ifrs 15 – revenue from contracts with customers 15 revenue...answer multiple choice questions in...

IFRS 15 – Revenue from contracts with customers

Revenue: The Basics

PwC and ICPAU

Agenda

1) 5-Step model

2) Deep dive: performance obligations, including material rights

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PwC and ICPAU

The 5-step model

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Step 1 - Identify the contract with the customer

Step 2 - Identify the performance obligations in the contract

Step 3 - Determine the transaction price

Step 4 - Allocate the transaction price

Step 5 - Recognise revenue when (or as) a performance obligation is satisfied

Core principleRevenue recognised to depict transfer of goods or services


PwC and ICPAU

Revenue recognition model

A simple example….

• Contract: Entity A sells products X, Y and Z to Customer B

• Transaction price: CU18m, 50% upfront, 50% when all three delivered

• Stand alone price: Each sold separately for CU8m each

• Nature of products:

- Product X: Good, control transferred at a point in time

- Product Y: Good, control transferred at a point in time

- Service Z: Service transferred over one year

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PwC and ICPAU

Revenue recognition model – a simple example

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Step 1 - Identify the contract with the customer





Step 1 – Signed contract exists

ContractAn agreement between two or more parties that creates

enforceable rights and obligations (not necessarily written)

• Approved

• Rights of each party identified

• Payment terms identified

• Commercial substance

• Collectibility

PwC and ICPAU


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Step 1 – Signed contract existsStep 2 – Customer B can benefit from X, Y and Z separately as they are sold separately – three separate performance obligations

Performance obligation:

A promise in a contract with a customer to transfer a good or service to the customer

Implicit Explicit Written Verbal

DistinctAND

PwC and ICPAU


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Step 2 – Customer B can benefit from X, Y and Z separately as they are sold separately – three separate performance obligations

Step 3 – The transaction price is fixed at CU18m.

Transaction price = Amount to which entity expects to be entitled in exchange for transferring goods or services

• Highly probable?

• Subject to significant reversal?

PwC and ICPAU



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Step 2 – Customer B can benefit from X, Y and Z separately as they are sold separately - three separate performance obligations

Step 4 – 25% discount is allocated evenly across X, Y, Z

Total stand alone price = CU24mTotal transaction price = CU18mTotal discount = 25%Discount * stand-alone = CU6m

1• Observable price of good or service that is sold separately

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• Estimate selling prices if not observable• Adjusted market assessment approach or expected cost plus margin

approach

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• Residual approach…• Only when selling price is highly variable or uncertain (different to

current residual method)

Relative stand-alone selling price

PwC and ICPAU


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Step 2 – Customer B can benefit from X, Y and Z separately as they are sold separately - three separate performance obligations


Step 4 – 25% discount is allocated evenly across X, Y, Z

Total stand alone price = CU24mTotal transaction price = CU18mTotal discount = 25%Discount * stand-alone = CU6m

Step 5 – CU6m each = recognise when control of X / Y transfers CU6m = recognise over the period that Z is provided

Customer receives benefits as performed/another entity would not need to re-perform

e.g. cleaning service, shipping

Create/enhance an asset customer controlse.g. house on customer’s land

Does not create asset w/alternative use AND

Right to payment for work to datee.g. ‘manufacturing service’

No

NoOve

r ti

me

Poin

t in tim

e

Yes

Yes

Yes No

PwC and ICPAU


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If not over time, then point in time….

Recognise revenue when control transfers

Indicators that customer has obtained control of a good or service:

Right to payment for asset

Legal title to asset

Physical possession of asset

Customer has significant risk and rewards

Customer has accepted the asset

PwC and ICPAU


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PwC and ICPAU

Exercise - Temperature test

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Answer multiple choice questions in each scenario.

PwC and ICPAU

Exercise – Scenario 1

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• Entity C sells land to Customer D. Customer D uses the land to construct a housing development.

• Customer D makes a non-refundable upfront payment of CU10,000 when legal title is transferred and CU990,000 in five years, which is when Customer D expects to have completed the development.

• Entity C has no history with this customer and the land is in an area currently not zoned for housing development. Thus, Entity C is not able to conclude that Customer D will pay more than the upfront payment.

• If Customer D fails to pay in five years, Entity C re-takes legal title to the land and any assets on the land.

Question

How much revenue is recognised when Entity C transfers legal title of the land?

A. Recognise revenue CU1,000,000 as the control of the land has been transferred. There is a long-term receivable of CU990,000.

B. Recognise revenue of CU10,000 as this is a non-refundable payment and control of the land has transferred to the customer.

C. Recognise no revenue as there is no contract with the customer due to the significant doubt about the customer’s ability and intention to pay.

PwC and ICPAU

Temperature test: Exercise DebriefStep 1: Identify the contract

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Scenario 1

Entity C

• Initial payment: CU10,000• Deferred payment: CU990,000

How much revenue is recognised when Entity C transfers legal title of the land?

A. CU1,000,000, full contract amount

B. CU10,000, non-refundable amount

C. Nil, there is no contract with the customer

PwC and ICPAU

Temperature test: Exercise DebriefStep 1: Identify the contract

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Contract

• Approved

• Rights of each party identified

• Payment terms identified

• Commercial substance

• Collectibility

What is the appropriate

treatment then?• Record deposit liabilities initially and continue to re-assess whether a contract with a customer is established subsequently

• Recognise revenue only if the consideration received is non-refundable and when:

o either there is no remaining obligations to transfer goods or services to the customer;

o or the contract has been terminated

Step 1 Collectibility criterion to determine if contract exists

PwC and ICPAU


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• Entity E enters into a contract with Customer F to construct a brand new high-end power station. Control of the power station is expected to transfer at the end of five years.

• It is the first power station of this particular design and Entity E agreed to provide support to Customer F in connection with the general maintenance of the plant for the first year of operation free of charge.

• Entity E also provides similar maintenance services to other power stations.

Question

How many performance obligations exist in this agreement?

A. One. The maintenance service is not a distinct performance obligation. It is a marketing expense and costs should be expensed as incurred.

B. Two. The construction of the plant and maintenance represent two distinct performance obligations. They can be sold separately to the customer.

C. Many. Each component of the power station that can be sold separately (for example, the generator) is a distinct performance obligation.

PwC and ICPAU

Temperature test: Exercise DebriefStep 2: Identify the performance obligations

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Scenario 2

Entity E Customer F

$

How many performance obligations exist in this agreement?

A. One

B. Two

C. Many

PwC and ICPAU

Temperature test: Exercise DebriefStep 2: Identify the performance obligations

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Distinct Performance Obligations

Can the customer benefit from the goods or services transferred on their own?

Is the promise separately identifiable from other

promises?

Step 2Distinct considered from the perspective of the customer

PwC and ICPAU


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• Assume the same facts as Scenario 2.

• The contract price is CU1,000,000 plus a 5% bonus if the plant meets specific operating thresholds in the first two years. Entity E projects a 50% chance that it will receive the bonus (50% that it will not receive a bonus).

• The plant is a new design and Entity E has limited historical evidence on the plant’s operations.

• Customer F finances the project by making a CU1,000,000 prepayment before construction begins. The lending rate between the customer and the entity is 10%.

Question

What is the transaction price?

A. CU1,000,000, the fixed contract sum

B. CU1,025,000, the fixed contract sum plus estimated bonus of CU25,000 (5% * 50% likelihood)

C. CU1,610,510, the fixed contract sum considering time value of money

D. CU1,635,500, the fixed contract sum plus estimated bonus of CU25,000 (5% * 50% likelihood) plus effect of time value of money (TVM on the contingent payment assumed immaterial)

PwC and ICPAU

Temperature test: Exercise DebriefStep 3: Calculate the transaction price

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Scenario 3

ContractExpected construction

period................. 5 years

Full payment…… CU1 million

5% bonus based on operating target

……

What is the transaction price?

A. CU1,000,000

B. CU1,025,000

C. CU1,610,510

D. CU1,635,500

PwC and ICPAU

Temperature test: Exercise DebriefStep 3: Calculate the transaction price

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Step 3New model for variable consideration and financing

IAS 11 / 18

IFRS 15

• Measured reliably?

• Sufficiently advanced that performance is probable to meet [IAS 11]?

• Highly probable?

• Not subject to significant reversal?

Variable consideration

IAS 11 / 18

IFRS 15

• Prepayment is non-financial liability

• Time value of money only considered for deferred payments

• Need to determine if significant financing component exists

Financing

PwC and ICPAU


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• Entity G sells mobile phones, tablets and airtime plans to its customers.

• Entity G offers a new promotion package where customers can purchase a phone, subscribe for a 12-month airtime plan and receive a ‘free’ tablet for a total price of CU800.

• This reflects a 20% discount from the standalone selling prices of the items which are as follows:

Phone: CU300

Airtime: CU300

Tablet: CU400

Total: CU1,000

• The entity regularly offers bundled packages for the phone and a 12-month airtime plan for CU400.

Question

How should the transaction price of CU800 be allocated to the phone, airtime and tablet?

A. Phone: CU240, Airtime: CU240, Tablet: CU320, based on 20% discount applied proportionally to all three performance obligations

B. Phone: CU200, Airtime: CU200, Tablet: CU400, based on the entire discount being allocated to the phone and airtime because there is objective evidence that the discount relates to those two performance obligations

PwC and ICPAU

Temperature test: DebriefStep 4: Allocate the transaction price

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Scenario 4

How should the transaction price of CU800 be allocated?

A. Phone: CU240, Airtime: CU240, Tablet: CU320

B. Phone: CU200, Airtime: CU200, Tablet: CU400

PhoneCU300

AirtimeCU300

Tablet CU400

CU1,000

20% Discount

CU800

PwC and ICPAU

Temperature test: Exercise DebriefStep 4: Allocate the transaction price

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Step 4Based on relative stand-alone selling price but more guidance provided

PhoneCU300

AirtimeCU300

Tablet CU400

CU1,000

20% Discount

CU800

Phone and airtime regularly sold together for CU400

Phone/airtime CU400

Tablet CU400

PwC and ICPAU


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• Entity H agrees to produce 10,000 car frames for Customer I for a transaction price of CU10,000,000.

• Entity H has the right to payment for work performed including a reasonable margin if Customer I cancels while production is partially completed.

• There is no alternative use for the frames as they reflect a particular car model designed by the customer.

Question

Entity H has completed 50% of the production and delivered 2,000 car frames to Customer I. How much revenue should Entity H recognise for the work performed to date?

A. CU2,000,000

B. CU5,000,000

PwC and ICPAU

Temperature test: Exercise DebriefStep 5: Recognise revenue

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Scenario 5

Entity H Customer I

CU10 million

How much revenue should Entity H recognise for the work performed to date?

A. CU2,000,000

B. CU5,000,000

PwC and ICPAU


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IAS 18IFRS 15 Exclusive

Point in time

Over time

Step 5 Single model for all performance obligations criteria to determine over time

PwC and ICPAU


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Customer receive benefits as performed/another would not need to re-

perform

Create/enhance an asset customer controls

Does not create asset w/alternative use

ANDright to payment for work

to date

Good or service transfers over time if one of the following criteria met:

If criteria not met, transfers at a point in time based on following indicators

Right to payment for asset Legal title to asset

Physical possession of asset

Customer has significant risk and

rewards

Customer has accepted the asset

PwC

Deep dive: performance obligationsRecap: definition

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Performance obligation if:

• Distinct good or service:

o customer benefits from good/service on its own or with other resources; and

o separable from other promises

• Series of goods/services, if consistent pattern of transfer to customer over time

PwC and ICPAU

Deep dive: performance obligationsIn practice

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Individual distinct

good or service

Sold separately or

can be used separately

• Consumer goods• Simple installation• Mobile and service

Group of inseparable

goods or service

Dependent on or interrelated with other items in the

contract

• Construction contracts• Complex installations• Customised software

Series of homogeneous

‘services’

Consistent pattern of transfer over time

• Daily cleaning service• Ferry service• Call centre processing

PwC

Deep dive: material rightsCustomer options for additional goods or services

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What are potential customer options?

• Customer loyalty programme

• Extended warranty options

• Renewal options, etc.

Material right?

If YES, then

Estimate the standalone selling price of the option and allocate a portion of the sale price to it

PwC and ICPAU

Deep dive: performance obligations - Exercise

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Answer multiple choice and any follow-up questions in each scenario.

PwC and ICPAU


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Entity T, a telecommunications company, offers the following 12-month bundled package:

• Broadband: broadband up to 25MB including a free router and free activation

• Mobile phone: a selected mobile phone plus 500 minutes per month

• TV: 10 designated entertainment channels with a free TV box

The functionalities of each product are as follows:

• Customers can use their own router. However, this would not result in any discount.

• Customers can use the handset with different service providers.

• The TV box can only be used to watch the designated channels offered by Entity T.

An engineer activates the broadband by enabling a live connection to the customer’s house.

Question

How many performance obligations are included in the bundled package offered by Entity T?

A. Five

B. Six

C. Seven

PwC and ICPAU

Deep dive: performance obligations – Debrief Bundled package

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Scenario 1

To be DISTINCT – Criterion a) whether customers can benefit from particular goods or services upon transfer

Key judgment areas:

• Can the customer benefit from the product on its own?

• Activation – required special arrangements and potential integration?

1

5

4

3

2

How many performance obligations are included in the bundled package offered by Entity T?

A. Five

B. Six

C. Seven

PwC and ICPAU


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Government G engaged with Entity J to build a high-security prison. Entity J is responsible for the overall management of the project, including prison design, site clearance, construction of foundations and structure, installation of CCTV and establishment of fences. There are competitors that offer similar services or sell similar goods.

Question

How many performance obligations does Entity J have in the contract with Government G?

A. One

B. Five

PwC and ICPAU

Deep dive: performance obligations – DebriefPrison design & constructions

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Scenario 2

To be DISTINCT – Criterion b) whether the promises are separately identifiable to each othersHow about when Entity J only acts as a project coordinator and individual subcontractors are directly responsible to Government G? What is the potential implication?

• Principal v. agent

How many performance obligations does Entity J have in the contract with Government G?

A. One

B. Five

PwC and ICPAU

Deep dive: performance obligations – DebriefDistinct in the context of the contract

Factors that indicate good or service is separately identifiable include:

• entity does not provide a significant service of integrating the good or service with other goods or services into a bundle that represent the combined output

• good or service does not significantly modify or customise another good or servicepromised in the contract

• good or service is not highly dependent on, or highly interrelated with, other goods or services promised in the contract

Judgment required

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PwC and ICPAU


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• Entity K operates flights for passengers travelling between different cities in Country X. Other airlines offer similar routes.

• Entity K operates a customer loyalty programme whereby the customer can accumulate mileage for each trip using Entity K’s services.

• Customers can redeem one short trip for no further consideration after 10 short haul flights. The fair value of the points received per flight is not material.

Question

How should Entity K determine the accounting for this customer loyalty programme?

A. Entity K shall disregard the loyalty points earned by customers each time given it is not material individually.

B. Entity K shall separately account for the loyalty points and recognise related revenue only when a customer redeems the points and takes the free flight.

PwC and ICPAU

Deep dive: material rights – DebriefCustomer loyalty programme

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Scenario 3

How should Entity K determine the accounting for this customer loyalty programme?

A. Entity K shall disregard the loyalty points earned by customer each time given it is not material individually.

B. Entity K shall separately account for the loyalty points and recognise related revenue only when a customer redeems the points and takes the free flight.

Loyalty points

10 times =

PwC and ICPAU

Deep dive: material rights – DebriefCustomer loyalty programme

• Material rights existed – consideration of whole arrangement

• Accounting implication

Dr. Trade receivables <B/S> xx

Cr. Revenue <P/L> (xx)

Cr. Deferred revenue <B/S> (xx)

• Other complexities?

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PwC

Recap

What do customers buy?

Material rights?

Separable from other goods /

services?

What benefits do customers obtain from

goods / services transferred?

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Similar in nature and recognition

pattern?

PwC

More challenges are coming…

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Uh oh….this is not going to be

easy…

Questions?

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

ifrs 15 – revenue from contracts with customers 15 revenue...answer multiple choice questions in...

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