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  • Revenue from contracts with customers

    A summary of IFRS 15 and its effects April 2016

  • Background The International Accounting Standards Board (IASB) issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under IFRS.

    The standards core principle is that a company will recognise revenue when it transfers goods or services to customers at an

    expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgement and make more estimates than under todays guidance.

    The new standard will likely affect the measurement, recognition and disclosure of revenue, which is often a

    the one most closely scrutinised by investors and analysts.

    Gaining an understanding of the effects of the new standard, providing early communication to stakeholders and planning ahead are crucial for successful implementation. Even companies that

    of revenue will need to validate that assumption and identify any necessary changes to policies, procedures internal controls and systems to ensure that revenue transactions are appropriately evaluated through the lens of the new model.

    disclosure requirements. For companies that will experience a

    standard, the implementation effort will be considerable.

    IRFS 15 creates a single source of revenue guidance

    impact many entities across various industries.

    The new standard will likely affect the measurement, recognition and disclosure of revenue, which is often a companys most important

    indicator and the one most closely scrutinised by investors and analysts.

  • What you need to know IFRS 15 creates a single source of revenue guidance for many entities across various industries. The new standard is a

    in approach from current IFRS.

    The new standard applies to revenue from contracts with customers and replaces all the revenue standards and interpretations currently issued in IFRS, i.e. 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 and provides more application guidance than the current standards. Adoption is required for annual periods beginning on or after 1 January 2018, but early adoption is permitted under IFRS. Early preparation will be key to a successful implementation of the new standard.

    What is in scope or affected by the standard? Contracts with customers

    of the entitys ordinary activities (e.g., property, plant and equipment, investment property, intangible assets)

    What is in not in scope? Leasing contracts Insurance contracts Financial instruments contracts and certain other contracts Certain non-monetary exchanges Certain put options on sale and repurchase agreements

  • The impact of the adoption of IFRS 15The following diagram illustrates the potential impact of the adoption of IFRS 15 on

    Leve

    l of i

    mpa

    ct o

    n in

    dust

    ry

    Effort to comply

    Low High

    High

    Banking

    Insurance

    Retail and consumer products

    Oil and Gas

    Construction & engineering

    Entities most likely to be affected by the changesTelecommunications entities selling post-paid contracts to customers.

    Construction and engineering entities that enter into contracts that provide for performance obligations, allow

    Mining & metals entities

    a contract is within the scope of the new standard and determining when control transfers.

    Oil & gas entities that enter into commodities contracts, multi-period contracts, or enter into production sharing, joint venture and similar arrangements.

    Retail & consumer entities providing rights of return to customers, selling products through distributors or resellers, providing customer options for goods or services and licenses and franchising arrangements.

    Insurance entities who have third party administrator arrangements and managed care arrangements. It also includes insurance brokers. Estimation of variable consideration will be affected.

    Banking entities that provide credit card arrangements and enters into sale agreements with regards to real estate owned. Banking issues may arise from interchange fee revenue, rewards programs, annual fees and asset management fees.

    Telcos

    Mining & Metals

  • The key principles of IFRS 15Scope

    revenue earned from a contract with a customer (with limited exceptions), regardless of the type of revenue transaction or the industry. The standards requirements will also apply to the recognition and measurement of gains and losses on the

    of the entitys ordinary activities (e.g., sales of property, plant and equipment or intangibles).Extensive disclosures will be required, including disaggregation of total revenue; information about performance obligations; changes in contract asset and liability account balances between periods and key judgements and estimates. Disclosures will be required on both an annual and interim basis.

  • 1.Identify the contract(s) with the customer

    3.Determine the transaction price

    2.Identify the separate performance obligations in the contract(s)

    4.Allocate the transaction price to performance obligations

    5. Recognise revenue when (or as) the

    performance obligations

    Contracts may be written, verbal or implied by customary business practices, but must be enforceable and have commercial substance.

    The model applies to each contract with a customer, once it is probable the entity will collect the consideration to which it will be entitled. In evaluating whether collection is probable, the entity would consider only the customers ability and intention to pay the consideration when due.

    An entity should combine two or more contracts that are entered into at or near the same time with the same customers, and account for them as a single contract, if they

    The standard provides detailed requirements for contract

    to evaluate the terms and customary business practices to identify which promised goods or services, or a bundle of promised goods or services, would be accounted for as separate performance obligations.

    The key determinant for identifying a separate performance obligation is whether a good or service, or a bundle of goods or services, is distinct. A good or service is distinct if the customer can

    readily available resources and the good or service is separately

    Entities are also required to consider whether the promised good or service is separable from other promises in the contract. Each distinct good or service will be a separate performance obligation.

    An entity may provide a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer. Examples could include services provided on an

    series could be a single performance obligation.

    Step 1: Identify the contract(s) with a customer

    Step 2: Identify the separate performance obligations in the contract(s)

  • Step 3: Determine the transaction price

    Estimate of any variable consideration*

    Fair value of any non-cash consideration

    Any consideration payable to a customer such as vouchers and coupons

    Effect of time value of money if Transaction price

    The transaction price is generally not adjusted for credit risk. However, it may be constrained because of variable consideration. That is, an entity can include variable consideration in the transaction price only to the extent it is highly probable that a subsequent change in estimated variable consideration will not

    For sales and usage-based royalties from the licence of

    not include such consideration in the transaction price before the subsequent sale or usage occurs.

    allowed to pay in arrears. Conversely, when the customer

    customer. An entity is however not required to assess whether an

    period between the customers payment and the entitys transfer of goods or services is greater than one year.

    *Variable consideration should be estimated using either a probability-weighted expected value or the most likely amount, whichever better predicts the amount of consideration to which the entity will be entitled.

  • How we see itIn most instances, an entity will be able to make estimates of stand-alone selling prices that represent managements best estimate considering observable inputs. However, it could be

    by the entity or others.

    Current IFRS does not explicitly address the accounting for multiple-element arrangements, which has resulted in diversity in practice. IFRS 15 provides detailed requirements for transactions with multiple elements, but does not eliminatethe need to exercise judgement to determine the appropriate performance obligations and allocate the consideration to those performance obligations.

  • Step 4: Allocate the transaction price to the separate performance obligationsAn entity must allocate the transaction price to each separate performance obligation on a relative stand-alone selling price basis, with limited exceptions.

    When determining stand-alone selling prices, an entity must use observable information, if it is available.

    If stand-alone selling prices are not directly observable, an entity will need to use estimates based on reasonably available information. Another suitable method of estimating stand-alone selling price may be forecasting expected cost and adding an appropriate margin for