Module 5 - Revenue (IFRS 15) (Final)

IFRS 15 Revenue from
contracts with customers

2017 GTIL IFRS Technical
Academy
© 2013 Grant Thornton International Ltd. All rights reserved.

IFRS 15: Revenue from Contracts with Customers
Objectives
• Understand the 5-step model. Be able to:

‒ Identify the contract
‒ Identify performance obligations in a contract
‒ Estimate transaction prices
‒ Allocate the transaction price to the performance obligations
‒ Recognise revenue over time or at a point in time
• Know how to account for a number of common application issues
• Describe transition options and significant disclosures
© 2017 Grant Thornton International Ltd. All rights reserved. 2

Today’s Agenda
• Introduction
• Basics of 5-step control-based model
• Common application issues
• Presentation, Disclosure and Transition

The Standards replaced by IFRS 15
IFRIC
18
IFRIC IAS
15 11 IFRIC
13
IAS
18 SIC
31
IFRS 15 Revenue from contracts with customers

Introducing the TRG
Formed by FASB & IASB to address stakeholders’ implementation issues

TRG
• Identifies areas that are unclear or could lead to diversity in practice
• Helps Boards determine what, if any, actions are needed to address
• Provides a forum for stakeholders to learn about the guidance
While non-authoritative, maybe unwise to ignore
www.ifrs.org/About-us/IASB/Advisory-bodies/Joint-Revenue-Transition-Resource-Group

Today’s Agenda
• Introduction ü
• Basics of 5-step control-based model

Overview
Five step approach to a new control-
based model
Allocate the Recognise
Identify the Determine
Identify transaction revenue as
contract the
performance price to performance
with the transaction
obligations performance obligations
customer price
obligations satisfied

What is in Scope?
In scope: Out of Scope:

– Leases (IAS 17)
• All contracts with
– Insurance (IFRS 4)
customers
– Financial instruments (IFRS 9)
• Costs to obtain and – Rights/obligations within scope of
fulfil those contracts IFRS 10, IFRS 11, IAS 27 or IAS 28
(IFRS 15.5) – Certain non-monetary exchanges

Practical application: What is in Scope?
Description In Scope?
Lease contract
û
Local car dealer sells automobile to individual
ü
Sale of insurance contract to customer
û
Sale of apartments by real estate developer
ü
Two oil companies exchange fixed qty of same product
û
Issuance of financial instrument to customer
û
Manufacturer sells televisions to retailer
ü
What is in Scope?
Additional gating criteria
Apply IFRS 15 to in-scope customer contracts ONLY if:

– Contract approved
– Each party's rights identified
– Payment terms identified
– Commercial substance, AND
– Collection is probable (IFRS 15.9)

What is in Scope?
Additional gating criteria: Collectability
Objective: Is there a substantive transaction between

the entity and the customer?
Consider only
Consider only the
goods/services that will
customer's ability and Think about price
be transferred,
intention to pay concessions
may be less than ALL of
substantially all of the
the promised
consideration when due
goods/services

What is in Scope?
Practical application: Hospital Services
• Hospital provides medical services to an

uninsured patient in the emergency room.
• Hospital has not previously provided medical
services to this patient but is required by law
to provide medical services to all emergency
room patients.
• Because of the patient’s condition upon
arrival at the hospital, the entity provides the Can IFRS 15’s
services immediately. 5-step model
be applied?
No

What is in Scope?
Practical application: Price concession vs Failure to collect
Continuing with the previous example: After

providing services, the hospital obtains the
following information:
– Patient not eligible for charity care
– Standard rate for services: $10,000
– Hospital expects to be entitled to $1,000
and concludes that it is probable it will Can IFRS 15’s
collect that amount 5-step model
be applied?
Yes

What is in Scope?
Practical application: Price concession vs Failure to collect
Considerations:
 First – the hospital concludes it will accept an
amount lower than $10,000 and therefore the
consideration is variable
 Second – the hospital considers the
collectibility criterion and whether it is
probable that it will collect the $1,000 Can IFRS 15’s
Conclusion: 5-step model
 The entity determines that it is probable that it be applied?
will collect substantially all of the $1,000 to
which it is entitled
Yes

What is in Scope?
Practical application: Master Supply Agreement
• Entity A signs a master supply agreement

with its customer for 12 months
• The MSA prescribes general terms and
conditions but no minimum quantities
• The MSA includes a price list for parts that
Entity A agrees to honour for the next 12 Can IFRS 15’s
months
5-step model
be applied?
No

What is in Scope?
Summary
Even if within scope, the model is not applied unless criteria met:
N
Is contract in scope? Apply other standards
Y
Have ALL of the following criteria been met?

• contract has commercial substance Revenue is recognised only when
• parties have approved the contract either:
• the entity can identify each party's rights and (1) the entity's performance is
the payment terms N
complete, substantially all of the
• it is probable the entity will collect the consideration has been collected
consideration and is non-refundable, OR
(2) the contract has been terminated
Y
and the consideration received is
non-refundable
Apply the IFRS 15 model

Five step approach:

contract the
customer price

Step 1: Identify the contract with the customer
• Enforceable by law
Contract:
• Written, oral, or implied An agreement between
• Will vary across two or more parties that

jurisdictions, industries, creates enforceable
and entities rights and obligations

Considering termination provisions
A contract does not exist if both parties have the unilateral enforceable
right to terminate a wholly unperformed contract without compensating
the other party (IFRS 15.12)
A contract is wholly unperformed if:

• Entity has not yet transferred
promised goods/service to customer
• Entity has not yet received or is not
entitled to receive any consideration

Practical application: Termination provisions
End of End of End of End of

Year 1 Year 2 Year 3 Year 4
Cancellation Cancellation Cancellation

Fee = $100 Fee = $90 Fee = $80
Scenario:
• Entity enters into 4-year service contract with a customer
• Only the customer can cancel at the end of each year, but if it does so, it
must pay a substantive termination penalty


Fee = $100 Fee = $90 Fee = $80
Question:
How should the entity evaluate the contract term when only the customer has
the right to terminate without cause?
View A: This is a 4-year contract. Substantive termination penalties
provide evidence of enforceable rights and obligations throughout the term.
View B: In substance, this is a 1-year contract with 3 renewal options



Fee = $100 Fee = $90 Fee = $80
Analysis:
Answer = View A.
A substantive termination penalty is evidence of enforceable rights and
obligations throughout the period covered by the termination penalty.

Combining contracts
Dependent
Consideration
Criteria Single Single
(any one of) Objective Performance
Obligation
Contracts
must be
combined
Mandatory Same customer Entered into at or near

preconditions (or related parties) the same time

Practical application: Combining contracts
A manufacturer of hydraulic pumps for the

military negotiates a contract to design and
manufacture new pumps for a Southern
California base.
At the same meeting, the manufacturer enters

into a separate contract to supply parts for
existing pumps at other bases.
Would these contracts be combined?

Practical application: Combining contracts
Mandatory
preconditions
Contracts are between same (or related) parties?
ü
Contracts agreed at or near the same time?
(both of)
ü
Negotiated together with a single commercial
objective? ?
Applicability Amount to be paid in one contract depends on price
criteria (any or performance in the other? ?
one of)
The goods and/or services promised in the
contracts represent a single combined performance
obligation? û
Combining contracts
Key message
Documenting parts of an arrangement

in separate legal contracts does not
guarantee separate accounting!

Portfolio approach (practical expedient)
Eg. A company elects to

IFRS 15 can be applied to account for a number of
a portfolio of contracts identical 6-month service
contracts with different
(or performance customers all commencing
obligations) with similar April 1 as a single portfolio
characteristics if the entity
reasonably expects that
the effects on the F/S
would not differ materially
(IFRS 15.4)

Portfolio approach (practical expedient)
Can you think of a common

example where we almost always Answer:
apply a portfolio approach?
Identical sales with
30-day return right
(IFRS 15.IE111)
(And many others of course)

Questions

Five step approach:

contract the
customer price

Step 2: Identify the performance obligations
Identify promises
Assess if promises
meet the definition
Identify promises
of a performance
obligation

Identify promises
• Not limited to explicit goods / services

• Includes implied promises (IFRS 15.24)
• Does not include activities that the entity must
undertake to fulfill a contract (administrative tasks,
setup activities)
• Can you think of items that sound like marketing
incentives that may represent promised goods or
services under the new contract?
Consider materiality to the F/S when identifying performance obligations

Identify promises
EXAMPLES
Sale of goods purchased or produced
Providing financial planning services
Granting licences over intellectual property (eg drug formulas, motion pictures,
brand names, etc)
Constructing, manufacturing, or developing on behalf of a customer
When-and-if-available software updates (a stand-ready service)
Customer option to acquire goods or services at a significant discount

When is a promise a performance obligation?
• A performance obligation is a promise to transfer

to the customer either: (IFRS 15.22)
– a good or service that is distinct, or
– a series of distinct goods or
services that are substantially
the same and have the same
pattern of transfer

What does ‘distinct’ mean?
Distinct Judgment required!

(IFRS 15.27)
Customer can
benefit either alone Separately
or with other readily
available
identifiable
resources (IFRS 15.29)
(IFRS 15.28)
Readily available
resource = Sold Significant No signfiicant Not highly
separately or integration services customisation or dependent or
customer has not provided modification interrelated
already obtained

What is a series of distinct goods or services?
• Substantially the same (IFRS 15.22(b))
• Each distinct good/service would meet criteria for revenue recognition

over time (IFRS 15.23(a))
• Progress for each distinct good/service would be measured using same
method (IFRS 15.23(b))

Series Guidance
1. In order to apply the series provision, does the accounting result
need to be the same as if the underlying distinct goods and
services each were accounted for as a separate performance
obligation?
No, the application of the series provision does not require an
entity’s revenue recognition to be substantially the
same
with or without the series provision.
2. In order to apply the series guidance,

must the goods or services be performed
consecutively?
TRG Insights
No. This is not one of the criteria
for applying the series provision.

Activity 1 – Identifying the performance obligations
• Read the case facts in your table

groups for Activity 1
• As a table, decide which promises
are distinct
• Be prepared to share your answer Which
and rationale with the group promises are
distinct?

Activity 1 Debrief – Identifying the performance obligations
Scenario Promises? Capable Separately Rationale and performance obligation
of being identifiable conclusion
distinct? ?
Engineering, site
clearance, foundation, The entity accounts for all of the goods/services in
procurement, construction the contract as a single performance obligation due
1 – Airport
of the structure, piping to the significant amount of effort the construction
and wiring, installation of company will spend integrating the various
equipment, and finishing promises as well as the clear interdependencies.
License, installation,
2- Software The entity identifies four performance obligations –
developer unspecified software
updates, tech support software license, installation services, software
(help desk) updates, and tech support.
License and The entity is using the license and customization

3- Software customization services as inputs to produce a combined output The
developer software is significantly modified/customised by the
continued… Tech support, and seller. The software license and customisation are
unspecified updates therefore not separately identifiable and must be
combined.

Stand ready obligations
What is the nature of the promise in a typical stand-ready obligation?
Type A Type B Type C Type D
Delivery is within Delivery is outside Delivery is within Seller makes a

control of seller, of the control of the control of the good or service
but must be further seller and customer customer available to the
developed customer
continuously
Software updates Periodic Health club

Snow removal
maintenance membership

Customer options
For example, a discount
incremental to the range of
discounts typically given for
Does the option provide the those goods or services to that
customer with a material right it class of customer in that
would not receive without entering geographical area or market.
into the contract?
Account for the option as a

Account for the option as a
marketing or promotional offer – not
performance obligation
a performance obligation

Practical application: Customer options
Entity sells a pair of running shoes to a

customer for CU100 and includes a voucher
good for a 40% discount on all additional
purchases made in the next 30 days
Entity offers all its customers a 10% discount

over the next 30 days as a seasonal promotion
Does the customer have a material right that it would not receive
without entering into the contract? YES

What about the goods or services
underlying a customer option?
Does the contract

include substantive
penalties?
Y N
Do not identify the additional

goods / services underlying the
It may be appropriate to option as promised goods /
include the goods / services
services underlying the
customer options as part
of the contract at
TRG Insights inception (effectively, a Determine whether the option
minimum purchase represents a material right
obligation exists)

Activity 2 – Identifying the performance obligations
• Read the case facts in your table

groups for Activity 2
• Be prepared to share your answer
and rationale with the group Should the
underlying goods
be considered
part of the initial
contract?

Activity 2A Debrief
Question 2A:
Should the ink cartridges underlying the options be considered part of the
initial contract?
Conclusion:
No. The transaction price is CU600 (entirely attributable to the equipment),
resulting in a $200 loss upon transfer of control.

Activity 2B Debrief
Question 2B:
Should the ink cartridges underlying the options be considered
part of the initial contract?
Conclusion:
Yes. The penalty is substantive and therefore effectively creates
a minimum purchase obligation which constitutes evidence of
enforceable rights and obligations. The transaction price is
therefore CU2,600 ((200 cartridges X CU10/cartridge) + $600 for
the printer).

Up-front activities
• Set-up or other administrative tasks are not a performance

obligation unless they transfer a service to the customer as
performed (IFRS 15.25)
• This is so even if activities MUST be undertaken in order to
fulfill a contract
• Activities must also be
excluded when
measuring progress on
other promised goods
or services (IFRS 15.42)

Up-front activities
Practical application: Payroll Services
Entity enters into 3-year contract to perform monthly payroll processing

services for up to 3,000 employees. Which of the following are
performance obligations?
Purchase of additional computer equipment needed to deliver the

services û
û
Loading each employee’s benefits selections and other personal
data into the system and linking to the customer's system
Preparing monthly journal entries, payroll remittances, and various
monthly and annual reports
ü

Questions

Five step approach:

contract the
customer price

Step 3: Determine the transaction price
Transaction price considerations
2
Time value of
money
Transaction price:
The amount of
consideration an entity
expects to be entitled
Consideration Variable to in exchange for
Transaction consideration
4 payable to price
1 transferring promised
(including right of goods or services to a
customer return) customer, excluding
amounts collected on
behalf of third parties
(IFRS 15.47)
3
Noncash
consideration

Variable consideration (IFRS 15.50-59)
consideration
Variable
• Examples of variable consideration:

Significant
–
financing
Price concessions: discounts, rebates, credits

– Product sold with a right of return
– Incentives, performance bonuses, penalties
consideration
Non-cash
– Similar items
• May be contractual or implied (IFRS 15.52)
Payable to
customer

consideration
Variable
• Variable consideration must be estimated
• Use either:
Significant
financing
– most likely amount ("MLA")

– expected value ("EV")
consideration
Non-cash
• Not a free choice – use the method which

best predicts (IFRS 15.53)
Payable to
customer

Variable consideration
Q. Consider a transaction processing

contract where the processor receives a
fixed price per transaction but the
number of transactions is undefined. If
the quantity is unknown but the
contractual rate per unit of output is
fixed, is the consideration variable?
TRG Insights
A. Yes

consideration
Variable
Constraint
• Include variable consideration in the transaction price
only if highly probable that a significant reversal of
Significant
financing
cumulative revenue will not occur when uncertainty

is resolved (IFRS 15.56)
consideration
• Assessment of 'highly probable'

Non-cash
considers both:
– likelihood of change
Payable to
customer
– magnitude of the possible reversal

Practical insight: Variable consideration
• Construction contract to build a manufacturing facility

• Agreed price of $25M
• Construction to be completed by end of 18th month
• Performance bonus for early completion
– Scenario A – 15% if completed by end of 16th month
(80% likely it will achieve the bonus by the 16th
month)
– Scenario B – 15% if completed by 15th month (20%
likely), 10% in 16th month (50% likely), and 5% in
17th month (20% likely)
What method would you use estimate variable
consideration in each scenario?

Practical insight: Debrief on Scenario A
• Make best estimate using the most likely

amount
• 80% likelihood it will receive the
$3,750,000 performance bonus and
20% likelihood that it will not
• Using most likely amount approach,
entity would include the $3,750,000 in
the transaction price
• Consider the constraint (80% likely it
will receive the bonus)

Practical insight: Debrief on Scenario B
Make best estimate using expected-value approach:
Complete in Bonus (%) Bonus (CU) Probability

15 months 15% CU3,750,000 20%
16 months 10% CU2,500,000 50%
17 months 5% CU1,250,000 20%
18 months 0% nil 10%
• Company estimates variable consideration as the sum of the probability-

weighted amounts = CU2,250,000
• Company considers whether any of the amount should be constrained

Applying the constraint
Q. Should the constraint on variable consideration be applied at

the contract or performance obligation level?
A. The contract level
TRG Insights

Practical insight: Distributors and resellers
Situation:
Under IAS 18, some entities may delay recognizing revenue until the product is
sold to the end customer, believing the amount of revenue cannot be measured
reliably1 until the product is sold to the end customer (also referred to as the "sell
through" method).
Impact:
May no longer be acceptable to wait until the product is sold to the end customer
if the only uncertainty is the pricing. Under IFRS 15 the entity will need to
estimate the consideration to which it expects to be entitled and consider the
constraint.
1
IAS 18.14(c)

Significant financing components – Introduction
consideration
Variable
• Adjust transaction price when significant financing

benefit present for either party
Significant
financing
• Not required to be explicitly stated in contract

consideration
– may be implied by the agreed terms (IFRS 15.60)

Non-cash
• Transaction price should reflect cash selling price

("CSP") at time of transfer to customer (IFRS 15.61)
Payable to
customer

Significant financing components – Intro
Example of typical arrangement with a significant financing

component:
CU 200
• Cash CU 55 CU55
selling • 2nd • Final
price payment payment
CU 55 CU 55
• 1st • 3rd
payment payment
Delivery

Identifying significant financing components
consideration
Variable
Consider: (IFRS 15.61)
• The difference between the consideration promised

Significant
financing
and cash selling price

• The combined effect of:
consideration
– Expected length of time between transfer of

Non-cash
goods/services and receipt of payment

– Prevailing market interest rates
Payable to
customer

Identifying significant financing components
consideration
Variable
Practical expedient (IFRS 15.63)

Significant
financing
Not required to account for the time

value of money if at contract inception
the period between the transfer of goods
consideration
Non-cash
and the receipt of consideration is

expected to be one year or less
Payable to
customer

Identifying significant financing
CU 1,000 CU 250
• Cash selling CU 250 • Final
price • 2 payment
nd
payment
Delivery CU 250 CU 250

• 1st payment • 3rd payment
Q: A furniture retailer is selling a desk

set which normally retails for CU1,000.
As part of a special promotion,
customers have the option to obtain 0%
TRG Insights financing for 4 years. Does the
arrangement include a significant
financing component?

Identifying significant financing
CU 1,000 CU 250
• Cash selling CU 250 • Final
price (“CSP”) • 2nd payment payment
CU 250 CU 250
• 1st payment • 3rd payment
• Consider all relevant facts and

circumstances
• Do not automatically assume that a
significant financing component is not
TRG Insights present
• A cash customer may be able to
negotiate a discount!
• Considerable judgement required

Significant financing components
consideration
Variable
Significant financing is not present when:
• Customer paid in advance and timing of performance is at

Significant
financing
customer's discretion (IFRS 15.62(a))

• Substantial amount of consideration is variable and
amount/timing varies based on factors substantially outside
consideration
Non-cash
control of the parties (IFRS 15.62(b))

• Reason other than financing for difference between promised
consideration and CSP, and difference is proportional to the
Payable to
customer
reason (IFRS 15.62(c))

Impact of significant financing
Q: Can an adjustment for a significant financing

component ever be attributed to only one or some of the
performance obligations in the contract?
A: Yes, but doing so will

require the use of judgement
TRG Insights

Non-cash consideration (“NCC”)
consideration
Variable
What if your customer pays you in goods, services,

or shares (or anything else non-cash)?
• Measure it at FV. If can't reasonably estimate FV, use SSP of
Significant
financing
promised goods/services (IFRS 15.66-.67)

– If FV of noncash consideration varies for reasons other than only
consideration
the form of consideration (e.g. entity's performance), apply

Non-cash
constraint
– If customer contributes goods/services for use in a contract (e.g.
equipment, labour) and entity obtains control, account for as
Payable to
customer
noncash consideration

Measurement of non-cash consideration
Q: An entity agrees to provide weekly cleaning service for 1 year (a

series) in exchange for 5,200 shares of its customer’s common stock, to be
delivered 100 shares per week as the services are completed.
IFRS 15.66 clearly states that the

transaction price includes the fair
value of the shares. But when would
that fair value be measured? At
inception, when the shares are
TRG Insights received, or when the services for
each week are completed?

Measurement of non-cash consideration
Answer:
• Each view received support from some TRG members
• IFRS 15 does not specify a measurement date
• Entities will need to use their judgement
• Once measured, do not update for movement in share price
FASB position:
• May 2016 amendments specify
that the fair value of NCC must be
measured at contract inception
TRG Insights only
• Potential IFRS-US GAAP
difference

Consideration payable to a customer
consideration
• Amounts entity pays or expects to

Variable
pay to its customer (or customer's

customer) (IFRS 15.70)
Significant
financing
– Eg manufacturer's rebate offered to

dealer or dealer's retail customer
consideration
• Includes cash, credits, coupons,

Non-cash
rebates, etc.
• Evaluate whether payment is for
Payable to
customer
distinct good or service

consideration
Variable
Is a distinct good or service received from the customer in exchange for the amount paid?
Yes
Significant
financing
No
No Can the fair value of the distinct good
or service be reasonably estimated?
Reduce TP on later of:
Yes
consideration
Non-cash
(a) date revenue is recognised

for the related goods or Is the amount paid > the FV of the
services, or distinct good or service?
(b) date the entity pays or
promises to pay the Yes No
Payable to
customer
consideration
Reduce TP by Account for amount paid
excess as a regular purchase

Q1: How would you account for

payments to a prospective customer
made in anticipation of a future
contract? Would you recognise an
asset?
Q2: What if the payment is made to

an existing customer to entice them to
enter into an additional contract? Would
the payment automatically reduce
TRG Insights revenue from the original contract?

In all cases an entity applies judgement

to the specific facts and circumstances:
• If an existing customer, reduce
revenue as related goods/services
are transferred (including future
anticipated contracts)
• If not yet a customer, treatment
(asset versus expense) will depend
on specific facts & circumstances.
TRG Insights Judgement required (not a policy
choice)

Questions

Five step approach:

contract the
customer price

Step 4: Allocate the transaction price to the performance obligations
Core principles
Total $
To allocate the transaction price to $$$$$$
$$
performance obligations in an
amount that reflects the considera-
tion to which the entity expects to
be entitled in exchange for those
goods or services (IFRS 15.73) Good A Service 1 Good B
$$ $$$ $$$$

Overview
Observable price when sold

Allocate based on the relative separately is the best evidence
standalone selling price (SSP) of of SSP. If no observable price,
each performance obligation estimate, maximizing the use of
observable data.
Step 4
Do not adjust for changes in
Consider all information that is standalone selling price.
reasonably available and apply Allocate changes in transaction
estimation methods consistently price on same basis as at contract
in similar circumstances inception.

Estimating the stand-alone selling price (“SSP”)
Adjusted
Expected cost
market Residual
plus margin
assessment
• Estimate what
• Estimated SSP =
customers will pay
total TP minus the
• Consider sum of the
competitors’ pricing • Forecast costs and observable SSPs of
and adjust for own add appropriate the other
costs and margins margin performance
• Requires • Requires obligations
judgement! judgement! • Restricted use!
Estimation methods (IFRS 15.79)

Special rule for allocating some discounts
• Must allocate discount entirely to one or more

performance obligations when all of the following criteria
are met: (IFRS 15.82)
– regularly sell each distinct good/service (or bundle) on stand-
alone basis
– regularly sell sub-group on a stand-alone basis, at a discount,
– discount on sub-group is substantially the same as the contract
discount

Practical Insight: Special rule for allocating discounts
Scenario: Entity
regularly sells
• An entity enters into a contract with a customer to sell each product
separately
Products A, B, and C in exchange for $100
Entity
• The entity will satisfy the performance obligations for each regularly sells
a subgroup
of the products at different points in time separately at
a discount
• The entity regularly sells Products A, B, and C separately
Discount on
for CU40, CU45 and CU55 respectively subgroup
similar to
• Products B and C are regularly sold together for CU60 discount on
contract

Practical Insight: Special rule for allocating discounts
Entity
regularly sells
each product
Product Allocated Calculation separately
transaction
Entity
price regularly sells
a subgroup
Product A CU40 SSP separately at
a discount
Product B CU27 CU60 x [CU45/(CU45+CU55)]
CU60
Product C CU33 CU60 x [CU55/(CU45+CU55)]
Discount on
subgroup
TOTAL CU100 similar to
discount on
contract

Special rule for allocating variable consideration
• Similar rule for allocating variable amount entirely to a

performance obligation if both of the following criteria are
met:
– Terms of variable payment relate specifically to entity's efforts to
satisfy that performance obligation
– Allocating the variable amount entirely to the performance
obligation is consistent with the allocation objective in IFRS 15.73

Estimating the SSP of Customer Options
Estimation Practical Expedient

Allocate the transaction price to the
Estimate of the standalone selling
optional goods or services by
price of an option should reflect
reference to those expected to be
discount that customer would obtain
provided and the corresponding
when exercising the option and be
expected consideration if goods and
adjusted for:
services are:
Any discount that the customer could Similar to the original goods or
receive without exercising the option services in the contract
The likelihood that the option will be Provided in accordance with the
exercised terms of the original contract

Questions

Five step approach:

contract the
customer price

Step 5: Recognise revenue
New Model!
Core principle is to recognise revenue:

• When (or as) customer obtains control
Over time
of the promised goods or services (IFRS
15.31)
• In an amount that reflects the

consideration to which the entity Point in time
expects to be entitled in exchange
for those goods or services
(IFRS 15.73)

Definition of control
Control is the ability to direct the

use of and obtain substantially all
of the remaining benefits from an
asset. Control includes the ability
to prevent other entities from doing
the same (IFRS 15.33)

Point in time versus Over time
Does customer receive and consume Yes

35(a)
the benefits as the entity performs?
Control is transferred over time
No (IFRS 15.35)
Yes
Does customer control the asset as it
35(b)
is created or enhanced?
Yes
No
Does entity have the enforceable
35(c)
Does asset have an alternative use No
to the entity? right to receive payment for work to
date?
Yes
No
Control is transferred at a point in time

Recognising revenue over time
35(a): Simultaneous receipt and consumption of

benefits (IFRS 15.B4)
• Another entity would not need to
substantially reperform the work
completed to-date
• Disregard potential contractual MOVE CO.
or practical limitations that would

prevent you from transferring
the remaining work to another
party

35(b): Customer controls asset as it is created

or enhanced (IFRS 15.B5)
Customer controls the WIP arising from the
entity's performance. Common in the
following types of contracts:
• certain government contracts
• work performed on customer asset
• construction on customer-owned land
• software customization
• maintenance on customer equipment

The meaning of ‘over time’
When a performance
obligation meets the ‘over time’
criteria, can control of the
underlying goods or services
transfer at discrete points in
time?
TRG Insights

The meaning of ‘over time’
No. Meeting the "over time" criteria

implies that control does not
transfer at discrete points in time
(ie, control transfers continuously as
performance occurs).
Accordingly, an appropriate
measure of progress should not
TRG Insights result in material amounts of work-
in-process!

35(c) Over time
Asset has Consider Don’t

Assess at contractual update
no contract restrictions unless
alternative inception and practical contract
use limitations modified
Right to Consider Must

payment for contractual include
performance Enforceable terms, laws, reasonable
completed to legal profit
date precedents margin

No alternative use?
Background: An entity enters into a contract

with a customer to build equipment. The
customization of the equipment occurs when
the manufacturing process is approximately
75% compete. In other words, for
approximately 75% of the manufacturing
process, the in-process asset could be
redirected to fulfill another customer's
equipment order (no contractual restriction
against it). The design specifications of the
equipment are unique to the customer and
the entity would only be able to sell the
completed equipment at a significant loss.
TRG Insights Question: Does the asset meet the "no

alternative use" criterion?

No alternative use?
 The entity evaluates at contract

inception whether there is any
alternative use for the asset and
considers the asset that will
ultimately be significantly
customized before it is trans-
ferred to the customer (BC 136),
so yes, the asset qualifies as an
asset with "no alternative use"
Note: The entity must still consider
whether it has an enforceable right to
TRG Insights payment for performance completed to
date.

Measuring progress over time
Recognise revenue only if progress can be reasonably measured (IFRS 15.44)

Use an output or input-based method (select most appropriate) (IFRS 15.41)
Select a single method and apply it consistently to similar performance
obligations in similar circumstances (IFRS 15.40)
Exclude goods or services entity does not transfer control of (IFRS 15.42)
Remeasure progress each period as a change in estimate (IFRS 15.43)
If overall outcome cannot be reasonably measured, then…
If still expect to recover costs, then recognise revenue to extent of costs
incurred (IFRS 15.45)

Cost-to-cost method
Remember to adjust the cost-to-cost

calculations for:
• Costs that do not contribute to an entity’s
progress (eg, wasted materials)
• Costs that are not proportionate to the
entity’s progress (eg, uninstalled elevator)
Familiarise yourself with the elevator example
in Illustrative Example 19 (and IFRS
15.B19(b))

Recognising revenue at a point in time
When IFRS 15.35 criteria fail, then revenue is

recognised at a point in time. But when? (IFRS 15.38)
Consider the following indicators that control has
transferred:
• Present right to payment
• Customer has legal title to the asset
• Customer has physical possession of the asset
• Customer has significant risks and rewards of
ownership
• Customer has accepted the asset

Should revenue be recognised over time
or at a point in time? Why?
A public accounting firm enters into a

contract with a client to provide audit
services that result in the entity issuing an
audit opinion. If the customer were to
terminate the contract for reasons other
than the entity’s failure to perform as
promised, the contract requires the client to
compensate the entity for its costs incurred
plus a 20 percent margin. The 20 percent
margin approximates the profit margin that
TRG Insights the entity earns from similar contracts.

Revenue should be recognised over time
• 35(a) met? No. No simultaneous consumption of benefits. Another accounting firm

would need to substantially reperform the work. The customer will receive the
benefits of the entity’s performance only when the opinion is delivered.
• 35(b) met? No. The customer does not

control the work in progress.
• 35(c) met? Yes. Development of the audit
opinion does not create an asset with
alternative use to the entity because the audit
opinion relates to the specific facts and
circumstances of the customer. In addition,
TRG Insights the entity has an enforceable right to payment
for its performance completed to date for its
costs plus a reasonable margin.

Possession versus control
There are three common examples where

possession does not necessarily equate to
control. These include:
• Consignment arrangements
• Bill and hold
• Repurchase agreements

Consignment arrangements (IFRS 15.B77-B78)
Common features of consignment:

• Entity retains control until sale
to a customer or a specified
period of time elapses
• Entity can require return or
transfer of product
No revenue upon
• Dealer does not have delivery to dealer!
unconditional obligation to pay

Bill-and-Hold arrangements
• Customer is billed, but seller

retains physical possession of
the goods
• Evaluate whether customer
obtains control
• Assess whether custodial
services are also a performance
obligation (eg, warehousing)

Repurchase agreements
Three different kinds:
Forward – Entity has an obligation to repurchase the asset

Call option – Entity has the right to repurchase the asset
(but not the obligation)
Put option – Customer has the right to require the entity to

repurchase the asset previously sold

Forwards/Call Options (B66-B69)
• Customer does not obtain control of the asset

• Account for contract as either a:
– Financing
– Lease
• Consider time value of money when comparing prices
• If it's a financing and the option lapses unexercised,
derecognise liability and recognise revenue

Analysing Forwards/Call Options (B66-B69)
Place the repurchase price (RP) on the bar to find the appropriate treatment
Financing - B66(b)
Eg, If RP = 120, the
arrangement is a financing
CU
Original selling price
("OSP") = 100
Lease - B66(a)
Eg, If RP = 80, the

arrangement is a lease
* When comparing the repurchase price with the selling price, remember to consider the time value of money

Put options (B70-B76)
• Complex matrix of possible results

• What matters is:
– whether expected future market value ("E(MV)") is
above or below OSP
– where RP falls relative to these two values
• See graph and flow-chart which follow
• Always refer to the guidance!

Analysing Put Options (B70-B76)
Choose the bar that reflects the relationship between the Original Selling Price (OSP) and
Expected Future Market Value (E(MV)), then place the Repurchase Price (RP) on the relevant bar
to find the appropriate accounting treatment.
Customer has
Customer has economic incentive*
incentive*
economic
Financing
(B73)
Financing (B73)
Expected Future Market

Value (“E(MV)”)
Right of
return
(B74)
CU

("OSP")
Right of return (B72)

Lease
(B70)

Value (E(MV))
Right of
return
(B72)
* Assumed here to occur when repurchase price ("RP") > E(MV), but guidance requires consideration of other factors
as well, including the amount of time until the right expires. Always go back to the Standard for the definitive word!

Practical insight – Put option
An entity enters into a contract with a customer for the sale of a tangible asset
on January 1, 2017, for $1 million (OSP). The contract includes a put option
that obliges the entity to repurchase the asset at the customer’s request for
$800,000 (RP) on or before December 31, 2017. The market value is expected
to be $700,000 (E(MV)) on December 31, 2017.
Financing Sale with right of return Lease
Considerations:
• Significant economic incentive because repurchase price exceeds expected
market value
• Control of the asset does not transfer to the customer because the customer is
limited in its ability to direct the use of, and obtain substantially all of the
remaining benefits from, the asset

Practical insight – Put option
Choose the bar that reflects the relationship between the Original Selling Price (OSP) and
Expected Future Market Value (E(MV)), then place the Repurchase Price (RP) on the relevant bar
to find the appropriate accounting treatment
Customer has
Customer has economic incentive*
incentive*
economic
Financing
(B73)
Financing (B73)

Value (“E(MV)”) > OSP
Right of
return
(B74)
CU

("OSP") = 1,000,000
Right of return (B72)

Lease
(B70)
Repurchase price = 800,000

Value (E(MV)) = 700,000
Right of
return
(B72)
* Assumed here to occur when repurchase price ("RP") > E(MV), but guidance requires consideration of other factors
as well, including the amount of time until the right expires. Always go back to the Standard for the definitive word!

Reassess, Reallocate and Revise
At the end of each reporting period:

Reassess
Reallocate
Revise
• Reallocate • Revise your
the TP con- rev rec
sistent with
• Reassess allocation at • Amounts
your estimate inception allocated to
of transaction satisfied PO’s
price • Don’t adjust will increase
for changes or decrease
• Reassess the in standalone revenue in
constraint selling price the period

Questions

Today’s Agenda
• Introduction ü
• Basics of 5-step control-based model ü

Contract modifications
A contract modification is: (IFRS 15.18)

– A change in contract scope or price (or both)
– Approved by the contracting parties
Creates new, or changes existing, rights and

obligations
May be approved in writing, orally or implied by

customary practices

Contract Modifications
Start here
Are all the NEWLY N Are at least SOME of the N Treat as part of
ADDED goods or remaining goods and existing contract
services distinct? services distinct? [IFRS 15.21(b)]
Y
Y
Does the additional N Are ALL remaining goods

price/unit = SSP? and services distinct? N
Combination –
Y Y
judgment needed
[IFRS 15.21(c)]
Treat as separate Treat as termination of old
contract and creation of new contract
[IFRS 15.20] [IFRS 15.21(a)]

If remaining goods and services are a

combination of distinct and not distinct,
then: Start here
Are all the NEWLY Are at least SOME of the Treat as part of
ADDED goods or remaining goods and existing contract
• Treat consistent with 21(a) and 21(b)

services distinct? services distinct? [IFRS 15.21(b)]
Does the additional Are ALL remaining goods

price/unit = SSP? and services distinct?
• Do not adjust amount recognised for Y
Treat as termination of old

Combination –
judgment
needed
[IFRS 15.21(c)]
Treat as separate
performance obligations already contract and creation of new contract

[IFRS 15.20] [IFRS 15.21(a)]
satisfied
• Judgement required!

Practical insight: Contract modifications
• Entity promised to sell 100 products to

customer for $15,000 ($150 per product) over
a 6 month period beginning 1 Jan 2017 What price per unit should
the entity recognize as
• Control transfers for each product at a point in revenue for each of the
time following?
• Entity has transferred control of 50 products to
A. The 50 products
date as of 1 June 2017
already transferred
• On 2 June 2017, the contract is modified for
B. The remaining 50 on
an additional 50 identical products for $5,000
the original contract
($100 per product)
C. The additional 50
• Pricing of additional products does not reflect
products
the standalone selling price of the products at
the time of the modification

Practical insight: Contract modifications
The contract does not meet the conditions to be

accounted for as a separate contract and the What price per unit should
remaining products are distinct. Therefore the the entity recognize as
modification is treated like a termination of the revenue for each of the
original contract and the creation of a new following?
contract.
A. The 50 products
The amount of revenue recognized for the already transferred
products already transferred does not change.
B. The remaining 50 on
The entity recognises a blended price of $125 for the original contract
each of the 100 items remaining to be transferred
(50 remaining on the original contract plus 50 C. The additional 50
additional products). products

Accounting for unapproved changes in scope or price
Parties may not have agreed yet, but are rights/obligations enforceable?
• Estimate change in transaction price as variable consideration (use
IFRS 15.50-.54)
• Estimate using MLA or EV approach
• Consider the constraint (IFRS 15.56-.58)

Accounting for other changes in transaction price
Changes not due to a modification may arise from resolution

of an uncertainty or other changes in circumstance
(IFRS 15.87-90)
• Allocate changes on the same basis as at inception (i.e.

do not update relative SSP %'s!)
• Amounts allocated to satisfied performance obligations
will adjust current period revenue (+/-)

Sales with a right of return
(IFRS 15.55, 15.B20-B27)
• Treat as variable consideration (not a performance

obligation)
• Excludes exchanges of
similar product and returns of
defective product
• Constraint applies

Practical insight: Presentation of return right assets
Situation:
An entity gives a customer the right to return a product for any reason in the next 30 days.
Under both IAS 18 and IFRS 15, the entity recognises:
a. revenue
b. a refund liability, and
c. an asset (and corresponding adjustment to COS) representing the right to recover
products from customers on settling the refund liability
How is this asset presented on the B/S under IAS 18 and IFRS 15?
Impact:
Under IAS 18 this asset was usually shown as “Inventory” on the B/S. Under IFRS 15 it is
a contract asset that must be presented separately from inventory and will need to be
assessed for impairment under IFRS 9 (or IAS 39).

Sales with a right of return
(IFRS 15.55, 15.B20-B27)
The ‘right to recover product’ asset

• must be presented separately from the refund liability and inventory
• is initially measured at former inventory carrying amount less
expected costs to recover (including decrease in value)
• is periodically remeasured as expectations about product to be
returned change
Must update product return estimates at end of

each period. Will impact asset, liability,
transaction price (revenue), and COS

Accounting for warranties
(IFRS 15.B28-B33)
Start by determining the nature of the promise:

• basic assurance that product complies with agreed-
upon specifications (does what it is supposed to)
• additional service
How long is the What is the nature of

Is the warranty
warranty coverage the tasks to be
required by law?
period? performed?

Accounting for warranties
(IFRS 15.B28-B33)
Start here
No Does the warranty provide a No Accrue estimated warranty

Can the customer purchase
service in addition to basic costs as a provision under IAS
the warranty separately?
assurance? 37
Yes
Yes
Does the contract promise
Account for warranty/service as No both a service-type warranty
a single performance obligation
and an assurance-type
separate from the product
warranty?
Yes
Accrue estimated warranty
costs as a provision under IAS
Can the service-type 37, and account for the
No warranty be reasonably Yes service-type warranty as a
separated from the separate performance
assurance-type warranty? obligation

Principal (gross) versus Agent (net)
(IFRS 15.B34-B38)
• Assess by performance obligation (not contract)

• A principal controls the specified good or service before it
is transferred to a customer
• Indicators you are an principal include:
– You are primarily responsible for fulfillment
– You have inventory risk before or after customer order
– You have discretion in setting prices
– Other?

Customer’s unexercised rights (“breakage”)
(IFRS 15.B44-B47)
Consider a typical “gift card”

• Nonrefundable prepayment from
customer results in a contract liability
• Customer may not exercise all their
contractual rights ("breakage")
Breakage is expected Breakage not expected

Recognise revenue in proportion to the Recognise revenue when the likelihood of
rights exercised customer exercising remaining rights is
remote

Practical insight: Breakage
• During 20X7, Retail Co sold gift

cards at face value totaling
CU10,000
How much revenue
• Retail Co expects that only CU9,500 should Retail Co
will ultimately be redeemed by recognise in the year
customers ended 20X7?
• In the year ended 31/12/20X7 gift

cards totaling CU4,500 have been
redeemed

Practical insight: Breakage
• Two components to revenue

– basic redemption CU4,500, plus Answer = CU4,737
– prorata share of expected breakage =
[CU4,500/CU9,500] x CU500 = CU237 Breakage is variable –
so remember to apply
• Alternatively the constraint!
[CU4,500/CU9,500]xCU10,000 = CU4,737

Nonrefundable upfront fees
(IFRS 15.B48-B51)
• Common examples include:

– health club joining fees,
– cable/mobile activation fees,
– payroll processor’s initial setup fees
• IN GENERAL – add the upfront fee to the transaction price and

allocate among the performance obligations, as usual. Just be
sure you have identified all performance obligations!
• KEY CONSIDERATION – by paying the upfront fee, does the

customer receive a material right?

Nonrefundable upfront fees
(IFRS 15.B48-B51)
Does the upfront fee provide the customer with a material right?
Renewal price vs. Available Average customer

new customer price alternatives life
• Renewal of $100 • Consider • Average

per month availability and customer life that
compared to new pricing of extends well
customer price of service beyond the one
$150 ($100 alternatives month
monthly service • Do equivalent contractual
+ $50 activation services from period is an
fee) another provider indication that
require an fee incentivizes
activation fee? continued
service

Over what period of time should an entity
recognise a non-refundable upfront fee as
revenue when the underlying activity (e.g., set-
up) does not result in the transfer of a good or
service to the customer?
(Assume for the sake of this simple example that the

contract is for services to be delivered over a 1-month
period and there are no other goods or services to be
transferred under the arrangement)
TRG Insights

The answer depends on whether the upfront fee
provides the customer with a material right to
avoid paying future upfront fees upon renewal
No material right
Recognise the upfront fee over
the contract term (treated as
additional consideration)
Material right
Recognise the portion of the transaction
price allocated to the material right over
TRG Insights the period over which the customer is
expected to benefit from not having to
pay the upfront fee again upon renewal

Licences
(IFRS 15.B52-B63)
Start here
License is not distinct and is accounted for

together with other promises as a single
Is licence distinct from other
N performance obligation. Entity assesses
goods/services in the contract?
whether control transfers over time or at a
point in time (eg software in blu-ray player)
Y
License is a distinct performance obligation and accounted for separately from other
promises. Assess nature of entity's promise related to the licence.
Is licence a "right to use" the IP as it exists when the licence is granted, or a "right to
access" the IP as it exists throughout the licence period?
Right to use Right to access
Control transferred at point in time Control is transferred over time

(eg, Microsoft Office [non-subscription]) (eg, licence trademark for pro sports team)

Licences
(IFRS 15.B52-B63)
Right to access Right to use

(Revenue recognised over time) (Revenue recognised at a point in time)
a) Entity will undertake activities

that will significantly affect the IP • Licences not meeting the criteria
b) Customer is exposed to the
for “right to access”
positive and negative effects
from the entity's IP-related
activities, AND
c) Those activities are

not a performance
obligation

Licences
(IFRS 15.B52-B63)
• When assessing right to use versus right to access:

– ignore restrictions of time, geographical region or use
that define the attributes of the promised licence
– ignore seller guarantees that it will defend its patent
from unauthorized use (not a performance obligation)

Practical insight A: Nature of a licence
• Creator of a comic strip licenses use of the 1. What are the

images and character names to customer performance
for four years obligations?
• Fixed payment of CU1M per year

2. Is this a right to
• Images of characters evolve over time access or use
intellectual
• Contract requires the customer to use the property?
latest images

Practical insight A: Nature of a licence
Which are performance obligations?

ü • Licence?
û
• Ongoing activities to introduce new characters
and evolve existing ones?
Is this a 'right to access' or a 'right to use'
intellectual property? Right to access
ü • Customer reasonably expects entity to undertake
activities impacting the IP?
ü • Customer gains/loses from entity's activities?
ü • Activities don’t transfer a good or service?

Practical insight B: Licence restrictions
• On 1 January 2017 an entity enters into a 5-year

contract with a customer permitting the customer
Did the entity grant
to embed the entity's IP into two classes of the
customer's consumer products (Classes 1 & 2). A. A single licence
with a restrictive
• During 2017, the customer is permitted to
attribute specifying
embed the IP into Class 1 products. Beginning
when the IP can be
in 2018, the customer can also embed the IP in
embedded in Class
Class 2 products.
2 products, or
• Assume that the entity provides the IP on 1
B. Two separate
January 2017 and that all revenue will be
licences (a 5-year
recognised at a point(s) in time, consistent with
and a 4-year)?
the “right-to-use” nature of the IP.

Practical insight B: Licence restrictions
Answer: B (two promises)

Considerations:
 The rights to embed the IP in Class 2 only begin in 2018 – meaning after the
customer can begin to use and benefit from the right to embed the IP in
Class 1, the entity must still fulfill its promise to grant the right to embed
the IP in Class 2
 The entity does not transfer control of the right to embed the IP in Class 2
before the customer can begin to use and benefit from the right (2018)
 The entity concludes that the two promises are capable of being distinct
and distinct within the context of the contract – meaning they constitute
separate performance obligations

Practical insight C: Licence renewals/extension
A music record label licenses a recording of a

classical symphony to a customer. The customer
can use the recording in U.S. commercials for two
years beginning January 1, 2017. The entity When should the
receives $10,000/mo in exchange for the license. entity recognize the
$240K for the
The entity concludes that the promised license renewal?
provides the customer with a right to use the IP
and is a PO satisfied at a point in time (1/1/17). A. 1 Dec 2017
The entity records $240K of revenue on 1/1/17.
B. 1 Jan 2019
One year later, the entity and customer agree to
extend the license for two additional years subject
to the same terms and conditions.

Practical insight C: Licence renewals/extension
B. January 1, 2019
An entity will not recognize revenue from a license

renewal before the beginning of the renewal
period, consistent with the guidance in IFRS
15.B61.

Licences
(IFRS 15.B52-B63)
IP license royalties
• Special rule for sales- or usage-based royalties on
licences of intellectual property
• Royalty recognised only when (later of): (IFRS 15.B63)
– Customer's subsequent sale or use occurs, or
– Related performance obligation has been satisfied
(or partially satisfied)
• What about lags between a customer’s use and their
reporting of that usage to the seller?

Licensing
Activity 3 – Sales- and usage-based royalties with
fixed minimums
• Read the case facts in your table groups for

Activity 3 (based on question discussed in TRG
Paper 58)
• As a table group, determine how an entity should
recognize revenue when a contract includes How should an
sales- or usage-based royalties with fixed entity account for
minimum payments. contracts that
include sales- or
• Be prepared to share your answer and rationale usage-based
with the group royalties with fixed
minimums?

Licensing
Activity 3 – Sales- and usage-based royalties with
fixed minimums
 The staff thinks all three approaches are reasonable

interpretations of the new revenue standard (TRG
agreed)
 The entity must select an appropriate measure of

progress, which may require judgment.

Customer acceptance
(IFRS 15.B83-B86)
• Existence of formal acceptance clause does not automatically

preclude revenue recognition before acceptance
• If objectively demonstrate that control of a good or service has
transferred, acceptance is a formality
• If cannot objectively demonstrate, then defer revenue
and wait for customer acceptance
• Products delivered for trial purposes – control does
not transfer until trial period ends or customer
accepts

Customer acceptance
(IFRS 15.B83-B86)
Tying it all together…
Customer acceptance spectrum
Higher barriers
Lower barriers
Seller-specified Customer-specified
objective criteria subjective criteria Customer-specified Trial or
(size, weight) (doesn't like colour) objective criteria demonstration
Basic warranty. Right of return. Custom Defer revenue until

Accrue costs when Recognise revenue manufacture. trial period ends or
revenue booked. net of expected Recognise revenue customer accepts.
returns and accrue if can demonstrate
related liability. that criteria met.
Otherwise defer.
(IFRS 15.B28-B33
and B83-B85) (IFRS 15.B20-B27) (IFRS 15.B83-B85) (IFRS 15.B86)
Examples of customer-acceptance related clauses commonly found in contracts

Contract costs
(IFRS 15.B52-B63)
Two kinds:
1. Contract acquisition costs (IFRS 15.91-94)
– Incremental costs to obtain a contract that would not be
incurred if contract not obtained (Eg sales commission)
2. Contract fulfilment costs (IFRS 15.95-98)
– Costs to fulfil (i.e. perform/deliver) a contract
– Consider deferral under IFRS 15.95 only if not already
within scope of another standard (eg. IAS 2, IAS 16, IAS 38).

Contract costs
(IFRS 15.91-94)
1. Contract acquisition costs

• Recognise as an asset the incremental costs to
obtain a contract that are expected to be recovered
• Practical expedient to expense such costs if
amortisation period would be one year or less
Eg, Incremental sales commissions

ü
Eg, Annual bonus based on total sales achieved û
Contract costs
(IFRS 15.95-98)
2. Contract fulfilment costs

• If not covered under another standard, then recognise as
an asset under this standard if costs:
– Directly relate to a contract (or anticipated contract),
such as direct labour and materials, indirect costs of
production, etc.
– Generate or enhance resources that will be used to
satisfy performance obligations in the future, AND
– Expect to be recovered

Contract costs
(IFRS 15.95-98)
Capitalisable as contract fulfilment costs?
General and admin costs (not chargeable to customer)

û
Costs of wasted materials
Costs of performing necessary set-up activities
û
ü
Costs related to satisfied performance obligations
û
Costs where entity cannot tell whether relates to satisfied or
unsatisfied performance obligations û

Deferred costs
Amortisation and impairment (IFRS 15.99-104)
Amortisation
• Use systematic basis consistent with the pattern of transfer
of the related goods or services
• Update amortisation estimate if expected pattern of transfer
changes
Impairment loss
Impairment loss = carrying amount less remaining “profit”*
*Remaining profit = remaining amount of consideration entity expects to receive for related goods and services, less
the costs to provide those goods or services not yet recognised in expense .

Contract costs
Practical insight: Treatment of fulfilment costs
• Customer outsources its information technology data center

• Term = 5 years plus two 1-yr renewal options
• Average customer relationship is 7 years
• Entity spends CU350k designing and building the technology platform
needed to accommodate out-sourcing contract:
Design services 40,000

Hardware 120,000 How should the
Software 90,000 costs at left be
Migration and testing of data centre 100,000 treated?
TOTAL 350,000

Contract costs
Practical insight: Treatment of fulfilment costs
How should the costs shown be treated?
Assess under IFRS 15.95. Any resulting asset would

Design services 40,000
be amortised over 7 years (i.e. include renewals)
Hardware 120,000 Account for asset under IAS 16
Software 90,000 Account for asset under IAS 38
Migration and testing of Assess under IFRS 15.95. Any resulting asset would
100,000
data centre be amortised over 7 years (i.e. include renewals)
TOTAL 350,000

Amortizing capitalized commissions over a period
longer than the initial contract would not be
appropriate if an entity pays a commission on renewal
that is commensurate with the commission paid when
obtaining the initial contract. IFRS 15.BC309
Q: What does "commensurate

with" mean? Is this a quantitative
assessment only? Or can qualitative
aspects also be considered (like
whether the renewal commission is
commensurate with the relative effort
TRG Insights expended to get the customer to agree
to renew?

Answer: Focus is on a quantitative assessment. Is the
amount of the renewal commission proportional to the
commission paid on the original contract?
Commission
Commission
Contract on initial Commensurate
on renewal
contract
1 5% 5% Yes
2 5% 1% No
(Example assumes the original contract and

renewal contract have similar values)
TRG Insights 12-month contracts with non-commensurate

renewal commissions would lose access to
the practical expedient in 15.94!

Questions

Today’s Agenda
• Introduction ü
• Common application issues ü

Presentation - Definitions
(IFRS 15.108 and Appendix A)
• Receivable: an unconditional right to consideration (only

passage of time is required before payment is due)
• Contract asset: An entity's right to consideration

dependent on something other than just the passage
of time (e.g. the entity's future performance)
• Contract liability: An entity's obligation to

transfer goods or services to a customer for
which consideration has been received
(or the amount is due)

Presentation – Key concepts
(IFRS 15.108 and Appendix A)
• A receivable (IFRS 9) is not a contract

asset (IFRS 15)
• A contract is either in a net asset or net
liability position depending on the
relationship between the entity’s
performance and the customer’s payment
• You cannot have both an asset and a
liability for the same contract on the same
B/S

Presentation
Practical insight: Example B/S presentations

Contract costs
Practical insight: Conditional payments
• Entity contracts to transfer

Products X and Y for total of
Q: What journal
CU1,000
entries are needed
• X must be delivered first when X is
transferred and
• But no payment until Y delivered when Y is
transferred?
• Entity applies model and allocates
CU400 to X and CU600 to Y

Contract costs
Practical insight: Conditional payments
Description Dr. (Cr.)
On transfer of Product X
Contract asset CU 400
Revenue CU (400)
On transfer of Product Y
Receivable CU 1,000
Contract asset CU (400)
Revenue CU (600)

Disclosures
(IFRS 15.110-129)
Significant judgements and

Information about an entity's changes to judgements made
contracts with its customers
Objective: To disclose sufficient information to

enable users to understand the nature, amount, timing
and uncertainty of revenue and cash flows arising
from contracts with customers
Assets recognised from
Information should be both contract costs
qualitative and quantitative

Disclosures
(IFRS 15.110-129)
Three pillars
Contracts with
customers Significant Assets recognised
judgements from costs to obtain
or fulfil a contract
• Disaggregation of • Judgements made

revenue • Determining the in determining the
timing of satisfac- amount of costs
• Contract balances tion of performance incurred
• Performance obligations
• Amortisation
obligations • Determining the method
transaction price
• Transaction price • Closing balances,
allocated to the • Determining the by category
remaining amounts allocated
performance • Amortisation and
to performance
obligations impairment losses
obligations
recognised in the
period

Disclosures - Disaggregation
(IFRS 15.114-115)
• Disaggregate into categories to show the influence

of various economic factors on the entity's revenue
and cash flows
• Selection of categories depends on facts
Contracts with
customers
and circumstances.
• Disaggregation
of revenue
• Contract
balances
• Performance
• May need more than one category. obligations

• Transaction
price allocated
to the remaining
performance
obligations

(IFRS 15.114-115)
Can you name some examples of

categories that might be appropriate
to include when disaggregating
revenue?
When selecting categories, consider how revenue
information is presented in the annual report,
earnings releases, internal reports, and other
information used by anyone to evaluate
performance and make decisions

(IFRS 15.114-115)
Examples of categories (not all-inclusive):
IFRS 15.B89
Market or type of customer
Type of good or service
Geographical region (e.g. government versus
(e.g. major product line)
non-government)
Contracts with
How revenue is recognised customers
Type of contract (e.g.
Contract duration (e.g. point-in-time versus
fixed price, T&M) • Disaggregation
over-time) of revenue
• Contract
Sales channels (e.g. B2B balances
versus B2C) • Performance

obligations
• Transaction
(Must be clear how disaggregated revenue relates to segment info) price allocated
to the remaining
performance
obligations

Disclosures
Practical insight: Disaggregation Example
Segments Consumer Transport Energy Total
Prods
Geography:
North America 990 2,250 5,250 8,490
Europe 300 750 1,000 2,050
Asia 700 260 - 960
1,990 3,260 6,250 11,500
Goods/Service line:
Office supplies 600 - - 600
Appliances 990 - - 990 Contracts with
customers
Clothing 400 - - 400

• Disaggregation
Motorcycles - 500 - 500 of revenue
• Contract
Automobiles - 2,760 - 2,760 balances
• Performance
Solar panels - - 1,000 1,000 obligations
Power plant - - 5,250 5,250 • Transaction

price allocated
to the remaining
1,990 3,260 6,250 11,500 performance
obligations

Disclosures – Contract balances
(IFRS 15.116-118)
• Opening and closing balances for contract assets, contract liabilities, and
receivables
• Quantitative and qualitative explanation of changes in contract assets and

liabilities during the period (eg, rollforward)
• Amount of revenue recognised in current period
Contracts with
– in contract liability at beginning of the period customers
– that arose from performance obligations satisfied in previous • Disaggregation

of revenue
periods (e.g. changes in transaction price) • Contract

balances
• Performance
• The relationship (in time) between performance and

obligations
• Transaction
payment and how this impacts contract assets and price allocated
to the remaining
performance
liabilities obligations

Disclosures – Performance obligations
(IFRS 15.119)
Mandatory disclosures include:

• When performance obligations are typically satisfied
• Significant payment terms
• Nature of goods or services promised Contracts with
customers
• Whether acting as an agent • Disaggregation

of revenue
• Obligations for returns, refunds, and similar

• Contract
balances
• Performance
obligations
• Types of warranties and related obligations • Transaction

price allocated
to the remaining
performance
obligations

Disclosures – Transaction price allocated to the
remaining performance obligations
(IFRS 15.120-122)
• Aggregate amount of transaction price allocated to

unsatisfied performance obligations
• When expected to recognise that revenue
(exclude periods prior to initial application) Contracts with
customers
• Describe any significant renewals and variable

• Disaggregation
of revenue
• Contract
consideration not disclosed in estimated

balances
• Performance
obligations
transaction price (e.g. if constrained) • Transaction

price allocated
to the remaining
performance
obligations

Disclosures
Practical insight: Transaction price allocations
20X8 20X9 Total

Revenue on existing contracts at
31/12/X7 expected to be 1,575 788 2,363
recognised in years shown Contracts with
customers
• Disaggregation
of revenue
• Contract
Practical expedient: ignore contracts with original

balances
• Performance
obligations
terms < 1 year • Transaction

price allocated
to the remaining
performance
obligations

Disclosures – Significant judgements
(IFRS 15.123-126)
Determining the timing of satisfaction of performance

obligations
• Judgements (and changes in judgements) made in determining the
amount and timing of revenue
• For revenue over time:
– A discussion of methods used Significant
judgements
– Why methods provide a faithful depiction of transfer • Determining the

timing of satisfac-
tion of performance
• For revenue at a point in time: obligations

• Determining the
transaction price
– Discussion of significant judgements made evaluating • Determining the

amounts allocated
when customer obtained control

to performance
obligations

Disclosures – Significant judgements
(IFRS 15.123-126)
Determining the transaction price and amounts allocated

to performance obligations
Disclose methods, inputs and assumptions used in:
• Determining the transaction price (e.g. estimating variable and non-
cash consideration, time value of money)
• Whether variable consideration is constrained Significant
judgements
• Allocating the transaction price (e.g. estimating SSPs, and

• Determining the
timing of satisfac-
tion of performance
allocating variable consideration and discounts)

obligations
• Determining the
transaction price
• Measuring obligations used for returns, refunds, and other • Determining the
amounts allocated
to performance
similar obligations obligations

Disclosures – Assets from costs to obtain/fulfil
contracts (IFRS 15.127-128)
Assets from costs to obtain/fulfil contracts

Disclose:
• Judgements made in determining amount of costs incurred
• Closing balances, by main category of assets
Assets recognised from
(e.g. cost to obtain, pre-contract, setup) costs to obtain or fulfil a

contract
• Judgements made in
• Amortisation method determining the amount

of costs incurred
• Amortisation method
• Amortisation and impairment losses recognised

• Closing balances, by
category
• Amortisation and
in the period impairment losses

recognised in the period

Disclosures – Use of practical expedients
(IFRS 15.129)
• Entities are required to disclose

if they elect to use practical
expedients for:
– Existence of significant
financing component (IFRS 15.63)
– Incremental costs of
obtaining a contract (IFRS 15.94)

Disclosures – Helping our clients
• Are your clients’ systems

presently capturing all of the
data required to make these
disclosures?
• Are appropriate and sufficient
internal controls in place now?
• What disclosures will require the
most work?

Transition and implementation
(IFRS 15.Appendix C)
Effective date (IFRS 15.C1)
Effective date Annual periods beginning on or after 1 January 2018

and interim periods within those annual periods
Early application? Permitted

Full Retrospective Modified Retrospective
• Cumulative effect adjustment to

• Required to disclose the effect of opening retained earnings
the changes on any prior periods
that have been retrospectively • May elect to apply only to those
adjusted contracts that are not completed
at the adoption date
• Practical expedients available
• Disclose how current year
amounts would have been
different under IAS 18/IAS 11

Practical expedients available to those
applying the full retrospective method
For completed contracts that have variable

An entity need not restate contracts that
consideration, an entity may use the
begin and are completed within the same
transaction price at the date the contract was
annual reporting period, or are already
completed rather than estimating variable
complete at the beginning of the earliest
consideration amounts in the comparative
period presented
reporting periods
For all reporting periods presented before

the date of adoption, an entity is not
required to disclose the amount of the
transaction price allocated to the remaining
performance obligations and an explanation
of when the entity expects to recognize that
amount as revenue

Practical expedients available under both
transition methods
For contracts modified before the beginning of the earliest reporting period
presented under the new standard, an entity does not need to retrospectively
restate the contract for those modifications
An entity can instead reflect the aggregate effect of all modifications that
occur before the beginning of the earliest period presented under the new
standard when:
• Identifying the satisfied and unsatisfied performance obligations
• Determining the transaction price
• Allocating the transaction price to the satisfied and unsatisfied performance
obligations for the modified contract at transition

A completed contract is a contract for which the entity has transferred all of
the goods or services identified in accordance with IAS 11, IAS 18 and
related Interpretations.
If excluded, then completed contracts continue to be accounted for in

accordance with the previous revenue Standards.

Implementation timeline – Full retrospective method

(IFRS 15.C3(a))
1 January 2016; Start 31 March 2018 first
of second comparative 1 January 2018 interim reporting date
year (if applicable) Effective date
Parallel ledgers
2016 2017 2018

The time for assessment is 31 December 2018 first
already in the past! annual financial statements
under new standard

Implementation timeline – Modified retrospective

method (IFRS 15.C3(b))
31 March 2018 first
1 January 2018 interim reporting date
Effective date
Assessment period
2016 2017 2018
31 December 2018 first

annual financial statements
under new standard

Action steps for clients
• Identify an implementation team

• Educate people cross-functionally
• Identify population of contracts / different
contracting provisions
• Understand new disclosure requirements
and IT needs (data gathering/processing)
• Identify areas of change
• Document new accounting policies and
controls
• Communicate with auditors
• Identify tax implications
• Communicate with stakeholders
• Follow the IASB / TRG / FASB
• Consult with local regulators as necessary

ESMA* Public Statement on IFRS 15 Implementation
• IAS 8.30 disclosures in 2017 interims (not just year ends)

• Over time, qualitative and quantitative descriptions of the
impact of adoption should get increasingly entity-specific
• Where the impact is expected to be significant, ESMA
expects issuers to:
• provide info about policy choices to be taken upon
initial application of IFRS 15 (eg, full vs modified
retrospective method and use of practical expedients);
• Describe impact of IFRS 15 on both the timing and
amount of revenue to be recognised.
• Explain the nature of the impacts so that users of F/S
understand the changes to current practices and their
key drivers
• Explain the impact on risk management and APM’s
* European Securities and
Markets Authority
• Use caution when applying interpretative guidance intended
for the US

Independence
Allowed and prohibited services
 Do not make decisions related to

 Be mindful of independence rules accounting policies or document new
 Assist in educating clients about accounting policies
IFRS 15  Do not perform work that could be
 Limit discussions to avoid performing subject to audit
management functions  Do not act in the capacity of
management

Latest IFRS 15 Publications from GTIL
GTInet > Services & Industries > Assurance > IFRS > External publications > Revenue recognition

Other sources of information IFRS users
proceed
AICPA Industry Task Forces with
caution
Aerospace and Construction

Hospitality Power and utility
defense contractors
Depository
Airlines Insurance Software
institutions
Asset
Gaming Not-for-profit Telecommunication
management
Broker-dealers Health care Oil and gas Timeshare
www.aicpa.org > Interest areas > Financial reporting center > Accounting & Financial reporting > Revenue recognition

Today’s Agenda
• Introduction ü
• Common application issues ü
• Presentation, Disclosure and Transition ü

Questions & Feedback

Put options (B70-B76)
Or if you prefer words…
• If an entity has an obligation to repurchase the asset at the customer’s request (a put option) at a price that
is lower than the original selling price of the asset, the entity shall consider at contract inception whether
the customer has a significant economic incentive to exercise that right. …if the customer has a
significant economic incentive to exercise that right, the entity shall account for the agreement as a lease
in accordance with IAS 17.
• If the customer does not have a significant economic incentive to exercise its right at a price that is lower
than the original selling price of the asset, the entity shall account for the agreement as if it were the sale of a
product with a right of return as described in paragraphs B20–B27.
• If the repurchase price of the asset is equal to or greater than the original selling price and is more than
the expected market value of the asset, the contract is in effect a financing arrangement and, therefore,
shall be accounted for as described in paragraph B68.
• If the repurchase price of the asset is equal to or greater than the original selling price and is less than
or equal to the expected market value of the asset, and the customer does not have a significant
economic incentive to exercise its right, then the entity shall account for the agreement as if it were the sale
of a product with a right of return as described in paragraphs B20–B27.

Module 5 - Revenue (IFRS 15) (Final)

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Module 5 - Revenue (IFRS 15) (Final)

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IFRS 15 Revenue from

contracts with customers

© 2013 Grant Thornton International Ltd. All rights reserved.

• Understand the 5-step model. Be able to:

• Know how to account for a number of common application issues

• Describe transition options and significant disclosures

© 2017 Grant Thornton International Ltd. All rights reserved. 2

© 2017 Grant Thornton International Ltd. All rights reserved. 3

IFRS 15 Revenue from contracts with customers

© 2017 Grant Thornton International Ltd. All rights reserved.

Formed by FASB & IASB to address stakeholders’ implementation issues

• Identifies areas that are unclear or could lead to diversity in practice

• Helps Boards determine what, if any, actions are needed to address

• Provides a forum for stakeholders to learn about the guidance

While non-authoritative, maybe unwise to ignore

© 2017 Grant Thornton International Ltd. All rights reserved.

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Five step approach to a new control-

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In scope: Out of Scope:

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Apply IFRS 15 to in-scope customer contracts ONLY if:

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Objective: Is there a substantive transaction between

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• Hospital provides medical services to an

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Continuing with the previous example: After

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• Entity A signs a master supply agreement

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Have ALL of the following criteria been met?

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Five step approach:

Allocate the Recognise

© 2017 Grant Thornton International Ltd. All rights reserved. 17

• Will vary across two or more parties that

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A contract is wholly unperformed if:

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End of End of End of End of

Cancellation Cancellation Cancellation

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Cancellation Cancellation Cancellation

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End of End of End of End of

Cancellation Cancellation Cancellation

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Mandatory Same customer Entered into at or near

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A manufacturer of hydraulic pumps for the

At the same meeting, the manufacturer enters

Would these contracts be combined?

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Documenting parts of an arrangement

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Eg. A company elects to

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Can you think of a common

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Five step approach:

Allocate the Recognise