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Revenue from Contracts with Customers

17 February 2017

IFRS 15

Why IFRS 15 is important?

What does it mean for entities?

• Revenue recognition principles will change

• P/L may vary to a certain extent

• IT Systems, Accounting Policies, Internal Processes and Controls may be subject to change

What do I need to know now?

• Key challenges

New estimates & judgments required

Retrospective application includes associated data gathering analysis

Change of systems, processes and internal controls

What is it?

• More detailed guidance on revenue recognition which involve significant judgments

• Effective on 1/1/2018 with retrospective application

What does it mean for auditors?

• Identify the key impacts on your clients

• Early discussion with clients on the key impacts and help your clients prepare for the changes

Entities

Key c

halle

ng

es

Auditors

Key fa

cts

IFRS 15

©2017 Deloitte & Touche (M.E.). All rights reserved. IFRS 15 Revenue from Contracts with Customers 1

Overview—the core principle

Identify the contract with a customer

(Step 1)

Identify the performance obligations in the contract

(Step 2)

Determine the

transaction price

(Step 3)

Allocate the transaction price

to the performance obligations

(Step 4)

Recognize revenue when

each performance obligation is

satisfied

(Step 5)

Control approach

(differs from the risks and rewards approach under IAS 18)

Recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entityexpects to be entitled in exchange for those goods or services.

Five-step model to apply the core principle:

IFRS 15 Revenue from Contracts with Customers©2017 Deloitte & Touche (M.E.). All rights reserved. 2

Identify theperformance obligations

(Step 2)

Identify the contract

(Step 1)

Determine the transaction price (Step

3)

Allocate thetransaction price (Step

4)

Recognize revenue (Step 5)

Contract with customerCU 110

Deliver equipment

Provide training services

Provide support services

Provide extended warranty

CU 4

CU 1

Point in time

Over time

Over time

Over time

CU 100

CU 5

Applying the 5 step model—Example


A legally enforceable contract (incl. oral or implied) must meet all of the following requirements:

A contract is outside the scope if:

Commercial substance.

Contracts are approved and the parties are committed to perform.

Each party’s rights can be identified.

Payment terms can be identified.

The contract is wholly unperformedEach party can unilaterally terminate the contract without

compensation

Step 1 Step 2 Step 3 Step 4 Step 5

It is probable that the entity will collect the consideration to which it will be entitled.

AND

Step 1: Identifying the contract

Collectability threshold


Identify all (incl. implicit) promised goods/services in the contract

Is the good/service distinct?

Can the customer benefit from the good or service on its own or together with other

readily available resources?

Is the good or service separately identifiable from other promises in the contract?

Account for as a separate performance obligation

Combine two or more promised goods or services

YES NO

CAPABLE OF BEING DISTINCT DISTINCT IN CONTEXT OF CONTRACT


AND

Step 2: Identifying performance obligations

New


Transaction price

The transaction price would not be reduced for the effects of customer credit risk.

Excluding credit risk

Variable considerationConsideration amount to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer.

Definition

The amount is fixed and not contingent on the outcome of future events.

Fixed consideration

• Consideration in a form other than cash• Shall be measured at FV

Non-cash consideration

Significant benefit of financing

Estimated and potentially constrainede.g., discounts, rebates, refunds, etc.

What is the transaction price? What does it include?

Consideration payable to customers

• If identified, leads to adjustment in transaction price.

• Practical expedient available.

Reduces transaction price unless payment is made for a distinct good/service.

Step 3: Determining the transaction price Step 1 Step 2 Step 3 Step 4 Step 5

Exception

Exception for sales/ usage based royalties of IP


Determine standalone selling price

• Estimate the price if unobservable

• Acceptable methods：

• > Adjusted market assessment approach

• > Expected cost plus a margin approach

• > Residual approach

Allocate the transaction price

• Allocate the transaction price to each performance obligation on a relative stand-alone selling price basis.

• Allocate discounts proportionally to all performance obligations unless certain criteria are met.

• Allocate variable consideration and changes in transaction price to all performance obligations unless two criteria are both met.

• Do not reallocate changes in standalone selling price after inception.


Maximize the use of observable

inputs and apply consistently

Step 4: Allocating the transaction price

Only allowed in limited circumstances


The seller’s performance creates or enhances an asset controlled by the

customer.

Performance satisfied over time = Revenue recognized over time

The seller does not create an asset that has an alternative use to the seller

and the seller has the right to be paid for performance to date.

OR

Revenue recognized at a point in time

The customer simultaneously receives and consumes the benefit of the seller’s

performance as the seller performs.

IF NOT


OR

Step 5: Recognizing revenue


Indicators that control transfers include:

Present right to payment

Legal title of goods and services

Transferred physical possession

Significant risks and rewards of ownership

The customer has accepted the asset

Revenue recognized at a point in time

Step 5: Recognizing revenue Step 1 Step 2 Step 3 Step 4 Step 5


What are the key changes?

Recognition of revenue at a point in time or over time

Unbundling of contracts

Allocation of total revenue to the unbundled parts

Uncertain revenue or contingent revenue

More extensive disclosure requirements

Key areas:


Identify the contract with a customer

Identify the performance obligations in the contract

Determine the transaction price

Allocate the transaction price to performance obligations

Recognize revenue when each performance obligation is satisfied

Step 1

Step 2

Step 3

Step 4

Step 5

Collectability

Healthcare

Technology

Unbundling of

contracts

Telecom

Software

Automotive

Uncertain revenue or

contingent revenue

Life Science

Consumer &

Industrial Products

Allocation of total

revenue to the

unbundled parts

Telecom

Recognition of

revenue at a point in

time or over time

Contract

Manufacturer

Real estate

Key impact on revenue recognition

Actual impact will depend on specific customer contracts and what the clients did before


Example - Contract Manufacturing Industry

Question

Should the revenue be recognized over time or at a point of time?

Answer

Revenue should be recognized over time.

Entity X Customer A

Customer-specific parts, large quantities, repetitive basis

Right to payment even if customer A cancels the contract

No other customers


Example – Software Industry

Current practice: Entity A might unbundle the licence from the add-on services.

New practice: Entity A will need to use judgement to determine whether to combine the licence and some or all of theprofessional services as one perfomance obligation and recognize revenue over time.

Entity A Customer Y

Sells a software license and provides consulting services for customizing the software

Software is highly customized and the add-on service are necessary

to utilize the software

CU600,000

These services could be provided by a different

supplier


Example – Real Estate

An entity is developing a multi-unit residential complex. A customer enters into a binding sales contract with the entity for a specified unit that isunder construction. Each unit has a similar floor plan and is of similar size, but for example the location of the unit within the complex is different.The customer pays a non-refundable deposit upon entering into the contract and will make progress payments during construction.


Current practice: Recognize revenue when apartment is handed over.

New practice: Possibly recognize revenue over time – will depend on facts and circumstances.

This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles setout will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refrainingfrom acting on any of the contents of this publication. Deloitte & Touche (M.E.) would be pleased to advise readers on how to apply the principlesset out in this publication to their specific circumstances. Deloitte & Touche (M.E.) accepts no duty of care or liability for any loss occasioned toany person acting or refraining from action as a result of any material in this publication.

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