IFRS 15 Revenue from contracts with customers

Welcome!
Welcome to the module – IFRS 15 Revenue from contracts with customers.

While this appears to be a theory intensive topic, please always keep in mind that the ultimate purpose
of the standard is to provide principles to determine WHEN and HOW MUCH REVENUE a company can
record in its financial statements.

The five-step process is there to guide users on how to analyse and interpret contracts, in order to
ultimately be able to record revenue at the appropriate time and the appropriate amount.

Background
Revenue is an important number to users of financial statements as it is a key driver in assessing an
entity’s financial performance in any particular period, as you would have realised during the FMA
assignment.

IFRS 15 is the culmination of more than a decade of effort in development and consolation by both the
International Accounting Standards Board (IASB) and its American counterpart, the Financial Accounting
Standards Board (FASB), in addressing concerns with existing revenue recognition requirements under
both IFRS and US GAAP. The result is a harmonious approach that will see IFRS and US GAAP preparers
adopting a uniform approach to recognising revenue transactions in the future, irrespective of country
of origin or type of industry. IFRS 15 was issued in May 2014 and became effective for reporting periods
beginning 1 January 2018.

The core principles under IFRS 15 is that revenue is recognised to depict the transfer of promised goods
or services to customers in an amount that reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services.

The standard establishes a 5-step model that will apply to revenue earned from a contract with a
customer (with limited exceptions), regardless of the type of revenue transaction or the industry in
which the entity operates.
 Technical resources:
Your technical resources for the module:

 IFRS 15 standard in Volume A, including Appendix A (definitions) and Appendix B (detailed

application guidance)

 IFRS 15 illustrative examples (IE) in Volume B

 IFRS 15 mapping document – mapping the five steps to IFRS 15 paragraphs and IEs

Please note, the standard is not written in the five-step format – it still follows the “look and
feel” of a normal standard, i.e. scope, recognition (steps 1,2, & 5), measurement (steps 3 & 4),
presentation and disclosure principles.

Additional resources:
Your additional key resources for the module:

 Lecture slide and short recordings – note Revenue is normally a double lecture topic and is fairly
theory intensive, as such there’s quite a number of slide to work through

 BDO eight-page summary of IFRS 15

 IFRS 15 Question Bank

Common abbreviations used in this module:

1) G/S Good(s) or Service(s)

2) PO Performance Obligation(s)
3) TP Transaction Price
4) SASP Stand-alone Selling Price
 The five-step model framework is as follows:

1
• Identify the contract(s) with the customer

2
• Identify the performance obligations in the contract

3
• Determine the transaction price

4
• Allocate the transaction price to the performance obligations

5
• Recognise revenue as/ when each performance obligation is satisfied

Overview (“pre-reading”) – please do this!

Before we jump in, let’s get a big picture overview of the standard (15 minutes).

You can either read through the following IFRS Box page and/or watch the IFRSBox video that I have
included for you on the Blackbaord page as pre-reading. Please ignore the information about contract
modifications under Step 1 as this is only covered in CTA

This material will re-enforce existing knowledge. While watching the video/reading the document,
identify at least three principles that you were not aware of before watching this video
 NB! Recording revenue & links to other standards
When recording revenue, we process the journal entry:

Dr Cash / Receivables (SFP) Note: Cash & Accounts receivable are financial assets ito IAS32 and IFRS9
Cr Revenue (P/L)

When selling goods, it is important remember that we will also record the related cost of sales at the
point where we record revenue:

Dr Cost of sales (P/L)

Cr Inventory (SFP) Note: The cost of inventory is calculated ito of IAS 2

And, lastly, when these goods are sold with product warranties or guarantees, we will record a
provision for the warranty at the point of sale as well, as that is our obligating event:

Dr Provision (P/L)
Cr Provision (SFP) Note: IAS 37 principles applies to recognised and measure provisions

Please take note of the important links to other accounting standards noted above.
The 5-step revenue recognition process
This module will be logically work through the 5-steps, pausing at each step to consider the
technicalities associated with each step.

I suggest that you do follow the prompts for taking a break as I have included in each video. take a
break; and lastly do step 5. Step 5 is the step that most students neglect and is actually crucial as it
establishes when you can record the revenue.

Slides 1 – 7 and The recording under the introduction provides an overview of the topic and introduces
the main principles and objective of IFRS 15.

• Identify the contract(s) with the customer

1

Volume B for IFRS 15 contain a number of

 Slides 8 to 19 examples that are key to building your
 Recording 1 understanding of the standard. The paragraphs are
 Volume B IE2 to IE17 numbered as IE1, IE2 etc., and each example will be
3 or 4 paragraphs long on average.
(Examples 1 to 4)

Key paragraphs to note: You need to work through all the recommended
paragraphs for each step as per the mapping
- IFRS 15.9 document to understand revenue, but the key
- IFRS 15.15 paragraphs will potentially be crucial when
applying of IFRS 15 in assessments.
Key concepts:

- All 5 criteria has to be met, if an entity fails any one of the five we will conclude that a contract
with a customer does not exist at that stage;

- If we conclude there is not a contract this assessment can be re-visited when facts and
circumstances change;

- Understand what is meant by “probable that entity will collect consideration” – this is assessed
at the contract date. Changes to the likelihood of collectability of revenue once the contract
starts becomes a IFRS 9 loss allowance(provision for bad debt) or bad debt issue;

- Understand what hat to do if cash is received in advance and identify when it can be recorded as
revenue

Other thoughts:

In practice, for most transactions, a contract will generally exist with a customer and the step will be
proven by default.
In assessments, you will often be told to assume that the step has been met. In that case your discussion
will start with step 2.

• Identify the performance obligations (POs) in the contract

2

 Slides 20 to 54
 Voice recording 2 - 4
 Volume B IE44 to IE65 (Examples 10 to 12)

Key paragraphs to note:

- IFRS 15.27 to 29
- IFRS B29 to B31
- IFRS B36 to B37

Key concepts:

- Identify each distinct promise to deliver a good or service;

- A PO is distinct if
o a customer can benefit from the good or service either on its own or in conjunction
with other readily available resources owned by the customer AND
o the promise to transfer the good or service to the customer is separately identifiable
(i.e. not bundled, modified or interrelated)
- If a PO is not distinct, you combine it with another PO until you have a clearly, distinct G/S;

- Understand difference between and assurance-type and service-type warranty, as assurance-

type warranties are not distinct POs but service-type warranties can be distinct POs;

- Understand how to identify a principal or an agent in a contract, as the nature of the PO is

different – a principal provides the G/S whereas an agent provides a “middle man”/intermediary
service.

Other thoughts:

Practically, identify distinct POs by viewing the contract from the customer’s point of view. What does
the customer think they are buying / getting in the deal?

When in doubt, also consider the transaction price – if there’s no practical means to allocate a portion of
the transaction price to something you feel is a PO, maybe reconsider your assessment once more.
 • Determine the transaction price (TP)
3

 Slides 55 to 96
 Recordings 4 - 7
 Volume B IE101 to IE154 (Examples 20 to 30)

Key paragraphs to note:

- IFRS 15.47, 55 and 60

- IFRS B20 to B23

Key concepts:

- Exclude revenue collected on behalf of someone else from TP (e.g. agents) – specifically
remember to exclude VAT and other refundable taxes from the TP;

- When considering variable consideration – the amount you are most likely to receive from the
contract for which is a significant reversal is not likely to occur is considered revenue;

- Understand how a right to return is different from a warranty provision, and understand the
accounting entries for both revenue and cost of sales to record a right to return; and

- Consider if there is a significant financing component included in the TP that should be

accounted for as an interest income/expense; not as revenue. This is generally relevant if there
is >12 months between the payment date and date of delivery of G/Ss. Understand the JEs.
 • Allocate the TP to the POs
4

 Slides 97 - 108
 Recording 8
 Volume B IE164 to IE187 (Examples 33 to 35)

Key paragraphs to note:

- IFRS 15.73, 77 and 78

- IFRS 15.81 and 83

Key concepts:

- Allocate total TP calculated in step 3 to the individual POs identified in step 2 based on the
observable stand-alone selling prices of the individual POs;

- If there is a discount in the contract because a number of POs are transferred in one contract,
this discount is shared proportionally between POs unless it is clear that it only relates to
specific POs. In that case, the discount is allocated to the specific POs only.
 • Recognise revenue when (or as) the entity satisfies a PO
5

 Slides 109 - 119

 Recording 9
 Volume B IE66 to IE100 (Examples 13 to 19)

Key paragraphs to note:

- IFRS 15.33 and 35

- IFRS 15.38
- IFRS 15.39 and 41

Key concepts:

- This step is almost the most important step from an accounting perspective in my opinion as it
determines exactly when we will be able to record the revenue in our records – being as control
of the identified POs is transferred to the customer;

- It’s the end goal and often gets neglected by students;

- The entire purpose of the step is to decide exactly when we can record the revenue, and how of
the revenue (measured per steps 3 and 4) can be recorded at each date for each PO (identified
in step 2);

- Generally – unless it is a clearly a single good that is being transferred at a specific point in time
– the process required is to first consider the over time criteria as set out in para 35. Only if we
fail all 3 over time criteria, do when then conclude revenue has to be recorded at a point in
time.

- If we are successful in proving one of the 3 over time criteria, then we need to choose an
appropriate method to recognise revenue either using input or output factors (for e.g. stage of
completion).

o NB! You can’t (and don’t) prove all 3 para 38 criteria – you only prove ONE of the over
time criteria. Start by considering para. 38(a). If your answer is yes, conclude over time.
If no, consider 38(b). Again, if yes, conclude over time, if no consider 38(c). If yes – over
time. If no, then you have failed all three over time considerations and therefore
revenue has to be recorded at a point in time.

- If you conclude the revenue has to be recognised at a point in time, you have to assess when the
revenue will be recognised by determining when control will be transferred to the customer.
5-STEPS CONCLUSION
Please always keep in mind that the ultimate purpose of the standard is to provide principles to
determine WHEN and HOW MUCH REVENUE a company can record in its financial statements.

For any scenario you go through the five steps in order to determine when (at what point) and how
much (the actual Rand value) of the revenue you should recognise. Any theoretical discussion should
therefore conclude with this information (clearly stating both when and how much).

It is also good exam technique to conclude on each step, as appropriate, before moving on to the next
step.
Other IFRS 15 considerations:

Work through the remaining slides (120 - 138) for other matters pertaining to revenue, contract costs,
and presentation and disclosure. Recordings 10 and 11.

For disclosure, be aware of the principles of IFRS 15 disclosure aims to. Companies adopted IFRS 15 for
the first time for financial years ending 31 December 2018. Your financial statements that you have
downloaded should therefore include examples of the disclosure.

Tutorial question
Attempt any tutorial question you may have for this year. Also remember integration with other topics