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IFRS 15 Revenue from contracts with customers
1 Overview
This policy is based on IFRS 15 Revenue from contracts with customers effective from 1
January 2018.
The core principle of the policy is that an entity recognizes revenue to represent the transfer
of promised goods or services to customers, reflecting the amount of consideration to which
an entity expects to be entitled in exchange for those goods or services.
The policy focuses on the identification of performance obligations and distinguishes
between performance obligations satisfied “at a point in time” and those satisfied “over time”,
which is determined by the manner, control of goods or services, passes to the customer.
The policy should be applied consistently to contracts with similar characteristics and in
similar circumstances. The entity shall recognize revenue by applying the five step model in
order to meet the standards core principles and ensure a consistent approach. All of the five
steps in the model should be considered for every contract with a customer, unless the step
is clearly not applicable.
1.1 Individual contract or a portfolio approach
The standard allows a practical expedient, the five steps can be applied to a portfolio of
contracts with similar characteristics provided that it is reasonably expected that the effects
on the financial statements of applying a portfolio approach will not differ materially from
applying IFRS 15 to the individual contracts within that portfolio. When accounting for a
portfolio, estimates and assumptions that reflect the size and composition of portfolio should
be used, applying the five step model as explained in the following chapters.
An entity will need to exercise significant judgment in segregating its contracts into portfolios
with similar characteristics at a level with sufficient granularity to ensure that the outcome of
using a particular portfolio approach is not expected to differ materially from applying the
requirements of the standard to each individual contract.
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1.2 The five step model
The first step in the five step model is to identify whether a contract exists and meets
specified criteria. Entities are required to account for a contract with a customer that is within
the scope of IFRS 15 only when five requirements as specified in step 1 are met.
A contract is out of scope of the policy if one or more of the five requirements are not met, or
if the contract is wholly unperformed and each party can unilaterally terminate the contract
without compensation.
The second step is to identify all performance obligations in the contract.
The goods or services that will be transferred to the customer are usually explicitly stated in
the contract. The performance obligations identified in a contract with a customer are not
limited to the goods or services that are explicitly stated in the contract, this is referred to as
implicit offers. Implicit offers are promises that are implied by the entity’s customary business
practices, published policies or specific statements that raise valid expectation of the
customer that the entity will transfer such goods or services.
The entity hence has to identify all the explicit, the explicit but offered for free (non-prized)
and the implicit offers as performance obligations.
The third step is to determine the transaction price, which is the amount of consideration to
which an entity expects to be entitled in exchange for transferring promised goods or
services to a customer. The estimate of transaction price will be affected by the nature,
timing and amount of consideration promised by the customer. In determining the transaction
price the following effects have to be considered using certain methods:
a) Variable consideration
b) Significant financing component in the contract
c) Non-cash consideration
d) Consideration payable to a customer
The fourth step is to allocate the transaction price to each performance obligation identified in
step 3. The amounts allocated should represent the consideration to whom which the entity
expects to be entitled in exchange for transferring the performance obligations to the
customer.
The entity is required to allocate the transaction price to each identified performance
obligation on a relative stand-alone selling price basis. This means that each performance
obligation will be allocated its share of revenue based on its stand-alone selling price put in
relation to the sum of all performance obligations stand-alone selling price.
The fifth step is to recognize revenue when the entity satisfies a performance obligation by
transferring a promised goods or service to the customer. An asset is transferred when the
customer obtains control of the asset hence revenue can be recognized. Control of an asset
refers to the ability to direct the use of, and obtain substantially all of the remaining benefits
from the asset.
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The starting point is to identify if revenue should be recognized over time or not. When any of
the following criteria are met it demonstrates that an entity is transferring control of a good or
service over time:
1. The customer simultaneously receives and consumes the benefit of the entity’s
performance as the entity performs; or
2. The entity’s performance creates or enhances an asset controlled by the customer; or
3. The entity’s performance creates an asset with no alternative use to the entity and the
entity has an enforceable right to be paid for performance completed to date
If a performance obligation is not satisfied over time it is satisfied point in time, transfer of
control is indicated by any of the below criteria:
1. Present right to payment
2. Legal title of goods and services
3. Transferred physical possession
4. Significant risks and rewards of ownership
5. The customer has accepted the asset
1.3 Certain aspects to consider in five step model
Contract modifications
Contract can sometimes be modified due to additional quantity or added number of products.
Revenue from modified contracts should be recognized in different manners depending on
the modification, such as additional quantity but to a price below stand-alone selling price.
Such modification causes the existing contract to be terminated. The new contract created
should take into account the un-performed parts from the terminated contract and the
additional ordered services or goods.
Contract costs
Contract costs refer to cost to obtain a contract and costs to fulfill a contract. These costs can
under certain conditions be reported as a contract asset (non-fixed asset) and periodized
over the contract period.
Licensing
Licenses provided to a customer can either be recognized over time or point in time due to
the level of integration needed. In many cases other services than a license is often provided
such as installation, support and updates. All these aspect of the license agreement needs to
be considered when judging the timing of recognizing revenue.
Repurchase clauses
Customers are sometimes offered the option to sell back the bought equipment to pre-
determined price at a certain date in the future. Such clauses need extra attention since the
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transfer of control might not have taken place. This is the case when a customer has a
significant economic incentive to exercise that option (the repurchase price is considered
being at market price level or higher at the contracted date of possible return). The revenue
from that contract shall than be recognized as an operational lease according to IFRS16
Leases.
Further details on revenue recognition according to Sandvik’s policy are found in the
chapters to follow.
2 Introduction
This policy is based on IFRS 15 Revenue from contracts with customers effective from 1
January 2018.
3 Scope
The policy should be applied to all contracts with customers excluding those who fall in the
following categories:
Lease contracts – see IFRS 16 Leases applicable from 1 January 2019
Insurance contracts – see IFRS 4 Insurance contracts
Financial instruments - see IFRS 9 Financial Instruments applicable from 1 January
2018
Non-monetary exchanges between entities in the same line of business to facilitate
sales to customers
4 Definitions
Below follows definitions of terms in the policy.
A contract is defined as “an agreement (either in writing, orally or in accordance with other customary business practices) between two or more parties that creates enforceable rights and obligations”.
Practical expedient is synonymous to a relief, an exception for practical reasons.
Contract inception the effective date of the contract.
A performance obligation is defined as a promise in a contract with a customer to transfer to the customer a distinct goods or services.
Implicit offers is defined as promises that are implied by the entity’s customary business practices, published policies or specific statements that raise valid expectation of the customer that the entity will transfer such a good or service (even though it is not explicitly stated in contract).
Consideration is synonymous to remuneration , in return for something, reward, anything given or promised by one in exchange for the promise of another.
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Cost are expected to be recovered
means that the contract costs are part of a break-even or profitable contract.
The stand-alone selling price of a good or service
is defined as “the price at which an entity would sell a promised good or service separately to a customer”.
Probable means that a threshold of higher than 50 percent is reached.
Highly probable means that a threshold of 80 percent or higher is reached.
A contract asset is defined as “an entity’s right to consideration in exchange for goods or services that the entity has transferred to the customer when that right is conditioned on something other than the passage of time”. It is reported as a non-fixed asset in the short term, variable asset section of the balance sheet.
A contract liability is defined as “an entity’s obligation to transfer goods or services to the customer for which the entity has received consideration from the customer”. It is reported as a non-loan asset in the short term, variable liability section of the balance sheet.
5 Matters of materiality
The revenue policy includes several practical expedients that Sandvik have chosen to apply
in order to avoid unnecessary administrative burden. The standard also includes several
thresholds, probabilities and levels of significance to be considered, in order to only
recognizing revenue adjustments that are expected not to be reversed. This will as well
reduce the administrative burden. An entity has to make sure that those expedients,
probabilities and levels of significance are properly applied to avoid administration of petty
revenue adjustments.
The expedients, probabilities and levels of significance are to be applied by all entities
without exception.
In other matters of materiality concerning revenue recognition the entity has to consider how
an external party would view the effect of applying a level of materiality (on all concerned
contracts). The entities financial performance shall be viewed as unaffected by the applied
materiality threshold.
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6 Recognition of revenue from contracts with customers
The core principle of the policy is that an entity recognizes revenue to represent the transfer
of promised goods or services to customers, reflecting the amount of consideration to which
an entity expects to be entitled in exchange for those goods or services.
The revenue standard focuses on the identification of performance obligations and
distinguishes between performance obligations satisfied “at a point in time” and those
satisfied “over time”, which is determined by the manner, control of goods or services passes
to the customer.
The policy should be applied consistently to contracts with similar characteristics and in
similar circumstances.
The entity shall recognize revenue by applying the five step model below in order to meet the
standards core principles and ensure a consistent approach. All of the five steps in the model
should be considered for every contract with a customer, unless the step is clearly not
applicable.
6.1 Principal versus agent
When another party is involved in providing the goods or services to a customer, the entity
should determine whether the nature of its promise is a performance obligation to provide the
specified goods or services itself (a principal) or to arrange for the other party to provide
those goods or services (an agent).
An entity is an agent if the performance obligation is to arrange for the provision of goods or
services by another party. The entity acting as an agent recognizes either the commission or
the net amount of consideration that the entity retains after paying the other party the
consideration received in exchange for the goods or services transferred.
Indication that an entity is an agent includes the following:
a) Another party is primarily responsible for fulfilling the contract;
b) The entity does not have any inventory risk at any point during the contract;
c) The entity does not have discretion in establishing prices for the other party’s goods
or services;
d) The entity’s consideration is in the form of a commission;
e) The entity is not exposed to any credit risk for the amount receivable from a customer
in exchange for the other party’s goods or services.
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When an entity determines in accordance with the above that it provides goods or services
as a principal, it should recognize revenue (gross amounts), according to the five-step model
below.
Example A – Entity acting as an agent
An entity, within the Mining industry, enters into a contract with a customer to supply three
rock tool machines. The contract stipulates that the entity should on behalf of the customer
organize the over-sea transportation with the customers transporter located in the region. It is
agreed that the cost for the transportation should be included on the invoice to the customer
with an agreed mark-up of 10 percent covering the entity’s administration costs. The control
of the equipment is agreed in the contract to have taken place FOB shipping point, control is
transferred to the customer when equipment has been loaded on the sea carrier.
The entity considers the criteria of being an agent in relation to the transportation and
identifies the following as being applicable:
The transporter is primarily responsible for fulfilling the performance obligation of taking the
equipment over-seas.
The entity does not have the discretion in establishing the price for the over-seas
transportation since it is a given by the contract between the customer and the transporter.
The entity’s consideration is in the form of a commission (the net between the transportation
cost and the agreed mark-up).
The entity concludes that it should treat the recognition of revenue related to the
transportation being an agent, hence recognize it as commission (the net of the invoiced
amount and the transportation cost) when the transportation is organized.
6.2 Portfolio approach – a practical expedient
IFRS 15 specifies the accounting for an individual contract with a customer, the standard
allows as a practical expedient that it can be applied to a portfolio of contracts with similar
characteristics provided that it is reasonably expected that the effects on the financial
statements of applying a portfolio approach will not differ materially from applying IFRS 15 to
the individual contracts within that portfolio.
When accounting for a portfolio, estimates and assumptions that reflect the size and
composition of portfolio should be used, applying the five step model explained in the
following chapters.
An entity will need to exercise significant judgment in segregating its contracts into portfolios
with similar characteristics at a level with sufficient granularity to ensure that the outcome of
using a particular portfolio approach is not expected to differ materially from applying the
requirements of IFRS 15 to each individual contract.
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In segregating contracts into portfolios with similar characteristics, an entity should apply
objective criteria associated with the particular contracts or performance obligations and their
accounting consequences.
Objective criteria that might be used (but not limited to):
Contract deliverables different mix of products and services, options to acquire additional goods and services, warranties etc
Contract duration short-term, long-term
Terms and conditions of the contract rights of return, shipping terms, bill and hold arrangement, consignment stock, cancellation privileges
Amount, form and timing of consideration fixed, time and material, variable, upfront fees, significant financing component
Characteristics of the customer Size, type, creditworthiness, geographical location, sales channel
Characteristics of the entity Volume of contracts that include different characteristics, historical information available
Timing of transfer of goods or services over time or point in time
Example A – applying the portfolio approach
An entity within Sandvik have analyzed its contracts and concluded that some revenue
streams are built up on standardized contracts in big volume. The entity decides to see if
they can segregate that/those revenue streams into portfolios. The first revenue stream
concerns contracts containing inserts sold to local customers, price list is applied, point in
time (ex works) and with a general volume discount of three percent, paid out annually. The
entity has solid historical information on the volume rebates credited to the customers.
The entity concludes that applying an estimate of potential volume rebates on the portfolio of
contracts will not differ from reviewing each and every contract to achieve the same
adjustment of recognized revenue. The timing of revenue will also be accurate since the
control transfers to the customer in similar fashion for all contracts.
The entity establishes a revenue recognition template for the identified portfolio of contracts
applying the five step model. The template will then be applied to the portfolio of contracts.
6.3 Step 1 - Identify the contract
The first step in the five step model is to identify whether a contract exists and meets
specified criteria. Entities are required to account for a contract with a customer that is within
the scope of IFRS 15 only when all the below criteria are met:
1. The contract has been approved by the parties, and the parties are committed to
perform their respective obligations. An approved contract means either in writing,
orally or in accordance with other customary business practices. If a written contract
is being prepared and not yet being signed by the parties, this might itself be an
indication that the contract not yet has been approved.
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2. The entity can identify each party’s rights regarding the goods or services to be
transferred.
3. The entity can identify the payment terms for the goods or services to be transferred.
4. Commercial substance.
5. It is probable that the entity will collect the consideration to which it will be entitled in
exchange for the goods or services to be transferred to the customer.
A contract is out of scope of IFRS 15 if one or more of the above requirements are not
met or if the contract is wholly unperformed and each party can unilaterally terminate the
contract without compensation. The contract can then neither be recognized as order
intake nor as revenue.
6.3.1 Reassessing the criteria for identifying a contract
If the criteria set out above, in chapter 6.3 Step 1 – Identify the contract, are met at
contract inception, the entity should not reassess those unless there is an indication of a
significant change in facts and circumstances. For example, if a customer’s ability to pay
the consideration deteriorates significantly, an entity would reassess whether it is
probable that the entity will collect the consideration.
If the customers fall below the threshold of 50 percent probability of collecting the
consideration the entity should cease to recognize revenue and impair any contract
assets in line with IFRS9 Financial Instruments.
6.3.2 Combining contracts
Two or more contracts entered into at or near the same time with the same customer
should be combined and accounted for as a single contract if one or more of the following
criteria are met:
a) The contracts are negotiated as a package with a single commercial objective
b) The amount of consideration to be paid in one contract is dependent on the price
or performance of the other contract; or
c) The goods or services promised in the contracts (or some of the goods or
services promised in each of the contracts) are a single performance obligation.
6.4 Step 2 - Identifying performance obligations
At this stage the purpose is to identify all performance obligations in the contract.
The goods or services that will be transferred to the customer are usually explicitly stated in
the contract. However, the performance obligations identified in a contract with a customer
are not limited to the goods or services that are explicitly stated in the contract, this is
referred to as implicit offers. Implicit offers are promises that are implied by the entity’s
customary business practices, published policies or specific statements that raise valid
expectation of the customer that the entity will transfer such a good or service.
The entity hence has to identify all the explicit, the explicit but offered for free (non-prized)
and the implicit offers as performance obligations.
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Example A – Explicit promise of service
An entity sells inserts to a distributor, the entity promises to provide a performance review for
no additional consideration (for free) to any party that purchased the product from the
distributor. Because the promise of a performance review is a promise to transfer goods or
services in the future and is part of the negotiated exchange between the entity and the
distributor, the entity determines that the promise to provide performance reviews is a
performance obligation. The entity allocates a portion of the transaction price to the promise
to provide performance reviews.
Example B – Implicit promise of service
An entity has historically provided performance reviews for no additional consideration (for
free) to end customers that purchase the entity’s inserts from the distributor. The entity does
not explicitly promise performance reviews during negotiations with the distributor and the
final contract does not specify such terms or conditions for those reviews. However, on basis
of its customary business practice, the entity determines at contract inception that it has
made an implicit promise to provide performance reviews as part of the negotiated exchange
with the distributor. The entity identifies the promise of performance reviews as a
performance obligation to which it allocates a portion of the transaction price.
6.4.1 Distinct goods or services
In order to identify if a performance obligation should be recognized individually both the
following criteria have to be met:
a) The customer can benefit from the goods or services either on its own or together
with other resources that are readily available to the customer, and
b) The entity’s promise to transfer the good or service to the customer is separately
identifiable from other promises in the contract.
When considering the criteria b) above, factors that indicate that an entity’s promise to
transfer goods or services to a customer is separately identifiable include:
a) The entity does not provide a significant service of integration of the good or service
with other goods or services promised in the contract into a bundle of goods or
services that represent the combined output for which the customer has contracted.
b) The good or service does not significantly modify or customize another good or
service promised in the contract
c) The good or service is not highly dependent on or highly interrelated with other goods
or services promised in the contract.
If the top two criteria are met, the promise is distinct and a performance obligation exist, that
shall be recognized individually.
Example – Distinct goods or services
An entity, within the Mining industry, enters into a contract with a customer to supply a drill rig
including commissioning. The entity sells the drill rig and the commissioning separately. The
commissioning includes checking fuel, oil levels, tire pressure, mounting of inserts and a test
drive to control that the drill rig is ready to be used. The commissioning is routinely performed
by other entities and does not modify the drill rig in any aspect. The drill rig remains
functional without the commissioning.
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The entity assesses the goods and services promised to the customer to determine which
goods and service are distinct in line with chapter 5.3.1 Distinct goods or services. The entity
concludes that the customer can benefit from each of the goods and services either on their
own or together with other readily available goods and services.
The promise to transfer each good and service to the customer is separately identifiable from
each other to the other promises in the contract.
In particular, the entity observes that the commissioning does not significantly modify or
customize the drill rig itself, and the drill rig and commissioning are separate outputs
promised by the entity instead of inputs used to produce a combined output.
The entity concludes that it has two distinct performance obligations, the drill rig and the
commissioning respectively.
6.4.2 Goods or services that are not distinct
If the above test indicates that the entity’s promise to transfer good or service to a customer
is not distinct, an entity combines that good or service with other promised goods or services
until it identifies a bundle of goods or services that is distinct.
Example – Significant customization
The promised goods and services are the same as in example Distinct goods or services
above, except that the contract stipulates that, in addition, a critical software installation and
customization in the drill rig should be performed which without the drill rig can’t operate
according to specifications. The installation and customization of the software can be
provided by other entities.
The entity observes that the terms of the contract result in a promise to provide a significant
service of integration of the licensed software in order for the drill rig to perform according to
promises.
Although the installation and customization can be performed by other entities, the entity
determines that within the context of the contract the promise of installation and
customization of the software in the drill rig is not separately identifiable from delivering the
drill rig itself, since without the installation and customization of software it will not work
according to specifications.
The entity concludes that it has two distinct performance obligations, the drill rig including the
installation and customization of software and the commissioning respectively.
6.4.3 Special considerations in Step 2 - Identifying performance obligations
Some promises in a customer contract need special attention in order to properly identify it
as a performance obligation.
6.4.3.1 Warranties
In the case of warranties, see below, the promise can fall under two standards, either IFRS
15 Revenue from contracts with customers or IAS 37 Provisions, Contingent Liabilities and
Contingent Assets or in a combination of both.
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Assurance type warranties
Some warranties provide the customer with assurance that the related product will function
as the parties intended because it complies with agreed upon specifications (an assurance
type of warranty). Such a warranty should be accounted for in accordance with IAS 37
Provisions, Contingent Liabilities and Contingent Assets, see policy xxx.
Service type warranties
Other warranties provide the customer with a service in addition to the assurance that the
product complies with agreed upon specifications (a service type warranty). When the
customer can purchase such a warranty separately, the warranty is a distinct service
because the entity has promised to provide that service in addition to the product that has the
functionality described in the contract. Under such circumstances, the promised warranty is
accounted for as a separate performance obligation. This will require a portion of the
transaction price to be allocated to the warranty service provided.
Identification of type of warranties
The following criteria can be used to help identifying the type of warranty:
a) If the entity is required by law to provide warranty, the existence of that law indicates
that the warranty is an assurance type of warranty and is not a performance
obligation.
b) The longer the coverage period, the more likely it is that a service-type warranty
exists and should be identified as a distinct service.
In some cases the customer has purchased a warranty as a distinct service in addition to a
warranty that cannot be purchased separately, and then both standards apply to its
respective warranty.
Example – Warranties
An entity, within the stainless steel industry, enters into a contract with a customer to supply
a set of tubes, including a warranty that assures that the goods complies with agreed-upon
specifications and will operate as promised for one year from the date of purchase. In
addition, the customer is also provided with an extension of the existing warranty with a
guarantee of having any specification related issue solved within 24 hours. The entity sells
the tubes and the extended warranty separately.
The entity assess the promise to provide warranties and observes that it offers two
warranties, one of assurance type and one of service type. It concludes that the assurance
type warranty does not provide the customer with a good or service in addition to that
assurance and therefore does not account for it as a performance obligation. The service
type warranty on the other hand provides the customer with a distinct service and is
considered a performance obligation.
The entity allocates the transaction price to the two performance obligations (the tubes and
the service type warranty). The assurance type of warranty is accounted for in accordance
with IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
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6.4.3.2 Customer options for additional goods and services
Customers can sometimes be offered an option of buying additional goods or services at a
discount or for free. This option can be provided as sales incentives, customer award credits,
contract renewal options or other discounts on future goods or services. This optional right
should be considered a distinct performance obligation when it provides a material right to
the customer. A material right is defined as a right that the customer would not have received
without entering into that contract.
If the option provides the customer with a material right, the customer is in effect paying the
entity in advance for future goods and services. The entity should then defer the recognition
of revenue allocated to that option until those goods or services are transferred or the option
expires.
6.4.3.3 Stand-ready obligations
A stand-ready obligation should also be considered a distinct performance obligation if such
a commitment exist in the contract. A stand ready obligation can be allocation of production
capacity, staff being on call or any other resource in control of the entity that is or will come
available to the customer.
6.5 Step 3 - Determine the Transaction price
The transaction price is the amount of consideration to which an entity expects to be entitled
in exchange for transferring promised goods or services to a customer. The consideration
might include fixed amounts, variable amounts or both. Both the terms of the contract and
the entity’s customary business practices (implicit offers) needs to be considered.
The estimate of transaction price will be affected by the nature, timing and amount of
consideration promised by the customer. In determining the transaction price the following
effects have to be considered:
e) Variable consideration
f) Significant financing component in the contract
g) Non-cash consideration
h) Consideration payable to a customer
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6.5.1 Variable consideration
If the consideration includes a variable amount, the entity is required to estimate the amount
of consideration to which it will be entitled in exchange for the promised goods or services.
Examples of variable considerations are the following:
a) Cash discounts
b) Volume rebates
c) Right of return
d) Refunds
e) Credits
f) Price concessions
g) Incentives
h) Performance bonuses
i) Penalties
If any of the above aspects are present in the contract, explicitly or implicitly, either of two
different methods shall be used to estimate the consideration the entity is entitled to.
a) The Expected value method – this method may be appropriate when the entity has a
large number of contracts with similar characteristics. The outcome is calculated as
the sum of probability weighted amounts in a range of possible considerations.
b) The Most likely amount – this maybe appropriate when a contract has only two
possible outcomes. It is the single most likely amount in a range of possible
consideration amounts. (The amount received is based on whether a performance
bonus is achieved or not).
Then the entity shall determine if it is highly probable that a significant revenue reversal will
not occur in the future.
An entity has to consider certain aspects when assessing the likelihood of a reversal, such
as:
a) The amount of consideration is highly susceptible to factors outside the entity’s
influence
b) The uncertainty about the timing of consideration is not expected to be resolved in a
long time.
c) The experience with similar types of contracts is limited or has limited predictable
value.
d) The entity has a practice of offering a broad range of price concessions.
e) There are a large number and broad range of possible consideration amounts within
the contract.
f) If it is highly probable that a significant revenue reversal will not occur in the future the
variable consideration should be taken into account and reduce the consideration the
entity is entitled to.
Comment [JE1]: You need to apply it in the following order:
1.Estimate the consideration to which the entity is entitled to (expected value method or most likely amount method) 2.Determine that is it highly probable that a significant revenue reversal will not occur on the estimated consideration
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6.5.1.1 Reassessment of variable consideration
The estimated transaction price is updated at the end of each reporting period to represent
the circumstances present at the end of the reporting period and any changes in
circumstances during the reporting period. The changes to the estimated transaction prices
due to variable consideration should be adjusted in line with chapter 5.6.2.2 Allocation of
variable consideration.
Example – Variable consideration
An entity enters into a contract with a customer to build a customized asset. The promise to
transfer the asset is a performance obligation that is satisfied over time. The promised
consideration is CU 2 500 000, which will be invoiced when the delivery is approved by the
customer. The consideration will be reduced or increased depending on the timing of the
completion of the asset. For each day after 31 of March 20x7 that the asset is incomplete,
the promised consideration is reduced by CU 10 000. For each day before 31 March 20x7
that the asset is completed, the promised consideration increases by CU 10 000.
In addition, upon completion of the asset a rating of specific metrics of the asset will be
performed. If the asset receives a specified rating, the entity will be entitled to an incentive
bonus of CU 150 000.
a) The entity decides to use the expected value method to estimate the variable
consideration associated with the daily penalty or incentive.
The entity decides to use the most likely amount to estimate the variable consideration
associated with the incentive method.In the example of variable consideration in case a) they
calculate as follows:
50 % on time, 30 % 2 days early and 20 % 3 days early – (0,5*0+0,3*20 000+0,2*30 000 =
12 000).
The entity foresee that it is highly probable that they will be on time or early since the entity
have performed well in terms of delivery of this type of asset.
In the example of variable consideration in case b) they calculate as follows:
The entity can either be within specification and then entitled to zero or outside specification
and then penalized with 150 000. The entity determine that they will have issues and be
outside specification, causing a penalty of 150 000
The entity foresee with high level of probability that they will come across the issue with not
meeting specifications.
The consideration to be recognized over time amounting to in total at the end of the contract,
just before invoicing, will be the following: 2 500 000 + 12 000 – 150 000 = 2 362 000
Revenue cr 2 362 000 revenue recognized over time
Contract asset db 2 362 000 the day before invoiced to customer
The rights and performance obligations in a contract should always be accounted for and
presented on a net basis, as either a contract asset or a contract liability. In this example the
contract end up with a net contract asset of 2 362 000.
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6.5.1.2 Sale with a right of return
To account for the transfer of products with a right of return, the entity should recognize all of
the following:
1. An amount of revenue for the products transferred based on the consideration to
which the entity expects to be entitled. (The entity should not recognize revenue for
the products expected to be returned.)
2. A refund liability for the amounts expected to be refunded.
3. An asset with a corresponding adjustment of Cost of goods sold, for the entities right
to recover products from the customer on settling the refund liability.
In each reporting period the entity should reassess, separate from each other the refund
liability respectively the asset. The refund liability should be reassessed based on the
expectations of refunds and the asset also for the expected amounts to be refunded but also
the changes in value of the returned assets.
It is important to separate right of return transactions from warranty returns which has a
different treatment.
Example – Right of return
An entity enters into 100 contracts with customers. Each contract includes the sale of 1 000
products for CU 100 (100*1 000*100 = CU 10 000 000 in total consideration). In the contract
the customer is allowed to return any unused product within 60 days and receive a full
refund. The entity’s cost for each product is CU 60.
The entity applies the portfolio approach as stated in chapter 5.2 Portfolio approach - a
practical expedient.
Because the contract allows a customer to return the products, the consideration received
from the customer is variable. The entity decides to use expected value method and
estimates that 97 percent of the products will not be returned.
The entity estimates that the cost of recovering the products will be immaterial and expects
that the returned products can be resold at a profit.
Upon transfer of control of the 1 000 products, the entity does not recognize revenue for the
30 products that it expects to be returned. The contract is recognized as follows:
Revenue cr 97 000 (CU 100 * 1 000 * 0,97)
COGS db 58 200 (CU 60 * 1 000 * 0,97)
Asset, its right to recover db1 800 (CU 60 * 30)
30 products on settling the
refund liability
Refund liability cr 3 000 (CU 100 * 30)
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6.5.1.3 Sale with a repurchase agreement
A repurchase agreement is a contract in which the entity sells an asset and also promises or
has the option to repurchase the asset.
The agreement will be accounted for as a product with a right of return if either, see example
in chapter 5.3.1.1 Sale with right of return:
The customer doesn’t have significant economic incentive to exercise the option
at a price lower than the original selling price.
The repurchase price of the asset is equal to or greater than the original selling
price and is less than or equal to the expected market value of the asset, and the
customer does not have a significant incentive to exercise its option.
The customer can sometimes be offered an option of selling back the acquired goods at a
pre-agreed price, a put option, or the entity might opt for a similar right to buy back the sold
goods at a pre-agreed price, a call option.
Repurchase agreements generally come in three forms:
a) The entity has an obligation to repurchase the asset, a forward contract.
b) The entity has the right to repurchase the asset, a call option.
c) The entity has an obligation to repurchase the asset at the customer’s request, a put
option.
In Sandvik’s case the contracts agreed with the customer, the customer most often have a
put option, the repurchase takes place at the request by the customer.
If the entity has the obligation to repurchase the asset at a price lower than the original
selling price of the asset, the entity should consider if the customer have a significant
economic incentive to exercise that right. If the entity concludes that the customer has
significant economic incentive to exercise the put option, the agreement is accounted for as a
lease in accordance with IAS 17 Leases, see Sandvik policy in FRP chapter 2.2.4.01 Leases.
In order to proper measure the incentive one has to consider the expected market price at
the date of repurchase and the amount of time until the option expire. If the market price is
expected to be above or in level with the repurchase price that indicates that the customer
has a significant economic incentive to exercise the option.
If any of the two other forms of repurchase agreements are applicable, a forward contract or
a call option, a customer does not obtain full control of the asset. The contract should be
accounted for as either:
a) A lease in accordance with IAS 17 Leases, if the entity has an obligation or the right
to repurchase the asset at an amount less than the original selling price.
b) A financing arrangement if the entity has an obligation or a right to repurchase the
asset for an amount that is equal to or more than its original selling price.
If the repurchase agreement is a financing agreement the entity should continue to recognize
the asset and it should recognize a liability for any consideration received from the customer.
The difference between the amount of consideration received from the customer and the
amount of consideration to be paid to the customer should be recognized as interest.
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6.5.2 Significant financing component
A promised amount of consideration is adjusted for the effects of the time value of money if
the timing of payments agreed by the parties provides the entity with a significant benefit of
financing the transfer of the goods or services to the customer.
A practical expedient exists when there is a shorter period than one year or less between the
entity transferring the goods or services and the customer paying for it. This expedient shall
be applied by all Sandvik entities with advances received and unperformed for periods
shorter than one year.
A significant financing component is identified by assessing the following:
a) The difference, if any, between the amount of promised consideration and the cash
selling price of the promised goods or services, and
b) The combined effect of:
i. The expected length of time between when the entity transfers the promised goods or
services to the customer and when the customer pays for those, and
ii. The prevailing interest rates in the relevant market.
The entity need to determine the discount rate to apply:
The discount rate to be use should reflect that which would be used in a spate financing
transaction between the entity and its customer at contract inception. The discount rate is not
updated for interest changes or similar aspects after contract inception.
An entity can also estimate the discount rate by using the implicit rate, which is calculated by
establishing the cash selling price and put in it in relation to the contract consideration. This
can only be done if it is seen as an appropriate estimation of the above method.
The financing component is accounted for by debiting financial interest and crediting contract
liabilities. At date of revenue recognition the contract consideration including the accrued
interest is reported as revenue point in time or over time.
A contract with a customer does not include a significant financing component if any of the
following factors exists:
a) The customer paid for the goods in advance and the timing of the transfer of those
goods or services is at the discretion of the customer.
b) A substantial amount of the consideration promised by the customer is variable and
the amount or timing of that consideration varies on the basis of the occurrence or
non-occurrence of a future event that is not substantially within control of the
customer or the entity.
c) The difference between the promised consideration and the cash selling price of the
good or service arises for reasons other than the provision of finance to either the
customer or the entity, and the difference between those amounts is proportional to
the reason for the difference. For example, the payment terms might provide the
entity or the customer with protection from the other party failing adequately to
complete some or all of its obligations under the contract.
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Example – Significant financing component
An entity enters into a contract with a customer to sell Tubes. Control of the Tubes will
transfer to the customer in one and a half years’ time, over time (from 17 to 24 months). The
contract stipulates that the customer has to pay an advance amount of 50 percent of the total
contract value of CU 4 000 000.
The interest rate is estimated to 5 per cent which is the market rate for borrowing / lending
transactions in this type of business at contract inception.
The entity concludes that the contract contains a significant financing component because of
the length of time between when the customer pays the advance and when the entity
transfers the asset to the customer and the interest rate is significant.
The following entries illustrate how the entity would account for the significant financing
component:
Recognize a contract liability for the CU 2 000 000 received at contract inception:
Cash db 2 000 000
Contract liability cr 2 000 000
During the first 16 months, until the start of the over-time transfer in month 17 of the asset to
the customer, the entity adjusts the promised amount of consideration and increases the
contract liability by recognizing interest on the CU 2 000 000 at five percent per year for 16
months:
Interest expense db 150 000
Contract liability cr 150 000 (2 150 000 will now be the total balance)
As the transfer of the asset commence, the entity will recognize the following revenue
according to the input method, between months 17-24, in total in month 24:
Revenue cr 4 150 000 (advance incl interest of 2 150 000
recognized as revenue, 1 000 000 recognized and
invoiced plus revenue accrual of 1 000 000)
Accounts receivable db 1 000 000 (still due from latest invoicing
occasion)
Contract asset db 1 000 000 (accrued revenue, not yet invoiced)
6.5.3 Non-cash considerations
Not applicable to Sandvik. A customer promises considerations in another form than cash,
for example an advert in the customer’s newspaper in exchange for the goods or services.
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6.5.4 Consideration payable to a customer
An entity sometimes does business with their customer. The transactions between the
parties should then be treated in a certain way. In Sandvik the situation with consideration
payable to a customer is most common is when we accept a trade-in as part of the contract
with the customer.
6.5.4.1 Trade-ins
If consideration payable to a customer is a payment for a distinct good or service from the
customer, then the entity should account for the purchase of the good or service in the same
way that it accounts for other purchases from its suppliers.
If the amount of consideration exceeds the fair value of the distinct good or service that the
entity receives from the customer, then the excess is accounted for as a reduction of the
transaction price. If the entity cannot reasonably estimate the fair value of the good or service
received from the customer, it should account for all of the consideration payable to the
customer as a reduction of the transaction price.
6.6 Step 4 - Allocate the Transaction price
When allocating the transaction price to each performance obligation identified in step 3, the
objective is to allocate the amounts that represents the consideration to whom which the
entity expects to be entitled in exchange for transferring the performance obligations to the
customer.
The entity is required to allocate the transaction price to each identified performance
obligation on a relative stand-alone selling price basis. This means that each performance
obligation will be allocated its share of revenue based on its stand-alone selling price put in
relation to the sum of all performance obligations stand-alone selling price.
The allocation is subject to exceptions that might be applicable when allocating discounts
and when allocating considerations that include variable amounts, see 6.6.2.1 Allocation of
discounts and 6.6.2.2 Allocation of variable amounts.
6.6.1 To determine the stand alone selling price
If a stand-alone selling price is not observable for one or more of the performance
obligations, the entity can, but not limited to, apply one of three methods, listed below in
order of preference. A combination of methods applied to a contract might be needed in
order to be able to allocate the transaction price. The use of observable input should be
maximized for this estimation, and the methods used should be applied consistently in similar
circumstances.
Adjusted market assessment approach
by evaluating the market in which it sells goods or services the entity estimates the
price that a customer on that market would be willing to pay for those goods or
services.
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Expected cost plus a margin approach
by forecasting the expected cost of satisfying s performance obligation and then
adding an appropriate margin for that good or service
Residual approach
by estimating the stand-alone selling price by reference to the total transaction price
less the sum of the observable stand-alone selling prices of other goods or services
promised in the contract. This approach can only be applied if one of the two criteria
below is met:
− same item sold to different customers, at or near same time, for broad range
of amounts, or
− price of item not yet established and item not previously sold on a stand-
alone basis
Example – To determine Stand-alone selling price
An entity enters into a contract with a customer to sell product A, B and C in exchange for
CU 1 000 000. The entity will satisfy the performance obligations of each product at different
points in time. The entity regularly sells product A separately and therefore the stand-alone
selling price is directly observable. The stand-alone selling price for products B and C are not
directly observable, and hence the entity has to estimate the stand alone selling price for
those two products.
Product CU Method
Product A 500 000 Directly observable
Product B 250 000 Adjusted market approach
Product C 750 000 Expected cost plus a margin approach
Total 1 500 000
The customer receives a discount for purchasing the bundle of goods because the sum of
stand-alone selling prices exceed the promised consideration CU 1 000 000. The discount is
proportionately across product A, B and C. The entity considers whether it has observable
evidence about performance obligation to which the entire discount belongs and concludes
that it does not.
Product CU Calculation
Product A 330 000 (CU 500 000 / CU 1 500 000 * CU 1 000 000)
Product B 170 000 (CU 250 000 / CU 1 500 000 * CU 1 000 000)
Product C 500 000 (CU 750 000 / CU 1 500 000 * C 1 000 000)
Total 1 000 000
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6.6.2 To allocate the transaction price
Allocate the transaction price to each performance obligation on a relative stand-alone
selling price basis.
• Allocate discounts proportionally to all performance obligations, unless certain criteria
are met, see below 6.6.2.1 Allocation of discounts.
• Allocate variable consideration and changes in transaction price to all performance
obligations, unless two criteria are both met, see below 6.6.2.2 Allocation of variable
amounts.
Do not reallocate changes in standalone selling price after inception.
6.6.2.1 Allocation of a discount
When the sum of the stand-alone selling prices of goods or services promised in the
contracts exceeds the promised consideration in a contract, the customer has received a
discount for purchasing a bundle of goods or services.
The discount should be allocated proportionally to all performance obligations in the
contract unless there is observable evidence that the entire discount does not relate to all
performance obligations in the contract. See example in 6.6.1 To determine the stand
alone selling price.
6.6.2.2 Allocation of variable consideration
Variable consideration is generally allocated to all performance obligations. Allocate to a
single performance obligation, only if:
• the terms of variable payment relate specifically to efforts to satisfy the performance
obligation or transfer the distinct good or service is directly related to that
performance obligation, and
• consistent with overall allocation objective when considering all performance
obligations and payment terms in the contract.
An example can be a penalty that strictly relates to one of the performance obligations.
6.7 Step 5 - Timing of Recognition
Revenue is recognized when the entity satisfies a performance obligation by transferring a
promised goods or service to the customer. It is important to make the distinction between
the occasion of invoicing and when the revenue shall be recognized. An asset
(product/service) is transferred when the customer obtains control of the asset hence
revenue can be recognized.
6.7.1 Meaning of control
Control of an asset refers to the ability to direct the use of, and obtain substantially all of the
remaining benefits from the asset. Control includes the ability to prevent other entities from
directing the use of, and obtaining the benefits from an asset. The benefits from an asset are
the potential cash flow that can be obtained directly or indirectly, such as:
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Using the asset to produce goods or provide services
Using the asset to enhance the value of other assets
Using the asset to settle liabilities or reduce expenses
Selling or exchanging the asset
Pledging the asset to secure a loan
Holding the asset
When evaluating whether a customer obtains control of an asset, an entity should consider
any agreement to repurchase the asset, see 6.5.1.3 Sale with a repurchase agreement
which might prevent the customer from obtaining control of the asset.
6.7.2 Revenue recognized over time
The starting point is to identify if revenue should be recognized over time or not. When any of
the following criteria are met it demonstrates that an entity is transferring control of a good or
service over time:
4. The customer simultaneously receives and consumes the benefit of the entity’s
performance as the entity performs; or
5. The entity’s performance creates or enhances an asset controlled by the customer; or
6. The entity’s performance creates an asset with no alternative use to the entity and the
entity has an enforceable right to be paid for performance completed to date. The
asset is considered to have no alternative use to an entity if either:
a) the entity is restricted by contract from readily directing the asset for another
use during the creation or enhancement of the asset; or
b) the entity is limited in practice from readily directing the asset in its completed
state for another use.
In assessing the criteria if the entity creates an asset with no alternative use
the entity has to consider if the product at its completed state will have an
alternative use to the entity. If the entity at the stage can’t redirect the product
to someone else without incurring significant costs to rework the design and
functionality of the product or sell it to a significant loss the entity shall
conclude it has no alternative use of the product.
6.7.3 Measuring progress for revenue recognized over time
For each performance obligation satisfied over time, revenue is recognized over time by
measuring the progress towards complete satisfaction of that performance obligation. A
single method of measuring progress for each performance obligation satisfied over time
is applied, and should be applied consistently to similar performance obligations and in
similar circumstances.
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As circumstances change over time, an entity should update the measure of progress to
reflect any changes in the outcome of the performance obligation.
Revenue is only recognised for a performance obligation satisfied over time if the entity
can reasonably measure its progress. In some circumstances, in the early stages of a
contract, it might not be possible to reasonably measure the outcome of a performance
obligation. If the entity expects to recover the costs (a profitable contract), revenue is
recognised only to the extent of the costs incurred until such time that the entity can
reasonably measure the outcome of the performance obligation.
6.7.3.1 Input method
The input method is the method to apply when progress should be measured by a
Sandvik entity.
Input methods recognize revenue on the basis of the entity’s efforts or input to the
satisfaction of the performance obligation relative to the total expected inputs required in
order to satisfy the performance obligation.
If the entity’s efforts or inputs are expended evenly throughout the performance period, it
may be appropriate for the entity to recognize revenue on a straight-line basis.
An entity should exclude the effects of any inputs that, in accordance with the objective of
measuring progress, do not represent the performance of that entity in transferring the
goods or service to the customer. An adjustment to the measure of progress might be
done under the following circumstances:
Costs incurred that does not contribute to an entity’s progress in satisfying the
performance obligation, such as significant inefficiencies (costs of unexpected
wasted materials, labour or other resources).
(Costs incurred are not proportionate to the entity’s progress in satisfying that
performance obligation.)
6.7.3.2 Practical expedient when recognizing revenue over time
If an entity has a right to consideration from a customer in an amount that corresponds
directly with the value to the customer of the entity’s performance completed to date a
service contract in which an entity bills a fixed amount for each hour of service provided),
IFRS 15 provides a practical expedient whereby the entity may recognize revenue based
on the amount it has a right to invoice.
Example – apply the input methodology
An entity within the steel industry enters into an agreement with a customer to supply
10 000 tubes to a total value of CU 200 000 000. The order is placed 18 months in
advance of production start. The contract stipulates an advance of 20 percent of contract
value to be paid at order, another 30 percent when melting is completed (milestone 1)
and the remaining 50 percent when customer have received the quality certificates and
returned with their approval (milestone 2).
The entity has applied the five step model in order to properly recognize revenue. The
entity has concluded that the contract value is CU 200 000 000, no variable consideration
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exist, the advance is paid to reserve production capacity, hence no significant financing
component needs to be considered. Recognition should be performed over time since the
performance obligation identified fulfill the following criteria “the entity’s performance
creates an asset with no alternative use to the entity and the entity has an enforceable
right to be paid for performance completed to date.”
The Input method is applied by the entity as basis for measuring the progress of the
performance obligation. The contract value is CU 200 000 000 and the contract cost is
estimated to CU 140 000 000 generating a gross profit of CU 60 000 000 (30%)
At contract signing:
The entity recognizes the received cash advance of CU 40 000 000 as a contract liability:
Cash db 40 000 000
Contract liability cr 40 000 000
Start of production (18 months after contract signing):
The entity starts the melting process which takes one month to conclude, generating a
cost base of CU 10 000 000. The entity estimates the progress to 7 percent (10 / 140).
Revenue cr 14 000 000 accrued revenue (0,07*200)
COGS db 10 000 000
Gross profit 4 000 000
Contract liability op bal 40 000 000 cash advance
db 14 000 000 accrued revenue
cl bal 26 000 000
Milestone 1 is reached:
The entity has finalized the melting process and concludes that it can invoice milestone 1.
The entity continues during the second month with next step, extrusion. The entity checks
the cost base for the project at month end and finds CU 24 000 000 being reported. The
entity estimates the progress to 17 percent (24 / 140).
Revenue cr 34 000 000 accrued revenue (0,17*200)
COGS db 24 000 000
Gross profit 10 000 000
Accounts receivable db 60 000 000 milestone 1 invoice
Contract liability op bal 26 000 000
db 20 000 000 accrued revenue
cr 60 000 000 milestone 1 deferred revenue
cl bal 66 000 000
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Production finalized and shipment performed:
The entity has finalized the production and shipping is concluded. The entity will soon
send the requested certificates in order to fulfill the criteria for sending the last invoice
concerning milestone 2.
The entity checks the cost base for the project at month-end and finds CU 150 000 000
being reported. The entity finds that the project have had a cost over-run of CU
10 000 000 occurring at a late stage of the project. The extra cost relate to quality
problems in production and is disregarded in the estimation of progress. The entity
estimates the progress to 100 percent (140 / 140), but concludes that the profitability will
be lower than anticipated.
Revenue cr 200 000 000 invoiced and accrued revenue
COGS db 150 000 000 expensed during progress
Gross profit 50 000 000
Contract asset op bal 0
db 100 000 000 accrued revenue
cl bal 100 000 000 awaits to be invoiced when milestone 2
criteria are fulfilled
Contract liability op bal 66 000 000
db 66 000 000
cl bal 0
Milestone 2 is reached:
The entity has supplied the customer with requested certificates, which have been
approved by the customer. The entity concludes that the second and final milestone have
been met and send the invoice of CU 100 000 000.
Revenue db 100 000 000 reversal of revenue accrual
cr 100 000 000 issued invoice
Trade receivables db 100 000 000
Contract asset op bal 100 000 000
cr 100 000 000 reversal of revenue accrual
cl bal 0
6.7.4 Revenue recognized point in time
If a performance obligation is not satisfied over time it is satisfied point in time. Together with
indicators mentioned in chapter 6.7.1 Meaning of control, the below indicators should also be
considered:
Present right to payment
if a customer is presently obliged to pay for the asset, this may indicate that the
customer has obtained the ability to direct the use of, and obtain substantially all
of the remaining benefits from, the asset in exchange
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Legal title of goods and services
legal title may indicate which party to a contract has the ability to direct the use of,
and obtain substantially all of the remaining benefits, an asset or restrict the
access of other entities to those benefits.
Transferred physical possession
the customer’s physical possession of an asset may indicate that the customer
has the ability to direct the use of, and obtain substantially all of the remaining
benefits, an asset or restrict the access of other entities to those benefits.
Physical possession might not always coincide with control of an asset. In some
repurchase agreements and some consignment arrangement physical possession
is not an indicator of control being transferred to a customer. In some bill-and-hold
arrangements the entity may have physical possession of an asset that the
customer controls.
Significant risks and rewards of ownership
The customer has accepted the asset
More than one indicator can be applied in the contract, but usually one is dominant and the
other(s) are included to further clarify when control transfers. Legal title can in addition be
included to make it possible to take control of the equipment if payment conditions aren’t
met.
6.7.4.1 Certain considerations on control indicators
Customer acceptance
The customer’s acceptance of an asset may indicate that the customer has obtained control
of the asset. Customer acceptance clauses allow a customer to cancel a contract or require
an entity to take remedial action if goods or service doesn’t meet agreed-upon specifications.
When an entity can objectively determine that control of goods or services has been
transferred to the customer in accordance with agreed-upon specifications in the contract,
then the customer acceptance is a formality and does not affect the entity’s determination of
when the customer has obtained control of the goods or services.
If an entity cannot objectively determine that the goods or services provided to the customer
is in accordance with the agreed-upon specifications in the contract, then it cannot conclude
that the customer has obtained control until it the entity receives the customers’ acceptance.
When a product is delivered to a customer for trial or evaluation purposes and the customer
is not committed to pay any consideration until the trial period lapses, control of the product
is not transferred to the customer until either the customer accepts the product or the trial
period lapses.
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Consignment arrangements
A product that has been delivered to another party may be held in a consignment
arrangement if the other party has not obtained control of the product. Accordingly, revenue
is not recognized upon delivery of a product to another party if the delivered product is held
on consignment.
Indicators that an arrangement is a consignment arrangement include the following:
a) The product is controlled by the entity until a specified event occurs
b) The entity is able to require the return of the product or transfer the product to a third
party.
c) The dealer does not have an unconditional obligation to pay for the product.
Bill-and-hold arrangements
A bill-and-hold arrangement is a contract under which an entity bills a customer for a product
but the entity retains physical possession of the product until it is transferred to the customer
at a point in time in the future. A customer might ask for such a contract because of lack of
space for the product or delays in the customer’s productions schedules.
All of the following criteria must be met for a customer to have obtained control of a product
in bill-and-hold arrangement and giving the entity right to recognize revenue:
a) The reason for the bill-and-hold arrangement must be substantive, the customer has
requested it.
b) The product must be identified separately as belonging to the customer.
c) The product currently must be ready for physical transfer to the customer.
d) The entity cannot have the ability to use the product or direct it to another customer.
6.8 Contract modification
Contracts are sometimes modified or changed. Contract modifications are to undergo
certain analysis to identify how it affects revenue recognition.
As with the original contract, a contract modification can be approved in writing, by oral
agreement or implied by customary business practices. If the contract modification have
not yet been approved the policy should be applied to the existing contract until the
contract modification has been approved.
a) If the contract modification does not add distinct goods or services it should be
accounted for as being part of the already agreed contract. For example, the
customer increases the number of pieces of an article already in the contract and
any price changes deemed being in line with the original pricing.
b) If the additional services or goods are added to a non-competitive price (below
stand-alone selling price) the existing contract shall be terminated. The new
contract created should take into account the un-performed parts from the
terminated contract and the additional services or goods.
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c) If the contract modification is adding distinct services or goods reflecting a stand-
alone selling price (market price) it should be recognized as a separate (new)
contract.
When the parties to a contract are in dispute about the scope or price of a modification, or
the scope of the contract modification has been approved but the corresponding change in
price has not yet been finalized, it is still possible that a contract modification has taken
place. In determining whether rights and obligations that are created or changed by a
modification are enforceable, all relevant facts and circumstances should be considered.
If the parties have approved the change in scope of the contract, but not yet determined the
corresponding change in price, the new transaction price should be estimated.
6.9 Contract costs
This policy also address how to account for cost associated with a contract with a customer
when they do not fall within the scope of another standard.
6.9.1.1 Cost to obtain a contract
Incremental costs to obtain a customer contract shall be recognized as a contract asset if
certain conditions are met.
If the cost is incremental and the entity expects to recover the costs (a profitable contract) it
should be recognized as a contract asset and periodized over the contract life time. If the
contract time is equal to or less than 12 months the cost to obtain the contract can be
expensed.
Examples of incremental costs are agent fees, commission to sales employees, signing fees
etc.
Cost to obtain a contract that is stipulated in the agreement should always be reported as a
contract asset and periodized over the contract life time. Examples of such costs can be
costs for certificates, samples etc.
6.9.1.2 Costs to fulfill a contract
If the costs incurred in fulfilling a contract with a customer are not within the scope of another
standard, such as IAS 2 Inventories, IAS 16 Property, plant and Equipment or IAS 38
Intangible Assets, a contract asset is recognized for the costs incurred to fulfill a contract only
if those costs meet all of the following criteria:
a) The costs relate directly to a contract or to an anticipated contract that the entity can
specifically identify.
b) The costs generate or enhance resources of that entity that will be used in satisfying
performance obligations in the future.
c) The costs are expected to be recovered (a profitable contract).
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Example – Costs to fulfill a contract
A entity enters into a service contract to manage a customer’s fleet of Mining equipment for
five years. The initial costs to set up the service site including monitoring software are as
follows:
Service and maintenance workshop 200 000
Hardware 50 000
Software 100 000
Migration and testing of monitoring center 75 000
Total costs 425 000
The initial costs relate primarily to activities to fulfill the contract but do not transfer goods or
services to the customer. The entity accounts for the initial set up costs as follows:
Service and maintenance workshop accounted for as a fixed asset in
accordance with IAS 16 Property, Plant
and Equipment.
Hardware accounted for as fixed asset in
accordance with IAS 16 Property, Plant
and Equipment.
Software accounted for as fixed asset in
accordance with IAS 38 Intangible
Assets.
Migration and testing of monitoring data center accounted for as a contract asset (non-
fixed asset) in accordance with IFRS
15 Revenue from contract with
customer. The contract asset, if
fulfilling the requirements, would be
periodized on a systematic basis over
the five year contract period.
6.10 Amortization and impairment of contract costs
6.10.1 Amortization of contract costs
A contract asset (non-fixed, variable asset) recognized in respect of a cost of obtaining or
fulfilling a contract should be periodized on a systematic basis that is consistent with the
transfer to the customer of their goods or services to which the contract asset relates.
It is recommended to use a straight line periodization, unless evidence suggests a different
pattern that better reflects the transfer the pattern of transfer of goods or services. Entities
need to consistently apply the same method to similar contracts.
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6.10.2 Impairment of contract costs
An impairment loss is recognized in profit or loss to the extent that the carrying amount of an
contract asset recognized in respect of a cost of obtaining or fulfilling a contract exceeds:
The remaining amount of consideration that the entity expects to receive in exchange for the
goods or services to which the asset relates; less
The costs that relate directly to providing those goods or services and that have not been
recognized as expenses.
Any impairment losses for assets related to the contract recognized in accordance with
another standard, IAS 2 Inventories, IAS 16 Property, Plant and Equipment and IAS 38
Intangible Assets should be recognized before an entity recognizes an impairment loss for a
contract asset recognized in respect of a cost of obtaining or fulfilling a contract. A reversal of
some or all of an impairment loss previously recognized in accordance with IFRS 15 is
recognized in profit or loss when the impairment conditions no longer exists or have
improved.
See Sandvik policy in FRP on Impairments, chapter 2.2.2.08 Impairment.
6.11 Licensing
A license establishes a customer’s right to the intellectual property of an entity. Licenses of
intellectual property may include:
Software and technology;
Motion pictures, music and other forms of media;
Franchises;
Patents, trademarks and copyrights.
If the promise to grant a license is not distinct from other promised goods or services in the
contract, the promise to grant a license and other promised goods or services are accounted
for as a single performance obligation.
A license that forms a component of a tangible good and that is integral to the
functionality of the good.
A license that the customer can benefit from only in conjunction with a related
service.
When an entity’s promise to grant a license is distinct from the other promised goods or
services in the contract, and is therefore accounted for as a separate performance obligation,
an entity is required to determine whether the license transfers to a customer either point in
time or over time.
A right to access the entity’s intellectual property as it exists throughout the license
period (over time).
A right to use the entity’s intellectual property as it exists at the point in time at which
the license is granted (point in time).
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6.11.1 Right to access the entity’s intellectual property rights
The nature of an entity’s promise in granting a license is a promise to provide a right to
access the entity’s intellectual property if all of the following criteria are met:
a) The contract requires, or the customer reasonably expects, that the entity will
undertake activities that significantly affect the intellectual property to which the
customer has rights;
b) The rights granted by the license directly expose the customer to any positive or
negative effects of the entity’s activities identified, in a) above.
c) Those activities do not result in the transfer of goods or services to the customers as
those activities occur.
If the above criteria are met, the promise to grant a license is accounted for as a
performance obligation satisfied over time. It will be necessary to select an appropriate
method to measure its progress towards complete satisfaction of that performance obligation
to provide access.
6.11.2 Right to use the entity’s intellectual property rights
If the criteria above in chapter 6.11.1 Right to access the entity’s intellectual property rights
are not met, the entity has in fact provided a right to use the intellectual property as that
intellectual property exists at the point in time at which the licenses is granted to the
customer.
6.12 Transition to IFRS 15 Revenue from contracts with customers
IFRS 15 Revenue from contracts with customers is required to be adopted for annual
reporting periods beginning on or after 1 January 2018 for all Sandvik entities.
6.12.1 Fully retrospective approach
Sandvik have chosen to apply the fully retrospective approach for the transition to IFRS 15
Revenue from contracts with customers which demand that the annual reporting period
starting 1 January 2017 need to be restated according to the new standard. This will take
place by monthly reporting of revenue according to IFRS 15 Revenue from contracts with
customers, in parallel to IAS 18 Revenue and IAS 11 Construction contracts, in BPC during
2017.
Sandvik has decided to use the following practical expedients when restating the comparison
period of 2017:
1. An entity is not required to apply IFRS15 retrospectively to contracts completed*
before 1 January 2017;
2. For contracts that were modified before the beginning of the earliest period
presented (2017), an entity need not to retrospectively restate the contract but shall
instead reflect the aggregate effect of all of the modifications that occur before the
beginning of the earliest period presented.
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3. The disclosure requirements, concerning transaction price allocated to remaining
performance obligations, need not to be applied for the reporting period 2017;
*A completed contract is a contract for which the entity has transferred all of the goods or
services identified in accordance with IAS 11 Construction contracts, IAS 18 Revenue and
related interpretations.
An entity should apply the practical expedients described above consistently to all contracts
before and during the earliest period presented (2017). Sandvik will disclose the following
information in the Annual report:
The three expedients above that have been decided to be applied; and
To the extent reasonably possible, a qualitative assessment of the estimated effect of
applying each of those expedients.
6.12.2 Transition methodology for a reporting entity within Sandvik
The work to perform the transition has its starting points in the contracts that constitute the
revenue as reported in BPC December 2016. To make the process less cumbersome there
are three expedients that Sandvik have chosen to apply, see above chapter 6.12.1 Fully
retrospective approach. It is important that those are applied consistently by all Sandvik
entities when performing the below analysis and adjustment of reported revenue.
Below follows a high level step-by-step procedure:
1. The entity has to identify all customer contracts that are still open and hence will
affect the following financial year. See expedients above.
2. All those still open customer contracts need to be restated by applying the
methodology in this policy. The accumulated difference, between applying existing
accounting standards (IAS 11 and IAS 18) and IFRS 15, on those open contracts
should be reflected in Opening balance of Equity and other related Balance sheet
accounts. Remember to apply any of the three expedients above if applicable.
3. In January 2017 the entity will continue to report revenue according to IAS 18
Revenue and IAS 11 Construction contracts in Finance Actual. In parallel the entity
will report revenue from customer contracts according to IFRS 15, identified being in
scope in step 1 and 2 above and all the new contracts received during 2017, in a
separate workbook in BPC.
