applying ifrs: a closer look at ifrs 15, the revenue ......updated september 2019 a closer look at...

Applying IFRS

A closer look at IFRS 15, the revenue recognition standardIFRS 15 Revenue from Contracts with Customers

(Updated September 2019)

Updated September 2019 A closer look at IFRS 15, the revenue recognition standard 2

Overview

The largely converged revenue standards, IFRS 15 Revenue from Contracts

with Customers and Accounting Standards Codification (ASC) 606, Revenue

from Contracts with Customers1 (together with IFRS 15, the standards), that

were issued in 2014 by the International Accounting Standards Board (IASB

or the Board) and the US Financial Accounting Standards Board (FASB)

(collectively, the Boards) provide accounting requirements for all revenue

arising from contracts with customers. They affect all entities that enter into

contracts to provide goods or services to their customers, unless the contracts

are in the scope of other IFRSs or US GAAP requirements, such as those

for leases. The standards, which superseded virtually all legacy revenue

requirements in IFRS and US GAAP, also specify the accounting for costs

an entity incurs to obtain and fulfil a contract to provide goods or services to

customers (see section 9.3) and provide a model for the measurement and

recognition of gains and losses on the sale of certain non-financial assets, such

as property, plant or equipment (see section 2.2.1).

As a result, entities that adopted the standards often found implementation to

be a significant undertaking. This is because the standards require entities to

make more judgements and estimates and they affect entities’ financial

statements, business processes and internal controls over financial reporting.

Following issuance of the standards, the Boards created the Joint Transition

Resource Group for Revenue Recognition (TRG) to help them determine

whether more application guidance was needed on the standards. TRG

members include financial statement preparers, auditors and other users from

a variety of industries, countries, as well as public and private entities.

Members of the joint TRG met six times in 2014 and 2015, and members of the

FASB TRG met twice in 2016.

TRG members’ views are non-authoritative, but entities should consider them as

they implement the standards. In its July 2016 public statement, the European

Securities and Markets Authority (ESMA) encouraged issuers to consider

the TRG discussions when implementing IFRS 15.2 Furthermore, the former

Chief Accountant of the US Securities and Exchange Commission (SEC)

encouraged SEC registrants, including foreign private issuers (that may report

under IFRS), to consult with his office if they are considering applying the

standard in a manner that differs from the discussions in which TRG members

reached general agreement.3

We have incorporated our summaries of topics on which TRG members generally

agreed throughout this publication. Unless otherwise specified, these summaries

represent the discussions of the joint TRG. Where possible, we indicate if

members of the IASB or its staff commented on the FASB TRG discussions.

This publication summarises the IASB’s standard (including all amendments)

and highlights significant differences from the FASB’s standard. It also

addresses topics on which the members of the TRG reached general agreement

and discusses our views on certain topics.

1 Throughout this publication, when we refer to the FASB’s standard, we mean ASC 606

(including the recent amendments), unless otherwise noted. 2 ESMA Public Statement: Issues for consideration in implementing IFRS 15: Revenue from

Contracts with Customers, issued 20 July 2016, available on ESMA's website. 3 Speech by Wesley R. Bricker, 5 May 2016. Available on the SEC’s website.

http://www.esma.europa.eu/sites/default/files/library/2016-1148_public_statement_ifrs_15.pdfhttps://www.sec.gov/news/speech/speech-bricker-05-05-16.html

3 Updated September 2019 A closer look at IFRS 15, the revenue recognition standard

While entities have adopted the standards, application issues may continue to

arise. Accordingly, the views we express in this publication may evolve as

additional issues are identified. The conclusions we describe in our illustrations

are also subject to change as views evolve. Conclusions in seemingly similar

situations may differ from those reached in the illustrations due to differences

in the underlying facts and circumstances. Please see ey.com/IFRS for our most

recent revenue publications.

http://www.ey.com/ifrs


Contents

Overview ................................................................................................................... 2

1. Objective, effective date and transition .................................................................. 7

1.1 Overview of the standard ......................................................................... 7

1.2 Effective date ......................................................................................... 8

1.3 Transition methods ................................................................................. 8

2. Scope .................................................................................................................. 37

2.1 Scope of IFRS 15 ................................................................................... 37

2.2 Other scope considerations .................................................................... 39

2.3 Definition of a customer ......................................................................... 41

2.4 Collaborative arrangements ................................................................... 42

2.5 Interaction with other standards ............................................................. 43

3. Identify the contract with the customer ............................................................... 54

3.1 Attributes of a contract ......................................................................... 55

3.2 Contract enforceability and termination clauses ....................................... 64

3.3 Combining contracts .............................................................................. 71

3.4 Contract modifications .......................................................................... 73

3.5 Arrangements that do not meet the definition of a contract under the

standard .................................................................................................... 86

4. Identify the performance obligations in the contract .......................................... 89

4.1 Identifying the promised goods or services in the contract ........................ 89

4.2 Determining when promises are performance obligations ........................ 101

4.3 Promised goods or services that are not distinct .................................... 128

4.4 Principal versus agent considerations ................................................... 129

4.5 Consignment arrangements ................................................................. 149

4.6 Customer options for additional goods or services .................................. 149

4.7 Sale of products with a right of return ................................................... 164

5. Determine the transaction price ........................................................................ 166

5.1 Presentation of sales (and other similar) taxes ....................................... 168

5.2 Variable consideration ......................................................................... 169

5.3 Refund liabilities ................................................................................. 191

5.4 Rights of return .................................................................................. 192

5.5 Significant financing component ........................................................... 197

5.6 Non-cash consideration ....................................................................... 213

5.7 Consideration paid or payable to a customer .......................................... 217

5.8 Non-refundable upfront fees ................................................................ 226

5.9 Changes in the transaction price ........................................................... 230

6. Allocate the transaction price to the performance obligations ............................ 231

6.1 Determining stand-alone selling prices .................................................. 231

6.2 Applying the relative stand-alone selling price method ............................ 248

6.3 Allocating variable consideration .......................................................... 251


6.4 Allocating a discount ........................................................................... 256

6.5 Changes in transaction price after contract inception ............................. 260

6.6 Allocation of transaction price to components outside the scope of

IFRS 15 .................................................................................................... 263

7. Satisfaction of performance obligations ............................................................. 265

7.1 Performance obligations satisfied over time .......................................... 266

7.2 Control transferred at a point in time .................................................... 304

7.3 Repurchase agreements ...................................................................... 312

7.4 Consignment arrangements ................................................................. 319

7.5 Bill-and-hold arrangements .................................................................. 320

7.6 Recognising revenue for licences of intellectual property ........................ 324

7.7 Recognising revenue when a right of return exists .................................. 324

7.8 Recognising revenue for customer options for additional goods or

services ................................................................................................... 324

7.9 Breakage and prepayments for future goods or services ......................... 325

8. Licences of intellectual property ........................................................................ 329

8.1 Identifying performance obligations in a licensing arrangement ............... 330

8.2 Determining the nature of the entity’s promise in granting a licence ........ 337

8.3 Transfer of control of licensed intellectual property ................................ 343

8.4 Licence renewals ................................................................................. 348

8.5 Sales-based or usage-based royalties on licences of intellectual property . 349

9. Other measurement and recognition topics ........................................................ 362

9.1 Warranties .......................................................................................... 362

9.2 Onerous contracts ............................................................................... 370

9.3 Contract costs .................................................................................... 372

10. Presentation and disclosure ............................................................................. 401

10.1 Presentation requirements for contract assets and contract liabilities .... 402

10.2 Presentation requirements for revenue from contracts with customers .. 411

10.3 Other presentation considerations ...................................................... 413

10.4 Disclosure objective and general requirements ..................................... 414

10.5 Specific disclosure requirements ........................................................ 415

10.6 Transition disclosure requirements ..................................................... 432

10.7 Disclosures in interim financial statements .......................................... 432

Appendix A: Extract from EY’s IFRS Disclosure Checklist ....................................... 433

Appendix B: Illustrative examples included in the standard and references in this

publication ............................................................................................................ 442

Appendix C: TRG discussions and references in this publication ............................. 446

Appendix D: IFRS IC discussions and references in this publication ......................... 449

Appendix E: Defined terms ..................................................................................... 451

Appendix F: Changes to the standard since issuance .............................................. 452

Appendix G: Summary of important changes to this publication ............................. 453

Appendix H: Summary of differences from US GAAP .............................................. 456


What you need to know

• IFRS 15 provides a single source of revenue requirements for all entities in

all industries. It represents a significant change from legacy IFRS.

• IFRS 15 applies to revenue from contracts with customers and replaced

all of the legacy revenue standards and interpretations in IFRS, including

IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer

Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real

Estate, IFRIC 18 Transfers of Assets from Customers and SIC-31 Revenue

– Barter Transaction involving Advertising Services.

• IFRS 15 is principles-based, consistent with legacy revenue requirements,

but provides more application guidance. The lack of bright lines requires

increased judgement.

• The standard may have had little effect on some entities, but may have

required significant changes for others, especially those entities for which

legacy IFRS provided little application guidance.

• IFRS 15 also specifies the accounting treatment for certain items not

typically thought of as revenue, such as certain costs associated with

obtaining and fulfilling a contract and the sale of certain non-financial

assets.


1. Objective, effective date and transition

1.1 Overview of the standard

The revenue standards the Boards issued in May 2014 were largely converged

and superseded virtually all legacy revenue recognition requirements in IFRS

and US GAAP, respectively. The Boards’ goal in joint deliberations was to

develop revenue standards that:4

• Remove inconsistencies and weaknesses in the legacy revenue recognition

literature

• Provide a more robust framework for addressing revenue recognition issues

• Improve comparability of revenue recognition practices across industries,

entities within those industries, jurisdictions and capital markets

• Reduce the complexity of applying revenue recognition requirements by

reducing the volume of the relevant standards and interpretations

• Provide more useful information to users through expanded disclosure

requirements

The standards provide accounting requirements for all revenue arising from

contracts with customers. They affect all entities that enter into contracts to

provide goods or services to their customers, unless the contracts are in the

scope of other IFRSs or US GAAP requirements, such as those for leases. The

standards also specify the accounting for costs an entity incurs to obtain and

fulfil a contract to provide goods or services to customers (see section 9.3) and

provide a model for the measurement and recognition of gains and losses on

the sale of certain non-financial assets, such as property, plant or equipment

(see section 2.2.1).

IFRS 15 replaced all of the legacy revenue standards and interpretations

in IFRS, including IAS 11 Construction Contracts, IAS 18 Revenue,

IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the

Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers

and SIC-31 Revenue – Barter Transactions Involving Advertising Services.5

After issuing the standards, the Boards have issued converged amendments on

certain topics (e.g., principal versus agent considerations) and different

amendments on other topics (e.g., licences of intellectual property). The FASB

has also issued several amendments that the IASB has not issued (e.g., non-

cash consideration, consideration payable). See Appendix F for a discussion of

the changes to the standards since issuance.

While we address the significant differences between the IASB’s final standard

and the FASB’s final standard throughout this publication, the primary purpose

of this publication is to describe the IASB’s standard, including all amendments

to date, and focus on the effects for IFRS preparers.6 As such, we generally

refer to the ‘standard’ in the singular.

1.1.1 Core principle of the standard

The standard describes the principles an entity must apply to measure and

recognise revenue and the related cash flows. The core principle is that an

4 IFRS 15 (2016).IN5. 5 IFRS 15.C10. 6 For more information on the effect of the new revenue standard for US GAAP preparers,

refer to our Financial Reporting Developments: Revenue from contracts with customers (ASC 606), Revised September 2019, available on EY AccountingLink.

http://www.ey.com/UL/en/AccountingLink/Accounting-Link-Home


entity recognises revenue at an amount that reflects the consideration to

which the entity expects to be entitled in exchange for transferring goods

or services to a customer.7

The principles in IFRS 15 are applied using the following five steps:

1. Identify the contract(s) with a customer

2. Identify the performance obligations in the contract

3. Determine the transaction price

4. Allocate the transaction price to the performance obligations in the

contract

5. Recognise revenue when (or as) the entity satisfies a performance

obligation

Entities need to exercise judgement when considering the terms of

the contract(s) and all of the facts and circumstances, including implied

contract terms. Entities also have to apply the requirements of the

standard consistently to contracts with similar characteristics and in similar

circumstances.8 To assist entities, IFRS 15 includes detailed application

guidance. The IASB also published more than 60 illustrative examples that

accompany IFRS 15. We list these examples in Appendix B to this publication

and provide references to where certain examples are included in this publication.

1.2 Effective date

IFRS 15 became effective for annual reporting periods beginning on or after

1 January 2018. Early adoption was permitted, provided that fact was

disclosed.

FASB differences

The FASB’s standard became effective for public entities, as defined, for

fiscal years beginning after 15 December 2017 and for interim periods

therein.9 Non-public entities (i.e., an entity that does not meet the definition

of a public entity in the FASB’s standard) are required to adopt the standard

for fiscal years beginning after 15 December 2018 and for interim periods

within fiscal years beginning after 15 December 2019. That is, non-public

entities are not required to apply the standard in interim periods in the year

of adoption.

US GAAP public and non-public entities were permitted to adopt the standard

as early as the original public entity effective date (i.e., fiscal years beginning

after 15 December 2016, including interim periods therein).

1.3 Transition methods (updated October 2018)

IFRS 15 requires retrospective application. However, it allows either a ’full

retrospective’ adoption (in which the standard is applied to all of the periods

7 IFRS 15.2. 8 IFRS 15.3. 9 The FASB’s standard defines a public entity as one of the following: A public business

entity (as defined); A not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed or quoted on an exchange or an over-the-counter market; An employee benefit plan that files or furnishes financial statements with the US SEC. An entity may meet the definition of a public business entity solely because its financial statements or financial information is included in another entity’s filing with the SEC. The SEC staff said it would not object if these entities adopt the new revenue standard using the effective date for non-public entities rather than the effective date for public entities.


presented) or a ‘modified retrospective’ adoption. See sections 1.3.2 and 1.3.3

below, respectively.

The following are the dates relevant to transition:

• The date of initial application – the start of the reporting period in which

an entity first applies IFRS 15.10 This date of initial application does not

change, regardless of the transition method that is applied. Examples of

dates of initial application for different year-ends include:

Year ending Date of initial application

31 December 2018 1 January 2018

30 June 2019 1 July 2018

• The beginning of the earliest period presented – the start of the earliest

reporting period presented within an entity’s financial statements for the

reporting period in which the entity first applies IFRS 15. This is relevant

for entities using the full retrospective adoption method. For example:

Beginning of the earliest period presented

Year ending (one comparative period)

(two comparative periods)

31 December 2018 1 January 2017 1 January 2016

30 June 2019 1 July 2017 1 July 2016

1.3.1 Definition of a completed contract (updated September 2019)

IFRS 15 defines a completed contract as a contract in which the entity has

fully transferred all of the goods or services identified in accordance with legacy

IFRS.11 Depending on the manner an entity elects to transition to IFRS 15, an

entity may not need to apply IFRS 15 to contracts if they have completed

performance before the date of initial application or the beginning of the

earliest period presented (depending on the practical expedient) (see

sections 1.3.2 and 1.3.3), even if they have not yet received the consideration

and that consideration is still subject to variability. Applying a completed

contract practical expedient might also affect an entity’s revenue recognition in

subsequent reporting periods. That is, if an entity applies a practical expedient

for completed contracts, it continues to apply its legacy revenue policy to its

completed contracts, instead of IFRS 15. In some cases, even though an entity

will have fully transferred its identified goods or services, there may still be

revenue to recognise in reporting periods after adoption of IFRS 15.

The IASB noted in the Basis for Conclusions that ‘transferred all of the goods

or services’ is not meant to imply that an entity would apply the ‘transfer of

control’ notion in IFRS 15 to goods or services that have been identified in

accordance with legacy IFRS. Rather, it is performance in accordance with

legacy requirements (i.e., those in IAS 11, IAS 18 and related Interpretations),

as noted in IFRS 15.BC441. “Consequently, in many situations the term

‘transferred’ would mean ‘delivered’ within the context of contracts for the sale

of goods and ‘performed’ within the context of contracts for rendering services

and construction contracts. In some situations, the entity would use judgement

when determining whether it has transferred goods or services to the

customer.”12

10 IFRS 15.C2(a). 11 IFRS 15.C2(b). 12 IFRS 15.BC445D.


Consider the following examples (assuming the modified retrospective

transition method is applied):

• Contract is completed — a retailer sold products to a customer on

31 December 2017, with immediate delivery. The customer has a poor

credit history. Therefore, the retailer required the customer to pay half

of the consideration upfront and half within 60 days. In accordance with

IAS 18, the retailer recognised half of the consideration at the time of

the sale. However, the retailer concluded it was not probable that it would

be able to collect the remainder and deferred recognition of this amount.

Because the goods were delivered prior to the date of initial application of

IFRS 15 (e.g., 1 January 2018) and collectability concerns were only the

reason for delaying recognition of revenue under IAS 18, the contract is

considered completed under IFRS 15 (see Question 1-5 below).

• Contract is not completed — an entity entered into a contract to provide

a service and loyalty points to a customer on 31 January 2017. In

accordance with IFRIC 13, the entity allocated a portion of the total

contract consideration to the loyalty points and deferred revenue

recognition until the points were exercised on 15 January 2018. The entity

completed the required service within six months and recognised revenue

related to the service over that period in accordance with IAS 18. As at

the date of initial application of IFRS 15 (e.g., 1 January 2018), the entity

had not yet performed in relation to the loyalty points. As a result, the

contract was not considered completed under IFRS 15 (see Question 1-7

below).

How we see it

As discussed above, determining which contracts are completed at transition

may require significant judgement, particularly if legacy IFRS did not provide

detailed requirements that indicated when goods had been delivered or

services performed (e.g., licences of intellectual property).

Entities should not consider elements of a contract that did not result in

recognition of revenue under legacy IFRS (e.g., warranty provisions) when

assessing whether a contract is complete.

FASB differences

The definition of a ‘completed contract’ is not converged between IFRS and

US GAAP. A completed contract under ASC 606 is defined as one for which

all (or substantially all) of the revenue was recognised in accordance with

legacy US GAAP that was in effect before the date of initial application.13

The different definitions could lead to entities having a different population

of contracts to transition to the revenue standards under IFRS and US GAAP,

respectively. However, the Board noted in the Basis for Conclusions that

an entity could avoid the consequences of these different definitions by

choosing to apply IFRS 15 retrospectively to all contracts, including

completed contracts.14

13 As defined in ASC 606-10-65-1(c)(2). 14 IFRS 15.BC445I.


Frequently asked questions

Question 1-1: Which elements of a contract must be considered when

determining whether a contract meets the definition of a completed

contract?

An entity must consider all of the elements (or components) in a contract

that give rise to revenue in the scope of legacy IFRS. It should not consider

the elements of a contract that do not result in recognition of revenue

(e.g., warranty provisions accounted for in accordance with IAS 37

Provisions, Contingent Liabilities and Contingent Assets) when assessing

whether a contract is complete.

For example, under legacy IFRS, an entity may have accounted for a

financing component (i.e., separating the interest income or expense

from the revenue). Doing so effectively split the contract into a revenue

component and a financing component. In our view, the financing component

would not be considered in determining whether the goods or services have

transferred to the customer (i.e., it would not affect the assessment of

whether the contract meets the definition of a completed contract).

In addition, income elements that are not within the scope of IFRS 15 need

not be considered. For example, IAS 18 applied to dividends and provided

guidance on the recognition of interest and fees integral to the issuance of

a financial instrument. None of these elements would be considered when

determining whether a contract meets the definition of a completed contract

for transition to IFRS 15. This is because:

• Dividends are not within the scope of IFRS 15.15

• The guidance that was previously included in the illustrative examples

to IAS 18 for fees integral to the issuance of a financial instrument is

now included within IFRS 9 Financial Instruments.16

• Interest income will continue to be accounted for in accordance with

the effective interest method as set out in IFRS 9.17

Question 1-2: Do the requirements in IFRS 15 for identifying a contract

(including contract duration) affect the identification of a contract under

legacy IFRS?

When determining whether a contract is completed, an entity considers

the requirements of legacy IFRS and not IFRS 15. In order to determine

whether a contract is completed, an entity needs to determine the boundaries

of a contract, including the term of the contract, whether it was combined

with other contracts, whether it was modified, etc. That is, an entity must

identify what is the contract in order to assess if it meets the definition of

a completed contract.

Considering the requirements of IFRS 15 could lead to different outcomes

from legacy IFRS. IFRS 15 provides detailed requirements to assist entities

in identifying a contract, including determining the contract duration.

These requirements are more detailed than legacy IFRS and could result in

outcomes that are different under IFRS 15 (e.g., an entity may conclude a

contract is of a shorter duration than the stated contractual term in certain

circumstances under IFRS 15. Refer to section 3.2 for further discussion).

15 IFRS 9.5.7.1A and IFRS.9.5.7.6. 16 IFRS 9.B5.4.1-B5.4.3. 17 IFRS 9 Appendix A, IFRS 9.5.4.1, IFRS 9.B5.4.1-B5.4.7.


Frequently asked questions (cont’d)

While legacy IFRS did not provide detailed requirements for identifying the

contract, accounting policies and an entity’s past practice may be informative

in identifying the contract, including determining: (a) what the entity

considered the contract to be (e.g., master supply agreement or individual

purchase orders); and (b) the contract duration (i.e., the stated contractual

term or a shorter period).

Consider the following examples:

Illustration 1-1 — Definition of completed contract: contract duration

Scenario 1

On 30 June 2016, Entity A entered into a contract with a customer to

provide services for 24 months. The customer was required to pay a fixed

monthly fee of CU150, which remained constant during the contract term

of 24 months, regardless of the time needed to provide the services or the

actual usage from the customer each day. The customer could cancel the

contract at any time without penalty by giving Entity A one month’s notice.

Entity A had not received any cancellation notice up to 1 January 2017

and, based on past experience, Entity A did not expect customers to cancel

within the first year. For this contract, Entity A concluded that the contract

duration under legacy IFRS was the stated contractual term of 24 months.

Entity A’s accounting policy for these types of contracts under IAS 18

stated that revenue from providing monthly services to customers was

recognised over the service period, on a monthly basis. While not explicitly

stated in its accounting policy, Entity A had typically treated the stated

contractual term as the duration of the contract (unless the customer

cancelled or the contract was modified), being the period over which the

contractual rights and obligations were enforceable.

Assume that Entity A adopts IFRS 15 on 1 January 2018 using the full

retrospective method. Entity A also uses the practical expedient in

IFRS 15.C5(a)(ii) not to restate contracts that meet the definition of

a completed contract, as defined in IFRS 15.C2(b), at the beginning of

the earliest period presented (i.e., 1 January 2017; Entity A presents

one comparative period only).

Under IFRS 15, Entity A is likely to conclude that the contract is a month-

to-month contract. However, when determining whether the contract is

completed, Entity A only considers legacy IFRS. Entity A might have noted

that its accounting policy under IAS 18 did not focus on the identification

of contract duration and, therefore, perhaps the contract is neither a 24-

month contract nor a month-to-month contract. Entity A had accounted

for this type of service contract based on monthly invoicing and, arguably,

that accounting treatment is similar to the accounting treatment of

a month-to-month contract. However, while not explicitly stated, Entity A

had generally viewed the stated contractual term as the period over which

the rights and obligations are enforceable.




(cont’d)

Furthermore, Entity A cannot cancel the contract with the customer and

is obliged to render services for the entire contract period of 24 months,

unless a termination notice is provided by the customer which would limit

Entity A’s obligation to provide services for the next 30 days from the

notification date. Since no cancellation notice had been submitted by

the customer at least one month before 1 January 2017, approximately

18 months of services still had to be provided as at the beginning of

the earliest period presented (i.e., 1 January 2017). Therefore, Entity A

concludes that the contract does not meet the definition of a completed

contract and would need to be transitioned to IFRS 15.

Scenario 2

Assume the same facts as Scenario 1, with the exception that the

customer submitted an early termination notice on 30 November 2016.

Similar to Scenario 1, the contract duration under legacy IFRS would have

been the stated contractual term of 24 months. However, in this scenario,

the customer has submitted the termination notice on 30 November 2016.

Therefore, Entity A concludes that the term of the contract ceased on

31 December 2016.

Entity A cannot cancel the contract with the customer and is obliged

to render services for the entire contract period of 24 months, unless

a termination notice is provided by the customer which limits Entity A’s

obligation to provide service for the next 30 days from the notification

date. Since Entity A had provided all services prior to 31 December 2016,

Entity A concludes that the contract is a completed contract. Entity A

continues to apply its legacy accounting policy (developed in accordance

with IAS 18) to any remaining consideration still to be recognised.

Scenario 3

Assume the same facts as Scenario 1, with the exception that the

customer was required to pay a non-refundable upfront fee of CU50

at commencement of the contract (in addition to the monthly fixed fee).

The customer can cancel the contract at any time without penalty, with a

month’s notice period. The customer cancelled the contract on

30 November 2016.

In its financial statements, Entity A’s accounting policy for these types of

contracts under IAS 18 stated that revenues from non-refundable upfront

fees were deferred over the average customer retention period. The

customer retention period was estimated to be two years. Therefore,

the deferred revenue was recognised as revenue on a straight-line basis

over the next 24 months.




(cont’d)

Similar to Scenario 2, the contract duration under legacy IFRS would have

been the stated contractual term of 24 months. However, the customer

had submitted the termination notice on 30 November 2016 and,

therefore, Entity A concludes that the term of the contract ceased on

31 December 2016.

Entity A’s legacy accounting policy for the non-refundable upfront fee

referred to recognition of deferred income over the average customer

retention period, not the contractual term. The definition of a completed

contract is not dependent on all revenue being recognised, but rather on

all goods and services being transferred to the customer. Furthermore,

the period over which revenue is recognised does not affect the contract

duration. As such, recognition of this upfront fee is not relevant in

determining whether the contract is a completed contract. All previously

contracted services had been provided to the customer up to the date of

cancellation. Therefore, the contract is a completed contract.

Entity A continues applying its legacy accounting policy (developed

in accordance with IAS 18) to any remaining consideration still to be

recognised. However, given that the customer has terminated the contract

early, Entity A needs to reassess, in line with the requirements of IAS 18,

the period over which this remaining revenue arising from the non-

refundable upfront fee would be recognised.

Question 1-3: When determining whether an entity has ‘transferred all

goods or services’, does it consider the requirements of IFRS 15 for

‘transfer of control’?

No. The IASB noted in the Basis for Conclusions that ‘transferred all of

the goods or services’ is not meant to imply that an entity would apply the

‘transfer of control’ notion in IFRS 15 to goods or services that have been

identified in accordance with legacy IFRS. Rather, an entity is required to

determine whether it has transferred all the goods or services in accordance

with the requirements in legacy IFRS, as noted in IFRS 15.BC441 (see

Question 1-4 below).

“Consequently, in many situations the term ‘transferred’ would mean

‘delivered’ within the context of contracts for the sale of goods and

‘performed’ within the context of contracts for rendering services and

construction contracts. In some situations, the entity would use judgement

when determining whether it has transferred goods or services to the

customer”.18

18 IFRS 15.BC445D.



Question 1-4: If some or all of revenue has not been recognised under

legacy IFRS, would that prevent the contract from being completed?

Possibly. The definition of a completed contract is not dependent on an entity

having recognised all related revenue. However, the requirements in legacy

IFRS with respect to the timing of recognition may provide an indication of

whether the goods or services have been transferred.

IAS 18 provided the following five criteria, all of which needed to be satisfied

in order to recognise revenue from the sale of goods:19

• The entity had transferred to the buyer the significant risks and rewards

of ownership of the goods.

• The entity retained neither continuing managerial involvement to the

degree usually associated with ownership nor effective control over

the goods sold.

• The amount of revenue could be measured reliably.

• It was probable that the economic benefits associated with the

transaction would flow to the entity.

• The costs incurred or to be incurred in respect of the transaction could

be measured reliably.

IAS 18 viewed the passing of risks and rewards as the most crucial of the five

criteria, giving the following four examples of situations in which an entity

may have retained the significant risks and rewards of ownership:20

• When the entity retained an obligation for unsatisfactory performance

not covered by normal warranty provisions.

• When the receipt of the revenue from a particular sale was contingent

on the derivation of revenue the buyer from its sale of the goods.

• When the goods were shipped subject to installation and the installation

was a significant part of the contract which had not yet been completed

by the entity.

• When the buyer had the right to rescind the purchase for a reason

specified in the sales contract and the entity was uncertain about the

probability of return.

Understanding the reasons for the accounting treatment under legacy IFRS

may, therefore, assist entities in determining whether the goods or services

have been transferred and the completed contract definition has been met.

However, judgement may be needed in respect of some goods or services.

Assume, for example, that an entity sells products, but cannot recognise

revenue immediately. The delayed recognition of revenue may be because of

factors related to the timing of transfer, such as a bill-and-hold arrangement,

or because the goods or services have been transferred, but not all of the

criteria for recognition have been met.

19 IAS 18.14. 20 IAS 18.16.



Question 1-5: If collectability concerns delayed recognition of revenue

under legacy IFRS, would that prevent the contract from being completed?

If collectability concerns were the only reason for delaying recognition

of revenue under legacy IFRS (i.e., because it was not probable that the

economic benefits associated with the transaction would flow to the entity),

it would not prevent a contract from meeting the definition of a completed

contract. However, it is important to ensure that this was the only reason for

the delay in recognition. Consider the following examples:

Illustration 1-2 — Definition of completed contract: collectability

Scenario 1

In November 2016, Entity A entered into a contract with a customer to

deliver 1,000 products with immediate delivery. Because of the customer’s

poor credit history, Entity A agreed that the customer could pay for 60%

of the products on the date of delivery and the remaining 40% within

60 days of the delivery date. Under its previous accounting policy (in

accordance with IAS 18.14), Entity A only recognised revenue for 60%

of the consideration and deferred recognition of the remaining 40% until

it was probable that this amount would be collected (provided the other

criteria in IAS 18.14 were met). Collectability of the remaining 40% of

the consideration became probable at the end of January 2017.

Assume that Entity A adopts IFRS 15 on 1 January 2018 and uses

the full retrospective method to transition. Entity A also uses the practical

expedient in IFRS 15.C5(a)(ii) not to restate contracts that meet the

definition of a completed contract, as defined in IFRS 15.C2(b), at the

beginning of the earliest period presented.

At the beginning of the earliest period presented (i.e., 1 January 2017;

Entity A presents one comparative period only), Entity A had transferred

all goods identified in the contract by delivering 1,000 products to the

customer and had recognised 60% of the revenue. Although Entity A

could only partially recognise the revenue from the sale of the 1,000

products (because it was not probable whether it would collect 40% of

the consideration), this does not affect the determination of whether the

identified goods were transferred to the customer. Therefore, Entity A

considers the contract as completed. Entity A continues to account for

the contract in accordance with its legacy accounting policy (developed in

accordance with IAS 18).

Scenario 2

In January 2016, Entity A entered into a contract with a customer to

construct a highly specialised system on the customer’s premises that

was expected to be completed within 11 months. The consideration of

CU100,000 took into account the particularities of the customer’s specific

premises. The repayment schedule corresponded to the performance

completed to date and Entity A applied the percentage of completion

method in accordance with IAS 11.25, recognising revenue in the

accounting period in which the relevant services were rendered.



Illustration 1-2 — Definition of completed contract: collectability

(cont’d)

Upon completion of the highly specialised system, Entity A had collected

the consideration of CU100,000 and recognised an equal amount as

revenue. However, in October 2016, while executing the construction

activities, Entity A incurred unexpected additional costs to adjust the initial

design of the highly specialised system due to certain changes in the

customer’s premises that had not been communicated at contract

inception. Entity A filed a claim for these unexpected costs, requesting an

increase in the consideration of CU1,000. The construction was completed

in November 2016. In February 2017, Entity A agreed with its customer to

settle the claim at an amount of CU500 to be paid within three months.

Assume that Entity A adopts IFRS 15 on 1 January 2018 and uses the full

retrospective method to transition. Entity A also uses the practical




At the beginning of the earliest period presented (i.e., 1 January 2017),

Entity A had transferred all goods and services identified in the contract by

completing the construction and delivering the highly specialised system

to the customer. The fact that Entity B had submitted a claim for additional

consideration for the identified goods and services that had already been

transferred to the customer is not relevant when determining whether

the identified goods or services have been transferred. Therefore, Entity A

considers the contract as completed. Entity A continues to account for

the contract in accordance with its legacy accounting policy (developed in

accordance with IAS 11).

Question 1-6: When did legacy IFRS consider licences to be transferred?

Legacy IFRS provided limited guidance to assist entities in determining when

a licence of intellectual property was transferred (i.e., when the significant

risks and rewards of ownership of the licence transferred to the customer in

accordance with IAS 18.14(a)). Therefore, entities need to use significant

judgement to determine whether a contract involving the licence of

intellectual property meets the definition of a completed contract.

IAS 18.33 stated that "royalties accrue in accordance with the terms of the

relevant agreement and are usually recognised on that basis unless, having

regard to the substance of the agreement, it is more appropriate to recognise

revenue on some other systematic and rational basis”. IAS 18.IE20 stated

that “fees and royalties paid for the use of an entity’s assets (such as

trademarks, patents, software, music copyright, record masters and motion

picture films) are normally recognised in accordance with the substance of

the agreement. As a practical matter, this may be on a straight-line basis over

the life of the agreement, for example, when a licensee has the right to use

certain technology for a specified period of time … In some cases, whether or

not a licence fee or royalty will be received is contingent on the occurrence of



a future event. In such cases, revenue is recognised only when it is probable

that the fee or royalty will be received, which is normally when the event has

occurred.”

Since the guidance provided in this paragraph and the illustrative examples to

IAS 18 focused on the recognition of revenue, it may be difficult to determine

when the entity transferred the significant risks and rewards of ownership to

the customer. If an entity has recognised revenue over time under legacy

IFRS, it needs to carefully assess the reason for this treatment.

It may be helpful to assess whether or not there were remaining or ongoing

obligations related to the licence, as discussed in IAS 18.IE20:

• If the licence of intellectual property was an in-substance sale and there

were no remaining obligations to perform, it is likely that the significant

risks and rewards of ownership transferred to the customer at the time of

sale.

As discussed in IAS 18.IE20: “An assignment of rights for a fixed fee or

non-refundable guarantee under a non-cancellable contract which

permits the licensee to exploit those rights freely and the licensor has

no remaining obligations to perform is, in substance, a sale. An example

is a licensing agreement for the use of software when the licensor has

no obligations subsequent to delivery. Another example is the granting

of rights to exhibit a motion picture film in markets where the licensor

has no control over the distributor and expects to receive no further

revenues from the box office receipts. In such cases, revenue is

recognised at the time of sale.”

• In all other instances, an entity needs to use judgement to determine

when the licensee could exploit the rights under the licence freely and the

licensor had no remaining obligations to perform. This may be helpful in

understanding whether the ongoing obligations mean that the significant

risks and rewards of ownership did not pass at a single point in time, but

over a period of time. Furthermore, this assessment could help in

determining whether it is over the entire licence period or a shorter

period and might include considering factors such as:

• The reason that the contract is cancellable (if applicable)

• The nature of any restrictions over use of the intellectual property.

For example, whether it is a characteristic of the licence itself (e.g.,

the countries covered by the licence) or restricts the licensor’s

ability to use the rights received (e.g., the licensor cannot use the

intellectual property before a specified date)

• The nature of any remaining obligations and the period in/over which

those obligations apply



Consider the following examples:

Illustration 1-3 — Definition of completed contract: licences

Scenario 1

On 1 January 2016, Entity A entered into a three-year contract that

granted rights to exhibit a film at cinemas and allowed for multiple

showings within a specific period for a non-refundable upfront fee of

CU9,000. The delivery of the film was the only activity that Entity A was

obliged to perform in the contract and there was no further involvement

or other obligations for Entity A. The film was delivered to the customer

on 1 January 2016 and Entitly A concluded that the significant risks and

rewards of ownership transferred on that date.

Entity A’s legacy IFRS accounting policy for this type of contracts stated

that revenue was recognised in full upon commencement of the licence

period, because that was the first point at which the customer had the

risks and rewards of ownership and all the criteria for revenue recognition

were met at that date.


retrospective method to transition. Entity A also uses the practical




According to Entity A’s previous accounting policy, revenue was

recognised in full upon commencement of the licence period (i.e., on

1 January 2016) and Entity A had no further involvement beyond that

point. Therefore, at the beginning of the earliest period presented

(i.e., 1 January 2017), the contract is completed. Entity A continues to

account for the contract in accordance with its legacy accounting policy

(developed in accordance with IAS 18).

Scenario 2

Assume the same facts as Scenario 1, with the exception that the fee

was contingent upon the occurrence of a future event, specifically the

purchase price was based on a percentage of the box office receipts during

the stated contract term (i.e., three years).

Entity A concluded that the significant risks and rewards of ownership

transferred to the customer on 1 January 2016, when the film was

delivered.

The existence of a sales-based royalty earned over the two-year period

after adoption of IFRS 15 does not affect the timing of transfer to the

customer because Entity A had no further obligations to perform. The

licence fee is contingent on box office receipts. In such cases, IAS 18.IE20

stated that “revenue is recognised only when it is probable that the fee or

royalty will be received, which is normally when the event has occurred.”



Illustration 1-3 — Definition of completed contract: licences (cont’d)

However, this does not give rise to an additional obligation for Entity A.

Therefore, it does not affect the timing of transfer to the customer.

Therefore, at the beginning of the earliest period presented

(i.e., 1 January 2017), the contract is completed. Entity A continues to

account for the contract in accordance with its legacy accounting policy

(developed in accordance with IAS 18).

Scenario 3

Assume the same facts as Scenario 1, with the exception that, along

with the delivery of the film, Entity A supported the promotion of the films

through promotional and marketing campaigns for a period of 18 months

after the film was delivered to the customer.

Entity A’s legacy IFRS accounting policy for this type of contracts stated

that “promotional and marketing campaigns are not separately identifiable

components in a contract in which it grants rights to exhibit and broadcast

films. Revenue is recognised as the promotional and marketing campaigns

are performed on a straight-line basis over the period of the licence.”

Entity A concluded that, while the film was delivered on 1 January 2016,

the significant risks and rewards of ownership of the deliverable (i.e., the

film and services, together) did not transfer to the customer until the

services were provided (i.e., 30 June 2017).

The contract included multiple components because Entity A had to

provide promotional support services in addition to the delivery of the

licence. However, Entity A had considered IAS 18.13 and determined that

these services were not separately identifiable components to which

revenue needed to be allocated. Instead, revenue was recognised for both

the licence and the promotional support services during the licence period,

as Entity A provided the services.

The contract is not considered completed because Entity A had to transfer

additional services after transferring the right to exhibit the film. The fact

that Entity A had not separately allocated the consideration to each

component in the contract did not relieve it from its obligations to

undertake the promotional activities over the following 18 months.

Therefore, at the beginning of the earliest period presented

(i.e., 1 January 2017), Entity A still had to perform and provide the

remaining promotional support services to the customer up to 30 June

2017. Accordingly, the contract does not meet the definition of a

completed contract. The contract needs to be transitioned to IFRS 15.



Question 1-7: When did legacy IFRS consider loyalty points to be

transferred?

Under legacy IFRS, an entity would not have ‘transferred’ loyalty points

granted to a customer until the points were redeemed or expired.

Entities need to carefully assess their loyalty programmes as points typically

arose from several contracts with the same customer(s). Since IFRIC 13

required that such programmes be treated as a revenue element in a

contract, rather than a cost accrual, a contract would not be considered

complete until the loyalty points arising from that contract have been

redeemed or have expired.

Entities that operate loyalty programmes may face practical challenges in

determining which contracts gave rise to unexpired and unused loyalty

points and, therefore, which contracts are not yet completed (and must be

transitioned to IFRS 15). Some entities may have data within their systems

that assist them in identifying those contracts for each customer. However,

if an entity has not specifically tracked such information by customer,

the terms and conditions of the loyalty programme may assist entities in

understanding whether/when points expire, in order to identify the likely

timing of the original transaction that gave rise to the point(s). Furthermore,

it may help to understand whether the entity used a first-in-first-out approach

to the utilisation of loyalty points or some other approach.

Consider the following example:

Illustration 1-4 — Definition of completed contract: loyalty

programmes

Entity A sells goods to retail customers. The customers can enter into

a loyalty programme such that when they purchase goods, they receive

1 loyalty point for every CU100 spent on goods purchased from Entity A.

Customers can redeem their accumulated loyalty points for discounts

on future purchases from Entity A. When redeemed, 1 point entitles the

customer to a CU1 discount, which is assumed to be the fair value of each

loyalty point. Points awarded expire in two years from the award day.

Entity A recognises revenue from sales of goods when customers buy

them at the point of sale. According to IFRIC 13, Entity A allocated the fair

value of the consideration received or receivable in respect of the initial

sale between the award points and the initial good sold.

On 1 November 2016, Entity A sold CU10,000 worth of goods and granted

100 loyalty points to a customer. Using a relative fair value approach,

Entity A allocated CU9,901 to the sale of goods and CU99 to the loyalty

points. The revenue from the sale of goods was recognised immediately.

However, revenue recognition for the loyalty points was deferred until the

points were exercised or expired. On 1 January 2017, the customer had

not used the points.


retrospective approach to transition. Entity A also uses the practical





Illustration 1-4 — Definition of completed contract: loyalty

programmes (cont’d)

beginning of the earliest period presented (i.e., 1 January 2017; Entity A

presents one comparative period only).

As at the beginning of the earliest period presented, Entity A concludes

that the loyalty points have not yet been exercised or expired.

At the beginning of the earliest period presented (i.e., 1 January 2017),

Entity A had delivered the goods to the customer that triggered the award

of the unredeemed loyalty points. However, at that date, Entity A had

not yet performed in relation to the loyalty points that represented a

separately identifiable component of the initial sale transaction in which

they were granted. Therefore, the contract does not meet the definition

of a completed contract. The contract needs to be transitioned to IFRS 15.

1.3.2 Full retrospective adoption (updated October 2018)

Entities electing the full retrospective adoption must apply the provisions of

IFRS 15 to each period presented in the financial statements, in accordance

with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors,

subject to the practical expedients created to provide relief, as discussed below.

Extract from IAS 8

Applying changes in accounting policies

19. Subject to paragraph 23:

(a) an entity shall account for a change in accounting policy resulting from

the initial application of an IFRS in accordance with the specific

transitional provisions, if any, in that IFRS; and

(b) when an entity changes an accounting policy upon initial application of

an IFRS that does not include specific transitional provisions applying to

that change, or changes an accounting policy voluntarily, it shall apply

the change retrospectively.

20. For the purpose of this Standard, early application of an IFRS is not

a voluntary change in accounting policy.

21. In the absence of an IFRS that specifically applies to a transaction, other

event or condition, management may, in accordance with paragraph 12,

apply an accounting policy from the most recent pronouncements of other

standard-setting bodies that use a similar conceptual framework to develop

accounting standards. If, following an amendment of such a pronouncement,

the entity chooses to change an accounting policy, that change is accounted

for and disclosed as a voluntary change in accounting policy.


Extract from IAS 8 (cont’d)

Retrospective application

22. Subject to paragraph 23, when a change in accounting policy is applied

retrospectively in accordance with paragraph 19(a) or (b), the entity shall

adjust the opening balance of each affected component of equity for the

earliest prior period presented and the other comparative amounts disclosed

for each prior period presented as if the new accounting policy had always

been applied.

Limitations on retrospective application

23. When retrospective application is required by paragraph 19(a) or (b),

a change in accounting policy shall be applied retrospectively except to the

extent that it is impracticable to determine either the period-specific effects

or the cumulative effect of the change.

24. When it is impracticable to determine the period-specific effects of

changing an accounting policy on comparative information for one or more

prior periods presented, the entity shall apply the new accounting policy

to the carrying amounts of assets and liabilities as at the beginning of the

earliest period for which retrospective application is practicable, which may

be the current period, and shall make a corresponding adjustment to the

opening balance of each affected component of equity for that period.

25. When it is impracticable to determine the cumulative effect, at the

beginning of the current period, of applying a new accounting policy to all

prior periods, the entity shall adjust the comparative information to apply

the new accounting policy prospectively from the earliest date practicable.

26. When an entity applies a new accounting policy retrospectively, it applies

the new accounting policy to comparative information for prior periods as

far back as is practicable. Retrospective application to a prior period is not

practicable unless it is practicable to determine the cumulative effect on the

amounts in both the opening and closing statements of financial position

for that period. The amount of the resulting adjustment relating to periods

before those presented in the financial statements is made to the opening

balance of each affected component of equity of the earliest prior period

presented. Usually the adjustment is made to retained earnings. However,

the adjustment may be made to another component of equity (for example,

to comply with an IFRS). Any other information about prior periods, such

as historical summaries of financial data, is also adjusted as far back as is

practicable.

27. When it is impracticable for an entity to apply a new accounting policy

retrospectively, because it cannot determine the cumulative effect of

applying the policy to all prior periods, the entity, in accordance with

paragraph 25, applies the new policy prospectively from the start of the

earliest period practicable. It therefore disregards the portion of the

cumulative adjustment to assets, liabilities and equity arising before that

date. Changing an accounting policy is permitted even if it is impracticable to

apply the policy prospectively for any prior period. Paragraphs 50–53 provide

guidance on when it is impracticable to apply a new accounting policy to one

or more prior periods.


Under the full retrospective method, entities have to apply IFRS 15 as if it

had been applied since the inception of all its contracts with customers that

are presented in the financial statements. That is, an entity electing the full

retrospective method has to transition all of its contracts with customers

to IFRS 15 (subject to the practical expedients described below), not just

those that are not considered completed contracts as at the beginning of the

earliest period presented. This means that for contracts that were considered

completed (as defined) before the beginning of the earliest period, an entity still

needs to evaluate the contract under IFRS 15 in order to determine whether

there was an effect on revenue recognised in any of the years presented in the

period of initial application (unless an entity elects to use one of the practical

expedients described below).

During deliberations on the original standard, the IASB seemed to prefer the full

retrospective method, under which all contracts with customers are recognised

and measured consistently in all periods presented within the financial

statements, regardless of when the contracts were entered into. This method

also provides users of the financial statements with useful trend information

across all periods presented.

However, to ease the potential burden of applying it on a fully retrospective

basis, the IASB provided the following practical expedients:

Extract from IFRS 15

C3. An entity shall apply this Standard using one of the following two

methods:

(a) retrospectively to each prior reporting period presented in accordance

with IAS 8 Accounting Policies, Changes in Accounting Estimates and

Errors, subject to the expedients in paragraph C5; or

…

C5. An entity may use one or more of the following practical expedients when

applying this Standard retrospectively in accordance with paragraph C3(a):

(a) for completed contracts, an entity need not restate contracts that:

(i) begin and end within the same annual reporting period; or

(ii) are completed contracts at the beginning of the earliest period

presented.

(b) for completed contracts that have variable consideration, an entity may

use the transaction price at the date the contract was completed rather

than estimating variable consideration amounts in the comparative

reporting periods.


Extract from IFRS 15 (cont’d)

(c) for contracts that were modified before the beginning of the earliest

period presented, an entity need not retrospectively restate the contract

for those contract modifications in accordance with paragraphs 20-21.

Instead, an entity shall reflect the aggregate effect of all of the

modifications that occur before the beginning of the earliest period

presented when:

(i) identifying the satisfied and unsatisfied performance obligations;

(ii) determining the transaction price; and

(iii) allocating the transaction price to the satisfied and unsatisfied

performance obligations.

(d) for all reporting periods presented before the date of initial application,

an entity need not disclose the amount of the transaction price allocated

to the remaining performance obligations and an explanation of when the

entity expects to recognise that amount as revenue (see paragraph 120).

C6. For any of the practical expedients in paragraph C5 that an entity uses,

the entity shall apply that expedient consistently to all contracts within all

reporting periods presented. In addition, the entity shall disclose all of the

following information:

(a) the expedients that have been used; and

(b) to the extent reasonably possible, a qualitative assessment of the

estimated effect of applying each of those expedients.

While the practical expedients provide some relief, an entity still needs to use

judgement and make estimates. For example, an entity needs to use judgement

in estimating stand-alone selling prices when there has been a wide range of

selling prices and when allocating the transaction price to satisfied and

unsatisfied performance obligations if there have been several performance

obligations or contract modifications over an extended period. Furthermore,

if an entity applies the practical expedient for contract modifications, it is still

required to apply the standard’s contract modification requirements (see

section 3.4) to modifications made after the beginning of the earliest period

presented under IFRS 15 (e.g., modifications made after 1 January 2017 for an

entity with a 31 December year-end that adopts the standard using the full

retrospective method and presents one comparative period only).

Illustration 1-5 — Transition practical expedient for contract

modifications

Entity A entered into a contract with a customer to sell equipment for

CU1 million and provide services for five years for CU20,000 annually.

The equipment was delivered on 1 January 2013 and the service contract

commenced at that time. The equipment and the service contract are separate

performance obligations.

In 2015, the contract was modified to extend it by five years and to provide

an additional piece of equipment for CU1 million. The additional equipment

will be delivered during 2018 and is a separate performance obligation.

Entity A elects to apply the practical expedient on contract modifications in

accordance with IFRS 15.C5(c).


Illustration 1-5 — Transition practical expedient for contract

modifications (cont’d)

The total transaction price for the modified contract is CU2,200,000

[CU1 million (equipment) + CU1 million (equipment) + (10 years x CU20,000

(service))], which is allocated to the two products and the service contract

based on the relative stand-alone selling price of each performance

obligation. See section 6 for discussion on allocating the transaction price

to performance obligations.

The transaction price allocated to the second piece of equipment and the

remaining unperformed services would be recognised when or as they are

transferred to the customer.

FASB differences

The FASB’s standard includes a similar practical expedient for contract

modifications at transition for entities that elect to apply the full

retrospective method. Entities would also apply the FASB’s practical

expedient to all contract modifications that occur before the beginning

of the earliest period presented under the standard in the financial

statements. However, this could be a different date for IFRS preparers

and US GAAP preparers depending on the number of comparative periods

included within an entity’s financial statements (e.g., US GAAP preparers

often include two comparative periods in their financial statements) and

whether an entity is a public or non-public entity for US GAAP purposes (see

section 1.2).

Unlike IFRS 15, the FASB’s standard does not allow an entity that uses the

full retrospective method to apply ASC 606 only to contracts that are not

completed (as defined) as at the beginning of the earliest period presented.

An entity that elects to apply the standard retrospectively must also provide

the disclosures required in IAS 8, as follows:

Extract from IAS 8

Disclosure

28. When initial application of an IFRS has an effect on the current period or

any prior period, would have such an effect except that it is impracticable to

determine the amount of the adjustment, or might have an effect on future

periods, an entity shall disclose:

(a) the title of the IFRS;

(b) when applicable, that the change in accounting policy is made in

accordance with its transitional provisions;

(c) the nature of the change in accounting policy;

(d) when applicable, a description of the transitional provisions;

(e) when applicable, the transitional provisions that might have an effect

on future periods;


Extract from IAS 8 (cont’d)

(f) for the current period and each prior period presented, to the extent

practicable, the amount of the adjustment.

(i) for each financial statement line item affected; and

(ii) if IAS 33 Earnings per Share applies to the entity, for basic and

diluted earnings per share;

(g) the amount of the adjustment relating to periods before those presented,

to the extent practicable; and

(h) if retrospective application required by paragraph 19(a) or (b) is

impracticable for a particular prior period, or for periods before those

presented, the circumstances that led to the existence of that condition

and a description of how and from when the change in accounting policy

has been applied.

Financial statements of subsequent periods need not repeat these

disclosures.

An entity must make the above disclosures in the period in which a new

standard is applied for the first time. Financial statements in subsequent periods

need not repeat the required disclosures. The IASB provided some additional

relief from disclosures (through optional practical expedients) for an entity that

elects to apply IFRS 15 on a fully retrospective basis. Although permitted to

do so, an entity need not present the quantitative information required by

IAS 8.28(f) for periods other than the annual period immediately preceding

the first annual period for which IFRS 15 is applied (the ‘immediately preceding

period’).

Frequently asked questions

Question 1-8: Does an entity have to apply elected practical expedients to

all periods and to all contracts?

Yes. Entities may elect to apply none, some, or all of the practical expedients.

However, if an entity elects to use a practical expedient, it must apply it

consistently to all contracts within all periods presented under IFRS 15. It

would not be appropriate to apply the selected practical expedient to some,

but not all, of the periods presented under IFRS 15. Entities that choose to

use some, or all, of the practical expedients are required to provide additional

qualitative disclosures (i.e., the types of practical expedients the entity has

applied and the likely effect of their application).21

Question 1-9: If an entity is able to exclude from transition those contracts

that are completed (e.g., because it applies one of the optional practical

expedients), how does it account for those completed contracts?

Depending on the way in which an entity adopts IFRS 15, it may be able to

exclude contracts that meet the definition of a completed contract from the

population of contracts to be transitioned to IFRS 15 (i.e., it would not

need to restate those contracts). This is illustrated in section 1.3.1 in

Illustrations 1-1 through 1-4.

21 IFRS 15.C6.



The Basis for Conclusions clarifies that “if an entity chooses not to apply IFRS

15 to completed contracts in accordance with paragraph C5(a)(ii) or

paragraph C7, only contracts that are not completed contracts are included

in the transition to IFRS 15. The entity would continue to account for the

completed contracts in accordance with its accounting policies based on

legacy IFRS”.22

For example, an entity might elect to apply the standard retrospectively

using the full retrospective method and use the practical expedient in

IFRS 15.C5(a)(ii) not to restate contracts that meet the definition of a

completed contract at the beginning of the earliest period presented

(i.e., 1 January 2017 for an entity with a 31 December year-end that

presents one comparative period only). Therefore, the entity also does not

record an asset for incremental costs to obtain contracts under IFRS 15 (see

section 9.3.1) that meet the definition of a completed contract as at the

beginning of the earliest period presented. Furthermore, any assets or

liabilities related to completed contracts that are on the balance sheet prior

to the date of the earliest period presented continue to be accounted for

under legacy IFRS after the adoption of IFRS 15. Note that a similar optional

practical expedient is available under the modified retrospective method (see

section 1.3.3).

1.3.3 Modified retrospective adoption (updated October 2018)

The standard provides the following requirements for entities applying the

modified retrospective transition method:

Extract from IFRS 15

C3. An entity shall apply this Standard using one of the following two

methods:

(a) …

(b) retrospectively with the cumulative effect of initially applying this

Standard recognised at the date of initial application in accordance with

paragraphs C7–C8.

…

C7. If an entity elects to apply this Standard retrospectively in accordance

with paragraph C3(b), the entity shall recognise the cumulative effect of

initially applying this Standard as an adjustment to the opening balance of

retained earnings (or other component of equity, as appropriate) of the

annual reporting period that includes the date of initial application. Under this

transition method, an entity may elect to apply this Standard retrospectively

only to contracts that are not completed contracts at the date of initial

application (for example, 1 January 2018 for an entity with a 31 December

year-end).

22 IFRS 15.BC445E.


Extract from IFRS 15 (cont’d)

C7A. An entity applying this Standard retrospectively in accordance with

paragraph C3(b) may also use the practical expedient described in

paragraph C5(c), either:

(a) for all contract modifications that occur before the beginning of the

earliest period presented; or

(b) for all contract modifications that occur before the date of initial

application.

If an entity uses this practical expedient, the entity shall apply the expedient

consistently to all contracts and disclose the information required by

paragraph C6.

C8. For reporting periods that include the date of initial application, an entity

shall provide both of the following additional disclosures if this Standard is

applied retrospectively in accordance with paragraph C3(b):

(a) the amount by which each financial statement line item is affected in the

current reporting period by the application of this Standard as compared

to IAS 11, IAS 18 and related Interpretations that were in effect before

the change; and

(b) an explanation of the reasons for significant changes identified in C8(a).

Entities that elect the modified retrospective method apply the standard

retrospectively to only the most current period presented in the financial

statements (i.e., the initial period of application). To do so, the entity has to

recognise the cumulative effect of initially applying IFRS 15 as an adjustment

to the opening balance of retained earnings (or other appropriate components

of equity) at the date of initial application.

How we see it

When an entity applies the modified retrospective method, there is no effect

on the statement of financial position as at the beginning of the preceding

period (third statement of financial position according to IAS 1.40A).

Furthermore, IFRS 15 does not require an entity to provide restated

comparative information in its financial statements or in the notes to

the financial statements (e.g., disaggregated revenue disclosures in the

comparative period) under this method. Therefore, we believe the inclusion

of a third statement of financial position as at that date is not required.

Under this method, IFRS 15 is applied either to all contracts at the date

of initial application (e.g., 1 January 2018 for an entity with a 31 December

year-end, see section 1.2 above) or only to contracts that are not completed at

this date. Depending on how an entity elects to apply the modified retrospective

method, it has to evaluate either all contracts or only those that are not

completed before the date of initial application, as if the entity had applied the

standard to them since inception. An entity is required to disclose how it has

ap

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