Study Unit 12

IFRS 15
Revenue from contracts
with customers
PART 1

GG Chapter 4

Presented by: Ms. Lindie Venter

Applicable Standards

IFRS 15: Revenue from contracts with customers

Learning Outcomes

Analyse and evaluate a given practical situation in order to

advise on the correct recognition, measurement and disclosure
of different types of income transactions;

Evaluate customer loyalty programmes in order to suggest the

appropriate accounting treatment; and

Integrate any of the abovementioned learning outcomes with

other learning outcomes in this module once the latter have been
discussed.

• Often examined by way of discussion questions.

• Remember to include relevant amounts/
calculations in your discussions.
• You must be able to apply the principles of this
standard on any given scenario.
 IGNORE THE FOLLOWING
PARAGRAPHS IN CHAPTER 4 OF
GRIPPING GAAP (OUTSIDE SILLABUS)

• PAR 5.7 – MODIFYING CONTRACTS

Relevance of the topic

A new standard that replaced two previous

standards (IAS 11 & 18) and several interpretations
relating to revenue, with the following purpose:

• Remove inconsistencies and weaknesses;

• Provide a more robust framework and guidance;
• Improve comparability across entities & industries; and
• Provide more useful information through enhanced disclosures.
 Scope of IFRS 15

IFRS 15 applies to all contracts with customers, except for

contracts that are within the scope of:
1. Leases (IFRS 16);
2. Insurance (IFRS 4) – not in the syllabus;
3. Financial instruments (IFRS 9);
4. Other contractual rights or obligations (IFRS 10 & 11, IAS
27 & 28); and
5. Non-monetary exchanges between entities in the same line
of business to facilitate sales to customers or potential
customers.
Important definition and scope
Contracts

Goods & services

Entity Customer
Consideration

Contract = an agreement between two or more parties that creates

enforceable rights and obligations.

Customer = a party that has contracted with an entity to obtain

goods or services (g/s) that are an output of the entity’s ordinary
activities in exchange for consideration.
If the contract is with a party
that doesn’t meet the
Stand-alone selling price = the price at which an entity
definition would sell
of a customer?
a promised g/s separately to a customer.
Class Question 1 & 2
(Handout)
Receivable vs Contract asset / liability

ASSETS = LIABILITIES =
OUR RIGHTS OUR OBLIGATIONS
CONTRACT ASSETS: CONTRACT LIABILITY:
• an entity’s right to consideration • an entity’s obligation to transfer goods
• in exchange for goods or services that or services to a customer
the entity has transferred to a • for which:
customer • the entity has received
• when that right is conditional on consideration from the customer;
something other than the passage of or
time (e.g. the entity’s future • the amount of consideration is due
performance). from the customer.

RECEIVABLE is defined as:

• an entity’s right to consideration
• that is unconditional.

A right to consideration is unconditional if: all

we have to do is wait for time to pass before
payment falls due.
GG 2017 Chapter 4
Example 1 & 2
5-Step model and core principle

CORE PRINCIPLE
To depict the transfer of promised g/s to customers in an amount that reflects the
consideration to which the entity expects to be entitled to in exchange for those g/s.

Step 1 – Identify the contract (recognition)

Step 2 – Identify the performance obligations in the contract (recognition)

Step 3 – Determine the transaction price (measurement)

Step 4 – Allocate the transaction price to the performance obligations in the

contract (measurement)

Step 5 - Recognise revenue when (or as) the entity satisfies performance
obligations (recognition)
Step 1 – Identify the contract (recognition)

CORE PRINCIPLE
To depict the transfer of promised g/s to customers in an amount that reflects the
consideration to which the entity expects to be entitled to in exchange for those g/s.

Step 1 – Identify the contract (recognition)

The following needs to be established to determine if a

contract with a customer exist and how to account for any
changes in such a contract:
• When is an “agreement“ a contract?
• What if a contract does not exist?
• What type of contract?
– One single contract OR multiple contracts with similar characteristics and
results?
– Must the contracts be combined or accounted separately?
• What happens with the costs to obtain or fulfil the contract?
Step 1 – Identify the contract (recognition)

When is an “agreement“ a contract?

• A contract can be written, oral or implied by the entity’s customary
business practices.
• However ALL the following criteria must be met:
1. The parties have approved the contract and are committed to perform;
2. The entity can identify each party’s rights regarding the g/s to be
transferred (to determine when control transfers) ;
3. The entity can identify the payment terms of those g/s to be transferred
(to determine the transaction price) ;
4. The contract has commercial substance (a valid business reason for the
transaction) ; and
5. It is highly probable (> 50 % likelihood) that the entity will collect the
consideration.

• Consider the customer’s ability and intention to pay.

• Consider past practices, collateral obtained, the entity's customary business practice of
accepting less than the contractually agreed-upon price, etc.
Step 1 – Identify the contract (recognition)

What if a CONTRACT DOES NOT EXIST?

• Overall principle = No revenue recognised.

• No contract if each party has the unilateral enforceable right to terminate a *wholly
unperformed contract without compensation (i.e. no penalty payable) to the other party.

When the entity has not yet transferred g/s to the customer and the entity has not yet received
and is not yet entitled to receive any consideration.

• When a contract does not yet exists and an entity receives consideration (e.g. a non-
refundable deposit) the entity can only recognise the consideration as revenue when 1 of
the following events has occurred:
1. The entity has no remaining obligations to transfer g/s to the customer, and all, or substantially all,
of the consideration promised by the customer has been received by the entity and is non-
refundable; OR
2. The contract has been terminated, and the consideration received from the customer is non-
refundable.

If neither the 5 criteria of a contract nor the events above are met – recognise a deposit liability
until the criteria of a contract is met or 1 of the events above occur.
GG 2017 Chapter 4
Example 3
Self study example
GG 2017 Example 4
Step 1 – Identify the contract (recognition)

What TYPE of contract (separate or combined)?

Determine the following at contract INCEPTION

Are the contracts entered into at or near the same time with the
same customer? NO

YES Account the

multiple
contracts
separately
Are 1 of the following criteria met?
• Contracts negotiated as a package with a single commercial
objective; OR
• Consideration is dependent on the price or performance under NO
another contract; OR
• Goods or services constitute a single performance obligation
(See step 2).

YES

Combine contracts and account as a single contract Recognition: Mr Nico Fourie - Adapted
Class Question 3
(Handout)
Step 1 – Identify the contract (recognition)

What happens with the costs to OBTAIN the contract?

Recognition: Mr Nico Fourie - Adapted
Determine the following at contract INCEPTION
Consider if it is
costs to FULFIL
Did the entity incur costs in its efforts to obtain a contract with a NO CONTRACT
customer?

YES Are those costs

explicitly
chargeable to the
customer
Are those costs incremental (ONLY incurred IF THE CONTRACT YES
IS OBTAINED)?
NO regardless of
whether the
contract is
obtained?
YES
EXPENSE costs
Does the entity expect to recover those costs? NO as incurred

YES Practical
expedient: the
entity may either
Is the amortisation period of the asset one year or less? YES expense the costs
as incurred or
NO recognise as an
asset

Capitalise contract costs - recognise as an ASSET

GG 2017 Chapter 4
Example 42
Step 1 – Identify the contract
(recognition)
What happens with the costs to FULFIL the contract?
Determine the following AFTER contract INCEPTION
Accounts for those
Does the cost fall within the scope of other standards (e.g. IAS 16)? YES costs in accordance
to that standard

NO

Are ALL the following criteria met?

NO Expense the costs
• Does the cost directly relate to the contract?
when they are
 Direct labour
 incurred
Direct cost

Direct material
include

 Allocation of costs relating directly to the contract (e.g. Depreciation)

 Costs are explicitly chargeable under the contract
 Other costs incurred due to contract (e.g. payments to sub-
contractors); AND
• Does the cost generate or enhance resources of the
entity that will be used in satisfying PO's in the future?;
AND
• Are the costs expected to be recovered?
YES
The following costs are expensed when incurred:
• General and administrative costs (unless these
costs are explicitly chargeable to the customer
under the contract);
• Costs of wasted material, wasted labour or other
wasted resources;
• costs that relate to satisfied or partially satisfied
PO's; and
• costs for which the entity cannot distinguish
whether the costs relate to unsatisfied PO's or
satisfied PO's or partially satisfied PO's.

Capitalise contract costs - recognise as an ASSET

GG 2017 Chapter 4
Example 43
Step 1 – Identify the contract
(recognition)
What happens with CAPITALISED CONTRACT COSTS?

1. Amortised consistent with the transfer of the g/s to which the asset
relates:
• Practical expedient: capitalised contract cost may (choice) be expensed as
incurred if the expected amortisation period is one year or less.

2. Shall be tested for impairment (and subsequent reversal of impairment):

• Recognise an impairment loss in P/L to the extent that the CA exceeds the
recoverable amount: Calculate the RA as follows:
– The remaining consideration that the entity expects to receive in exchange for the g/s
LESS
– The costs that relate directly to providing those g/s and that have not been recognised
as expenses (thus capitalised cost of fulfilling a contract).

• Remember any reversal should not result in the asset exceeding the amortised
balance of the asset that would have been recognised if no impairment loss had
been recognised (similar to those of IAS 36).
5-Step model and core principle

CORE PRINCIPLE
To depict the transfer of promised g/s to customers in an amount that reflects the
consideration to which the entity expects to be entitled to in exchange for those g/s.

Step 1 – Identify the contract (recognition)

Step 2 – Identify the performance obligations in the contract (recognition)

Step 3 – Determine the transaction price (measurement)

Step 4 – Allocate the transaction price to the performance obligations in the

contract (measurement)

Step 5 - Recognise revenue when (or as) the entity satisfies performance
obligations (recognition)
 Homework

• Work through the sections covered today in GG

(par 1 – 4, 5.1 – 5.6 & 10).

• Make sure you understand the principles underlying the class

examples we discussed today.

• Prepare the following for tomorrow:

GG Chapter 4, par 6 & 7 (Step 2 & 3)
QUESTIONS ??