IFRS15 Handouts

IFRS
15 Revenue from Contracts with

Customers
When and How to recognize revenue
BEFORE THE CHANGE AFTER THE CHANGE
✔ IAS 18 Revenue
✔ IAS 11 Construction Contracts

IFRS 15
✔ SIC 31 Revenue – Barter Transaction ✔ Revenue from Contracts
Involving Advertising Services with Customers
✔ IFRIC 13 Customer Loyalty Programs
1 January 2018
✔ IFRIC 15 Agreements for the
Construction of Real Estate
✔ IFRIC 18 Transfers of Assets from (Similar standard issued by FASB)

Customers
www.IFRSbox.com IFRS 15 Revenue from Contracts with Customers
IFRS 15 Revenue from Contracts with Customers
=applies to ALL CONTRACTS with CUSTOMERS except for:
û Lease contracts (IAS 17)

û Insurance Contracts (IFRS 4)
û Financial instruments and other contractual rights/obligations within the scope of

IAS 39/IFRS 9, IFRS 10, IFRS 11, IAS 27 and IAS 28
û Non-monetary exchanges between entities within the same business to facilitate sales
Complex contract = part of contract is under IFRS 15 and part is under different IFRS
Mortgage at fair value under IFRS 9

Mortgage Assistance services
Remaining amount to assistance services under IFRS 15
1
IFRS 15 Revenue from Contracts with
Customers
STEP 1 STEP 2 STEP 3 STEP 4 STEP 5
Identify the Identify the Determine Allocate Recognize

contract performance the the TP to revenue
with a obligations transaction the PO in when (or as)
customer (PO) price (TP) the contract an entity
in the satisfies a PO
contract
Oral / written?
Contract modification? Promises
Are they distinct? Fixed? Variable? Stand-alone selling prices
Over time?
At the point of time?
Example #1: telecom co. / bundle offers
Handset = 300 CU Free handset

+ 12-month network
services
ABC Johnny
Network services =
80 CU/month 12 x CU 100
without handset
2
Customers
12-m. monthly plan at 100 CU/month

Example #1: telecom co. / bundle offers
+ Free handset
No revenue for handset (given for free)

IAS 18
Revenue for network services: CU 100 per month => CU 1 200 total
IFRS 15 => Transaction price = 1 200 (100*12)
Performance Stand-alone Allocated Revenue Billing

obligations selling price transaction price
Handset 300 285.70 285.70 0
(300/1260*1200) when handset is delivered
Network services 960 (12*80) 914.30 76.20 /month 100 /month

(960/1260*1200) (914.30/12)
TOTAL 1 260 1 200 1 200 1 200
Identify the contract with the customer

STEP 1
= agreement between 2 or more parties creating

Contract
enforceable rights + obligations
✔ Written ✔ Oral
Attributes
✔ Parties have approved the contract and are committed to perform
✔ Each party’s rights to goods/services can be identified
✔ The payment terms for goods/services can be identified 1000 units
✔ The contract has commercial substance CU 1 000 000

Supplier Client
✔ It is probable that an entity will collect the consideration CU 400 000
(evaluate customer’s ability and intention to pay).
3
Customers

STEP 1
Combination of contracts
When 1 or more is met:
✔ The contracts are negotiated as a package with a single commercial objective; OR
✔ The amount of consideration paid in one contract depends on the price or

performance of the other contract; OR
✔ The goods or services in the contracts (or some of them in each contract) are
a single performance obligation.

STEP 1
Contract modifications
= change in the scope, or price, or both => must be approved by the parties!
Prior approval => Based on enforceability!

Access to land within 30 days
Constructor Customer Contract

Compensation for delays
Made a CLAIM
Access provided after 90 days => Constructor
=contract modification even if not approved
(enforceable)
4
Customers

STEP 1
Contract modifications
NO II. CM = PART OF EXISTING

Are additional goods/services CONTRACT
in CM distinct? (“catch-up adjustment”)
IV.
YES Combination of
III. CM ≠ SEPARATE CONTRACT; II. and III.
Does consideration for added NO (termination of old contract +
goods/services reflect their creation of new contract)
stand-alone prices?
YES Consideration allocated to the remaining PO:

= consideration from old contract not yet recognized
I. CM = SEPARATE
CONTRACT + consideration in the contract modification
Identify the performance obligations in the contract

STEP 2
Performance obligations
= promise in a contract with a customer to transfer to the customer either:
Good / service (or Series of distinct goods/services that are substantially

bundle) that is distinct the same and have the same pattern of transfer
= single performance obligation

(not small individual PO)
✔ PO can be both explicit (in the contract) and implicit (based on practices or policies)
✔ If no transfer to customer => No PO! (e.g. admin or setup)
5
Customers

STEP 2
Performance obligations => What is “DISTINCT”?
Examples:
✔ Sale of goods produced by entity
✔ Resale of goods purchased by entity
✔ Resale of rights purchased by an entity
✔ Performing contractually agreed-upon tasks
✔ Granting licenses
✔ Constructing, manufacturing, developing an asset on behalf of a customer

STEP 2
Performance obligations => What is “DISTINCT”?
2 criteria:
I. Good/service is capable of being distinct On its own
=> Customer can benefit from good/service In conjunction with other readily
available resources
II. Separately identifiable from other goods/services in the contract
=> Entity is NOT using good/service as an input to produce or deliver combined output
=> The good/ service does NOT significantly modify or customize another good/service
=> The good/ service is not highly dependent with other goods/services in the contract
6
Customers

STEP 2
Performance obligations Example #4

Software license
Installation
Customer Contract Software developer
Software updates
Technical support
Scenario I Scenario II
- Software remains functional during installation - Installation will customize software substantially
- Installation performed by other entities, too - Installation performed by other entities, too
- Other services sold also separately - Other services sold also separately
PO 1 = License PO 3 = Updates PO 1 = PO 2 = Updates

License +
PO 2 = Installation PO 4 = Support Installation PO 3 = Support

STEP 2
Performance obligations => Other considerations
Goods/services that are NOT distinct:
=> Combine until you get a bundle that is distinct
PC = Not distinct, must be combined

PC only sold IT services sold either
with IT services separately, or with PC as a IT services = distinct
package
7
Customers

STEP 2
Performance obligations => Other considerations
Principal vs. agent considerations: => What is a performance obligation?
To provide good/service itself To arrange for another party to provide good/service
PRINCIPAL AGENT
Revenue = gross amount Revenue = net amount (commission)

Indicators
- Primary responsibility for fulfilling the contract - Consideration = commission
- Inventory risk - Customer’s credit risk
- Establishing prices
Determine the transaction price

STEP 3
Transaction price = amount of consideration to which the entity expects to be entitled
in exchange for transferring promised goods/services to a customer
excluding the amounts collected on behalf of third parties.
How to determine transaction price?
✔ Variable consideration
✔ Constraining estimates in variable consideration likelihood + magnitude of reversal
✔ Existence of significant financing component (over 1 year)
✔ Non-cash consideration At fair value

For distinct good/service =>as purchases
✔ Consideration payable to a customer
Not for distinct good/service =>reduction in TP
8
Customers
Allocate the transaction price to the performance obligations

STEP 4
Allocation =to allocate the transaction price to each performance obligation in an amount
objective that depicts the amount of consideration for transferring promised goods/services.
How to allocate the transaction price?
=> Based on relative stand-alone selling prices Criteria to apply the exception:
except for: Entity regularly sells each distinct good/service on
a stand-alone basis
Allocating discounts Bundles are also sold regularly on a stand-alone basis at a discount to
stand-alone selling prices of goods/services
Discount attributable to each bundle is substantially the same as

discount in the contract + analysis provides evidence
Product A = CU 40 = CU 60 Product A = CU 29 (40/140*100)

Product A = CU 40
= CU 55 Product B
Product B Product B = CU 39 (55/140*100)
Product B = CU 33 (55/100*60)
+ (discount
Product C = CU 45 of CU 40)
Product C = CU 32 (45/140*100) Product C = CU 27 (45/100*60)
Product C
= CU 140 (general) = CU 100 (exception) = CU 100

STEP 4
Allocation =to allocate the transaction price to each performance obligation in an amount
objective that depicts the amount of consideration for transferring promised goods/services.
How to allocate the transaction price?
=> Based on relative stand-alone selling prices Criteria to apply the exception:
except for:
Terms of variable payment relate specifically to

entity’s efforts to satisfy the PO
Allocating consideration with variable amounts
Allocating variable amount entirely to the PO is
consistent with the allocation objective
9
Customers

STEP 4
Stand-alone selling price = the price at which the entity would sell promised good
or service separately to the customer (at contract inception)
How to estimate the stand-alone selling price?
I. Take observable selling prices
II. If observable selling prices not available => make estimate
✔ Consider all information available Adjusted market assessment approach

Expected cost plus margin approach
✔ Use one of the following methods:
Residual approach
Combination
Recognize revenue when (or as) an entity satisfies a PO

STEP 5
Performance obligation is satisfied when a promised good or service is transferred to a customer.
Control
How can a performance obligation be satisfied?
Over time At the point of time
10
Customers

STEP 5
Performance obligation is satisfied if 1 of the following is met:

Over time
•  Customer simultaneously receives and consumes as the entity performs
•  Customer controls the asset enhanced or created by the entity
•  Entity does not create an asset with an alternative use + enforceable right to payment
How to measure progress towards completion?
=> Select single revenue recognition method + apply consistently (no change is permitted)
Output Input

STEP 5
Performance obligation is satisfied At the point of time if control not transferred over time.
Indicators:
•  The entity has a present right to payment for the asset.
•  The customer has legal title to the asset.
•  The entity has transferred physical possession to the asset.
•  The customer has the significant risks and rewards of ownership of the asset.
•  The customer has accepted the asset.
11
Customers
IFRS 15: Contract Costs
Costs to obtain a contract Costs to fulfill a contract
If not within IAS 2/IAS 16/IAS 38

Sales commissions Legal fees Bonuses to employees
Capitalize if:
•  Costs relate directly to contract
•  Costs generate/enhance resources used in
satisfying performance obligations in the future
•  Costs are expected to be recovered
üüü ûûû
Capitalize
Direct labor General + admin costs
Direct materials Wasted costs
+Amortize Allocated costs Costs of past performance
Chargeable costs Indistinguishable costs
IFRS 15 How to implement?
1 January 2018 = mandatory effective date
How to make a transition?
Full retrospective adoption Modified retrospective adoption
= retrospectively to each prior reporting period = retrospectively with cumulative effect at the
date of initial application
Expedients:
•  No need to restate completed contracts •  Comparatives presented under prior IFRS

within the same annual period
•  No need to estimate variable considerations in •  IFRS 15 applied to existing and new
the comparative periods contracts onwards
•  Some relief from disclosures •  Adjustment to opening retained earnings
12
Customers
Which industries are most affected?
Telecom Technology / Manufacturing Real estate

software
What does it mean for YOU / YOUR business?
Upgrade Amend business

accounting system contracts
Change in Key Change in Tax /

Performance Dividend policy
Indicators
13
Customers
Repurchase agreements
PO
RE
Sells an asset
Seller Customer
Buys or has the option to buy the same asset back at the later date
Forward contract Call option Put option
= obligation to repurchase = right to repurchase

= obligation to repurchase if
requested by the customer
Customer does not obtain Customer may obtain

CONTROL of the asset CONTROL of the asset
PO
RE
Forward contract + Call option Control
Is the repurchase price < original selling price ?

NO
YES
LEASE FINANCING ARRANGEMENT
(IFRS 16) (Seller keeps both the

asset and a liability)
14
Customers
PO
RE
Put option Control Is customer likely to exercise the option?
Is the repurchase price < original selling price ?

NO
YES
Does the customer have

incentive to exercise option? FINANCING ARRANGEMENT
NO No control is obtained if put option is not

YES
exercised.
✔  Lease (IFRS 16) ✔  Sale with right

of return
Consignment arrangements
Sells goods
Delivers goods
Seller Dealer Final customers
Sells goods
Indicators: Control over inventories transferred to dealer?

NO
Product controlled by the seller YES
until specified event occurs
The seller can require the return of

the product or transfer to another ✔  Inventories = in dealer’s FS ✔  Inventories = in seller’s FS
party
The customer (dealer) does not ✔  Deposit =
have an unconditional obligation to “other receivables”
pay for the product
15
Customers
Bill-and-hold arrangements
Sells an asset
Seller Customer
Asset remains in the possession

of seller for specified period
When does the customer obtain control of the product?

Criteria:
The reason for bill-and-hold is substantive
The product is separately identified as belonging to the customer

Revenue from sale
The product is ready for physical transfer to the customer
The entity has no ability to use the product or to transfer it to another customer
Bill-and-hold arrangements
Q: An entity enters into a contract with a customer on 1 January 20X4 for sale of
a big ship and spare parts. It takes 3 years to produce them and on 31 December
20X7, the customer pays for both the ship and spare parts, but only takes physical
possession of the ship. The customer inspects and accepts spare parts, but requests
they continue to be stored at the entity’s warehouse. When to recognize revenue?
3 performance obligations:
Ship Spare parts Custodial services
✔  Point of time ✔  Point of time ✔  Over time
✔  31 Dec 20X7 ✔  31 Dec 20X7 ✔  While spare parts are stored
16

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IFRS

15 Revenue from Contracts with

When and How to recognize revenue

BEFORE THE CHANGE AFTER THE CHANGE

✔ IAS 11 Construction Contracts

✔ IFRIC 18 Transfers of Assets from (Similar standard issued by FASB)

www.IFRSbox.com IFRS 15 Revenue from Contracts with Customers

IFRS 15 Revenue from Contracts with Customers

=applies to ALL CONTRACTS with CUSTOMERS except for:

û Lease contracts (IAS 17)

û Financial instruments and other contractual rights/obligations within the scope of

Mortgage at fair value under IFRS 9

www.IFRSbox.com IFRS 15 Revenue from Contracts with Customers

IFRS 15 Revenue from Contracts with Customers

STEP 1 STEP 2 STEP 3 STEP 4 STEP 5

Identify the Identify the Determine Allocate Recognize

www.IFRSbox.com IFRS 15 Revenue from Contracts with Customers

IFRS 15 Revenue from Contracts with Customers

Example #1: telecom co. / bundle offers

Handset = 300 CU Free handset

www.IFRSbox.com IFRS 15 Revenue from Contracts with Customers

IFRS 15 Revenue from Contracts with Customers

12-m. monthly plan at 100 CU/month

No revenue for handset (given for free)

IFRS 15 => Transaction price = 1 200 (100*12)

Performance Stand-alone Allocated Revenue Billing

Network services 960 (12*80) 914.30 76.20 /month 100 /month

TOTAL 1 260 1 200 1 200 1 200

www.IFRSbox.com IFRS 15 Revenue from Contracts with Customers

Identify the contract with the customer

= agreement between 2 or more parties creating

✔ Parties have approved the contract and are committed to perform

✔ Each party’s rights to goods/services can be identified

✔ The payment terms for goods/services can be identified 1000 units

✔ The contract has commercial substance CU 1 000 000

www.IFRSbox.com IFRS 15 Revenue from Contracts with Customers

Identify the contract with the customer

When 1 or more is met:

✔ The contracts are negotiated as a package with a single commercial objective; OR

✔ The amount of consideration paid in one contract depends on the price or

www.IFRSbox.com IFRS 15 Revenue from Contracts with Customers

Identify the contract with the customer

Prior approval => Based on enforceability!

Constructor Customer Contract

www.IFRSbox.com IFRS 15 Revenue from Contracts with Customers

Identify the contract with the customer

NO II. CM = PART OF EXISTING

YES Consideration allocated to the remaining PO:

www.IFRSbox.com IFRS 15 Revenue from Contracts with Customers

Identify the performance obligations in the contract

= promise in a contract with a customer to transfer to the customer either:

Good / service (or Series of distinct goods/services that are substantially

= single performance obligation

www.IFRSbox.com IFRS 15 Revenue from Contracts with Customers

Identify the performance obligations in the contract

Performance obligations => What is “DISTINCT”?

✔ Sale of goods produced by entity

✔ Resale of goods purchased by entity

✔ Resale of rights purchased by an entity

✔ Performing contractually agreed-upon tasks

✔ Constructing, manufacturing, developing an asset on behalf of a customer

www.IFRSbox.com IFRS 15 Revenue from Contracts with Customers

•  Customer simultaneously receives and consumes as the entity performs

•  Customer controls the asset enhanced or created by the entity

•  The entity has a present right to payment for the asset.

•  The customer has legal title to the asset.

•  The entity has transferred physical possession to the asset.

•  The customer has accepted the asset.