REVENUE RECOGNITION

IFRS 15
 learning objectives

Upon completion of this UNIT you will be able to:

 discuss the issues relating to the recognition of revenue
 understand the 5-step approach with regards to the
recognition of revenue
 record revenue in relation to contracts satisfied at a point in
time
 discuss how progress is recorded in relation to contracts
satisfied over time
 record revenue in relation to contracts satisfied over time
 record assets and liabilities relating to revenue from
contracts with customers.
 KEY TERMS
Contract An agreement between two or more parties that creates enforceable
rights and obligations.

Customer A party that has contracted with an entity to obtain goods or services
that are an output of the entity’s ordinary activities in exchange for consideration.

Fair Value The price that would be received upon the sale of an asset or paid to
transfer a liability in an orderly transaction between market participants at the
measurement date.

Fraud The intentional misstatement or omission of amounts or disclosures

designed to deceive financial statement users.
 KEY TERMS
Income Increases in economic benefits during the accounting period that result in an
increase in equity, other than those relating to contributions from equity participants.

Performance Obligation A promise in a contract to transfer to the customer either: a

good or service (or bundle) that is distinct; or a series of distinct goods or services
that are substantially the same and that have the same pattern of transfer to the
customer.

Revenue Income arising in the course of an entity’s ordinary activities.

Transaction Price The amount of consideration to which an entity expects to be

entitled in exchange for transferring promised goods or services to a customer,
excluding amounts collected on behalf of third parties.
 INTRODUCTION
Significant weight and importance given to
revenue, and its recognition
Often a barometer of past performance and future
prospects
Susceptible to fraud

Numerous examples of improper revenue

recognition
 IFRS 15 REVENUE FROM
CONTRACTS WITH CUSTOMERS
Background
• Conceptual Framework for Financial Reporting (2018)
• Debate typically placed in the context of historical cost double
entry system

Scope
• Applies to all contracts with customers except for: leases (IFRS
16); financial instruments (IFRS 9); IFRS 10; IFRS 11; IAS 27 ;
and IAS 28); insurance contracts (IFRS 4); and non-monetary
exchanges between entities in the same line of business to
facilitate sales to customers or potential customers
 IFRS 15 REVENUE FROM
CONTRACTS WITH CUSTOMERS

Core Principle

Asset-liability approach based

upon the transfer of control

An entity should recognise revenue to depict the transfer of

promised goods or services to customers in an amount that
reflects the consideration (payment) to which the entity expects
to be entitled in exchange for those goods or services

Five steps underpinning its application

 Five-step Model Framework

Step 1 Step 2 Step 3 Step 4 Step 5

Identify the Identify the Determine the Allocate the Recognise
contract(s) performance transaction transaction revenue when
with a obligations in price price to the (or as) the
customer the contract performance entity satisfies
obligations in a performance
the contract obligation
STEP 1: IDENTIFY THE CONTRACT(S) WITH A CUSTOMER

(i) Attributes of a Contract

• A contract with a customer is within the scope of IFRS 15
if all the following conditions are met:
• The contract has been approved by the parties to the
contract (oral, written or implied);
• Each party’s rights in relation to the goods or services to
be transferred can be identified;
• The payment terms for the goods or services to be
transferred can be identified;
• The contract has commercial substance ; and
• It is probable that the consideration to which the entity is
entitled to in exchange for the goods or services will be
collected.
 Oral Contract
Bruce Limited provides online technology support for customers
remotely via the internet. For a flat fee, Bruce Limited will scan a
customer’s PC for viruses, optimise the PC’s performance and solve any
connectivity problems. When a customer calls to obtain the scan
services, Bruce Limited describes the services the company can provide
and states the price for those services. When the customer agrees to the
terms stated by the representative, payment is made over the telephone.
Bruce Limited then gives the customer the information needed to obtain
the scan services (e.g., an access code for the website). Bruce Limited
provides the services when the customer connects to the internet and
logs onto the company’s website (which may be that day or a future
date).
Is there a contract
 Oral Contract
Bruce Limited and its customer are entering into an oral agreement for Bruce Limited
to repair the customer’s PC and for the customer to provide consideration by
transmitting a valid credit card number and authorisation over the telephone. Assuming
conditions (b) to (e) are also met, this agreement falls within the scope of IFRS 15 at
the time of the telephone conversation, even if Bruce Limited had not yet performed the
scanning services.
Substance of the Transaction

Ruby Limited (Ruby) is a port manufacturer and the manufacturing

process involves maturing wine in stainless steel for two years before
bottling. The port is sold at cost plus 200%. On 1 January 2019, the
first day of its accounting period, Ruby sold 100,000 litres of one year
old port to its investment bank at its cost to Ruby of N$1,260,000 and
agreed to buy it back two years later for N$1,524,600.

Requirement
Explain how this transaction should be accounted for in Ruby’s
financial statements for the year ended 31 December 2019 and 2020.
 Suggested Solution

From the circumstances outlined, the substance of the transaction is not a sale but a
means of raising finance. The appropriate accounting entry would be to recognise
the loan and charge the interest related to this advance in the financial statements.
The interest is calculated as the difference between the cost of the wine and the
amount it will cost to buy it back in two years time.

Dr Bank 1,260,000
Cr Loan 1,260,000
Year ended 31 December 2019:
Dr SPLOCI – P/L – finance cost 126,000
Cr Loan 126,000
Year ended 31 December 2020:
Dr SPLOCI – P/L – finance cost 138,600
Cr Loan 138,600

Note: Interest charge 1,524,600 / 1,260,000 = 1.21

Square root of 1.21 is 1.1, therefore the interest rate is 10%
 STEP 1: IDENTIFY THE
CONTRACT(S) WITH A CUSTOMER
(ii) Combing Contracts
IFRS 15 requires entities to combine contracts entered into at, or
near, the same time with the same customer if one or more of the
following criteria are met:

• The contracts are negotiated as a package with a single

commercial objective;

• The amount of consideration to be paid in one contract depends

on the price or performance of the other contract; or

• The goods or services promised in the contracts (or some goods

or services promised in each of the contracts) are a single
performance obligation (Step 2).
 STEP 2: IDENTIFY THE PERFORMANCE
OBLIGATIONS IN THE CONTRACT

• A performance obligation is a promise in a contract with a customer to transfer a

good or service to the customer. At contract inception, an entity should assess the
goods or services that have been promised to a customer and identify as a
performance obligation:
o a good or service (or bundle) that is distinct; or
o a series of distinct goods or services that are substantially the same and that
have the same pattern of transfer to a customer.

• Key considerations:
(i) the promise – explicit, implicit or none ;
(ii) what goods and services are distinct;
(iii) principal-agent relationships ;
(iv) consignment arrangements;
(v) customer options for additional goods or services; and
(vi) the sale of products with a right of return.
 Table : Distinct Goods and Services
A good or service is distinct if both of the following
criteria are met:
• the customer can benefit from the good or services on • each distinct good or service in
its own or in conjunction with other readily available
resources; and
• the entity’s promise to transfer the good or service to
the customer is separately identifiable from other
promises in the contract. Factors for consideration as
to whether a promise to transfer the good or service
to the customer is separately identifiable include: (i)
the entity does not provide a significant service of
integrating the good or service with other goods or
services promised in the contract; (ii) the good or
service does not significantly modify or customise
another good or service promised in the contract; or
(iii) the good or service is not highly interrelated with
or highly dependent on other goods or services
promised in the contract.
A series of distinct goods or
services is transferred to a
customer in the same pattern if
both of the following criteria are
met:
the series that an entity promises
to transfer consecutively to a
customer would be a
performance obligation that is
satisfied over time; and
• a single method of measuring
progress would be used to
measure the entity’s progress
towards complete satisfaction of
the performance obligation to
transfer each distinct good or
service in the series to the
customer.
 Determining whether Goods or Services are Distinct

Clarence Limited, a software development company, entered into a contract with a

customer to transfer the following:

• Software licence;
• Installation service (includes changing the web screen for each user);
• Software updates; and
• Technical support for 2 years.

Clarence Limited also sells the above separately. The installation service is
routinely performed by other entities and does not significantly modify the
software. The software remains functional without the updates and the technical
support.

Requirement
Are the goods or services promised by Clarence Limited to the customer distinct in
terms of IFRS 15?
 Suggested Solution
The software is delivered before the other goods or services and
remains functional without the updates and the technical support,
therefore it can be concluded that the customer can benefit from
each of the goods and services either on their own or together with
the other goods and services that are readily available.

The promise to transfer each good and service to the customer is

separately identifiable from each other. In particular, the
installation service does not significantly modify or customise the
software itself and, as such, the software and the installation
service are separate outputs promised by the entity instead of inputs
used to produce a combined output.

Therefore, based on the assessment, four performance obligations

in the contract have been identified for all four of the above goods
or services.
 (iii) Determining Principal-Agent
Relationships

Indicators that a performance obligation involves an

agency relationship:
• Another party is primarily responsible for fulfilling the contract;
• The entity does not have inventory risk before or after the goods
have been ordered by a customer, during shipping or on return;
• The entity does not have discretion in establishing prices for the
other party’s goods or services and, therefore, the benefit that the
entity can receive from those goods or services is limited;
• The entity’s consideration is in the form of a commission; and
• The entity is not exposed to credit risk for the amount receivable
from a customer in exchange for the other party’s goods or
services.
 Nature of relationship

Erin pty (Erin), a company based in Namibia, prepares its financial

statements to 31 December each year. Columbus Pty (Columbus), an
American company, has approached Erin to sell Columbus’s products in
Namibia. Columbus has offered the following alternatives to Erin:
a) Erin acts as Columbus’s agent and sells the products at a fixed price
calculated to yield a profit margin of 50%, receiving a commission of
12.5% of sales; or
b) Erin buys the products from Columbus and sells them at a gross profit
margin of 25%.
It is estimated that Erin will achieve total sales of N$140 million per annum
from Columbus’s products.

Requirement
Explain how the two proposals should be accounted for in Erin’s financial
statements.
 Suggested Solution

The two proposals put forward by Columbus are very different.

Under scheme a)
Erin would act as Columbus’s agent. Under this arrangement Erin must only
record in income the amount of commission it is entitled to under the
agreement, amounting to N$17.5 million (N$140 million × 12.5%) based on
the estimated figures.

Under scheme b)
Erin would buy the goods from Columbus as principal and the sales and cost
of sales would be included in Erin’s statement of profit or loss and other
comprehensive income – profit or loss as normal.

N$m
Sales 140
Cost of sales (105)
Gross profit 35
 IFRS 15 provides the following indicators
that an arrangement is a consignment
arrangement:

The product is controlled by the entity

until a specified event occurs (e.g., the sale
of the product to a customer of the dealer)
(iv) or until as specified period expires;
Determining
The entity is able to require the return of
Consignment the product or transfer the product to a
Arrangements third party (e.g., another dealer); and

The dealer does not have an unconditional

obligation to pay for the product (although
it might be required to pay a deposit).
 (v) Determining Customer Options for Additional Goods or
Services
• The option to purchase additional goods or services

• May be priced at a discount or free of charge

• Can come in many forms – e.g. sales incentives, customer award credits
(e.g. frequent flyer programmes), contract renewal options (e.g. waiver
of certain fees, reduced future rates) or other discounts on future goods
or services

• Option is only a separate performance obligation if it provides a material

right to the customer (i.e. results in a discount that the customer would
not receive without entering into the contract) (e.g. a discount that
exceeds the range of discounts typically given for those goods or
services to that class of customer in that geographical area or market)
Option that Provides the Customer with a Material Right

Relax Limited entered into a contract for the sale of Product A for
N$100. As part of the contract, Relax Limited gives the customer a
40% discount voucher for any future purchases up to N$100 in the
next 30 days. Relax Limited intends to offer a 10% discount on all
sales during the next 30 days as part of a seasonal promotion. The
10% discount cannot be used in addition to the 40% discount
voucher.

Requirement
Determine whether the discount voucher provides the customer
with a material right.
 Suggested Solution

• Because all customers will receive a 10% discount on purchases

during the next 30 days, the only discount that provides the
customer with a material right is the discount that is incremental
(i.e. the additional 30% discount)

• To estimate the stand-alone selling price of the discount voucher,

Relax Limited estimates an 80% likelihood that a customer will
redeem the voucher and that a customer will, on average, purchase
N$50 of additional products

• Consequently, Relax Limited’s estimated stand-alone selling price

of the discount voucher is N$12 (N$50 average purchase price of
additional products x 30% incremental discount x80% likelihood
of exercising the option)
 Suggested Solution
The stand-alone selling prices are:
Performance obligations: Stand-alone selling price:
N$
Product A 100
Discount voucher 12
Total 112

Allocated transaction price:

Product A (N$100/N$112 x N$100) 89

Discount voucher (N$12 /N$112 xN$100) 11

100
• N$89 allocated to Product A when control transfers
• N$11 allocated to the voucher and recognized on redemption or
when it expires
 (vi) Determining the Sale of Products with a Right of Return
• May be contractual, implicit or a combination thereof
• Customer may receive full/partial refund, credit note, exchange or
combination thereof
• Offering a right of return does not represent a separate
performance obligation
• Instead an entity makes an uncertain number of sales and, until the
right of return expires, does not know how many will fail
• Therefore, an entity should not recognise sales that are expected
to fail as a result of a right to return being exercised
• Instead, the potential for returns needs to be considered when
estimating the transaction price because potential returns are a
component of variable consideration (Step 3)
 (vi) Determining the Sale of Products with a Right of Return

• Exchanges by customers of one product for another of the

same type, quality, condition and price (e.g. one colour or
size for another) are not considered returns for the
purposes of applying IFRS 15

• Furthermore, contracts in which a customer may return a

defective product in exchange for a functioning product
should be evaluated in accordance with IFRS 15’s
requirements on warranties (Step 5))
 STEP 3: DETERMINE THE
TRANSACTION PRICE
An entity Variable consideration;
should
consider Constraining estimates of variable consideration;
the
effects of
all of the The existence of a significant financing component
in the contract;
following
: Non-cash consideration; and

Consideration payable to a customer.

(i) Variable Consideration
If the consideration promised includes a variable
amount, the amount of consideration should be
estimated

Consideration may vary because of discounts, rebates,

performance bonuses, penalties or because it is
contingent on the occurrence or non-occurrence of a
future event (e.g. sold with a right of return or a fixed
amount is promised as a performance bonus on
achievement of a specified target)
(ii) Constraining Estimates of Variable
Consideration
When consideration is variable, revenue is
only recognised when it is highly
probable that there will not be a
significant reversal in the cumulative
amount of revenue recognised to date
Factors indicating that including an
estimate of variable consideration may
result in a significant reversal include:
• the amount of consideration is highly susceptible to
factors outside the control of the entity (e.g. third party
judgement)
• uncertainty over the amount may not be resolved for a
long period
• the entity has limited experience with similar contracts

The amount of variable consideration

should be estimated by using either:
• The expected value – the sum of probability-
weighted amounts in a range of possible consideration
amounts (e.g. an entity has a large number of contracts
with similar characteristics); or
• The most likely amount – the single most likely
amount in a range of possible consideration amounts
(i.e. the single most likely outcome) (e.g. if a contract
has only two possible outcomes).
 Volume Discount Incentive

Denver Limited entered into a contract with a customer to sell beds for N$400 per bed
on 1 January 2020. If the customer purchases more than 1,000 beds in a calendar year,
the contract states that the price per unit is retrospectively reduced to N$380 per unit.
As a result of this the consideration in the contract is variable.

As at 31 March 2020, Denver Limited sells 80 beds to the customer, therefore Denver
Limited estimates that the customer’s purchase will not exceed the 1,000 bed
threshold required for the volume discount in the calendar year.

When considering the significant experience Denver Limited has with this product
and the customer’s purchasing pattern, it was concluded that it is highly probable that
a significant reversal in the cumulative amount of revenue recognised (N$ 400 per
bed) will not occur when the uncertainty is resolved (i.e. when the total amount of
purchases is known).

Consequently, the entity recognises revenue of N$32,000 (80 beds xN$400) for the
first quarter ended 31 March 2020.
 Volume Discount Incentive (cont’d)

At the beginning of June 2020, the customer acquires another

company and at the end of the second quarter, 30 June 2020, Denver
Limited sells an additional 500 beds to the customer. In light of the
new fact, Denver Limited estimates that the customer’s purchases
will exceed the 1,000 bed threshold for the calendar year and
therefore it would have to retrospectively reduce the price per unit.

Denver Limited therefore recognises revenue of N$188,400 for the

quarter ended 30 June 2020. The amount is calculated from
N$190,000 (500 beds x N$380) less the change in transaction price
of N$1,600 (80 beds x N$20 price reduction) for the reduction of the
beds sold in the first quarter.
 Note:
IFRS 15 states that the amount of variable consideration
should be estimated by using either the expected value or the
most likely amount methods, depending on which method the
entity expects to better predict the amount of consideration to
which it will be entitled

Some specific types of variable consideration require further

clarification:
sales and usage-based
goods with the right of non-refundable upfront
royalties from the licence
return fees
of intellectual property
 Right of Return

Due to increased competition, particularly from overseas, Caiti

Limited (Caiti) began selling goods on a sale or return basis during
2019. Under the terms of the sale, customers are able to return items
within 31 days from the date of sale. Payment for goods not returned
within this 31 day period is required within 28 days thereafter.
During 2019, a number of Caiti’s customers exercised their right of
return. Caiti typically sells goods on this basis at cost plus 20%. The
sales figure in the draft financial statements for the year ended 31
December 2019 is based upon goods supplied to customers by 31
December 2019. Sales on a sale or return basis in November and
December 2019 were N$1,000,000 and N$1,200,000 respectively.
Requirement
Explain how this transaction should be reflected in the financial
statements of Caiti for the year ended 31 December 2019.
 Suggested Solution

In this instance, title does not pass until the end of the return period
(i.e., 31 days from date of sale).
Furthermore, it appears that the ‘receivable’ is not due until title has
passed, i.e., after 28 days from the date of sale.
Therefore, Caiti should not recognise the revenue until the 31-day
period has expired.
Thus, the December 2019 sales should not be recognised, and these
goods should be included in inventory on 31 December 2019 at cost
in accordance with IAS 2 Inventories
The December sales of N$1,200,000 are included in inventory at
their cost of N$1,000,000.
However, the November sales of N$1,000,000 would be recognised
in revenue as the risks and rewards have been transferred from Caiti
to the customer at 31 December 2019.
 Non-refundable Upfront Fees

A customer signed a one-year contract with a health club and is required to pay both
a non-refundable initiation fee of N$150 and an annual membership fee in monthly
instalments of N$40. The club’s activity of registering the customer does not transfer
any service to the customer and is therefore not a performance obligation. By not
requiring the customer to pay the upfront membership fee again at renewal, the club
is effectively providing a discounted renewal rate to the customer.

The club determined that the renewal option is a material right because it provides a
renewal option at a lower price than the range of prices typically charged and
therefore it is a separate performance obligation. Based on prior experience, the club
determined that its customers, on average, renew their annual memberships twice
before terminating their relationship with the club. Therefore the club determined
that the option provides the customer with the right to two annual renewals at a
discounted price.
 Non-refundable Upfront Fees (cont’d)

In this scenario, the club could allocate the total transaction consideration ofN$630
(N$150 upfront membership fee +N$480 (N$ 40 × 12 months)) to the identified
performance obligations (monthly services and renewal option) based on the
relative stand-alone selling price method. The amount allocated to the renewal
option would be recognised as each of the two renewal periods is either exercised
or forfeited.

Alternatively, the club could value the option by ‘looking through’ to the optional
goods and services. In this case, the club would determine that the total transaction
price is the sum of the upfront fee plus three years of monthly service fees
(i.e.N$150 +N$1,440) and would allocate that amount to all of the services
expected to be delivered, or 36 months of membership (i.e.N$44.17 per month).
 (iii) The Existence of a Significant
Financing Component in the Contract
• Timing of the payment does not match the timing of the transfer of goods or
services
• When the customer pays in arrears, the entity is effectively providing financing to
the customer
• When the customer pays in advance, the entity has effectively received financing
from the customer
• Adjust the consideration for the effects of the time value of money
• Objective is to recognise revenue at an amount that reflects the price that a
customer would have paid if the customer had paid cash (i.e. the cash selling price)
• Practical expedient – no adjustment if the period between when the entity transfers
a promised good or service to a customer and when the customer pays for that good
or service is < one year or the period between the customer’s payment and the
entity’s transfer of the goods or services is > one year
 Significant Financing Component and Right of Return

Rodgers Limited sold a product to a customer forN$121 that is

payable 24 months after delivery, with the customer obtaining
control of the product at contract inception. The contract permits the
customer to return the product within 90 days. The product is new
and Rodgers Limited has no relevant historical evidence of product
returns or other available market evidence. The cash selling price of
the product isN$100, which represents the amount that the customer
would pay upon delivery for the same product sold under otherwise
identical terms and conditions as at contract inception. The cost of
the product to Rodgers Limited isN$80.

Requirement
How should Rodgers Limited account for sale of the product to the
customer?
 Suggested Solution
Rodgers Limited does not recognise revenue when control of the product transfers
to the customer because the existence of the right of return and the lack of relevant
historical evidence means that the company cannot conclude that it is highly
probable that a significant reversal in the amount of cumulative revenue recognised
will not occur. Consequently, revenue is recognised after three months when the
right of return lapses.

Given the difference between the promised consideration of N$121 and the cash
selling price of N$100 at the date that the goods are transferred to the customer, the
contract includes a significant financing component. The contract includes an
implicit interest rate of 10% (i.e. the interest rate that over 24 months discounts the
promised consideration of- N$121 to the cash selling price of N$100). Assuming
that Rodgers Limited evaluates the rate and concludes that it is commensurate with
the rate that would be reflected in a separate financing transaction between the
company and its customer at contract inception, the journal entries required to
account for the contract are:
 Suggested Solution

When the product is transferred to the customer:

DR Asset for right to recover product to be returned N$80*
CR Inventory N$80
(* This example does not consider expected costs to recover the asset.)

During the three-month right of return period, no interest is recognised because no

contract asset or receivable has been recognised.

When the right of return lapses (the product is not returned):

DR Receivable N$100**
CR Revenue N$100

DR Cost of sales N$80

CR Asset for product to be returned N$80
(** The receivable would be measured in accordance with IFRS 9
 (iv) Non-cash Consideration
• When an entity (i.e. the seller or vendor) receives, or
expects to receive, non-cash consideration, the fair value of
the non-cash consideration is included in the transaction
price in accordance with IFRS 13 Fair Value Measurement
(v) Consideration Payable to a Customer

Consideration paid to a
customer can take many
Many entities make different forms, including:
payments to their • Slotting fees
customers • Co-operative advertising
arrangements
For the payment to be • Price protection
considered as something
• Coupons and rebates
other than a reduction of
the transaction price, the • ‘Pay-to-play’ arrangements
good or service provided • Purchase of goods or
must be distinct ( Step 2) services
 STEP 4: ALLOCATE THE TRANSACTION PRICE TO
THE PERFORMANCE OBLIGATION IN THE
CONTRACT
• If a contract has multiple performance obligations, the transaction
price should be allocated to the performance obligations by
reference to their relative stand-alone selling prices
• Under the relative stand-alone selling price method, the
transaction price is allocated to each separate performance
obligation based on the proportion of the stand-alone selling price
of each performance obligation to the sum of the stand-alone
selling prices of all of the performance obligations in the
arrangement
• If a stand-alone price is not directly observable, this should be
estimated
STEP 4: ALLOCATE THE TRANSACTION PRICE
TO THE PERFORMANCE OBLIGATION IN THE
CONTRACT
The main considerations in applying Step 4 are:

(i) Estimating and applying relative stand-alone selling

prices;
(ii) Allocating variable consideration; and
(iii)Allocating a discount.
(i) Estimating and applying relative stand-alone selling prices

Suitable methods for estimating the stand-alone

selling price are:
• Adjusted market assessment method;
• Expected cost plus a margin method; and
• Residual method.

One, or a combination of these, should be used to

develop an estimate except when:
• Allocating variable consideration; and
• Allocating a discount .
 Allocating a Discount (1)

Kitkar Limitied sold a vehicle with a warranty for N$30,000. If it

sold the vehicle and the warranty separately it would costN$27,000
for the vehicle and N$4,500 for the warranty.

Requirement
Explain how Kitkar Limited should account for this transaction in its
financial statements.
 Suggested Solution

The overall transaction price is N$30,000 should be allocated pro

rata to the two distinct obligations.

The sale of the vehicle element is N$25,714 (N$30,000/N$31,500

×N$27,000), and the amount allocated to the warranty element is
N$4,286 (N$30,000/N$31,500 ×N$4,500).

Kitkar Limited can recognise revenue of N$25,714 on the sale of the

vehicle immediately, with the revenue of N$4,286 relating to the
warranty being recognised over the life of the warranty.
 Step 4 introduces a significant change to many entities’ FROM PREVIOS
practice under IAS 18, with consideration having to be allocated on a relative
stand-alone selling price basis to each of the performance obligations in the
contract.
Note:

The free choice to apply a residual method under IAS 18, whereby the entire
discount in a bundled arrangement is allocated to the delivered goods, is not
acceptable under IFRS 15.

Those industries most impacted by this are likely to be those where bundled
contracts of ‘product plus service’ are quite common. For example, the mobile
telecommunication industry because IFRS 15 is likely to ‘force’ more
consideration to be allocated to the handset and recognised up-front; subsequent
revenue recognised over the contract period may consequently be lower than
the monthly bills issued.
Entities with customer loyalty programmes may also be affected.
 STEP 5: RECOGNISE REVENUE WHEN, OR AS,
THE ENTITY SATISFIES A PERFORMANCE
OBLIGATION
• Revenue should be recognised as control is passed (i.e. has
the seller satisfied the terms of the contract)

• Control is passed either:

(i) Over time; or
(ii) At a point in time
 Satisfying Contract Performance Obligations

Chris Limited received and accepted an order for ‘widgets’ from a

regular customer, Toffer Limited, on 21 December 2019 for an
agreed price ofN$50,000. However, due to the Christmas holidays,
the goods were not despatched until 4 January 2020. Toffer Limited
received the goods on the same day and paid for them on 23 January
2020. The goods are included in Chris Limited’s inventory on 31
December 2019 at their cost price of N$40,000.

Requirement
Explain how this transaction should be accounted for in Chris
Limited’s financial statements for the year ended 31 December 2019.
 Suggested solution

Revenue should only be recognised when a critical event occurs.

Normally, this is when ‘performance’ has been carried out via
delivery of an asset to a customer (i.e. this is the point at which the
revenue recognition criteria have been met).

As this occurs in 2020, therefore the goods should remain in Chris

Limited’s inventory at 31 December 2019 at their cost price of
N$40,000.
(i) Revenue Recognition Over Time

Revenue should be recognised over time if

one of the following criteria is met:
the entity’s performance
the customer
creates or enhances an
simultaneously receives and
asset that the customer
consumes all of the benefits
controls as the asset is
provided by the entity as the
created (e.g. building as
entity performs (e.g. routine
asset on a customer’s site);
or recurring services);
or
the entity’s performance
does not create an asset
with an alternative use to
the entity and the entity
has an enforceable right to
payment for performance
completed to date (e.g.
building a specialised
asset that only the
customer can use or
building as asset to a
customer order).
Measuring Progress

Fundamental to b) is measuring
progress in terms of satisfying
the performance obligation
• Output methods
• Input methods
 (ii) Revenue Recognition at a Point in
Time
Factors that may indicate the point in time at which control passes include the:

entity has a present right to payment for the asset;

customer has legal title to the asset;

entity has transferred physical possession of the asset;

customer has the significant risks and rewards related to the ownership of the asset; and

customer has accepted the asset.

Other Issues:

Repurchase agreements

Bill-and-hold arrangements

Breakage and prepayments for future goods or services

 Customer Loyalty Programmes

During the year ended 31 December 2019, Patch Limited started giving vouchers to
customers who spent more than N$200 in a single transaction on qualifying items.
The vouchers entitled customers to N$20 off a subsequent transaction, within three
months, of more than N$200 on qualifying items. Past experience indicates that 50%
of customers redeem the vouchers. The total sales of qualifying items during the
year ended 31 December 2019 amounted to N$10,000,000. At 31 December 2019, it
is estimated that there are unredeemed vouchers eligible for discount amounting to
N$1,000,000 (i.e. vouchers in respect of sales during the last three months of 2019).
No account has been taken of these unredeemed vouchers in Patch Limited’s draft
financial statements for the year ended 31 December 2019.

Requirement
Explain how the vouchers should be accounted for in the financial statements of
Patch Limited for the year ended 31 December 2019.
 Suggested Solution

The revenue of each separate component should be measured at fair value. Where
vouchers are issued that are redeemable against future purchases, revenue should
be reported at the amount of consideration received less the vouchers’ fair value
(i.e. customers are purchasing goods/services plus the voucher).

If the amount allocated to the vouchers is based on the fair value of the vouchers
relative to the other components of the sale then, as 50% of customers are expected
to redeem the vouchers, Patch Limited has sold goods worthN$10,500,000 (i.e.
sales N$10,000,000 +N$500,000 (being estimated redemption of 50% x
N$1,000,000)) for consideration of N$10,000,000.
 Suggested Solution

Allocating the discount between the two components:

N$10,000,000 ×N$10,000,000 =N$9,523,809

N$10,500,000

i.e.N$9,523,809 allocated to sales and N$476,191 to vouchers, which is deferred

and recognised when obligation is fulfilled (or lapses). Therefore 25% (last three
months of the year) of this figure represents deferred income at 31 December
2019.

DR Revenue/Retained earnings N$119,048

CR Current liabilities – deferred income N$119,048
 Other Issues:

Warranties – service-type and assurance-type

Onerous Contracts (see IAS 37 Provisions,

Contingent Liabilities and Contingent Assets
 CONTRACT COSTS

• In addition to detailed guidance for revenue recognition, IFRS 15

contains prescriptive criteria to be applied when determining whether
costs associated with the acquisition of a contract should be
recognised as an asset or expensed as incurred

• In particular, IFRS 15 specifies the accounting treatment for costs an

entity incurs in:
(i) obtaining ; and
(ii) fulfilling a contract to provide goods and services to customers
for both contracts obtained and contracts under negotiation
 PRESENTATION, DISCLOSURE AND TRANSITION

• Presentation – SFP & SPLOCI

• Disclosure – Disaggregation of revenue, Reconciliation of contract

balances, Remaining performance obligations; Costs to obtain or fulfil
contracts, Other qualitative disclosures and Interim period disclosures

• Transition
 (IFRS 15 Aspects)

Mr Angula entered into a 12-month mobile telephone contract with the

mobile telephone operator Blue Limited. The terms of contract are as
follows:
• Mr Angula received a free handset at the inception of the plan; and
• Mr Angula’s monthly fixed fee isN$100.

Blue Limited sells the same handset forN$300 and the same monthly
prepayment contract without a handset forN$80 per month.

Requirement
How should Blue Limited recognise the revenue from this plan in line in
accordance with IFRS 15?

[Note: This example ignores the price of the SIM and situations when Mr
Angula uses minutes in excess of his plan.)
 Suggested Solution (IFRS 15 Aspects)

Step 1: Identify the contract (i.e. the 12-month contract with Mr

Angula)

Step 2: Identify the performance obligations in the contract (i.e. the

obligation to deliver a handset and the obligation to deliver network
services over 12 months)

Step 3: Determine the transaction price (i.e.N$100pm × 12 months

=N$1,200)

Step 4: Allocate that transaction price ofN$1,200 to the individual

performance obligations under the contract based on their relative
stand-alone selling prices (or their estimates)
 Suggested Solution (IFRS 15 Aspects)

Revenue
(Relative
selling
Performance Stand-alone selling % of priceN$1,200
obligation price N$ total x %)
Handset 300.00 23.8 285.60
Network services ($80pm x 12) 960.00 76.2 914.40
Total 1,260.00 100.0 1,200.00
Step 5: Recognise the revenue when Blue Limited satisfies the
performance obligations
Therefore, when Blue Limited gives the handset to Mr Angula it
should recognise the revenue of N$ 285.60, and when Blue
Limited provides network services to Mr Angula it should
recognise the total revenue of N$914.40. The journal entries can
be summarised as follows:
 Suggested Solution (IFRS 15 Aspects)

Description Amount N$ Debit Credit When

Sale of handset 285.60 SFP: Unbilled SPLOCI: When handset
revenue Revenue from is given to Mr
sale of goods Angula

Network 100.00 SFP: When network

services (monthly Receivable (Mr services are
billing to Mr Angula) provided; on a
Angula) monthly basis
according to
76.20 (N$ SPLOCI: the contract
914.40/12) Revenue from with Mr
network Angula
services
23.80 (N$ SFP: Unbilled
285.60/12) revenue