small ppt on ifrs 15, "revenue from contracts with customers"

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IFRS 15 – REVENUE FROM CONTRACTS WITH CUSTOMERS CA Manish C. Iyer and CA Himanshi Arora [email protected] and [email protected]

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IASB issued IFRS 15, "Revenue from Contracts with Customers" on 28 May 2014 replacing IAS 11, IAS 18, IFRIC, 13, IFRIC 15, IFRIC 18 and SIC 31. IFRS 15 marks a historic event in that this is first standard where IASB and FASB have converged. However, there are minor differences between US GAAP and IFRS.

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2. Core Principle Recognise Revenue to depict transfer of promised goods or services to customers in an amount that reflects consideration to which entity expects to be entitled in exchange for those goods or services 3. Steps to achieve Core Principle Identify contract with a customer Identify separate performance obligations in contract Determine transaction price Recognise revenue when entity satisfies a performance obligation Allocate transaction price to separate performance obligations in contract 4. Contract: Agreement between two or more parties that creates enforceable rights & obligations Essentials of a Contract: - has commercial substance - has been approved by the parties (Written, Oral or Implied) & commitment to perform obligations - each partys right regarding goods/services can be identified - payment terms can be identified Apply proposed revenue requirements to each contract unless specified criteria met for combination of contracts Step 1: Identify Contract 5. Performance Obligation: Promise in a contract with a customer to transfer a good or service to customer Customer: Party that has contracted with entity to obtain goods/services that are output of entitys ordinary activities - IFRS to apply only to contract when counterparty is Customer - IFRS not to apply when counterparty might not be customer but rather a collaborator or partner that shares with entity, risks & benefits of developing a product to be marketed Step 2: Identify separate performance obligations 6. Step 2: Identify separate performance obligations (contd.)Step 2: Identify separate performance obligations (contd.) Entity promises to transfer more than one good or service Check conditions for Non-Distinct: - goods/services are highly interrelated & transferring them to customer requires that entity also provide a significant service of integrating goods/services into combined item(s) for which customer has contracted and - bundle of goods/services is significantly modified or customised to fulfil contract Yes Combine with other promised goods/ services until a distinct bundle is identified No Check conditions for Distinct: - sold separately on regular basis or - customer can benefit from good /service either on its own or together with other resources readily available to him No Yes Account as separate performance obligation 7. Step 3: Determine Transaction Price Transaction price: amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer excluding amounts collected on behalf of third parties IAS 18 - At FV AS 9 - May be at charges made to customer at goods supplied or services rendered Variable consideration: Use expected value or most likely amount whichever can be predicted better Time Value of Money: Adjust if contract has financing component that is significant to contract (Exception: 1 year or less) 8. Step 3: Determine Transaction Price (contd.) Non-cash consideration: At FV If FV cant be estimated reasonably, measure by reference to stand-alone selling price of goods /services Consideration payable to customer: - Entity pays or expects to pay consideration - to customer or other parties that purchase goods/services from customer and - customer can apply that amount against amount owed to entity Reduce from Transaction Price unless payment is in exchange for distinct good/service Ignore effects of customer credit risk 9. Step 4: Allocate Transaction Price Allocate TP to each separate PO Determine stand-alone selling price at contract inception of good/service underlying each separate PO for allocation purpose If stand-alone selling price not observable: estimation Allocation of subsequent changes in TP: - Amount allocated to a satisfied PO: Recognise as Revenue or as Reduction of Revenue - in period of subsequent change 10. Step 5: Recognise Revenue Satisfy Performance Obligation by transferring a promised good or service Customer obtains control of good or service Recognise Revenue 11. Step 5: Recognise Revenue (Contd.) Customer Obtains Control of Good or Service: Goods and services are assets, even if only momentarily, when they are received & used (as in case of many services) Control of an asset: - ability to direct use of & obtain substantially all of the remaining benefits from asset - ability to prevent other entities from directing use of and obtaining benefits from an asset - benefits are potential cash flows that can be obtained directly or indirectly in many ways 12. Step 5: Recognise Revenue (contd.) Determine whether each Separate PO is satisfied: Over Time If either of following conditions is met: (a) entitys performance creates or enhances an asset that customer controls as asset is created or enhanced or (b) entitys performance does not create asset with an alternative use to entity & at least one of following criteria is met: - customer simultaneously receives & consumes benefits of entitys performance as it performs - another entity would not need to substantially re-perform the work entity has completed to date if that other entity were to fulfil remaining obligation to customer or - entity has right to payment for performance completed to date & it expects to fulfil contract as promised Point in time Entity to consider following indicators of transfer of control (in addition to requirements for control) to determine point in time: - entity has a present right to payment for asset - customer has legal title to asset - entity has transferred physical possession of asset - customer has significant risks and rewards of ownership of asset - customer has accepted asset 13. Step 5: Recognise Revenue (contd.) Alternative Use: When evaluating whether asset has alternative use to entity: consider at contract inception effects of contractual and practical limitations on entitys ability to readily direct the promised asset to another customer For example, an asset would have an alternative use to entity if asset is largely interchangeable with other assets that entity could transfer to customer without breaching contract & without incurring significant costs that otherwise would not have been incurred in relation to that contract. Conversely, asset would not have an alternative use if contract has substantive terms that preclude entity from directing asset to another customer or if entity would incur significant costs (for example, costs to rework the asset) to direct asset to another customer 14. Step 5: Recognise Revenue (contd.) PO satisfied over time: - Recognise Revenue over time by consistently applying method of measuring progress towards complete satisfaction - Output or Input Method - Update measure of progress over time PO satisfied at a point in time: Recognise Revenue when entity satisfy a performance obligation & customer obtains control of promised good/service 15. CA Manish C. Iyer and CA Himanshi Arora [email protected] and [email protected]