ifrs 15 revenue from contracts with · pdf file 2019-09-30 · ifrs 15 revenue from...

Click here to load reader

Post on 31-May-2020




1 download

Embed Size (px)


  • Ver K 2016-09-06


    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.

  • Ver K 2016-09-06


    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


    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.

  • Ver K 2016-09-06


    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.


    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

  • Ver K 2016-09-06


    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


    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


     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 performan