IFRS 15

REVENUE FROM CONTRACTS

WITH CUSTOMERS
CONTENT

1. Revenue recognition - IFRS 15 five steps to recognition of revenue

2. Common types of transaction
3. Performance obligations

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REVENUE RECOGNITION

 Income:
 Revenue (profit or loss)
 Interest and dividend income (profit or loss)

 Other gains or losses on assets:

 Revaluation of investments (Profit or loss)
 Revaluation of other non-current assets (Other comprehensive
income)

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DEFINITION

 Income arising in the course of an entity's ordinary activities

Examples
1. Sale of goods
2. Rendering of services
3. Contracts to construct an asset
Revenue does not include sales taxes, value added taxes or goods and
service taxes which are only collected for third parties, because these do
not represent an economic benefit flowing to the entity.

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DEFINITIONS UNDER IFRS 15
 Contract - An agreement between two or more parties that creates
enforceable rights and obligations.
 Performance obligation - A promise in a contract with a customer
to transfer to the customer either:
(a) A good or service (or a bundle of goods or services) that is distinct;
or
(b) A series of distinct goods or services that are substantially the same
ad that have the same pattern of transfer to the customer.
 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.

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PRINCIPLE OF REVENUE RECOGNITION

 The core principle of IFRS 15 is that an entity recognises revenue to

depict the transfer of goods or services to customers in an
amount that reflects the consideration to which the entity expects to
be entitled in exchange for those goods or services.

 Revenue is recognised when there is transfer of control to the customer from

the entity supplying the goods or services.

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PRINCIPLE OF REVENUE RECOGNITION

 Some indicators of the transfer of control are:

(a) The entity has a present right to payment for the asset.
(b) The customer has legal title to the asset.
(c) The entity has transferred physical possession of the asset.
(d) The significant risks and rewards of ownership have been transferred
to the customer.

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FIVE STEPS TO
RECOGNISE  IFRS 15 sets out a series of actions for recognising and
measuring revenue. These can be broken down into five
AND MEASURE steps.

REVENUE

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 1. Identify contract

FIVE STEP 2. Identify performance obligations

3. Determine transaction price
MODEL UNDER
4. Allocate transaction price to performance obligations
IFRS 15 5. Recognise revenue when (or as) performance obligation is
satisfied

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  A contract is only in scope when:
(a) Both parties are committed to carrying it out
(b) Each party’s rights to be transferred can be identified
(1) IDENTIFY (c) The payment terms can be identified
CONTRACT (d) The contract has commercial substance
(e) It is probable the entity will collect the consideration
A contract can be written, verbal or implied.

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  A performance obligation is a promise to transfer a good or
service to a customer.
(2) IDENTIFY  Performance obligations should be accounted for separately
PERFORMANCE provided the good or service is distinct.

OBLIGATIONS  Where a promised good or service is not distinct, it is

combined with others until a distinct bundle of goods or
services is identified.

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(3) DETERMINE TRANSACTION PRICE

 The amount to which the entity expects to be ‘entitled’

 Probability-weighted expected value or most likely amount used for
variable consideration
 Discounting not required where less than one year

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(4) ALLOCATE TRANSACTION PRICE TO
PERFORMANCE OBLIGATIONS

 Multiple deliverable - Transaction price allocated to each separate

performance obligation in proportion to the stand-alone selling price
at contract inception of each performance obligation

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(5) RECOGNISE REVENUE WHEN (OR AS)
PERFORMANCE OBLIGATION IS SATISFIED

 Ie when entity transfers control of a promised good or service to a

customer
 An entity must be able to reasonably measure the outcome of a
performance obligation before the revenue can be recognised.

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1. IDENTIFY THE CONTRACT

 A contract with a customer is within the scope of IFRS 15 only when:

(a) The parties have approved the contract and are committed to
fulfilling the terms of the contract
(b) Each party’s rights regarding the goods and services to be transferred
can be identified.
(c) Clear identification of the payment terms for the goods and services
(d) The contract has commercial substance.
(e) It is probable that the entity will collect the consideration to which it
will be entitled.
(f) The contract can be written, verbal or implied.

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2. IDENTIFY PERFORMANCE OBLIGATION
 At the start of a contract, the goods or services promised to the
customer should be assessed. Each transfer of a distinct good/service is
a performance obligation within the contract. There may be more than
one performance obligation within the same contract.
IFRS 15 states that a good or service that is promised to a
customer is distinct if both of the following criteria are met:
(a) The customer can benefit from the good or service either on its own
or together with other resources that are readily available to the
customer (ie the good or service is capable of being distinct); and
(b) The entity’s promise to transfer the good or service to the customer
is separately identifiable from other promises in the contract (ie the
good or service is distinct within the context of the contract).

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3. DETERMINE THE TRANSACTION PRICE

 The transaction price is the amount of consideration a company

expects to be entitled to from the customer in exchange for
transferring goods or services.
In determining the transaction price, consider the effects of:
 Variable consideration
 The existence of a significant financing component
 Non-cash consideration
 Consideration payable to a customer

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VARIABLE CONSIDERATION

 The transaction price should include variable consideration if it is highly

probable that a significant reverse of cumulative revenue will not occur.
 The variable consideration should be included provided that it is highly
probable that it will be received.
 It should be estimated using one of the following methods.
The choice of method will be dependent on which best predicts the
amount of consideration to be received:
 Probability weight expected value (eg reviewing past, similar contracts
to assess the likelihood of receiving the consideration); or
 Most likely amount (eg if there are only two possible outcomes).

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THE EXISTENCE OF A VARIABLE
FINANCING COMPONENT

 If the consideration is due from a customer which is dependent on a

significant financing component, then the credit risk should be taken
into account when assessing the consideration expected to be received
from the customer.
 The discount rate may be stated in the contract, but it should reflect
the credit risk of the transaction and represent market terms.
 This may result in different consideration amounts being recognised for
different customers, even if the contracts are similar. This is because the
customers may be more of a credit risk than others.

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NON-CASH CONSIDERATION

 This will be measured at fair value (where this cannot be easily

determined, then it will be compared to the selling price of the goods
being sold by the entity)

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CONSIDERATION PAYABLE TO A
CUSTOMER

 Examples of this type of consideration include discounts, rebates or

refunds on goods or services provided by the entity.
 Judgment may need to be applied by management to estimate the
transaction price if there is a degree of variability, such as the
consideration being based on timing or whether deadlines are met.

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4. ALLOCATING TRANSACTION
PRICE TO PERFORMANCE OBLIGATIONS

 Where a contract contains more than one distinct performance

obligation a company allocates the transaction price to all separate
performance obligations in proportion to the stand-alone selling price
of the good or service underlying each performance obligation

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5. RECOGNISING REVENUE AS
PERFORMANCE OBLIGATIONS MET

 Revenue is only recognised when a performance obligation is satisfied.

 A performance obligation is satisfied when the entity transfers a
promised good or service (ie an asset) to a customer.
 An asset is considered transferred when (or as) the customer obtains
control of that asset.
 Control of an asset refers to the ability to direct the use of, and obtain
substantially all of the remaining benefits from, the asset.
A performance obligation can be satisfied at a point in time eg goods being
delivered to a customer, or over a period of time eg construction of an
asset for a customer.

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 A performance obligation is satisfied over time if one of the
following criteria is met:
 The customer simultaneously receives and consumes the
benefits provided as they occur;

PERFORMANCE  The entity’s performance creates or enhances an asset that

the customer controls as the asset is created or enhanced;
OBLIGATIONS or
 The entity’s performance does not create an asset with an
SATISFIED OVER alternative use to the entity and the entity has an
enforceable right to payment for the performance
TIME completed to date.
An entity must determine the amounts to include as revenue in
each accounting period where performance obligations are
satisfied over time. This is done by measuring progress towards
completion of the performance obligation.

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PERFORMANCE OBLIGATIONS SATISFIED OVER TIME

Method to measure progress of performance obligations

Output methods:
Input methods:
Proportion of the work completed based
Proportion of work completed based on
on assessing how much of the finished
the inputs (eg costs) incurred to date
product is completed
• Resources consumed
• Surveys of performance completed to
• Labour hours expended
date
• Costs incurred
• Appraisals of results achieved
• Time elapsed
• Time elapsed
• Machine hours used
• Units produced or delivered

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PERFORMANCE OBLIGATIONS SATISFIED
OVER TIME

Examples include:
 Constructing a:
1. Bridge
2. Building
3. Dam
4. Ship

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PRESENTATION AND ACCOUNTING
ENTRIES

 Where the entity undertakes a contract with performance obligations

satisfied over time, such as construction of a building, the entity must
determine what to include as revenue and costs in each accounting
period.
 There may be either a contract asset or a contract liability in the
statement of financial position.
There are different ways that a contract with a customer may be presented
in the statement of financial position

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PRESENTATION AND ACCOUNTING ENTRIES

Statement of Description
financial
position

Receivable If an entity’s right to consideration is unconditional (only the passage of time is required before
payment is due), it should be recognised as a receivable (IFRS 15, para. 108).

Contract If a customer pays consideration or the entity has a right to an amount of consideration that is
liability unconditional (ie a receivable) before the entity transfers the goods or services to the customer,
the entity should present the contract as a ‘contract liability’ when the payment is made or falls
due (whichever is earlier) (IFRS 15, para. 106).

Contract asset If the entity transfers goods or services before the customer pays, it should present the
contract as a ‘contract asset’ if the entity’s right to consideration is conditional on something
other than the passage of time (eg the entity’s performance) (IFRS 15, para. 107).

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PRESENTATION AND ACCOUNTING
ENTRIES

Contract asset: A contract asset is recognized when revenue has been earned
but not yet invoiced (revenue that has been invoiced is a receivable).

Contract asset (presented separately under current assets) $

Revenue recognized (based on % certified to date) X
Less amounts invoiced to the customer to date (X)
Contract asset/(liability) X/(X)

Contract liability: A customer has paid prior to the entity transferring

control of the good or service to the customer.

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PRESENTATION AND ACCOUNTING
ENTRIES

 This is calculated as above. However, if the answer is a net amount

due to the customer, then this is included as a contract liability.
 The amount of revenue the entity is entitled to corresponds to the
amount of performance complete to date.

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COMMON TYPES OF TRANSACTIONS

IFRS 15 has specific guidance on different transactions, here we look at

some of the most common.
 Principal versus agent
 Sales with a right of return
 Consignment arrangements
 Bill and hold arrangements
 Warranties

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 When another party is involved in providing goods or services
to a customer, the entity shall determine whether the nature of
its promise is a performance obligation to provide the specified
goods/services itself, or to arrange for those goods or services
to be provided to the customer (IFRS 15: para. B34).

PRINCIPAL
VERSUS AGENT
  Indicators that an entity controls the goods or services
before transfer and therefore is classified as a principal
include (IFRS 15, para. B37):
PRINCIPAL (a) The entity is primarily responsible for fulfilling the
promise to provide the specified good or service;
VERSUS AGENT (b) The entity has inventory risk; and
(c) The entity has discretion in establishing the price for the
specified good or service.

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 An entity sells an item to a customer with a right or option
to repurchase. There are three forms of these:

SALES WITH A
RIGHT OF
RETURN
CONSIGNMENT ARRANGEMENTS

 The customer does not obtain control of the product at the delivery
date.
 The inventory remains in the books of the entity and revenue is not
recognised until control passes.

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BILL AND HOLD ARRANGEMENTS
 Goods are sold but remain in the possession of the seller for a specified
period of time. An entity will need to determine at what point the
customer obtains control of the product.
For a customer to have obtained control of a product in a bill and hold
arrangement the following criteria must be met:
(a) The reason for the bill and hold must be substantive.
(b) The product must be separately identified as belonging to the
customer.
(c) The product must be ready for physical transfer to the customer.
(d) The entity cannot have the ability to use the product or transfer it to
another customer.

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WARRANTIES

 If a customer has the option to purchase a warranty separately from

the product to which it relates, it constitutes a distinct service and is
accounted for as a separate performance obligation.
 This would apply to a warranty which provides the customer with a
service in addition to the assurance that the product complies with
agreed-upon specifications.
 If the customer does not have the option to purchase the warranty
separately, for instance if the warranty is required by law, that does not
give rise to a performance obligation and the warranty is accounted for
in accordance with IAS 37 Provisions, Contingent Liabilities and
Contingent Assets.

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