
• Allocating the transaction price to performance obligations
• Recognizing revenue
• Other concepts
Revenue Learning Objectives
Conceptual Framework for financial reporting
Learning Objectives (LOs)
• Discuss and apply the criteria that must be met before an entity can
apply the revenue recognition model to a contract
• Discuss and apply the five-step model which relates to revenue
earned from a contact with a customer
• Apply criteria for recognition of contract costs as an asset
• Discuss and apply the recognition and measurement of revenue
including performance obligations satisfied over time, sale with the
right to return, warranties, variable consideration, principal versus
agent considerations and non-refundable upfront fees
Revenue from
contracts with Introduction

customers
International Financial Reporting Standard
IFRS 15 – “Revenue from Contracts with Customers” specifies the criteria to be applied when
recognizing revenue by an entity.
IFRS 15 specifies a 5-step model to be followed in recognizing revenue.

Identify the contract

Identify separate performance obligations within the contract

Determine the transaction price

Allocate the transaction price to the performance obligations in the contract

Recognize the revenue when (or as) a performance obligation is satisfied

Revenue from
contracts with Identifying the contract

customers
Revenue from contracts with customers
Identify the contract
• Contract is an agreement between two parties that creates rights and obligations
• Doesn’t need to be written
Conditions to be satisfied for the revenue recognition
• The parties have an approved contract and ach party’s rights can be identified
• Payment terms can be identified
• The contract has a commercial substance
• It is probable that the entity will be paid
A contract does not exist if each party to the contract has a unilateral enforceable right to
terminate a wholly unperformed contract without compensating the other party (or parties).
A contract is 'wholly unperformed' if both of the following criteria are met:   
• the entity has not yet transferred any promised goods or services to the customer; and
• the entity has not yet received, and is not yet entitled to receive, any consideration in
exchange for promised goods or services.
Revenue from
contracts with
Identifying the separate
performance obligations
within a contract

customers
Revenue from contracts with customers
Performance obligations
• Promises to transfer distinct goods or services to a customer.
• Some contracts may have more than one performance obligation*
*Subject to conditions
Example 01
Company A enters into a contract with customer B to sell a machine with a one year’s free
service and maintenance.
Performance obligation 1 – supply of the machine
Performance obligation 2 – free service and maintenance
Promises to transfer a good or service can be stated explicitly in the contract or be
implied based on the entity’s customary business practices or published policies that
creates a valid expectation that the entity will transfer the good or service to the
customer.
Revenue from contracts with customers
Performance obligations
At contract inception, an entity considers the goods or services promised in a contract
and identifies each promise to transfer a distinct good or service as a performance
obligation.

A good or service that is promised in a contract is 'distinct' if both of the following criteria
are met.   
• The customer can benefit from the good or service either on its own or together with
other resources that are 'readily available' to the customer.
• The entity's promise to transfer the good or service to the customer is separately
identifiable from other promises in the contract.
Revenue from contracts with customers
Performance obligations
Example 02
ABC Company has entered into a contract to construct a shopping mall to one of its
customers. This contract includes number of activities such as clearing the land, bringing
the material, painting the building, installing electrical equipment etc.
Analysis – single performance obligation
The customer could benefit from the goods or services on their own -
each construction material is sold separately by numerous suppliers or
Criteria 1 could be resold for more than scrap value by the customer - or together
with other readily available resources such as additional materials or the
services of another contractor.

It provides a significant service of integrating the goods and services to

Criteria 2 produce the output (the shopping mall) for which the customer has
contracted. 
Revenue from contracts with customers
Performance obligations
Example 03
ABC Company enters into a contract to sell a machine to provide installation services. The
installation service is commonly offered by third party vendors as well. 
Analysis – separate performance obligations
• The customer can use the machine with a readily available resource
(services from a third-party vendor).
Criteria 1
• the installation service can be used with a machine owned by the
customer.

• ABC does not provide a significant integration service that would

Criteria 2 combine the machine with the installation services.
• the installation service and the machine do not significantly affect
each other because they are not highly interdependent
Revenue from contracts with customers
Principal vs agent
Provision of goods or services

When there is only one When there are two or more

party involved in provision parties involved in provision of
of goods or services goods or services

the nature of its promise is a the nature of its promise is a

performance obligation to performance obligation to
provide the specified goods arrange the specified goods or
or services itself services to be provided by
another party

No principal / agent The entity is the principal The entity is an agent

Revenue from contracts with customers
Warranties
Warranties

Assurance that the product complies Customer has the option to

with the agreed specifications purchase the warranty separately

Not a separate performance Likely to be a separate performance

obligation. To be accounted under obligation*
IAS 37.
* Normally, extended warranties or
lifetime warranties comes under this
category
Revenue from
contracts with Determining the
transaction price

customers
Revenue from contracts with customers
Determining the transaction price
• Amount of consideration the entity expects in exchange for satisfying a performance
obligation. – Transaction price
• Factors to be considered in determining the transaction price
 Variable consideration
 Significant financing components
 Non-cash consideration
 Consideration payable to the customer
Revenue from contracts with customers
Variable consideration
Variable consideration is estimated using either of the following methods, depending on
the method the entity expects to better predict the amount of consideration to which it
will be entitled.  
• Expected value: The sum of the probability-weighted amounts in a range of possible
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.
• Most likely amount: The single most likely amount in a range of possible
consideration amounts. The most likely amount may be an appropriate estimate of
the amount of variable consideration if the contract has only two possible outcomes.
Note : Products sold with a right to return attracts a variable consideration. Based on related
facts the entity should decide whether the variable consideration should be a part of the price.
Revenue from contracts with customers
Significant financing component
An entity adjusts the promised amount of consideration for the time value of money if
the contract contains a significant financing component.
An entity considers all relevant factors when determining if a significant financing
component exists, including:   
• the difference, if any, between the amount of promised consideration and the cash
selling price of the goods or services; and
• the combined effect of the length of time between the transfer of the goods or
services to the customer and payment, and the prevailing interest rates in the
relevant market.
The financing component is recognised as interest expense (when the customer pays in advance)
or interest income (when the customer pays in arrears).
Revenue from contracts with customers
Significant financing component
Example 04
ABC enters into a contract with a customer to construct and deliver an apartment complex. ABC
determines that the contract contains a single performance obligation that is satisfied at a point in
time when the apartment complex is delivered to the customer. Construction is expected to take
five years.   
ABC and the customer agree consideration of 100 Mn, which is payable in advance on the date
the contract is signed. The discount rate, based on comparable factors is 12%.    
Analysis
ABC considers the terms of the contract and determines that it includes a significant financing
component because there is a significant period between payment and delivery of the asset.
Therefore, to reflect the financing that it is receiving from the advance payment, ABC recognizes
an interest expense of 76 Mn during the construction period and revenue of 176 Mn (100 x 1.762)
on the delivery date. 
Revenue from contracts with customers
Non-cash consideration
Any non-cash consideration that is a part of the revenue to be measured at fair value.
Example 05
ABC sold a vehicle to a customer. The customer agreed to settle the price as follows,
• Part 1 – 5 Mn in cash
• Part 2 – 100,000 shares of a listed entity which was traded at 5/- per share on the transaction
date.
Analysis
Non – cash consideration to be measured at the fair value. Therefore, the total consideration
would be 5.5 Mn.
Revenue from contracts with customers
Consideration payable to a customer
Consideration payable to a customer includes cash amounts that an entity pays or
expects to pay to the customer, or to other parties that purchase the entity's goods or
services from the customer.
E.g.: Volume rebates.
Consideration payable to a customer also includes credit or other items that can be
applied against amounts owed to the entity, or to other parties that purchase the entity's
goods or services from the customer.
E.g.: Vouchers
Consideration payable to a customer is treated as a reduction of the transaction price, unless the
payment to the customer is in exchange for a distinct good or service that the customer transfers to
the entity.
Revenue from contracts with customers
Consideration payable to a customer
Example 06
ABC Company manufactures sells certain type of chemicals. ABC enters into a contract with a
distributor agency XYZ for the referral of XYZ's customers to ABC. Under the contract, XYZ is
entitled to a commission of 10% of ABC's billings for the purchase of its chemicals by XYZ's
customers. To secure its market share, ABC also agrees to pay a volume rebate directly to
XYZ's customers (i.e. the end users of the chemicals) if certain volumes are met during an
annual period.
Analysis   
ABC considers that it does not receive any distinct good or service in exchange for the
payment of volume rebates to XYZ's customers and therefore accounts for them as a
reduction in revenue. ABC's accounting for these volume rebates is not impacted by its
assessment of whether they are consideration payable to its customer or its customer's
customer.
Revenue from Allocating the

contracts with transaction price to the

performance obligations
in the contract

customers
Revenue from contracts with customers
Allocate the transaction price
The objective when allocating the transaction price is for an entity to allocate the
transaction price to each performance obligation at an amount of consideration to which
the entity expects to be entitled in exchange for transferring the promised goods or
services to the customer.
An entity generally allocates the transaction price to each performance obligation on a
relative stand-alone selling price basis.

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 this price is an observable price
from stand-alone sales of that good or service to customers with similar characteristics.
Revenue from contracts with customers
Determining the stand-alone price
IFRS 15 specifies three estimation methods.
Evaluate the market in which it sells goods or services and estimate the price
Adjusted market
that a customer in that market would be willing to pay for those goods or
assessment approach
services

Expected cost plus a Forecast its expected costs of satisfying a performance obligation and then add
margin approach an appropriate margin for that good or service.

Total transaction price less the sum of the observable stand-alone selling prices
Residual approach*
of other goods or services promised in the contract.

* Only if one of the following criteria is met:   

• the entity sells the same good or service to different customers for a broad range of amounts; or
• the entity has not yet established a price for that good or service and the good or service has not
previously been sold on a stand-alone basis.
Revenue from contracts with customers
Allocate the transaction price
Example 07
A telecom company “Telco” signs a one-year mobile contract with a customer to provide a
phone and a communication plan for a price of 40/- per month. Telco identified the phone and
the plan as separate performance obligations.  
The phone can be purchased outside for a price of 200/- and Telco offers the same plan
without a phone for a price of 30/- per month.
Analysis
The market price of the phone and the plan without the phone offered by Telco provides
observable evidence of stand-alone selling prices for both performance obligations. Therefore,
the transaction price of 480/- (40 x 12 months) is allocated to the performance obligations
based on their relative stand-alone selling prices.
Revenue from
contracts with Recognizing revenue

customers
Revenue from contracts with customers
Recognize revenue
An entity recognizes revenue when (or as) it satisfies a performance obligation by
transferring a good or service to a customer.
An entity 'transfers' a good or service to a customer when the customer obtains control of
that good or service. Control may be transferred either at a point in time or over time.

Recognize revenue

Point in time Overtime

Revenue is recognized at a particular point Revenue is recognized over the period where
when the performance obligation is satisfied performance obligation is satisfied over a period.
Revenue from contracts with customers
Performance obligation satisfied over time
An entity transfers control of a good or service over time and, therefore, satisfies a performance
obligation and recognizes revenue over time, if one of the following criteria is met:
• the customer simultaneously receives and consumes the benefits provided by the entity’s
performance as the entity performs.
E.g.: telecommunication companies
• the entity’s performance creates or enhances an asset (for example, work in progress) that the
customer controls as the asset is created or enhanced.
E.g.: Contracts to construct an apartment complex on a land owned by the customer
• 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.
E.g.: Made-to-order contracts / specialized contracts
Revenue from contracts with customers
Performance obligation satisfied at a point in time
If the performance obligation is not satisfied over time, it is satisfied at a point in time. The point in
time will be the time at which the customer obtains the control over the promised asset.

Indicators that control has passed to the customer include the customer having:   
• a present obligation to pay;
• physical possession;
• legal title;
• the risks and rewards of ownership; and
• accepted the asset.
Revenue from
contracts with Other concepts

customers
Revenue from contracts with customers
Contract modifications
A 'contract modification' is a change in the scope or price (or both) of a contract that is approved
by the parties to the contract. The modification is 'approved' when it creates legally enforceable
rights and obligations on the parties to the contract.
A contract modification is treated as a separate contract if the modification results in:   
• a promise to deliver additional goods or services that are distinct; and
• an increase in the price of the contract by an amount of consideration that reflects the entity's
stand-alone selling price of those goods or services adjusted to reflect the circumstances of the
contract.

If these criteria are not met, then the entity's accounting for the modification is based on whether
the remaining goods or services under the modified contract are distinct from those transferred to
the customer before the modification.
Revenue from contracts with customers
Contract modifications
If modification is not treated
as a separate contract

remaining goods or services under the remaining goods or services under the
modified contract are distinct from those modified contract are not distinct from
transferred to the customer before the those transferred to the customer
modification before the modification

Accounts for the modification as if it were a

Accounts for it on a combined basis as a part of the
termination of the existing contract and the
original contract, as if the additional goods or
creation of a new contract
services were part of the initial contract .
Revenue from contracts with customers
Sales with the right of return
Transaction in which an entity transfers control of a product to a customer and also grants the
customer the right to return the product for various reasons.
The guidance for a sale with a right of return is applied when a customer has a right to:  
• a full or partial refund of any consideration paid
• a credit that can be applied against amounts owed, or that will be owed, to the entity; or
• another product in exchange
An entity that transfers products with a right of return recognizes the following items
• Revenue: This is initially measured at the amount of consideration to which the entity expects to
be entitled, based on the expected level of returns.
• A refund liability: This is initially measured at the amount of consideration received or receivable
to which the entity does not expect to be entitled.
• An asset: (and a corresponding adjustment to cost of sales) for the right to recover products
from customers.
Revenue from contracts with customers
Sales with the right of return
Example 08 
ABC sells 100 units of manufactured goods at 30/- each and receives a payment of 3,000. Under
the contract, the customer is allowed to return any undamaged products within 30 days and
receive a full refund in cash. The cost of each product is 20/-.   
ABC estimates that 5 units will be returned.
Analysis   
Revenue – 2,850/- (95*30/-)
Refund liability – 150/- (5*30/-)
Refund asset – 100/- (5* 20/-)
Revenue from contracts with customers
Non-refundable upfront fee
An entity recognizes revenue from up-front fees when the goods or services to which they relate are
provided to the customer.
In some cases, an entity may charge a non-refundable fee in part as compensation for costs
incurred in setting up the contract. If the set-up activities do not represent a performance obligation,
then the up-front fees are not recognised as revenue until or as the entity satisfies its performance
obligations.
Revenue from contracts with customers
Contract costs
Cost to obtain a contract
• Incremental costs incurred as a result of obtaining a contract are capitalized.
• Costs that are incurred regardless of whether the contract is obtained - including costs that are
incremental to trying to obtain a contract - are expensed as they are incurred.
Cost of fulfilling a contract
If costs incurred to fulfil a contract with a customer are not in the scope of another standard (e.g.:
IAS 2), and they are expected to be recovered - capitalize

Both these costs are amortized to profit and loss as the related revenue is recognised
Revenue from contracts with customers
Contract assets and liabilities
A contract asset is an entity’s right to consideration in exchange for goods or services that
the entity has transferred to a customer, excluding any amounts presented as a
receivable.

Right to consideration is unconditional Right to consideration is conditional

Receivable Contract Asset

A 'contract liability' is an obligation to transfer goods or services for which consideration

has been received or is due from the customer.
Revenue from contracts with customers
Contract assets and liabilities
Example 09
ABC enters into a contract with a customer to deliver 100 liters of chemicals for 100/- each.
Customer determines the actual quantity of chemicals delivered after measuring. ABC delivers
copper concentrate on 20 March and the customer expects to confirm the actual quantity by 15
April.
Analysis
ABC determines that the consideration under the contract is variable and therefore it applies the
constraint. On 20 March, ABC recognizes revenue and a contract asset of 10,000/-.
Thank you