UNIT 5: IFRS 15 – REVENUE FROM CONTRACTS

WITH CUSTOMERS

RESOURCES:
- READER: IFRS 15
- INCLUDING THE ILLUSTRATIVE EXAMPLES
- INTRODUCTION TO IFRS: CHAPTER 10

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UNIT 5: LEARNING OUTCOMES

At the end of this learning unit, a student should be able to:

 Understand the accounting principles of IFRS 15.
 Know and apply definitions relevant to revenue.
 Recognise revenue based on the five-step revenue model
 Discuss and apply the recognition criteria for revenue transactions.
 Prepare the financial statements in accordance with IFRS.

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UNIT 5 (PART ONE): CONTENTS

 5.1: Scope of IFRS 15

 5.2: Background
 5.3: Five-step revenue model
 5.4: Step one: Identify the contract
 5.5: Step two: Identify the performance obligations
 5.6: Homework

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 Reader ref: IFRS 15:5 - 8 Textbook ref: Chap 10:4

5.1: SCOPE OF IFRS 15

 IFRS 15 is not applicable to the following contracts with customers:

 - Leases
 - Insurance contracts
 - Financial instruments
 - Group accounts (IFRS 10/11,IAS 28)
 - Non-monetary exchanges between entities in the same line of business to
facilitate sales

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 Reader ref: IFRS 15:1 - 4 Textbook ref: Chap 10:2

5.2: BACKGROUND

 Objective: to ensure reporting useful information about the nature, amount, timing
and uncertainty of revenue and cash flows arising from a contract with a customer.
 Entities should recognise revenue to depict (represent) the transfer of promised
goods or services to customers at an amount that reflects the consideration to which
the entity expects to be entitled to in exchange for those goods or services.
 How can entities achieve this?

 Five-step revenue model

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 Textbook ref: Chap 10:2

5.2: BACKGROUND

Food for thought

 Revise the definition of Income as per the Conceptual Framework for Financial
Reporting

 How does revenue relate to income?

 Where do we present and disclose revenue?

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 Textbook ref: Chap 10:5

5.3: FIVE-STEP REVENUE MODEL

 Step one: Identify the contract Steps 1 – 4:

 Step two: Identify the performance obligations On day one
when you
 Step three: Determine the transaction price sign the
contract
 Step four: Allocate the transaction price to the performance obligations
 Step five: Satisfy the performance obligations
Step 5: The measurement
and recognition of
revenue is done in terms
of the allocation
completed in step 4
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 Reader ref: IFRS 15:10 Textbook ref: Chap 10:5.1.1

5.4: STEP ONE: IDENTIFY THE CONTRACT

 First it should be determined if a contract exists.

Revenue can only be accounted for if

there is a contract.

 A contract is:
 An agreement between two or more parties that creates enforceable rights and
obligations.
 Can be verbal/written

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 Reader ref: IFRS 15:9 Textbook ref: Chap 10:5.1.1

5.4: STEP ONE: IDENTIFY THE CONTRACT

 For a contract to exist ALL the following criteria should be met:

 1.) The parties have approved the contract and are committed to perform their
respective obligations;
 2.) Each party’s rights regarding the goods/services to be transferred can be
identified;
 3.) The payment terms of the goods/services can be identified;
 4.) The contract has commercial substance (cash flows of the company will
change as a result); and
 5.) It is probable that the consideration will be collected by the entity (customer’s
ability and intention to pay).
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 Reader ref: IFRS 15:9 Textbook ref: Chap 10:5.1.1

5.4: STEP ONE: IDENTIFY THE CONTRACT

 Exam technique:
 1.) The parties have approved the contract and are committed to perform their
respective obligations;
 Consider if parties have agreed to the terms of the contract (either
verbally/written)
 Note the specific obligation of each party:
 Buyer: Has the obligation (specify) to pay the seller
 Seller: Has the obligation to deliver goods or service (specify) to buyer

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 Reader ref: IFRS 15:9 Textbook ref: Chap 10:5.1.1

5.4: STEP ONE: IDENTIFY THE CONTRACT

 Exam technique:
 2.) Each party’s rights regarding the goods/services to be transferred can be
identified;
 Note the specific right of each party:
 Buyer has the right to receive goods (specify) from seller
 Seller has the right to receive payment (specify) for the goods/services

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 Reader ref: IFRS 15:9 Textbook ref: Chap 10:5.1.1

5.4: STEP ONE: IDENTIFY THE CONTRACT

 Exam technique:
 3.) The payment terms of the goods/services can be identified;
 Discuss the payment terms – how should payment be made? COD;
Advance, etc.

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 Reader ref: IFRS 15:9 Textbook ref: Chap 10:5.1.1

5.4: STEP ONE: IDENTIFY THE CONTRACT

 Exam technique:
 4.) The contract has commercial substance;
 Commercial substance means that the cash flows of the company will change
as a result of the transaction/contract
 Discuss how the contract/transaction will change the risk, timing and amount
of the entity’s future cash flows because of the contract; i.e. there will be an
inflow of Rx when the customer pays the amount due and there will an
outflow to the value of Rx when the company fulfills their obligation to deliver
products x, y, z

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 Reader ref: IFRS 15:9 Textbook ref: Chap 10:5.1.1

5.4: STEP ONE: IDENTIFY THE CONTRACT

 Exam technique:
 5.) It is probable that the consideration will be collected by the entity (customer’s
ability and intention to pay).
 Discuss the probability that the client will be able to pay the amount due;
consider aspects from the information such as collectability of amounts due;
are there any certainties/uncertainties relating to the collectability of the
amounts – will the client be able to settle their accounts (perhaps good credit
record or bad credit records; new customer, old customer)
 If there are doubts w.r.t possible payment – then this criteria is not satisfied
and there is no contract

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 Reader ref: IFRS 15:12; 14 Textbook ref: Chap 10:5.1.1

5.4: STEP ONE: IDENTIFY THE CONTRACT

 If a contract does not meet the noted 5 criteria: a contract does not exist in terms of
IFRS 15.
 Remember! Entity needs to continuously assess the contract to determine if the
criteria is met in terms of Par 9.

 Also, a contract does not exist if each party has the unilateral enforceable right to
terminate a wholly unperformed contract without compensation.

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5.4: STEP ONE: IDENTIFY THE CONTRACT

Food for thought

 What is a “unilateral enforceable right to terminate a wholly

unperformed contract without compensation”?

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 Reader ref: IFRS 15:15; 16 Textbook ref: Chap 10:5.1.1

5.4: STEP ONE: IDENTIFY THE CONTRACT

 What if a contract does not exist and money has been received?
 Any money received is recognised as a liability until:
 The time that the agreement/transaction meets the criteria of a contract; or
 There is not a contract BUT the entity has no remaining obligation to transfer
goods or services to the customer and all consideration has been received and is
non-refundable; or
 There is not a contract BUT the contract has been terminated and the
consideration received is non -refundable

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 5.4: STEP ONE: IDENTIFY THE CONTRACT

Food for thought

 On 1 March 20.4 A Ltd entered into a non-cancellable contract with B Ltd. In terms of
the contract, A Ltd would transfer a product to B Ltd on 31 July 20.5. The full
transaction price of R2 500 would be settled in advance on 1 April 20.5. How should A
Ltd recognise the R2 500 received on 1 April 20.5?
A. As revenue
B. As income received in advance

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5.4: STEP ONE: IDENTIFY THE CONTRACT

Food for thought

 Answer:
 Consider par 15: Revenue may only be recognised when:
 The entity has no remaining obligation to transfer goods/services and
all consideration has been received and is non-refundable; OR
 The contract has been terminated and the consideration received is
non-refundable
 Thus: Income Received in Advance

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5.4: STEP ONE: IDENTIFY THE CONTRACT

Food for thought

 Work through the following applicable Illustrative examples included in the

reader as part of IFRS 15 in detail:
 Example 1
 Example 2
 Example 3
 Example 4

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 Textbook ref: Chap 10:5.1.1

5.4: STEP ONE: IDENTIFY THE CONTRACT - RECAP

If a contract does not meet the If not

Contract should satisfy the following criteria:
criteria, an amount of money that applicable?
• The parties approved the contact and is has been received can only be • Recognise
committed to perform; recognised as revenue if: money
• The entity can identify each party's rights received as:
regarding the goods or services to be • 1.) The entity has no remaining • Income
transferred; obligation to transfer goods or Received in
services and all consideration has Advance
• The entity can identify the payment terms of been received and is non-
those goods or services to be transferred; (SFP)
refundable;
• The contract has commercial substance; and • OR
• It is probable that the entity will collect the • 2.) The contract has been
consideration. terminated and the consideration
received is non-refundable
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 Reader ref: IFRS 15:22 - 25 Textbook ref: Chap 10:5.2

5.5: STEP TWO: IDENTIFY THE PERFORMANCE OBLIGATIONS

 At inception of the contract, an entity shall assess the goods or services promised in
the contract and shall identify the performance obligations.
 Performance obligations?
 A promise to deliver either:
 A: a distinct good or service (or a bundle of goods and services) (i.e. vehicle
with a service plan; hiring a photographer for an event); OR
 B: A series of distinct goods/services that are substantially the same and that
have the same pattern of transfer to the customer (i.e. magazine subscription;
hiring an accountant for monthly accounting services).

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 Reader ref: IFRS 15:27 - 30 Textbook ref: Chap 10:5.2

5.5: STEP TWO: IDENTIFY THE PERFORMANCE OBLIGATIONS

 A: a distinct good or service (or a bundle of goods and services) (i.e. vehicle with a service
plan; hiring a photographer for an event); or
 A distinct good or service?
 A.1 The customer can benefit from the good/service on its own or together with
other resources that are readily available to the customer (The goods/services are
capable of being distinct);
 AND
 A.2 The entity’s promise to transfer the good/service is separately identifiable from
other promises in the contract (the goods or services are distinct within the context of
the the contract).

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 Reader ref: IFRS 15:27 - 28 Textbook ref: Chap 10:5.2

5.5: STEP TWO: IDENTIFY THE PERFORMANCE OBLIGATIONS

 Explanation:
 A: a distinct good or service (or a bundle of goods and services) (i.e. vehicle with a service
plan; hiring a photographer for an event); or
 A distinct good or service?
 A.1 The customer can benefit from the good/service on its own or together with
other resources that are readily available to the customer:
 A customer can benefit from a good/service if it can be used, consumed or sold in
order to generate economic benefits for the customer
 A readily available resource is a good/service that is sold separately by the entity
or other entities or it is a resource that the customer has already obtained from the
entity
 TOP TIP! If a question states that an entity regularly sells a good/service
separately, this would indicate that a customer can benefit from the
good/service on its own or with other readily available resources Page 24 of 39
 Reader ref: IFRS 15:29 Textbook ref: Chap 10:5.2

5.5: STEP TWO: IDENTIFY THE PERFORMANCE OBLIGATIONS

 Explanation:
 A: a distinct good or service (or a bundle of goods and services) (i.e. vehicle with a service
plan; hiring a photographer for an event); or
 A distinct good or service?
 AND
 A.2 The entity’s promise to transfer the good/service is separately identifiable from
other promises in the contract:
 The following factors indicate that a promise is separately identifiable:
 Entity does not provide a significant service of integrating the good/service
with other goods/services;
 The good/service does not significantly modify or customize another
goods/services promised in the contract
 The good/service is not highly dependent on, or highly interrelated with other
goods/services promised in the contract. Page 25 of 39
 Reader ref: IFRS 15:23 Textbook ref: Chap 10:5.2

5.5: STEP TWO: IDENTIFY THE PERFORMANCE OBLIGATIONS

 Explanation:
 B: A series of distinct goods/services that are substantially the same and that have the
same pattern of transfer to the customer (i.e. magazine subscription; hiring an accountant
for monthly accounting services).
 B.1 Substantially the same
 B.2 The same pattern of transfer if the following criteria is met:
 B.2.1 Each distinct good/service in the series should meet the criteria to be a
performance obligation satisfied over time (control transferred over time)
 AND
 B.2.2 The same method would be used to measure the entity’s progress towards
complete satisfaction of the performance obligation to transfer each good/service in
the series Page 26 of 39
 Reader ref: IFRS 15:23 Textbook ref: Chap 10:5.2

5.5: STEP TWO: IDENTIFY THE PERFORMANCE OBLIGATIONS

 Explanation:
 B.2.1 Each distinct good/service in the series should meet the criteria to be a
performance obligation satisfied over time (control transferred over time) –
criteria: one of the following:
 Customer simultaneously receives and consumes the benefit as the entity
performs (magazine is delivered and read every month for twelve months);
 Entity’s performance creates or enhances an asset that the customer controls as it
is created/enhanced (building a shopping centre, adding value as they build); or
 Entity’s performance does not create an asset with alternative use to the entity
and the entity has an enforceable right to payment for performance completed to
date (specialised software developed for specific entity)
 AND
 B.2.2 The same method would be used to measure the entity’s progress towards
complete satisfaction of the performance obligation to transfer each good/service in
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the series:
 5.5: STEP TWO: IDENTIFY THE PERFORMANCE OBLIGATIONS- RECAP
A Performance obligation is one of the following:
A: a distinct good or service (or a bundle of goods and B: A series of distinct goods/services that are substantially the same
services) (i.e. vehicle with a service plan) OR and that have the same pattern of transfer to the customer (i.e.
magazine subscription).
A.1: The customer can benefit from the good/service on its own
B.1: goods/services should be substantially the same (are separately
(generates economic benefits; used or sold separate) or together
with other resources that are readily available (a good sold identifiable)
separately or resource the customer has already obtained) to the
AND
customer
B.2: Goods/services should have the same pattern of transfer to the
AND customer (i.e. magazine subscription).

A.2: Entity’s promise to transfer the good/service is separately identifiable

(no integration service, does not significantly alter other promised g/s, B.2.1: Each distinct good/service in the Satisfied over time:
decision to buy will not affect other g/s) from other promises in the series should meet the criteria to be a • Customer simultaneously
contract. performance obligation satisfied over receives and consumes the
time (control transferred over time) benefit as the entity performs;
• Entity’s performance creates or
Separately identifiable: AND enhances an asset that the
Entity does not provide a significant service of integrating the customer controls as it is
good/service with other goods/services; B.2.2: The same method would be created/enhanced; or
The good/service does not significantly modify or customize another used to measure the entity’s progress • Entity’s performance does not
good/service promised in the contract towards complete satisfaction of the create an asset with alternative
The good/service is not highly dependent on, or highly interrelated performance obligation to transfer each use to the entity and the entity
with other goods/services promised in the contract. good/service in the series has an enforceable right to
payment Page for28 of 39
performance
completed to date
 Reader ref: IFRS 15:30 Textbook ref: Chap 10:5.2

5.5: STEP TWO: IDENTIFY THE PERFORMANCE OBLIGATIONS

 At inception of the contract, an entity shall assess the goods or services promised in
the contract and shall identify the performance obligations.
 Consider Example 10.2 in Chapter 10 of Introduction to IFRS.

 If a good/service is not distinct, it cannot be identified as a separate performance

obligation.
 These type of goods/series should be combined with others until a bundle of
goods/services can be identified as being distinct. The bundle will then be a single
performance obligation.
 Consider Example 10.3 in Chapter 10 of Introduction to IFRS.
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5.5: STEP TWO: IDENTIFY THE PERFORMANCE OBLIGATIONS

Food for thought

 Consider the following example:
 A enters into an agreement with B for the sale of a vehicle along with a three-
year service plan for a total cost of R500 000. Vehicles can be obtained
without a service plan from A. A regularly sells three-year service plans to
customers on a stand-alone basis.
How many performance obligations?
A. 1: Delivery of vehicle
B. 2: Delivery of vehicle and service plan

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5.5: STEP TWO: IDENTIFY THE PERFORMANCE OBLIGATIONS

Food for thought

 Answer:
A. 2: Delivery of vehicle and service plan

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5.5: STEP TWO: IDENTIFY THE PERFORMANCE OBLIGATIONS

Food for thought

 Consider the following example:
A sells licensed accounting software to B for a total consideration of R40 000. In addition,
A promises to provide consulting services to significantly customise (modify) the software
to the customer’s business environment.
How many performance obligations?
A. 1: Delivery of licensed software
B. 1: Delivery of consulting services
C. 2: Delivery of licensed software and delivery of consulting services
D. 1: Delivery of licensed software and consulting services as a bundle
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5.5: STEP TWO: IDENTIFY THE PERFORMANCE OBLIGATIONS

Food for thought

 Answer:
D. 1: Delivery of licensed software and consulting services as a bundle

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5.5: STEP TWO: IDENTIFY THE PERFORMANCE OBLIGATIONS

Food for thought

 Consider the following example:
A enters into a contract with B to present a training course at B’s premises. In order to
fulfil the contract to provide training, A has to perform the following services:
- Arrange for logistics such as travel arrangements and other administrative tasks;
research the topic; prepare the training material and present the course.
Determine the number of performance obligations:
A. 1: Present the course
B. 2: Present the course and logistical arrangements
C. 3: Present the course, logistical arrangements, research of the topic
D. 4: Present the course, logistical arrangements, research of the topic and preparation
of training material Page 34 of 39
5.5: STEP TWO: IDENTIFY THE PERFORMANCE OBLIGATIONS

Food for thought

 Answer:
A. 1: Present the course

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5.5: STEP TWO: IDENTIFY THE PERFORMANCE OBLIGATIONS

Food for thought

 Consider the following example:
What if, in addition to the training services, A also promises to provide all participants at the
training with a copy of a textbook which will be used during the presentation and can be kept
by the each participant at the end of the day. A regularly sells these textbooks to the public and
this has been included in the price charged for training.
Determine the number of performance obligations:
A. 1: Present the course
B. 2: Present the course and provision of textbook
C. 4: Present the course, provision of textbook, logistical arrangements, research of the topic
D. 5: Present the course and provision of textbook, logistical arrangements, research of the
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topic and preparation of training material
5.5: STEP TWO: IDENTIFY THE PERFORMANCE OBLIGATIONS

Food for thought

 Answer:
B. 2: Present the course and provision of textbook

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5.5: STEP TWO: IDENTIFY THE PERFORMANCE OBLIGATIONS

Food for thought

 Work through the following applicable Illustrative examples included in the

reader as part of IFRS 15 in detail:
 Example 10
 Example 11 (A and B)

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5.6 HOMEWORK

• Healthwise (discuss only steps 1 and 2) (Question 5 in module guide)

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