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© 2017 KPMG Lower Gulf Limited and KPMG LLP, operating in the UAE, member firms of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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ContentsCompany name: ABC

IFRS report: IFRS 15 diagnostic report

Month: December 2017

Glossary of abbreviations 3

Background about the entire exercise and how to read the report 4

Disclaimers 5

IFRS 15 potential impact areas - Summary 6

IFRS 15 potential impact areas - Detail 8


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Background about the exercise and how toread the reportBackground about the exercise

The International Accounting Standards Board has issued a new accounting standard on revenue (‘IFRS 15 Revenue from Contracts with Customers’) which is mandatory for the companies to comply when they prepare financial statements for annual periods beginning on or after 01 January 2018 (early application permitted).

The new revenue standard:

– Replaces the following revenue guidance: IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Constructionof Real Estate, IFRIC 18 Transfer of Assets to Customers, and SIC 31 Revenue-Barter Transactions Involving Advertising Services

– Introduces a five-step model that is likely to affect the way companies account for revenue

– Could impact the timing of revenue recognition; the profile of margin on contracts; contract negotiations with customers; debt covenants; and employee reward schemes

In order to assess the potential impact areas under IFRS 15, the company has used the KPMG IFRS Health Check, a simple online self-diagnostic tool and received this diagnosticreport based on the responses provided to the online assessment.

How to read the report

a) IFRS 15 potential impact areas – Summary

b) IFRS 15 potential impact areas – Detail


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IFRS 15 potential impact areasSummary

S.No Topic Sub-topic Applicable for you Potential impact

1 Scope

2 Step 1: Identify the contract with a customer Existence of a contract

Term of the contract

Combination of contracts

3 Step 2: Identification of performance obligations inthe contract

4 Step 3: Determination of transaction price Variable consideration (and the constraint)

Significant financing component

Noncash consideration

Consideration payable to a customer

5 Step 4: Allocation of the transaction price to theperformance obligations in the contract

Estimation and allocation of stand-alone sellingprices

Allocation of discount to performance obligations

Allocation of variable consideration to performanceobligations

6 Step 5: Recognise revenue when or as the entitysatisfies a performance obligation

Performance obligations satisfied over time

Method to measure progress for revenuerecognition over time

Performance obligation satisfied at a point in time

Repurchase agreements

Consignment arrangements

Bill-and-hold arrangements

Customer acceptance

7 Contract costs Costs of obtaining a contract

Costs of obtaining a contract

Amortisation

Impairment

8 Contract modifications Identification of contract modifications

Accounting for contract modifications

9 Licensing Sale of intellectual property (IP)

License of intellectual property (IP) - Distinct fromother goods or services

License of intellectual property (IP) - Timing andpattern of revenue recognition

10 Sales outside ordinary activities

11 Other issues Sale with a right of return

Warranties

Principal vs agent

Customer options for additional goods or services

Customer loyalty programs

Customers' unexercised rights (breakage)

Non-refundable upfront fees

Onerous contract


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IFRS 15 potential impact areasDetail

S.No Topic Sub-topic Key changes under IFRS 15 Applicable foryou

Potentialimpact

Key reasons

1 Scope The new standard applies to contracts todeliver goods or services to a customer. Itsguidance applies to contracts withcustomers in all industries. However, acontract with a customer is outside thescope of the new standard if it comesunder the scope of other specificrequirements. In some cases, the newstandard will be applied to part of a contractor, in certain circumstances, to a portfolio ofcontracts.

Comparison with current IFRS:

- Similar scope despite some differences inexplicit exemptionsIAS 18 includes specific scope exceptionsrelating to changes in the fair value ofbiological assets, the initial recognition ofagricultural produce, the extraction ofmineral ores, and changes in the value ofother current assets. The new standarddoes not explicitly include these scopeexemptions, but because these items donot arise from contracts with customersthey are also out of the scope of the newstandard.

- Guidance on dividends moved to financialinstruments standardThe new standard does not includeguidance on the accounting for dividendincome. Instead, guidance that is consistentwith existing requirements has beenincorporated into the financial instrumentsstandards.

The entity has some revenue-generatingcontracts (e.g. collaboration agreement,market sharing agreement, productionsharing agreement, etc.) which may notqualify as a contract with a customer for IFRS15 (out of scope of IFRS 15).

The alternative revenue program with theregulator will continue to be accounted forunder the applicable existing standards (IFRS15 will be applied by the rate-regulatedentities to their ordinary sales activities).

2 Step 1: Identify thecontract with acustomer

Existence of acontract

A contract with a customer is in the scopeof the new standard when the contractmeets the following criteria:- legally enforceable- collection of consideration is probable- rights to goods or services and paymentterms can be identified- has commercial substance; and- is approved and the parties arecommitted to their obligations

If the criteria are not met, the contract isnot in the scope of the new standard andany consideration received from thecustomer is generally recognised as aliability.


The definition of a contract in the newstandard focuses on legal enforceability.

The entity delivers goods or services tocustomers under the expired contract (till thenew contract is finalised) which may not belegally enforceable (may preclude revenuerecognition).

The entity has contracts with customers whohave deteriorated in their creditworthiness(e.g. bankrupt, defaulted dues, etc.) andhence collection of consideration may not beprobable (may preclude revenue recognitionand for ongoing contracts, revenuerecognition may be discontinued with noreversal of revenue recognised previously).

Term of thecontract

The new standard is applied to the durationof the contract (i.e. the contractual period)in which the parties to the contract havepresently enforceable rights andobligations. The determination of thecontract term is important because it mayaffect the measurement and allocation ofthe transaction price, the collectabilityassessment, the timing of revenuerecognition for up-front nonrefundable fees,contract modifications, and theidentification of material rights.

The entity has contracts with customers thatcan be terminated before the stated durationresulting in the contract term shorter than thestated duration under the contract (mayaffect different parts of IFRS 15 -measurement, allocation, timing of revenuerecognition for non-refundable upfront fees,identification of material rights, etc.).

Combination ofcontracts

Contracts entered into at or near the sametime with the same customer (or a relatedparty of the customer) are combined andtreated as a single contract when certaincriteria are met.


The new standard requires contracts to becombined (mandatory) when certain criteriaare met unlike the current standards (IAS11 or IAS 18) which require the entity onlyto consider for combination.


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S.No Topic Sub-topic Key changes under IFRS 15 Applicable foryou

Potentialimpact

11 Other issues Sale with a rightof return

An entity applies the accounting guidancefor a sale with a right of return when acustomer has a right to:– a full or partial refund of any considerationpaid;– a credit that can be applied againstamounts owed, or that will be owed, to theentity; or– another product in exchange (unless it isanother product of the same type, quality,condition, and price such as exchanging ared sweater for a white sweater).

In addition to product returns, the guidancealso applies to services that are providedsubject to a refund.

The guidance does not apply to:– exchanges by customers of one productfor another of the same type, quality,condition, and price; and– returns of faulty goods or replacements,which are instead evaluated under theguidance on warranties


- Net presentation no longer permittedUnder the new standard, the refund liabilityis presented gross as a refund liability andan asset for recovery. This will be a changein practice for entities that currently presentreserves or allowances for returns net.

Key reasons

The entity provides customer a right to return the good or service and hence needs to evaluate the appropriate guidance to apply(right of return vs. warranty) under the new revenue standard.

The entity replaces the good or service returned by the customer for refund of cash or credit or exchange with a different product (e.g. exchange of a red sweater for a white sweater) and hence the guidance on 'sale with a right of return' will become relevant instead of the guidance on 'warranty' under IFRS 15.

Warranties Under the new standard, an entity accountsfor a warranty or part of a warranty as aperformance obligation if:- the customer has an option to purchase

the warranty separately; or- additional services are provided as part of

the warranty.Otherwise, warranties will continue to beaccounted for under the existing guidance(IAS 37).


- Presence of warranty clause does notpreclude recognition of revenueUnder IAS 18, a standard warranty clause ina sales contract that does not result in theseller retaining significant risks does notpreclude revenue recognition at the date ofsale of the product. In this case, the entityrecognises a warranty provision under IAS37 at the date of sale, for the best estimateof the costs to be incurred for repairing orreplacing the defective products. However,an abnormal warranty obligationcould indicate that the significant risks andrewards of ownership have not beenpassed to the buyer, and that revenueshould therefore be deferred.Unlike current IFRS, the new standard doesnot envisage that the presence of awarranty would ever preclude therecognition of all of the revenue associatedwith the sale. This could accelerate revenuerecognition in some cases.


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