Chapter 3

Approach to revenue recognition

1. Identify the contract with the customer

2. Identify the performance obligation(s)
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations
5. Recognise revenue when (or as) the performance obligations are satisfied

Identify the contract with the customer

(a) Applies where a contract exists

(b) The following criteria are met
- The parties have approved the contract
- The entity can identify each party’s rights
- The entity can identify payment terms
- The contract has commercial substance
- It is probable that entity will collect the consideration
(c) If the criteria in (b) are not met, the entity should continue to assess the contract against the criteria in (b). If the
criteria are met in the future, the entity must then apply the IFRS 15 revenue recognition model
(d) If the criteria in (b) are not met and consideration has already been received from the customer, the entity
should recognise the consideration as revenue when the entity has no remaining obligations to the customer
and substantially all of the consideration has been received and is not refundable or the contract has been
terminated and consideration is not refundable. Otherwise the entity should recognise a liability for the amount
of the consideration received.

Identify performance obligations

• At contract inception, an entity should assess the goods and services promised in a contract with a customer and
should identify as a performance obligation each promise to transfer to the customer either a good or service
that is distinct or a series of distinct goods or services that are substantially the same and that have the same
pattern of transfer to the customer
• If a promised good or service is not distinct, an entity should combine that good or service with other promised
goods and services until it identifies a bundle of goods or services that is distinct

Determine transaction price

• Amount which the entity expects to be entitled

• Consider effects of:
- The existence of a significant financing component
- Non-cash consideration
- Consideration payable to a customer
- Variable consideration
• Include any variable consideration in the transaction price if it is highly probable that significant reversal of
cumulative revenue will not occur. Measure variable consideration at probability-weighted expected value or
most likely amount
• Discounting is not required where consideration is due in less than one year

Allocate transaction price to performance obligations

• Multiple deliverables – transaction price allocated to each separate performance obligation in proportion to the
standalone selling price at contract inception of each performance obligation
Recognise revenue when performance obligation satisfied

• A performance obligation is satisfied when the entity transfers a promised good or service to a customer.
• An asset is considered transferred when the customer obtains control of that asset.
• Control of an asset refers to the ability to direct the use of, and obtain substantially all of the remaining benefits
from, the asset.

Transfer of control of a good or service

1. Satisfaction of a performance obligation over time

• Entity transfers goods and services over time, therefore, satisfies a performance obligation and receives
revenue over time if one of the following criteria are met
(a) The customer simultaneously receives and consumes the benefits provided by the entity’s performance
as the entity performs
(b) The entity’s performance creates or enhances an asset (eg work in progress) that the customer controls
as the asset is created or enhanced
(c) 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.
• For each performance obligation satisfied over time, revenue should be recognised by measuring
progress towards complete satisfaction of that performance obligation
2. Satisfaction of a performance obligation at a point in time
• To determine the point in time when a customer obtains control of a promised asset and an entity
satisfies a performance obligation, the entity would consider indicators of the transfer of control that
include, but are not limited to, the following
(a) The entity has a present right to payment
(b) The customer has legal title to the asset
(c) The entity has transferred physical possession of the asset
(d) The customer has the significant risks and rewards of ownership of the asset
(e) The customer has accepted the asset

Contract costs

▪ Incremental costs of obtaining a contract are recognised as an asset if the entity expects to recover them
▪ If the costs to fulfil a contract are not within the scope of another standard, they should be recognised as an
asset only if the costs relate directly to a contract or an anticipated contract that the entity can specifically
identify, he costs generate or enhance resources of the entity that will be used in satisfying performance
obligations in the future; and the costs are expected to be recovered
▪ The asset should be amortised on a systematic basis consistent with the pattern of transfer of the goods or
services to which the asset relates. For the costs of obtaining a contract, if the amortisation period is estimated
to be one year or less, the costs may be recognised as an expense when incurred. An impairment loss should be
recognised in profit or loss to the extent that the carrying amount exceeds the remaining amount of
consideration that the entity expects to receive in exchange for the goods or services to which the asset relates,
less the costs that relate directly to providing those goods or services that have not yet been recognised as
expenses.

Presentation
▪ When either party to a contract has performed, an entity shall present the contract in the statement of financial
position as a contract asset or as a contract liability