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  • Applying IFRS IFRS 15 Revenue from Contracts with Customers

    A closer look at IFRS 15, the revenue recognition standard

    (Updated October 2018)

  • Updated October 2018 A closer look at IFRS 15, the revenue recognition standard 2

    Overview

    Many entities have recently adopted the largely converged revenue standards,

    IFRS 15 Revenue from Contracts with Customers and Accounting Standards

    Codification (ASC) 606, Revenue from Contracts with Customers1 (together

    with IFRS 15, the standards), that were issued in 2014 by the International

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

    Accounting Standards Board (FASB) (collectively, the Boards). The standards

    supersede virtually all legacy revenue recognition requirements in IFRS and

    US GAAP, respectively.

    The standards provide accounting requirements for all revenue arising from

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

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

    scope of other IFRSs or US GAAP requirements, such as the leasing standards.

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

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

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

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

    (see section 2.1.1).

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

    be a significant undertaking. This is because the standards affected entities’

    financial statements, business processes and internal controls over financial

    reporting. For entities that have not yet adopted the standards, successful

    implementation will require an assessment and a plan for managing the change.

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

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

    whether more application guidance was needed on the standards. TRG

    members include financial statement preparers, auditors and users from

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

    Members of the TRG met six times in 2014 and 2015. In January 2016,

    the IASB announced that it did not plan to schedule further meetings of the IFRS

    constituents of the TRG, but said it would monitor any discussions of the FASB

    TRG, which met in April and November 2016. The November 2016 meeting was

    the last scheduled FASB TRG meeting.

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

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

    Securities and Markets Authority (ESMA) encouraged issuers to consider

    the TRG discussions when implementing IFRS 15.2 Furthermore, the Chief

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

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

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

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

    reached general agreement.3

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

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

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

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

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

  • 3 Updated October 2018 A closer look at IFRS 15, the revenue recognition standard

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

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

    2016 throughout this publication. Unless otherwise specified, these summaries

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

    constituents did not participate in the April 2016 and November 2016

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

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

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

    commented on the FASB TRG discussions.

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

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

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

    and discusses our views on certain topics.

    While many entities have adopted the standards, implementation issues

    may continue to arise. Accordingly, the views we express in this publication

    may evolve as implementation continues and additional issues are identified.

    The conclusions we describe in our illustrations are also subject to change

    as views evolve. Conclusions in seemingly similar situations may differ from

    those reached in the illustrations due to differences in the underlying facts

    and circumstances. Please see ey.com/IFRS for our most recent revenue

    publications.

    http://www.ey.com/ifrs

  • Updated October 2018 A closer look at IFRS 15, the revenue recognition standard 4

    Contents

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

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

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

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

    1.3 Transition methods ............................................................................... 10

    2. Scope .................................................................................................................. 39

    2.1 Other scope considerations .................................................................... 40

    2.2 Definition of a customer ......................................................................... 42

    2.3 Collaborative arrangements ................................................................... 43

    2.4 Interaction with other standards ............................................................. 44

    3. Identify the contract with the customer ............................................................... 52

    3.1 Attributes of a contract ......................................................................... 53

    3.2 Contract enforceability and termination clause ........................................ 62

    3.3 Combining contracts .............................................................................. 67

    3.4 Contract modifications .......................................................................... 69

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

    standard .................................................................................................... 80

    4. Identify the performance obligations in the contract .......................................... 83

    4.1 Identifying the promised goods or services in the contract ........................ 83

    4.2 Determining when promises are performance obligations .......................... 94

    4.3 Promised goods or services that are not distinct .................................... 118

    4.4 Principal versus agent considerations ................................................... 119

    4.5 Consignment arrangements ................................................................. 135

    4.6 Customer options for additional goods or services .................................. 135

    4.7 Sale of products with a right of return ................................................... 149

    5. Determine the transaction price ........................................................................ 151

    5.1 Presentation of sales (and other similar) taxes ....................................... 153

    5.2 Variable consideration ......................................................................... 154

    5.3 Refund liabilities ................................................................................. 172

    5.4 Rights of return .................................................................................. 173

    5.5 Significant financing component ........................................................... 178

    5.6 Non-cash consideration ....................................................................... 193

    5.7 Consideration paid or payable to a customer .......................................... 196

    5.8 Non-refundable upfront fees ................................................................ 204

    5.9 Changes in the transaction price ........................................................... 208

    6. Allocate the transaction price to the performance obligations ............................ 209

    6.1 Determining stand-alone selling prices .................................................. 209

    6.2 Applying the relative stand-alone selling price method ............................ 225

    6.3 Allocating variable consideration .......................................................... 228

    6.4 Allocating a discount ........................................................................... 233

  • 5 Updated October 2018 A closer look at IFRS 15, the revenue recognition standard

    6.5 Changes in transaction price after contract inception ............................. 237

    6.6 Allocation of transaction price to components outside the scope of

    IFRS 1 ...................................................................................................... 238

    7. Satisfaction of performance obligations ............................................................. 240

    7.1 Performance obligations satisfied over time .......................................... 241

    7.2 Control transferred at a point in time .................................................... 275

    7.3 Repurchase agreements ...................................................................... 282

    7.4 Consignment arrangements ................................................................. 289

    7.5 Bill-and-hold arrangements .................................................................. 290

    7.6 Recognising revenue for licences of intellectual property ........................ 294

    7.7 Recognising revenue when a right of return exists .................................. 294

    7.8 Recognising revenue for customer options for additional goods or

    services ................................................................................................... 294

    7.9 Breakage and prepayments for future goods or services ......................... 295

    8. Licences of intellectual property ........................................................................ 299

    8.1 Identifying performance obligations in a licensing arrangement ............... 300

    8.2 Determining the nature of the entity’s promise in granting a licence ........ 307

    8.3 Transfer of control of licensed intellectual property ................................ 313

    8.4 Licence renewals ................................................................................. 318

    8.5 Sales-based or usage-based royalties on licences of intellectual

    property ................................................................................................... 319

    9. Other measurement and recognition topics ........................................................ 332

    9.1 Warranties .......................................................................................... 332

    9.2 Onerous contracts ............................................................................... 339

    9.3 Contract costs .................................................................................... 341

    10. Presentation and disclosure ............................................................................. 367

    10.1 Presentation requirements for contract assets and contract liabilities .... 368

    10.2 Other presentation considerations ...................................................... 376

    10.3 Disclosure objective and general requirements ..................................... 377

    10.4 Specific disclosure requirements ........................................................ 378

    10.5 Transition disclosure requirements ..................................................... 394

    10.6 Disclosures in interim financial statements .......................................... 395

    Appendix A: Extract from EY’s IFRS Disclosure Checklist ....................................... 396

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

    publication ............................................................................................................ 405

    Appendix C: TRG discussions and references in this publication ............................. 409

    Appendix D: Defined terms .................................................................................... 412

    Appendix E: Changes to the standard since issuance .............................................. 413

    Appendix F: Summary of important changes to this publication .............................. 414

    Appendix G: Summary of differences from US GAAP .............................................. 421

  • Updated October 2018 A closer look at IFRS 15, the revenue recognition standard 6

    What you need to know

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

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

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

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

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

    Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real

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

    – Barter Transaction involving Advertising Services.

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

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

    increased judgement.

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

    significant changes for others, especially those entities for which legacy

    IFRS provided little application guidance.

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

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

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

    assets.

  • 7 Updated October 2018 A closer look at IFRS 15, the revenue recognition standard

    1. Objective, effective date and transition

    1.1 Overview of the standard

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

    IFRS 15 and the FASB’s standard supersede virtually all legacy revenue

    recognition requirements in IFRS and US GAAP, respectively. Noting several

    concerns with previous requirements for revenue recognition under both IFRS

    and US GAAP, the Boards’ goal in joint deliberations was to develop revenue

    standards that:4

    • Remove inconsistencies and weaknesses in the legacy revenue recognition

    literature

    • Provide a more robust framework for addressing revenue recognition issues

    • Improve comparability of revenue recognition practices across industries,

    entities within those industries, jurisdictions and capital markets

    • Reduce the complexity of applying revenue recognition requirements by

    reducing the volume of the relevant standards and interpretations

    • Provide more useful information to users through expanded disclosure

    requirements

    The standards provide accounting requirements for all revenue arising from

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

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

    scope of other IFRSs or US GAAP requirements, such as the leasing standards.

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

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

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

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

    (see section 2.1.1).

    IFRS 15 replaces all of the legacy revenue standards and interpretations

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

    IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the

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

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

    When they were issued in 2014, the standards were converged, except for

    a handful of differences.6 Since then, the Boards have issued some converged

    amendments to their standards, but they have also issued different amendments

    to the same topics (see Appendix E for a discussion of the changes to the

    standards since issuance). The FASB has also issued several amendments that

    the IASB has not issued. We highlight the significant differences between the

    IASB’s final standard and the FASB’s final standard throughout this publication.

    However, the primary purpose of this publication is to highlight the IASB’s

    4 IFRS 15.IN5. 5 IFRS 15.IN3, C10. 6 As originally issued, the standards under IFRS and US GAAP were identical except for these areas:

    (1) the Boards used the term ‘probable’ to describe the level of confidence needed when assessing collectability to identify contracts with customers, which will result in a higher threshold under US GAAP than under IFRS; (2) the FASB required more interim disclosures than the IASB; (3) the IASB allowed early adoption and the FASB did not; (4) the IASB allowed reversals of impairment losses and the FASB did not; and (5) the FASB provided relief for non-public entities relating to specific disclosure requirements and the effective date.

  • Updated October 2018 A closer look at IFRS 15, the revenue recognition standard 8

    standard, including all amendments to date, and focus on the effects for

    IFRS preparers.7 As such, we generally refer to the singular ‘standard’.

    1.1.1 Core principle of the standard

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

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

    entity recognise revenue at an amount that reflects the consideration to

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

    or services to a customer.

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

    1. Identify the contract(s) with a customer

    2. Identify the performance obligations in the contract

    3. Determine the transaction price

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

    contract

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

    obligation

    Entities need to exercise judgement when considering the terms of

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

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

    standard consistently to contracts with similar characteristics and in similar

    circumstances. To assist entities, IFRS 15 includes detailed application

    guidance. The IASB also included more than 60 illustrative examples in IFRS 15.

    We included a list of these examples in Appendix B to this publication and

    provided references to where certain examples are included in this publication.

    1.2 Effective date

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

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

    disclosed.

    7 For more information on the effect of the new revenue standard for US GAAP preparers,

    refer to our Financial Reporting Developments: Revenue from contracts with customers (ASC 606), Revised April 2017, available on EY AccountingLink.

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

  • 9 Updated October 2018 A closer look at IFRS 15, the revenue recognition standard

    The table below illustrates the effective date of IFRS 15 for entities with

    differing year-ends and assumes that entities report results twice a year (annual

    and half-year).

    Year-end Mandatory adoption Early adoption

    31 December 1 January 2018

    adoption date.

    Present for the first

    time in 30 June

    2018 interim

    financial statements

    and in

    31 December 2018

    annual financial

    statements.

    Possible adoption dates include, but are not limited to:

    • 1 January 2014 adoption date. Present for the first time in 30 June 2014 interim financial statements and in 31 December 2014 annual financial statements.

    • 1 January 2015 adoption date. Present for the first time in 30 June 2015 interim financial statements and in 31 December 2015 annual financial statements.

    • 1 January 2016 adoption date. Present for the first time in 30 June 2016 interim financial statements and in 31 December 2016 annual financial statements.

    • 1 January 2017 adoption date. Present for the first time in 30 June 2017 interim financial statements and in 31 December 2017 annual financial statements.

    30 June 1 July 2018 adoption date. Present for the first time in 31 December 2018 interim financial statements and in 30 June 2019 annual financial statements.

    Possible adoption dates include, but are not limited to:

    • 1 July 2014 adoption date. Present for the first time in 31 December 2014 interim financial statements and in 30 June 2015 annual financial statements.

    • 1 July 2015 adoption date. Present for the first time in 31 December 2015 interim financial statements and in 30 June 2016 annual financial statements.

    • 1 July 2016 adoption date. Present for the first time in 31 December 2016 interim financial statements and in 30 June 2017 annual financial statements.

    • 1 July 2017 adoption date. Present for the first time in 31 December 2017 interim financial statements and in 30 June 2018 annual financial statements.

  • Updated October 2018 A closer look at IFRS 15, the revenue recognition standard 10

    FASB differences

    The FASB’s standard became effective for public entities, as defined,8 for

    fiscal years beginning after 15 December 2017 and for interim periods

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

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

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

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

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

    adoption.

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

    as early as the original public entity effective date.

    1.3 Transition methods (updated October 2018)

    IFRS 15 requires retrospective application. However, the Board decided to allow

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

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

    1.3.3 below, respectively.

    The following are the dates relevant to transition:

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

    an entity first applies IFRS 15.9 This date of initial application does not

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

    dates of initial application for different year-ends include:

    Year ending Date of initial application

    31 December 2018 1 January 2018

    30 June 2019 1 July 2018

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

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

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

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

    Beginning of the earliest period presented

    Year ending (one comparative period)

    (two comparative periods)

    31 December 2018 1 January 2017 1 January 2016

    30 June 2019 1 July 2017 1 July 2016

    8 The FASB’s standard defines a public entity as one of the following: A public business

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

    9 IFRS 15.C2(a).

  • 11 Updated October 2018 A closer look at IFRS 15, the revenue recognition standard

    1.3.1 Definition of a completed contract (updated October 2018)

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

    fully transferred all of the identified goods or services before the date of initial

    application.10 Depending on the manner an entity elects to transition to

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

    completed performance before the date of initial application, even if they

    have not yet received the consideration and that consideration is still subject

    to variability.

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

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

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

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

    legacy requirements (i.e., IAS 11, IAS 18 and related Interpretations), as noted

    in IFRS 15.BC441. “Consequently, in many situations the term ‘transferred’

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

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

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

    when determining whether it has transferred goods or services to the

    customer.”11

    Consider the following examples:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    contract consideration to the loyalty points and deferred revenue

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

    completed the required service within six months and recognised revenue

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

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

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

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

    below).

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

  • Updated October 2018 A closer look at IFRS 15, the revenue recognition standard 12

    How we see it

    As discussed above, determining which contracts are completed at transition

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

    detailed requirements that indicated when goods had been delivered or

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

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

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

    when assessing whether a contract is complete.

    FASB differences

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

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

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

    US GAAP requirements that applied at the date of initial application.12

    The different definitions could lead to entities having a different population

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

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

    an entity could avoid the consequences of these different definitions by

    choosing to apply IFRS 15 retrospectively to all contracts, including

    completed contracts.13

    Frequently asked questions

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

    determining whether a contract meets the definition of a completed

    contract?

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

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

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

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

    Provisions, Contingent Liabilities and Contingent Assets) when assessing

    whether a contract is complete.

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

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

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

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

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

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

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

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

  • 13 Updated October 2018 A closer look at IFRS 15, the revenue recognition standard

    Frequently asked questions (cont’d)

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

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

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

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

    determining whether a contract meets the definition of a completed contract

    for transition to IFRS 15. This is because:

    • Dividends are not within the scope of IFRS 15.14

    • The guidance that was previously included in the illustrative examples

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

    now included within IFRS 9 Financial Instruments.15

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

    the effective interest method as set out in IFRS 9.16

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

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

    legacy IFRS?

    When determining whether a contract is completed, an entity considers

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

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

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

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

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

    a completed contract.

    Considering the requirements of IFRS 15 could lead to different outcomes

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

    in identifying a contract, including determining the contract duration.

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

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

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

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

    While legacy IFRS did not provide detailed requirements for identifying the

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

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

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

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

    term or a shorter period).

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

  • Updated October 2018 A closer look at IFRS 15, the revenue recognition standard 14

    Frequently asked questions (cont’d)

    Consider the following examples:

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

    Scenario 1

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

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

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

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

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

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

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

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

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

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

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

    stated that revenues from providing monthly services to customers were

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

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

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

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

    contractual rights and obligations were enforceable.

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

    retrospective method. Entity A also uses the practical expedient in

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

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

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

    one comparative period only).

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

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

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

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

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

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

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

    that accounting treatment is similar to the accounting treatment of

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

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

    the rights and obligations are enforceable.

  • 15 Updated October 2018 A closer look at IFRS 15, the revenue recognition standard

    Frequently asked questions (cont’d)

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

    (cont’d)

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

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

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

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

    notification date. Since no cancellation notice had been submitted by

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

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

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

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

    contract and would need to be transitioned to IFRS 15.

    Scenario 2

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

    customer submitted an early termination notice on 30 November 2016.

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

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

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

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

    31 December 2016.

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

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

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

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

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

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

    continues to apply its legacy accounting policy (developed in accordance

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

    Scenario 3

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

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

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

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

    without having to provide any notice. The customer cancelled the contract

    on 30 November 2016.

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

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

    fees were deferred over the average customer retention period. The

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

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

    over the next 24 months.

  • Updated October 2018 A closer look at IFRS 15, the revenue recognition standard 16

    Frequently asked questions (cont’d)

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

    (cont’d)

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

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

    had submitted the termination notice on 30 November 2016 and,

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

    31 December 2016.

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

    refers to recognition of the deferred income over average customer

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

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

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

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

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

    determining whether the contract is a completed contract. All previously

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

    cancellation. Therefore, the contract is a completed contract.

    Entity A continues applying its legacy accounting policy (developed

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

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

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

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

    refundable upfront fee would be recognised.

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

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

    ‘transfer of control’?

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

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

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

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

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

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

    Question 1-4 below).

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

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

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

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

    when determining whether it has transferred goods or services to the

    customer”.17

    17 IFRS 15.BC445D.

  • 17 Updated October 2018 A closer look at IFRS 15, the revenue recognition standard

    Frequently asked questions (cont’d)

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

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

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

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

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

    whether the goods or services have been transferred.

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

    in order to recognise revenue from the sale of goods:18

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

    of ownership of the goods.

    • The entity retained neither continuing managerial involvement to the

    degree usually associated with ownership nor effective control over

    the goods sold.

    • The amount of revenue could be measured reliably.

    • It was probable that the economic benefits associated with the

    transaction would flow to the entity.

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

    be measured reliably.

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

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

    may have retained the significant risks and rewards of ownership:19

    • When the entity retained an obligation for unsatisfactory performance

    not covered by normal warranty provisions.

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

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

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

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

    by the entity.

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

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

    probability of return.

    Understanding the reasons for the accounting treatment under legacy IFRS

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

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

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

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

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

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

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

    criteria for recognition have been met.

    18 IAS 18.14. 19 IAS 18.16.

  • Updated October 2018 A closer look at IFRS 15, the revenue recognition standard 18

    Frequently asked questions (cont’d)

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

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

    If collectability concerns were the only reason for delaying recognition

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

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

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

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

    the delay in recognition. Consider the following examples:

    Illustration 1-2 — Definition of completed contract: collectability

    Scenario 1

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

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

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

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

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

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

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

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

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

    the consideration became probable at the end of January 2017.

    Assume that Entity A adopted IFRS 15 on 1 January 2018 and used

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

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

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

    beginning of the earliest period presented.

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

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

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

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

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

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

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

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

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

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

    accordance with IAS 18).

    Scenario 2

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

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

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

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

    premises. The repayment schedule corresponded to the performance

    completed to date and Entity A applied the percentage of completion

    method in accordance with IAS 11.25, recognising revenue in the

    accounting period in which the relevant services were rendered.

  • 19 Updated October 2018 A closer look at IFRS 15, the revenue recognition standard

    Frequently asked questions (cont’d)

    Illustration 1-2 — Definition of completed contract: collectability

    (cont’d)

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

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

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

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

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

    customer’s premises that had not been communicated at contract

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

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

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

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

    Assume that Entity A adopted IFRS 15 on 1 January 2018 and used the

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

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

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

    beginning of the earliest period presented.

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

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

    completing the construction and delivering the highly specialised system

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

    consideration for the identified goods and services that had already been

    transferred to the customer is not relevant when determining whether

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

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

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

    accordance with IAS 11).

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

    Legacy IFRS provides limited guidance to assist entities in determining when

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

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

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

    judgement to determine whether a contract involving the licence of

    intellectual property meets the definition of a completed contract.

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

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

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

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

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

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

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

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

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

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

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

  • Updated October 2018 A closer look at IFRS 15, the revenue recognition standard 20

    Frequently asked questions (cont’d)

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

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

    occurred.”

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

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

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

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

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

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

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

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

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

    risks and rewards of ownership will have transferred to the customer at

    the time of sale.

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

    or non-refundable guarantee under a non-cancellable contract which

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

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

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

    no obligations subsequent to delivery. Another example is the granting

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

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

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

    recognised at the time of sale.”

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

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

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

    understanding whether the ongoing obligations mean that the significant

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

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

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

    period and might include considering factors such as:

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

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

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

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

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

    intellectual property before a specified date)

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

    those obligations apply

  • 21 Updated October 2018 A closer look at IFRS 15, the revenue recognition standard

    Frequently asked questions (cont’d)

    Consider the following examples:

    Illustration 1-3 — Definition of completed contract: licences

    Scenario 1

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

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

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

    CU 9,000. The delivery of the film was the only activity that Entity A was

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

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

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

    rewards of ownership has been transferred on that date.

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

    that revenue was recognised in full upon commencement of the licence

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

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

    were met at that date.

    Assume that Entity A adopted IFRS 15 on 1 January 2018 and used the

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

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

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

    beginning of the earliest period presented.

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

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

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

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

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

    account for the contract in accordance with its legacy accounting policy

    (developed in accordance with IAS 18).

    Scenario 2

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

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

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

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

    Entity A concluded that the significant risks and rewards of ownership

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

    delivered.

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

    not affect the timing of transfer to the customer because Entity A had no

    further obligations to perform. The licence fee is contingent on box office

    receipts. In such cases, IAS 18.IE20 stated “revenue is recognised only

    when it is probable that the fee or royalty will be received, which is

    normally when the event has occurred.”

  • Updated October 2018 A closer look at IFRS 15, the revenue recognition standard 22

    Frequently asked questions (cont’d)

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

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

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

    Therefore, at the beginning of the earliest period presented

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

    account for the contract in accordance with its legacy accounting policy

    (developed in accordance with IAS 18).

    Scenario 3

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

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

    through promotional and marketing campaigns for a period of 18 months

    after the film was delivered to the customer.

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

    that “promotional and marketing campaigns are not separately identifiable

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

    films. Revenue is recognised as the promotional and marketing campaigns

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

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

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

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

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

    The contract included multiple components because Entity A had to

    provide promotional support services in addition to the delivery of the

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

    that these services were not separately identifiable components to which

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

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

    as Entity A provided the services.

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

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

    that Entity A had not separately allocated the consideration to each

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

    undertake the promotional activities over the following 18 months.

    Therefore, at the beginning of the earliest period presented

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

    remaining promotional support services to the customer up to 30 June

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

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

  • 23 Updated October 2018 A closer look at IFRS 15, the revenue recognition standard

    Frequently asked questions (cont’d)

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

    transferred?

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

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

    Entities will need to carefully assess their loyalty programmes as points

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

    IFRIC 13 required that such programmes be treated as a revenue element

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

    complete until the loyalty points arising from that contract have been

    redeemed or have expired.

    Entities that operate loyalty programmes may face practical challenges in

    determining which contracts gave rise to unexpired and unused loyalty

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

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

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

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

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

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

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

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

    to the utilisation of loyalty points or some other approach.

    Consider the following examples:

    Illustration 1-4 — Definition of completed contract: loyalty

    programmes

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

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

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

    Customers can redeem their accumulated loyalty points for discounts

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

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

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

    Entity A recognises revenue from sales of goods when customers buy

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

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

    sale between the award points and the initial good sold.

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

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

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

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

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

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

    not used the points.

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

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

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

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

  • Updated October 2018 A closer look at IFRS 15, the revenue recognition standard 24

    Frequently asked questions (cont’d)

    Illustration 1-4 — Definition of completed contract: loyalty

    programmes (cont’d)

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

    presents one comparative period only).

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

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

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

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

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

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

    separately identifiable component of the initial sale transactions in which

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

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

    1.3.2 Full retrospective adoption (updated October 2018)

    Entities electing the full retrospective adoption must apply the provisions of

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

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

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

    Extract from IAS 8

    Applying changes in accounting policies

    19. Subject to paragraph 23:

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

    the initial application of an IFRS in accordance with the specific

    transitional provisions, if any, in that IFRS; and

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

    an IFRS that does not include specific transitional provisions applying to

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

    the change retrospectively.

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

    a voluntary change in accounting policy.

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

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

    apply an accounting policy from the most recent pronouncements of other

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

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

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

    for and disclosed as a voluntary change in accounting policy.

  • 25 Updated October 2018 A closer look at IFRS 15, the revenue recognition standard

    Extract from IAS 8 (cont’d)

    Retrospective application

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

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

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

    earliest prior period presented and the other comparative amounts disclosed

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

    been applied.

    Limitations on retrospective application

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

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

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

    or the cumulative effect of the change.

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

    changing an accounting policy on comparative information for one or more

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

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

    earliest period for which retrospective application is practicable, which may

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

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

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

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

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

    the new accounting policy prospectively from the earliest date practicable.

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

    the new accounting policy to comparative information for prior periods as

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

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

    amounts in both the opening and closing statements of financial position

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

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

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

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

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

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

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

    practicable.

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

    retrospectively, because it cannot determine the cumulative effect of

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

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

    earliest period practicable. It therefore disregards the portion of the

    cumulative adjustment to assets, liabilities and equity arising before that

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

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

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

    or more prior periods.

  • Updated October 2018 A closer look at IFRS 15, the revenue recognition standard 26

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

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

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

    retrospective method has to transition all of its contracts with customers

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

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

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

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

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

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

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

    expedients described below).

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

    retrospective method, under which all contracts with customers are recognised

    and measured consistently in all periods presented within the financial

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

    also provides users of the financial statements with useful trend information

    across all periods presented.

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

    basis, the IASB provided the following practical expedients:

    Extract from IFRS 15

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

    methods:

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

    with IAS 8 Accounting Policies, Changes in Accounting Estimates and

    Errors, subject to the expedients in paragraph C5; or

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

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

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

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

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

    presented.

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

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

    than estimating variable consideration amounts in the comparative

    reporting periods.

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    Extract from IFRS 15 (cont’d)

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

    period presented, an entity need not retrospectively restate the contract

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

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

    modifications that occur before the beginning of the earliest period

    presented when:

    (i) identifying the satisfied and unsatisfied performance obligations;

    (ii) determining the transaction price; and

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

    performance obligations.

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

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

    to the remaining performance obligations and an explanation of when the

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

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

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

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

    following information:

    (a) the expedients that have been used; and

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

    estimated effect of applying each of those expedients.

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

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

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

    range of selling prices and when allocating the transaction price to satisfied

    and unsatisfied performance obligations if there have been several performance

    obligations or contract modifications over an extended period. Furthermore,

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

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

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

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

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

    retrospective method and presents one comparative period only).

    Illustration 1-5 — Transition practical expedient for contract

    modifications

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

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

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

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

    performance obligations.

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

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

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

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

    accordance with IFRS 15.C5(c).

  • Updated October 2018 A closer look at IFRS 15, the revenue recognition standard 28

    Illustration 1-5 — Transition practical expedient for contract

    modifications (cont’d)

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

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

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

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

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

    to performance obligations.

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

    remaining unperformed services would be recognised when or as they are

    transferred to the customer.

    FASB differences

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

    modifications at transition for entities that elect to apply the full

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

    expedient to all contract modifications that occur before the beginning

    of the earliest period presented under the standard in the financial

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

    and US GAAP preparers depending on the number of comparative periods

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

    often include two comparative periods in their financial statements).

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

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

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

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

    the disclosures required in IAS 8, as follows:

    Extract from IAS 8

    Disclosure

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

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

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

    periods, an entity shall disclose:

    (a) the title of the IFRS;

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

    accordance with its transitional provisions;

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

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

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

    on future periods;

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    Extract from IAS 8 (cont’d)

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

    practicable, the amount of the adjustment.

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

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

    diluted earnings per share;

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

    to the extent practicable; and

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

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

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

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

    has been applied.

    Financial statements of subsequent periods need not repeat these

    disclosures.

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

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

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

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

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

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

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

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

    period’).

    Frequently asked questions

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

    all periods and to all contracts?

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

    expedients. However, if an entity elects to use a practical expedient, it

    must apply it consistently to all contracts within all periods presented under

    IFRS 15. It would not be appropriate to apply the selected practical expedient

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

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

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

    entity has applied and the likely effect of the application).20

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

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

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

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

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

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

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

    Illustrations 1-1 through 1-4.

    20 IFRS 15.C6.

  • Updated October 2018 A closer look at IFRS 15, the revenue recognition standard 30

    Frequently asked questions (cont’d)

    IFRS 15 clarifies that “if an entity chooses not to apply IFRS 15 to completed

    contracts in accordance with paragraph C5(a)(ii) or paragraph C7, only

    contracts that are not completed contracts are included in the transition to

    IFRS 15. The entity would continue to account for the completed contracts

    in accordance with its accounting policies based on legacy IFRS”.21

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

    using the full retrospective method and use the practical expedient in

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

    completed contract at the beginning of the earliest period presented

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

    one comparative period only). Therefore, the entity also would not record an

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

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

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

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

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

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

    optional practical expedient is available under the modified retrospective

    method (see section 1.3.3).

    1.3.3 Modified retrospective adoption (updated October 2018)

    The standard provides the following requirements for entities applying this

    transition method:

    Extract from IFRS 15

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

    methods:

    (a) …

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

    Standard recognised at the date of initial application in accordance with

    paragraphs C7–C8.

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

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

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

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

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

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

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

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

    year-end).

    21 IFRS 15.BC445E.

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    Extract from IFRS 15 (cont’d)

    C7A. An entity applying this Standard retrospectively in accordance with