MODULE 4

Revenue from Contracts with Customers.

SESSION TOPIC: International Financial Reporting Standard (IFRS) 15 its application of the
five-step framework to transfer goods and services made at a point in time and continuously over
time.

LEARNING OUTCOMES:
The following specific learning outcomes are expected to be realized at the end of the session:
1. Explain the core principle, the concept of control, and the five-step framework of IFRS 15.
2. Identify the criteria for a contract and the promises or performance obligations included in a
contract.
3. Understand the nature of a contract asset, contract liability, and accounts receivable.
4. Be able to determine the transaction price and know how to measure variable consideration, effect
of time value of money on consideration, noncash consideration, and consideration payable to
customer.
5. Be able to allocate revenue to separate performance obligations or multiple-element contracts.
6. Explain when performance obligations are satisfied at a point in time.
7. Demonstrate revenue recognition for more complex situations involving principal–agent
relationships, consignment sales, franchises, licenses, bill-and-hold arrangements, and sale and
repurchase agreements.
8. Explain the criteria for performance obligations that are satisfied continuously over time.
9. Demonstrate revenue recognition for performance obligations that are satisfied continuously over
time.
10. Know the disclosures and presentation required for revenue contracts under IFRS 15.

KEY POINTS
IFRS 15 Customer Contract Performance Obligations Satisfied at point in time
Satisfied over time Transaction price Distinct goods/services Inputs/outputs method

CORE CONTENT

Introduction
This Module outlines International Financial Reporting Standard (IFRS) 15, Revenue from
Contracts with Customers as a major standard that supersedes IAS/PAS 18, Revenue
Recognition and presents an overarching five-step framework that focuses on the transfer of
control. How the five-step framework of IFRS 15 works and why it is versatile enough to apply
to all types of revenue transactions are its emphasis. What control means and why control is
important in IFRS 15 are explained in this module. A critical unit of measurement in IFRS 15 is
the performance obligation or a promise made by the seller or service provider to a customer in a
contract. The importance of identifying these promises particularly in a contract that has
multiple-element deliverables is likewise briefly discussed. The application of the five-step
framework in IFRS 15 to transfers of goods and services made at a point in time and
continuously over time will be comprehensively discussed during the the time of problem
solving online presentations. How IFRS 15 deals with more complex revenue situations such as
those involving principal–agent relationships, variable consideration, and time value of money
will be likewise discussed.

IN-TEXT ACTIVITY

Part A
I. Framework of IFRS 15
A. According to the Conceptual Framework of the International Accounting Standards
Board (IASB), income is increases in assets or decreases in liabilities that arise from
non-owner transactions.
B. This is the core principle of IFRS 15: the seller recognizes revenue as the promises to
the customer are satisfied in an amount that reflects the expected consideration that the
seller is entitled to. The main principle of IFRS 15 reflects the exchange principle.
1. There must first be a contract that spells out the rights and obligations of both
the seller and the customer. The contract states the promises or performance
obligations that the seller has to the customer. Performance obligations are
satisfied when a customer obtains control of a good or service.
a. A contract includes promises made by the seller to the customer to
deliver distinct goods or services. Two conditions must exist for a good
or service to be distinct.
i. The good or service must be able to provide benefits on its own
(independently of other goods or services) or with resources
readily available to the customers.
ii. The promises to deliver distinct goods or services must be
specifically spelt out in the contract.
b. When a contract has multiple promises to deliver distinct goods and
services, each promise is a separate performance obligation. When each
separate performance obligation is satisfied, the seller or service provider
recognizes revenue.
2. The point when a customer obtains control of the asset in the form of goods
and services is when revenue is recognized. We will see that sometimes
performance obligations are satisfied at a point in time; in other cases, they are
satisfied over time through a process of continuous transfers (e.g., services) or
development or construction (e.g., building works).
a. In accounting standards, control is the ability to decide on the use of an
asset so as to obtain substantially the remaining benefits from that asset,
in its present form and condition.
b. Revenue recognition criteria help ensure that a proper cutoff is made
each period and that no more than one year’s activity that meets the
criteria is reported in the annual income statement.
3. When a company satisfies its obligations to a customer, the customer obtains
control of the good or service and the seller expects to be entitled to receive the
transaction price for those goods or services. The concept of expected
consideration is important to IFRS 15.
a. Typically, the seller recognizes the increase in assets in three forms:
cash, contract asset, and accounts receivable.
 i. A contract asset is the right to consideration that is conditional on
factors other than the passage of time.
ii. Accounts receivable, on the other hand, is the right of the seller to
receive payment from a customer and is conditional on time (i.e.,
credit period permitted).

II. Importance of Revenue

A. Revenue is an important measure of economic activity that drives net income and
other financial statement numbers. Markets get rattled when revenue numbers have
to be restated.
B. Over the course of corporate history, certain dubious practices have been carried out
to boost sales artificially or to recognize revenue prematurely. Some examples of
such practices includes “bill-and-hold” arrangements and sale and repurchase
agreements (or “round-tripping”).
C. Five steps are used to apply the principle in IFRS 15
1. Identify the contract with a customer
a. A contract is an agreement that creates legally enforceable rights and
obligations. The contract need not be a written document. Rights and
obligations can also be implied from normal business practices such as
advertisements or implicitly based on typical current or past business
practices that a company uses to sell products or services.
2. Identify the performance obligation(s) in the contract.
a. Performance obligations are promises that the seller makes to the
customers in the contract. A contract could obligate a seller to provide
multiple goods and services.
b. Sellers account for performance obligations separately if the
performance obligations are distinct.
c. Prepayments are not separate performance obligations because they
aren’t a promise to transfer a product or service to a customer. Instead, it
is an advance payment for future products or services to be allocated to
the various performance obligations in the contract and recognized as
revenue when each performance obligation is satisfied.
d. Right of return is not a separate performance obligation. Instead, it
represents a failure to satisfy the performance obligation to deliver
satisfactory goods. As a result, sellers need to estimate the amount of
product that will be returned and account for those returns as a reduction
in revenue and as a refund liability.
e. Quality assurance warranties are not separate performance obligations.
Rather, they are viewed as a cost of satisfying the performance
obligation to deliver products of acceptable quality. Therefore, the seller
recognizes in the period of sale an expense and related liability for these
warranties.
i. However, extended warranties do qualify as separate performance
obligations because they represent additional services that could be
(and often are) sold separately.
 f. An option for additional goods and services is a separate performance
obligation if it confers a material right to the buyer.
i. The option must be attractive to the customer for it to be a material
right. An example is the frequent flyer points of an airline
company.
3. Determine the transaction price.
a. Variable consideration should be included in the transaction price by
estimating it with either the expected value (probability-weighted
amount) or the most likely amount, depending on which measure better
predicts the amount that the seller will receive. If there are many
possible outcomes, a probability-weighted amount will be more
appropriate.
b. IFRS 15 requires noncash consideration to be measured at fair value. If
the fair value cannot be reliably estimated, the selling company should
use the stand-alone selling prices of the goods and services to indirectly
infer the consideration received. The indirect method is not as reliable as
the direct method and should be used only if a reliable measure of fair
value is not available.
c. A consideration payable to a customer (in a form of coupon or voucher)
is actually a rebate for future sale transaction and reduces the revenue on
actual sale date. IFRS 15 requires the reduction in transaction price to be
recognized at the later of:
i. transfer of goods and services to customer and
ii. date of payment or promised date of payment.
d. When time value of money is significant, a sales transaction is viewed as
including two parts: a delivery component (for goods or services) and a
financing component (either interest paid to the buyer in the case of a
prepayment or to the seller in the case of a receivable).
4. Allocate the transaction price to each performance obligation.
a. If an arrangement has more than one separate performance obligation,
the seller allocates the transaction price to the separate performance
obligations in proportion to the stand-alone selling price of the goods or
services underlying those performance obligations.
b. When the stand-alone selling price of a performance obligation is
uncertain, the seller may estimate it using the residual method, by
subtracting the stand-alone selling price of the other performance
obligation from total contract price.
c. In the presence of contract modification, the impact of these
modifications is determined with the following two questions:
i. Does the company now have an obligation to transfer distinct
goods or services?
ii. Is there an increase in contract price that is equal to the stand-alone
price of the additional promised goods and services?
d. If the answer to both questions is positive, contract modification is
accounted for as a new separate contract.
 e. If the additional goods or services are distinct but the additional price
does not reflect the stand-alone prices, the discount or premium is spread
over the remaining units from the existing contract and the new units
from the contract modification. Effectively, we are accounting for as if
we terminated the old contract and transferring the remaining obligations
to the new contract.
f. If the additional goods or services are not distinct and regardless of
whether the additional price reflects their stand-alone prices, these goods
or services are a single performance obligation with the goods and
services as originally contracted. We adjust the total transaction price
(i.e., the remaining contract price on unperformed obligations plus the
additional contract price from the modification) and allocate it
progressively to the remaining obligations.
i. Revenue recognized previously is not adjusted.
5. Recognize revenue when (or as) each performance obligation is satisfied.
a. Recognizing revenue at a single point in time
i. The performance obligation is satisfied when control of the goods
or services is transferred from the seller to the customer.
ii. Usually transfer of control is obvious and coincides with delivery.
iii. The customer is more likely to control a good or service if the
customer has:
√ an obligation to pay the seller,
√. legal title to the asset,
√. physical possession of the asset,
√. assumed the risks and rewards of ownership, and
√. accepted the asset.
iv. When more than one company is involved in providing goods or
services to a customer, we need to determine whether the company
is acting as a principal or as an agent. IFRS 15 provides the
following “clues” to determine whether a party is a principal or
agent.
√. The principal is the party who is primarily responsible for
fulfilling the contractual promises to the customer.
√. The principal, and not the agent, bears inventory risks before
transfer takes place and after returns (if any) are made.
√. The principal has the right to set prices for the goods and
services.
√. The agent’s consideration is in the form of a commission.
√. The agent is not exposed to credit risk from accounts
receivable.
v. In a consignment arrangement, the consignor physically transfers
the goods to the other company (the consignee), but the consignor
retains legal title. The consignor recognizes revenue only when
control is transferred to the ultimate customer. IFRS 15 states that
indicators of a consignment arrangement include, but are not
limited to the following factors:
 √. Product is under the control of the consignor until a specific
event occurs.
√. The consignor is able to require the return of the product or
the transfer to another dealer.
√. The consignee does not have an unconditional obligation to
pay for the product.
vi. For non-refundable upfront payments, fee paid is a contract
liability (deferred or unearned revenue) until the services are
rendered.
vii. In a franchise arrangement, a franchisor grants to the franchisee
the right to sell the franchisor’s products and use its name. The
fees to be paid by the franchisee to the franchisor usually comprise
(1) an initial franchise fee and (2) continuing franchise fees.
√. If the initial fee is collectible in installment over an extended
period of time. It is necessary to consider (1) the uncertainty
of cash collection and (2) the time value of money.
viii. Customers sometimes pay a licensing fee to use a company’s
intellectual property (“IP”). Licenses are common in software,
technology, media, and entertainment industries. Sometimes, a
license isn’t considered to be a separate performance obligation
because it’s not distinct from other goods or services provided in
the same transaction. However, if the licenses are distinct from
other goods or services, we have to determine whether the
performance obligation is satisfied over time or at a point in time.
√. Right-of-use licenses may satisfy performance obligations
differently from right-of-access licenses. The benefit the
customer receives from the license isn’t affected by the
seller’s ongoing activity.
√. Right-of-access licenses require ongoing activities by the
seller. The seller will undertake ongoing activities during the
license period that benefit the customer.
ix. A bill-and-hold arrangement occurs when the customer is billed
for the goods but does not have physical possession. For bill-and-
hold arrangements, the key issue is whether the customer has
obtained control of the goods, even though the seller has physical
possession of the items. In addition to asking the overriding
question relating to control, sellers need to ask some tough
questions required by IFRS 15 to justify recognizing revenue:
√. Was there a genuine reason for the bill-and-hold
arrangement? Fundamentally, was it the customer who
initiated this arrangement?
√. Can the product be identified separately as belonging to the
customer?
√. Is the product ready to be delivered to the customer?
√. Does the seller have the ability to use the product or to direct
it to another customer?
 If the answer to any of the questions is “no”, the seller has to
conclude that control has not been transferred and revenue should
not be recognized.
x. In a sale and repurchase agreement, control is not transferred to
the customer. IFRS 15 requires us to analyze the real nature of the
transaction as follows:
√. If the discounted value of the repurchase price is higher than
the sale price, the arrangement is a financing arrangement,
with the difference between the two prices being a financing
cost.
√. If the discounted value of the repurchase price is lower than
the sale price, the arrangement is a leasing arrangement, with
the difference between the two prices being the lease rental
for the item.
b. Recognizing revenue over a period of time
i. In a contract, there may be occasion when much of the activities
performed by the companies to generate revenue occur throughout
a period rather than at a point in time Hence, IFRS 15 requires a
company to test whether its performance obligation is satisfied
over time or satisfied at a point in time. If performance obligation
is satisfied over time, the company reports revenue on a
progressive basis as the performance obligations are satisfied.
ii. A performance obligation is satisfied over time if at least one of
the three criteria specified in IFRS 15 paragraph 35 is met.
√. Simultaneous receipt and consumption of benefits by the
customer as the seller provides the benefits.
√. The seller is involved in the process of creating or enhancing
an asset that the customer controls.
√. The seller creates an asset that has no alternative use to the
seller and the seller has an enforceable right to payment for
the work done to date on the asset from the customer.

III. Accounting for Performance Obligations Satisfied Over Time

A. The recognition of revenue as performance obligations are satisfied over time has a
more favorable impact on financial statements than recognizing revenue only when
performance obligations are satisfied at a point in time.
B. Progressive recognition of revenue through what is popularly known as the
percentage-of-completion method requires estimation of total costs and the final
profit on the contract as shown in the following steps.
1. Identify the contract price
a. Identification of the contract price is normally not difficult. However, it
is not uncommon for the contractor and/or the customer to change the
specifications in a contract after contract date. These amendments to the
contract price, if not yet agreed upon by the customer, constitute
“variable consideration.”
2. Identify the contract costs
 a. Contract costs comprise incremental costs of obtaining a contract and
costs to fulfill a contract (fulfillment costs).
i. Incremental costs are costs incurred to obtain a contract that could
have been avoided if the contract had not been obtained.
ii. The bulk of costs in a contract relates to costs incurred to produce
the promised goods or services. These are called fulfillment costs.
To be recognized as a contract asset, they must fulfill three criteria.
√. They must relate directly to a contract or to an anticipated
specific contract.
√. They are used to satisfy performance obligations.
√. They are expected to be recoverable.
b. Contract costs should not include items that qualify as another asset.
c. General administrative costs, wastage and inefficiencies should not be
included in contract costs.
3. Determine the progress to date for each period
a. IFRS 15 requires us to use the most appropriate method to measure a
contract’s progress in fulfilling the performance obligations. Essentially,
there are two methods of estimating progress: input and output methods.
i. Under the input method, measures that reflect efforts or inputs
such as costs incurred, hours spent, resources consumed, or
machine hours are applied to determine the percentage of
completion. Input measures are indirect measures of progress. A
very common method is the cost-to-cost method which uses costs
as a proxy for progress.
√. Advantage of the input method is the availability of data.
√. However, the input method has a shortcoming in that the
measures used may not reflect the progress of a contract’s
fulfillment of the performance obligations to date.
√. Under the input measure, it is important to exclude costs that
do not reflect the progress of contract fulfillment.
√. Another type of costs that should be excluded is “front-end”
loading costs/
b. The output method measures the outflow of value transferred to the
customer to date in comparison with total value promised. Measures in
the output method include, for example, surveys or inspections,
milestones achieved, and units produced or delivered.
i. While the output measures are more direct measures of progress, it
is difficult to obtain a reliable measure at the end of each period.
4. Determine the contract revenue and contract expense for each period
a. In this step, we apply the percentage of completion to the contract price
to determine cumulative revenue. Cumulative revenue is percentage of
completion multiplied by the contract price.
b. Current revenue is determine by taking the difference between
cumulative revenue at the start and at the end of a period.
c. Contract expense is simply the cost of inputs that has been incurred
during the period to fulfill the performance obligations to the customer.
 5. To recognized accounts receivable at the point of progress billings
a. In a long-term contract, a customer agrees to make progress payments to
the contractor when particular milestones are met. The progress
payments help to provide liquidity to the contractor in a long-term
contract. From the contractor’s perspective, these are commonly referred
to as progress billings that are invoices to the customer to require
payment.
b. At the point of billing, the contractor should recognize the asset as an
accounts receivable. The asset is transformed from a contract asset
(conditional on future performance obligations) to accounts receivable
(unconditional right to payment).
c. Prior to IFRS 15, the contractor has to maintain progress billings as a
“contra account” to construction work-in-progress. However, IFRS 15
has dispensed with this requirement as the contract asset or contract
liability essentially provides the information of the amount of work done
that is not yet billed (contract asset) or the amount of work that is owing
to the customer (contract liability).

IV. “Cumulative Catch-Up” From Change in Estimates

A. When estimates of total costs change, there is a cumulative catch-up adjustment
included in current revenue and current profit. The “cumulative catch-up”
adjustment is important as it is one of the items that must be disclosed under IFRS
15.
B. We can work out the cumulative catch-up adjustment by comparing the original
prior-year figure and the adjusted prior-year figure using the latest estimate.

V. Inability to Reasonably Measure the Outcome of a Performance Obligation

A. Recognizing revenue and profit progressively requires the use of estimates which
may result in “cumulative catch-up” adjustment in future periods.
B. If the reporting company lacks reliable information to reasonably measure progress
and the outcome of a performance obligation, it would not be meaningful to report
revenue and profit on a progressive basis.
C. In such circumstances, IFRS 15 requires the company to recognize contract revenue
to the extent of costs incurred that are expected to be recovered. This approach is
commonly referred to as the cost recovery method.
1. Under the cost recovery method, contract costs are expensed when incurred,
and an offsetting amount of contract revenue is recognized to the extent that it
is probable that costs will be recoverable from the customer.
2. No gross profit is recognized until all costs have been recovered.

Additional Consideration
A. Sometimes, a long-term contract fails to meet at least one of the three criteria for
performance obligations satisfied over time.
B. The accounting treatment is the same for situations where the performance
obligation is satisfied at a point in time. In the construction business, this method is
popularly known as the completed contracts method.
 C. The difference between the cost recovery and the completed contracts methods is in
the Income Statement. Unlike the cost recovery method that reports contract
revenue, contract expense, and zero profit, the completed contracts method reports
no revenue and no expense until all the performance obligations are fulfilled.

VI. Some Complexities Relating to Performance Obligations Satisfied Over Time

A. In a long-term contract, it is not uncommon for contract modifications to occur at the
initiation of either the contractor or the customer. Depending on the industry, these
are called “variation orders,” “change orders,” or simply amendments.
1. IFRS 15 requires variable consideration to be recognized based on either the
“expected value” amount or the “most likely” amount, whichever is the more
predictive of the final outcome.
B. In measuring progress, we explained earlier that we have to exclude costs that do not
reflect progress. These costs include wastage, inefficiencies, or assets that are not yet
used to satisfy performance obligations.
1. For example, a batch of inventory may be transported to the construction site
but remains idle and unused for construction. There are two issues. First, the
inventory is not a contract asset yet until it is deployed. Second, we should not
include the cost of the inventory in cumulative or actual costs incurred to date
as it does not represent any work done on the building project for that period.
C. Some sellers may be caught with unprofitable contracts when circumstances change
or their initial estimates are too bullish. In accounting, we describe these contracts as
onerous.
1. The seller has two options; to continue with the contract and incur a loss or to
terminate the contract and incur penalties or legal consequences.
2. Under IAS 37 Provisions, Contingent Assets and Contingent Liabilities, we
should recognize a provision for the present obligation under the onerous
contract.
D. IFRS 15 requires many disclosures, but the overarching principle is that the
disclosures should provide information to enable users to understand the amount,
timing, and uncertainty of revenue and cash flows from contracts with customers.
1. Income Statement Disclosure: The seller is required to include in the income
statement or disclosure notes revenue, any impairment loss and any interest
revenue or interest expense associated with significant financing components
of long-term contracts.
2. Statement of Financial Position Disclosure: The seller reports accounts
receivable, “contract liabilities,” and “contract assets” on separate lines of its
statement of financial position.
3. Disclosure Notes: Several important aspects of revenue recognition must be
disclosed in the notes to the financial statements.
a. For example, sellers must separate their revenue into categories that help
investors understand the nature, amount, timing, and uncertainty of
revenue and cash flows. Categories might include product lines,
geographic regions, types of customers, or types of contracts.
b. Sellers must also describe their outstanding performance obligations,
discuss how performance obligations typically are satisfied, and describe
 important contractual provisions like payment terms and policies for
refunds, returns, and warranties. They also must disclose any significant
judgments used to estimate transaction prices, to allocate transaction
prices to performance obligations, and to determine when performance
obligations have been satisfied.
c. Sellers must also explain significant changes in contract assets and
contract liabilities that occurred during the period.

SESSION SUMMARY

The core principle of IFRS 15: the seller recognizes revenue as the promises to the customer are
satisfied in an amount that reflects the expected consideration that the seller is entitled to. The
point when a customer obtains control of the asset in the form of goods and services is when
revenue is recognized. Performance obligations are satisfied at a point in time; or they are
satisfied over time through a process of continuous transfers (e.g., services) or development or
construction (e.g., building works). When a company satisfies its obligations to a customer, the
customer obtains control of the good or service and the seller expects to be entitled to receive the
transaction price for those goods or services. The concept of expected consideration is important
to IFRS 15.

SELF-ASSESSMENT
1. Assignment: Answer all the problems and questions provided in the following pages
2. Quiz : Synchronous LMS Activities – MOODLE

REFERENCES
Refer to the references listed in the syllabus of the subject.