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  • Applying IFRS

    IFRS 15 Revenue from Contracts with Customers

    A closer look at the new revenue recognition standard (Updated October 2017)

  • Updated October 2017 A closer look at the new revenue recognition standard 2

    Overview

    The International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) (collectively, the Boards) respectively have issued largely converged new revenue standards: IFRS 15 Revenue from Contracts with Customers and Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers (created by Accounting Standards Update (ASU) 2014-09)1 (together with IFRS 15, the standards). These new

    revenue standards supersede virtually all legacy revenue recognition requirements in IFRS and US GAAP, respectively.

    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 the leasing standards.

    The standards also specify the accounting for costs an entity incurs to obtain and fulfil a contract to provide goods and 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.2

    As a result, the standards will likely affect an entitys financial statements,

    business processes and internal controls over financial reporting. While some entities will be able to implement the standard with limited effort, others may find implementation a significant undertaking. Successful implementation will require an assessment of and a plan for managing the change. Unless early adopting, IFRS preparers and US GAAP public entities, as defined, will need to apply the standards beginning in 2018 (see section 1.2).

    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 is needed on their new revenue standards. TRG members include financial statement preparers, auditors and users from a variety of industries, countries, as well as public and private entities. Members of the TRG met six times in 2014 and 2015. In January 2016, the IASB announced that it did not plan to schedule further meetings of the IFRS constituents of the TRG, but said it will monitor any discussions of the FASB TRG, which met in April and November 2016. The November 2016 meeting was the last scheduled FASB TRG meeting.

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

    they implement the new standards. In a recent public statement, the European

    Securities and Markets Authority (ESMA) encouraged issuers to consider

    the TRG discussions when implementing IFRS 15.3 Furthermore, the Chief

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

    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.4

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

    agreed at joint meetings in 2014, 2015 and at FASB-only TRG meetings in

    1 Throughout this publication, when we refer to the FASBs standard, we mean ASC 606 (including the

    recent amendments), unless otherwise noted. 2 Refer to our publication Applying IFRS: The new revenue standard affects more than just

    revenue (February 2015), available on ey.com/IFRS. 3 ESMA Public Statement: Issues for consideration in implementing IFRS 15: Revenue from

    Contracts with Customers, issued 20 July 2016, available on ESMA's website. 4 Speech by Wesley R. Bricker, 5 May 2016. Refer to SEC website at

    https://www.sec.gov/news/speech/speech-bricker-05-05-16.html

    http://www.ey.com/ifrshttp://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 October 2017 A closer look at the new revenue recognition standard

    2016 throughout this publication. Unless otherwise specified, these summaries

    represent the discussions of the joint TRG. TRG members representing IFRS

    constituents did not participate in the April 2016 and November 2016

    meetings. However, certain members of the IASB and its staff observed

    the meetings and, during subsequent Board meetings, the IASB received

    oral updates. Where possible, we indicate if members of the IASB or its staff

    commented on the FASB TRG discussions.

    In 2016, the Boards amended their respective standards to address several

    implementation issues raised by constituents, many of which had been

    discussed by the TRG. The Boards did not agree on the nature and breadth

    of all of the changes to their revenue standards. However, the Boards expect

    the amendments to result in similar outcomes in many circumstances (see

    section 1.1.2).

    This publication summarises the IASBs standard and highlights significant

    differences from the FASBs standard. It addresses all of the IASBs

    amendments, along with topics on which the members of the TRG reached

    general agreement. It also discusses our views on certain topics.

    We have also issued industry-specific publications that address significant

    changes to industry practice.5 We encourage preparers and users

    of financial statements to read this publication and the industry supplements

    carefully and consider the potential effects of the standard.

    The views we express in this publication may evolve as implementation

    continues and 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.

    5 Available at ey.com/IFRS.

    http://www.ey.com/ifrshttp://www.ey.com/GL/en/Issues/IFRS/IFRS-Overview

  • Updated October 2017 A closer look at the new revenue recognition standard 4

    Contents

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

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

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

    1.2 Effective date ............................................................................. 9

    1.3 Transition methods.................................................................... 11

    2. Scope ....................................................................................................... 26

    2.1 Other scope considerations ........................................................ 27

    2.2 Definition of a customer ............................................................. 28

    2.3 Collaborative arrangements ....................................................... 28

    2.4 Interaction with other standards ................................................. 29

    3. Identify the contract with the customer ................................................... 34

    3.1 Attributes of a contract ............................................................. 35

    3.2 Contract enforceability and termination clauses ........................... 42

    3.3 Combining contracts .................................................................. 45

    3.4 Contract modifications ............................................................... 48

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

    standard......................................................................................... 57

    4. Identify the performance obligations in the contract .............................. 60

    4.1 Identifying the promised goods and services in the contract .......... 60

    4.2 Determining when promises are performance obligations ............. 69

    4.3 Promised goods and services that are not distinct ........................ 88

    4.4 Principal versus agent considerations ......................................... 89

    4.5 Consignment arrangements ..................................................... 103

    4.6 Customer options for additional goods or services ...................... 104

    4.7 Sale of products with a right of return ....................................... 114

    5. Determine the transaction price............................................................. 115

    5.1 Presentation of sales (and other similar) taxes ........................... 116

    5.2 Variable consideration ............................................................. 117

    5.3 Refund liabilities ...................................................................... 132

    5.4 Accounting for specific types of variable consideration ............... 133

    5.5 Significant financing component ............................................... 138

    5.6 Non-cash consideration............................................................ 151

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