special on revenue ifrs news - grant thornton …...revenue standard is here at last the iasb has...

Special

Edition

on Revenue

IFRS News

IFRS News Special Edition June 2014 1

A shift in the top line – the new global revenue standard is here at last

The IASB has published IFRS 15 ‘Revenue from Contracts with Customers’. IFRS 15:• replacesIAS18‘Revenue’,IAS11‘Construction

Contracts’ and some revenue-related Interpretations• establishesanewcontrol-basedrevenuerecognitionmodel• changesthebasisfordecidingwhetherrevenueisrecognised

at a point in time or over time• providesnewandmoredetailedguidanceonspecifictopics• expandsandimprovesdisclosuresaboutrevenue.

ThisspecialeditionofIFRSNewsexplainsthekeyfeatures ofthenewStandardandprovidespracticalinsightsinto its application and impact.

“AftermorethanfiveyearsindevelopmenttheIASBandFASBhaveatlastpublishedtheirnew,convergedStandardonrevenuerecognition–IFRS15‘RevenuefromContractswithCustomers’.IFRS15replacesIAS18andIAS11andwillaffectalmosteveryrevenue-generatingentitythatappliesIFRSs.WeapplaudthetwoBoardsfordeliveringaconvergedStandardinthiscriticalarea.Convergencehasbeenchallengingandsometimescontroversial.Againstthatbackground,weseethisStandardasalandmarkachievementthatwillprovideamajorboostforinvestorslookingtocomparecompanyperformanceacrossborders. IFRS15willapplytomostrevenuecontracts,includingconstructioncontracts.Amongotherthings,itchangesthecriteriafordeterminingwhetherrevenueisrecognisedatapointintimeorovertime.IFRS15alsohasmoreguidanceinareaswherecurrentIFRSsarelacking–suchasmultipleelementarrangements,variablepricing,rightsofreturn,warrantiesandlicensing. Theactualimpactoneachcompany’stoplinewilldependontheirspecificcustomercontractsandhowtheyhaveappliedexistingStandards.Forsomeitwillbeasignificantshift,andsystemschangeswillberequired,whileothersmayseeonlyminorchanges.AlthoughIFRS15onlytakeseffectin2017,managementshouldbegintheirimpactassessment much sooner.”

Andrew Watchman Global Head – IFRS

Asinglemodelforrevenuerecognition


IFRS15isbasedonacoreprinciplethatrequiresanentitytorecogniserevenue:• inamannerthatdepictsthetransferofgoodsorservicestocustomers• atanamountthatreflectstheconsiderationtheentityexpectstobeentitledtoinexchangeforthosegoodsorservices.

A“customer”isdefinedas“apartythathascontractedwithanentitytoobtaingoodsorservicesthatareanoutputoftheentity’sordinaryactivities.”Applying this core principle involvesthefivestepsshownatright:

IFRS 15 at a glance

Situation Details

Who’s affected? • allentitiesthatenterintocontractswithcustomerswithfew

exceptions.

What is the impact? • entitiesaffectedwillneedtoreassesstheirrevenuerecognitionpolicies

andmayneedtorevisethem

• thetimingandamountofrevenuerecognisedmaynotchangeforsimple

contractsforasingledeliverablebutmostcomplexarrangementswillbe

affectedtosomeextent

• IFRS15requiresmoreanddifferentdisclosures.

When are the changes • annualperiodsbeginningonorafter1January2017

effective? • earlyapplicationispermitted.

Five steps for revenue recognition

1.Identifythecontract(s)withacustomer

2.Identifytheperformanceobligations

3. Determine the transaction price

4. Allocate the transaction price to the performanceobligations

5.Recogniserevenuewhenorasanentitysatisfiesperformanceobligations


Practical insight – some industries will be affected more than othersSomeoftheindustriesthatwillbemostaffectedbyrevenuerecognition changesinclude:• telecoms and IT–wheremultipledeliverablesarecommonplaceandcurrent

practiceismixed.Cell-phonebusinessesthataccountfora“free”handsetasamarketingcostwillneedtochangethispolicyandinsteadallocaterevenuebasedonrelativestandalonesellingprices

• real estate–whentotakerevenuefor“offplan”apartmentsaleshasbeenadifficultissueandthenewmodelwillshifttheboundarybetweenpercentage-of-completionandon-completionrevenuerecognition

• asset management, legal and professional services and other sectors where performance-based or contingent fees are commonplace – underthenewmodelvariablepaymentsareaccountedforonabestestimatebasissubjecttoaconstraint

• retail –accountingforrightsofreturn,customerloyaltyschemesandwarrantiescouldallbeaffected.

Otherareasthatcouldbeaffectedincludedeferredandadvancedpayments,licensingarrangements,breakageandnon-refundableupfrontfees.

ScopeIFRS15appliestocontractswithcustomerstoprovidegoodsorservices.ItdoesnotapplytocertaincontractswithinthescopeofotherIFRSssuchasleasecontracts,insurancecontracts,financingarrangements,financialinstruments,guaranteesotherthanproductwarranties,andnon-monetaryexchangesbetweenentitiesinthesamelineofbusinesstofacilitatesalestothird-partycustomers.

Scope of IFRS 15

Practical insight – scopeAlthoughthescopeofIFRS15isdescribeddifferently,forpracticalpurposesweexpectitwillbeverysimilartothescopeofIAS18andIAS11takentogether. IFRS15alsocoversarrangementscurrentlyinthescopeofIFRIC13‘CustomerLoyaltyProgrammes’,IFRIC15‘AgreementsfortheConstructionofRealEstate’andIFRIC18‘TransfersofAssetsfromCustomers’.

• non-contractualincomeegfairvalueofagriculturalproducerecognisedunderIAS41‘Agriculture’

• contractswithinthescopeof: –IAS17‘Leases’ –IFRS4‘InsuranceContracts’ –IAS39‘FinancialInstruments:RecognitionandMeasurement’

(orIFRS9‘FinancialInstruments’)• contractsthatarenotwithcustomers(egsomerisk-sharingcontracts)• non-monetaryexchangesbetweenentitiesinthesamelineofbusiness

tofacilitatesalestocustomers.

• revenuefromcontractswithcustomers(subjecttospecificexceptions),includingcontractsfor

–salesofgoods –renderingofservices,includingconstructionservices –licensingofintellectualproperty• exchangesofnon-monetaryassetsotherthanscoped-outexchanges (seebelow).

In s

cope

Not in scope

Treat as a single contract

Treat as separate contracts


The five steps

ThefirststepinIFRS15istoidentifythe“contract,” whichIFRS15definesas“anagreementbetweentwoormorepartiesthatcreatesenforceablerightsandobligations.”Acontractcanbewritten,oral,orimpliedbyanentity’scustomarybusinesspractices.InadditionthegeneralIFRS15modelapplies

onlywhenorif:• thecontracthascommercialsubstance• the parties have approved the contract• theentitycanidentify − eachparty’srights − thepaymenttermsforthegoodsandservices

to be transferred• itisprobabletheentitywillcollectthe

consideration.

Ifacustomercontractdoesnotmeetthesecriteria,revenueisrecognisedonlywheneither:• theentity’sperformanceiscompleteandsubstantiallyalloftheconsiderationinthearrangementhasbeencollectedandis non-refundable

• thecontracthasbeenterminatedandtheconsideration received is non-refundable.

ForpurposesofIFRS15,acontractdoesnotexistifeachpartyhasanenforceablerighttoterminateawhollyunperformedcontractwithoutcompensatingtheotherparty.

Combining contractsAnentityisrequiredtocombinetwoormorecontractsandaccountforthemasasinglecontractiftheyareenteredintoatornearthesametimeandmeetoneofthefollowingcriteria:• thecontractswerenegotiatedasapackagewithonecommercialobjective

• theamountpaidunderonecontractis dependent on the price or performance under another contract

• thegoodsorservicestobetransferred underthecontractsconstituteasingleperformanceobligation.

Step1:Identifythecontract(s)withacustomer

Criteria for combining two or more contracts

Werecontractsnegotiatiedasapackagewitha

singlecommericialobjective?

Doesconsiderationinonecontractdependon

thepriceorperformanceofanothercontract?

Arecontractsforasingleperformance

obligation?

N

N

N

Y

Y

Y

Treat as separate contract, account for pre-modification contract as before

Allocate remaining transaction price not yet recognised to outstanding POs (treat as termination and new contract)

Update transaction price and measure of progress for effects of modification (cumulative catch-up method)


Contract modifications

Doesthemodificationmeetthecriteriafor

treatmentasaseparatecontract?

Areremaininggoods/servicesnotyet

transferreddistinctfromthosealready

transferred?

N

N

Y

Y

Contract modificationsA contract modification arises when the parties approveachangeinthescopeand/orthepriceofacontract(egachangeorder).Theaccountingfora contract modification depends on whether the modification is deemed to be a separate contract or not. Anentityaccountsforamodificationasaseparatecontract,ifboth:• thescopechangesduetotheadditionof‘distinct’goodsorservices(seebelow)

• thepricechangereflectsthegoods’orservices’stand-alonesellingpricesunderthecircumstances of the modified contract.

Inthiscase,onlyfuturerevenueisimpactedastheentitywillcontinuetoaccountforthepre-modification contract as before. Theaccountingforacontractmodificationthat is not a separate contract depends on whether theremaininggoodsandservicestobedeliveredunder the modified contract are ‘distinct’ from thosealreadytransferredtothecustomeratthemodification date:• iftheremaininggoodsorservicesaredistinct,thenthemodificationistreatedasaterminationoftheoriginalcontractandthecreation of a new contract. The transaction pricetobeallocatedtotheremainingseparateperformanceobligationsisthe(modified)totalconsiderationpromisedbythecustomerlesstheamountalreadyrecognisedasrevenue.

Noadjustmentsaremadetotheamountofrevenuerecognisedforseparateperformanceobligationssatisfiedonorbeforethemodificationdate.Ifachangetoanamountofvariableconsiderationarisessubsequentlyand relates to performance prior to the modificationtheentityappliestheguidanceon variable consideration

• iftheremaininggoodsorservicesarenotdistinctandarepartofasingleperformanceobligationthatispartiallysatisfiedasofthemodificationdate,theentityadjustsboththetransactionpriceandthemeasureofprogresstoward completion of the performance obligation.Revenuerecognisedtodateisadjustedforthecontractmodificationona‘cumulative catch-up’ basis

• iftheremaininggoodsorservicesareacombinationofthesescenariostheentityaccounts for the effects of the modification onunsatisfiedorpartiallysatisfiedobligationsconsistentlywiththeguidanceabove.Noadjustmentsaremadetotheamountofrevenuerecognisedforseparateperformanceobligationssatisfiedonorbeforethemodification date.

Ifthepartiesapproveachangeinscopebutthepricechangehasnotyetbeendetermined,theentityappliestherelevantguidancetothemodifiedcontractusinganestimateofthechangeintransactionpricearisingfromthemodification.Theguidanceonvariableconsiderationappliesinsuchcases–seeStep3.

Customer can benefit from

goods/ services

Separately identifiable from other contract

promises

Distinct

Meaning of ‘distinct’


Havingidentifiedacontract,theentitynextidentifiestheperformanceobligationswithinthatcontract.Aperformanceobligationisapromiseinacontractwithacustomertotransfereither(1)agoodorservice,orabundleofgoodsorservices,thatis‘distinct’(seebelow);or(2)aseriesofdistinctgoodsorservicesthataresubstantiallythesame and meet certain criteria. Performanceobligationsarenormally

specified in the contract but could also include promisesimpliedbyanentity’scustomarybusinesspractices,publishedpoliciesorspecificstatementsthatcreateavalidcustomerexpectationthatgoodsorserviceswillbetransferredunderthe contract. Performanceobligationsdonotinclude

administrative-typetasksthatdonotresultinatransferofagoodorservicetoacustomer(egsomeset-upactivities).Apromisedgoodorserviceis‘distinct’ifboth

ofthefollowingcriteriaaremet:• thecustomercanbenefitfromthegood

or service either on its own or with other resourcesreadilyavailabletothem.A readilyavailableresourceisagoodorservicethatissoldseparately(bytheentityorbyanotherentity)orthatthecustomerhasalreadyobtained

• itisseparatelyidentifiablefromotherpromises in the contract. Indicators of separate identifiabilityinclude:

− significantintegrationservicesarenotprovided(ietheentityisnotusingthegoodorservicemerelyasaninputtoproduce the specific output called for in thecontract)

− thegoodorservicedoesnotsignificantlymodifyorcustomiseotherpromisedgoodsor services in the contract

− thegoodorserviceisnothighlydependenton,orinterrelatedwith,otherpromisedgoodsorservicesinthecontract.

Practical insight – performance obligationsTheconceptofperformanceobligationsisacornerstoneoftheIFRS15model.Thetimingofrevenuerecognitionisbasedonsatisfactionofperformanceobligationsratherthanthecontractasawhole.Thisareaissometimesreferredtoas‘multipleelementarrangements’–atopiconwhichIAS18andIAS11arelackinginguidance.PracticehasthereforebeensomewhatmixedundercurrentIFRSsandinsomeindustries,suchassoftware,manyentitieshaveturnedtomuchmoredetailedUSGAAPforguidance. EntitiesapplyingIFRSswillneedtoanalyseallbutthesimplestcustomercontractstoidentifywhethertheyincludemorethanoneperformanceobligation,basedonthe‘distinct’principledescribedabove.Thatsaid,weexpectthatmanylong-termconstructionandservicecontractswillbeidentifiedassingleperformanceobligationsbecausetheyoftenincludeasignificantintegrationservice.Bycontrast,thecalculationofrevenueattributabletofreeordiscountedmobilephonesdeliveredbytelecommunicationscompaniesaspartofanairtimeordatapackagewillchangeifthosecompaniespreviouslyapplieda‘cashlimit’byanalogytoUSGAAPwhenassessingtheprobability ofreceipt. IFRS15alsoincludesspecificguidanceonsomecontractelementssuchaswarrantiesandcustomerloyaltyschemes.

Step2:Identifytheperformanceobligations


UnderIFRS15,the“transactionprice”isdefinedastheamountofconsiderationanentityexpectstobeentitledtoinexchangeforthegoodsorservicespromisedunderacontract,excludinganyamountscollectedonbehalfofthirdparties(forexample,salestaxes).Thetransactionpriceisnotadjustedforeffectsofthecustomer’screditrisk,butisadjustediftheentity(egbasedonitscustomarybusinesspractices)hascreatedavalidexpectationthatit willenforceitsrightsforonlyaportionofthecontract price. Anentitymustconsidertheeffectsofall

thefollowingfactorswhendeterminingthetransaction price:• variableconsideration• theconstraintonvariableconsideration• timevalueofmoney• non-cashconsideration• considerationpayableto

the customer.

Variable considerationThe amount of consideration received under a contractmightvaryduetodiscounts,rebates,refunds,credits,priceconcessions,incentives,performancebonuses,penaltiesandsimilaritems.IFRS15’sguidanceonvariableconsiderationalsoapplies if:

• theamountofconsiderationreceivedunderacontractiscontingentontheoccurrenceornon-occurrenceofafutureevent(egafixed-price contract would be variable if the contract includedareturnright)

• thefactsandcircumstancesatcontractinceptionindicatethattheentityintendstooffer a price concession.

To estimate the transaction price in a contract thatincludesvariableconsideration,anentitydetermines either:• theexpectedvalue(thesumofprobability-weightedamounts)or

• themostlikelyamount

ofconsiderationtobereceived,whicheverbetterpredicts the amount of consideration to which the entitywillbeentitled. Theexpectedvaluemightbetheappropriateamountinsituationswhereanentityhasalargenumberofsimilarcontracts.Themostlikelyamountmightbeappropriateinsituationswhereacontracthasonlytwopossibleoutcomes(forexample,abonusforearlydeliverythateitherwouldbefullyreceivedornotatall).Anentityshouldusethesamemethodto

estimatethetransactionpricethroughoutthelifeof a contract.

Anentitythatexpectstorefundaportionof the consideration to the customer would recognisealiabilityfortheamountofconsiderationitreasonablyexpectstorefund. Theentitywouldupdatetherefundliability eachreportingperiodbasedoncurrentfacts and circumstances.

Step 3: Determine the transaction price

Practical insight – customer credit riskUnderIAS18andIAS11collectabilityisarecognitionprinciplebecauseanentitycannotrecogniserevenueuntilitisprobablethattheeconomicbenefitswillflowtoit.IFRS15issomewhatsimilarinthatthemodelappliesonlyifcollectionisprobable. OncetheentityhasdeterminedthattheIFRS15modelapplies,thetransactionpriceisbasedonthecontractualentitlementsuchthatexpectedlossesarenottreatedasvariableconsiderationforrevenuerecognitionpurposes(althoughanexpectationofgrantingapriceconcessionmayariseincircumstancesofhighcustomercreditrisk).InsteadIFRS15requiresthatanentitywouldmeasurecreditlossesunderthefinancialinstrumentsstandards.TheIASBplanstoshortlyissueanewsectionofIFRS9‘FinancialInstruments’thatwillgenerallyrequiretheimmediaterecognitionoflifetimeexpectedlossesonbothcontractassetsandshort-termtradereceivables. UnderIFRS15creditlosses(initialandsubsequent)onbothcontractassetsandreceivablesmusteitherbepresentedonthefaceofthestatementofcomprehensiveincomeordisclosedinthefootnotes–butneednotbepresentedadjacenttorevenueasproposedinthe2011ExposureDraft.

Expected value

Most likely amount

Limited to the extent that it is ‘highly probable’ that there will not be a significant revenue reversal


Practical insight – uncertainty in the transaction priceUnderIASs18and11,uncertaintyinthetransactionpriceispartlyarecognitionissue.Iftherevenueamountcannotbemeasuredreliablythennorevenuecanberecognised(orrevenueislimitedtothecostsincurredwhentheirrecoveryisprobable).Ifareliableestimateisavailablethentheuncertainconsiderationwouldtypicallybemeasuredatfairvalue.Assessingreliabilitymayinvolveconsiderablejudgement. IFRS15hasmorespecificanddetailedguidanceandwillchangesomecurrentpractices.Thatsaid,inhighlyuncertainsituations(egsomesuccessfee-typearrangementswhentheoutcomeoftherelevantcontingencyisunpredictable)thepracticaleffectislikelytobethesame–ierevenueisrecognisedonlywhentheuncertaintyisresolved.Insituationsinvolvingmultiplesimilartransactions,suchthattheentityhasrelevant,predictiveexperience,webelievethatIFRS15couldleadtoearlierrecognitioninsomecases.

Constraint on variable consideration If the amount of consideration from a customer contractisvariable,anentityisrequiredtoevaluate whether the cumulative amount of revenuerecognisedshouldbeconstrained.Theobjectiveoftheconstraintisforanentitytorecogniserevenueonlytotheextentthatitishighlyprobablethattherewillnotbeasignificantreversal(iesignificantdownwardadjustment)whentheuncertaintyaboutthevariableconsideration resolves. Factorsthatcouldincreasethelikelihoodorthemagnitudeofarevenuereversalinclude,butarenotlimitedto,thefollowing:• theamountofconsiderationishighlysusceptibletofactorsoutsidetheentity’sinfluence

• theuncertaintyisnotexpectedtoberesolvedforalongtime

• theentity’sexperiencewithsimilarcontracts is limited

• theentityhasapracticeofofferingabroadrangeofpriceconcessions

• therearealargenumberandwiderangeofpossible consideration amounts in the contract.

Sales-based or usage-based royaltiesAnexceptiontothegeneralprinciplesonvariableconsideration applies to revenue for a sales-based orusage-basedroyaltypromisedinexchangeforalicenceofintellectualproperty.Revenueisrecognisedonlyonthelaterof:• whenthecustomermakesthesubsequent salesorusethattriggerstheroyalty

• theperformanceobligationtowhichsomeorallofthesales-basedorusage-basedroyaltyhasbeenallocatedhasbeensatisfied(orpartiallysatisfied).

Time value of moneyUnderIFRS15,anentitymustreflectthetimevalueofmoneyinitsestimateofthetransactionpriceifthecontractincludesasignificantfinancingcomponent.Theobjectiveinadjustingthetransactionpriceforthetimevalueofmoneyistoreflectanamountforthesellingpriceasthoughthecustomerhadpaidcashforthegoodsorserviceswhentheyweretransferred.Todeterminewhetherafinancingcomponent

issignificant,anentityconsidersseveralfactors,including,butnotlimitedto,thefollowing:• thedifference,ifany,betweenthepromised

consideration and the cash price• thecombinedeffectof:− theexpectedlengthoftimebetweendeliveryofthegoodsorservicesandreceiptofpayment

− theprevailinginterestratesinthe relevantmarket.

Acontractmaynothaveasignificantfinancingcomponent if:• advancepaymentshavebeenmadebutthetransferofthegoodorserviceisatthecustomer’s discretion

• theconsiderationisvariablebasedonfactorsoutside the vendor’s and customer’s control (egasales-basedroyalty)

• adifferencebetweenthepromisedconsideration and the cash price relates to somethingotherthanfinancingsuchasprotectingoneofthepartiesfromnon-performancebytheother.

Variable consideration and the revenue constraint

1. Estimatevariableconsiderationand

includeintransactionprice

2. Applyconstraint

Or

Account for the purchase of distinct good or service similarly to purchases from suppliers• if consideration owed to the

customer > fair value of goods/services: reduce transaction price by that excess

• ifentitycannotestimatefair value of goods/services received from customer: reduce transaction price by total consideration owed to the customer

Reduce the transaction price by the amount owed to the customer at later of:• relatedrevenueisrecognised• considerationispaidor

promised to customer


Asapracticalexpedient,anentitycanignoretheimpactofthetimevalueofmoneyonacontractifitexpects,atcontractinception,thattheperiodbetweenthedeliveryofgoodsorservicesandcustomerpaymentwillbeoneyearorless.Toadjusttheamountofconsiderationfor

thetimevalueofmoney,anentityappliesthediscount rate that would be used in a separate financingtransactionbetweentheentityandthecustomer at contract inception. That rate reflects thecreditriskofwhicheverpartyisreceivingcredit(iethecustomerifpaymentisdeferred andthevendorifpaymentisinadvance)and anycollateralorsecurityprovidedbythecustomer or theentity,includingassets transferred under the contract.Anentitypresentstheeffectsoffinancing

separatelyfromrevenueasinterestexpense or interest income in the statement of comprehensive income.

Non-cash considerationIf a customer promises consideration in a form otherthancash,anentitymeasuresthenon-cashconsiderationatfairvalueindeterminingthetransactionprice.Thisincludesarrangementsinwhichthecustomertransferscontrolofgoodsorservices(egmaterials,equipment,labour)tofacilitatetheentity’sfulfilmentofthecontract.Ifanentityisunabletoreasonablymeasurethe

fairvalueofnon-cashconsideration,itindirectlymeasurestheconsiderationbyreferringtothestand-alonesellingpriceofthegoodsorservicespromised under the contract.

Consideration payable to a customerConsiderationpayabletoacustomerincludesamountsthatanentitypaysorexpectstopayto a customer in the form of cash or non-cash items. This includes credit or other items that the customercanapplyagainstamountsowedtotheentity.Anentityreducesthetransactionpricebytheamountitowestothecustomer,unlesstheconsiderationowedisinexchangefordistinctgoodsorservicestransferredfromthecustomer totheentity.Ifthecustomertransfersdistinctgoodsor

servicestoanentityinexchangeforpayment,theentityaccountsforthepurchaseofthesegoodsorservicessimilarlytootherpurchasesfromsuppliers. If the amount of consideration owed to thecustomerexceedsthefairvalueofthosegoodsorservices,theentityreducesthe transaction price bytheamountoftheexcess.Iftheentitycannotestimatethefairvalueofthegoodsorservicesitreceivesfromthecustomer,itreducesthetransactionpricebythetotalconsiderationowedtothe customer. Anentityrecognisesanyreductioninrevenue

associatedwithadjustingthetransactionpriceforconsiderationpayabletoacustomeratthelaterofthefollowingdates:• thedatetheentityrecognisesrevenueforthetransferofgoodsorservicestothecustomer

• thedatetheentitypaysorpromisestopaytheconsideration to the customer. That promise maybeimpliedbytheentity’scustomarybusiness practices.

Consideration payable to a customer

Isconsiderationpayabletothecustomer

foradistinctgoodorservice?

N

Y


Possible methods to estimate the stand-alone selling price

Method Description

Adjusted market Involvesevaluatingthemarketinwhichtheentitysellsgoodsor

assessment approach servicesandestimatingthepricethatcustomersinthatmarketwouldpay

forthosegoodsorservices.Anentitymightalsoconsiderpriceinformation

fromitscompetitorsandadjustthatinformationfortheentity’sparticular

costsandmargins.

Expected cost plus Anentitywouldforecastitsexpectedcoststoprovidegoodsorservices

margin approach andaddanappropriatemargintotheestimatedsellingprice.

Residual approach Involvessubtractingthesumofobservablestand-alonesellingpricesfor

othergoodsandservicespromisedunderthecontractfromthetotal

transactionpricetoarriveatanestimatedsellingpriceforaperformance

obligation.Thismethodispermittedonlyiftheentity:

• sellsthesamegood/servicetodifferentcustomers(atornearthe

sametime)forabroadrangeofamounts;or

• hasnotyetestablishedpriceforthegood/serviceandthegood/

servicehasnotpreviouslybeensoldonastand-alonebasis.

UnderIFRS15,anentityallocatesacontract’stransaction price to each separate performance obligationwithinthatcontractonarelativestand-alonesellingpricebasisatcontractinception.IFRS15definesastand-alonesellingpriceas“thepriceatwhichanentitywouldsellapromisedgoodorserviceseparatelytoacustomer.”Thebestevidenceofthestand-alonesellingpriceistheobservablesellingpricechargedbytheentitytosimilarcustomersandinsimilarcircumstances,ifavailable.Ifnot,thestand-alonesellingpriceisestimatedusingallreasonablyavailableinformation(includingmarketconditions,entity-specificfactors,and information about the customer or class of customer),maximisingtheuseofobservableinputs.Whilenotrequiringtheiruse,IFRS15

suggeststhethreemethodsshowninthetable atrightwouldbesuitableforestimatingthe stand-alonesellingprice.

Allocating discounts and variable considerationIfthesumofthestand-alonesellingpricesforthepromisedgoodsorservicesexceedsthecontract’stotalconsideration,anentitytreatstheexcessasadiscounttobeallocatedtotheseparateperformanceobligationsonarelativestand-alonesellingpricebasis.However,anentitywouldallocateadiscounttoonlysomeoftheperformanceobligationsonlyifithasobservableevidenceoftheobligationstowhichtheentirediscountbelongs.IFRS15setsoutcriteriathatmustbemettosatisfythisrequirement.

Ifadiscountisallocatedentirelytooneormore,butnotall,performanceobligationsinacontract,thenIFRS15requiresanentitytoallocatethatdiscountbeforeusingaresidualapproachtoestimateastand-alonesellingpriceforagoodorservice.Variableconsiderationmaybeattributableto

theentirecontractoronlytoaspecificpart.IFRS15requiresthatvariableconsiderationisallocatedentirelytoasingleperformanceobligation(ortoadistinctgoodorservicethatformspartofaperformanceobligation)ifandonlyifbothofthefollowingconditionshavebeenmet:• thetermsofthevariablepaymentrelatespecificallytotheentity’seffortstowards,oroutcomefrom,satisfyingthatperformanceobligation(ordistinctgoodorservice)

• theresultoftheallocationisconsistentwiththe amount of consideration to which the entityexpectstobeentitledinexchangeforthepromisedgoodsorservices.

Changes in estimated transaction priceIftheestimatedtransactionpricechanges,anentityallocatesthechangetotheperformanceobligationsonthesamebasisasatcontractinception(subjecttothespecificguidanceoncontractmodifications).Amountsallocatedtoasatisfiedperformanceobligationarerecognisedeither as revenue or as a reduction in revenue in theperiodthechangeoccurs.

Changesinthetransactionpriceareallocatedentirelytooneperformanceobligation(oronlysomeofthetotalperformanceobligations)usingthe same criteria applied to allocation of variable considerationtoasingleperformanceobligation.

Step4:Allocatethetransactionpricetotheperformanceobligations

Over time

At a point in time

Control is transferred over time

Control is transferred at a point in time


UnderIFRS15,anentityrecognisesrevenuewhenorasittransferspromisedgoodsorservicesto a customer. A “transfer” occurs when the customerobtainscontrolofthegoodorservice.Acustomerobtainscontrolofanasset(good

orservice)whenitcandirecttheuseofandobtainsubstantiallyalltheremainingbenefitsfromit.Controlincludestheabilitytopreventotherentitiesfromdirectingtheuseofandobtainingthe benefits from an asset. The benefits of an asset are the potential cash flows that can be obtained directlyorindirectlyfromtheassetinmanyways.Akeypartofthemodelistheconceptthat

forsomeperformanceobligationscontrolistransferred over time while for others control transfers at a point in time.

Control transferred over timeAnentitydeterminesatcontractinceptionwhethereachperformanceobligationwillbesatisfied(thatis,controlwillbetransferred)overtime or at a specific point in time.

Control is considered to be transferred over timeifoneofthefollowingconditionsexists:• thecustomercontrolstheassetasitiscreatedorenhancedbytheentity’sperformanceunder the contract

• thecustomerreceivesandconsumesthebenefitsoftheentity’sperformanceastheentityperforms.Acustomerreceivesabenefitfromtheentity’sperformanceastheentityperformsifanotherentitydoesnothavetosubstantiallyreperformtheworkcompletedtodateifitsteppedintocompletetheremainingobligation(s)underthecontract

• theentity’sperformancecreatesorenhancesan asset that has no alternative use to the entity,andtheentityhastherighttoreceivepaymentforworkperformedtodate.Anentityevaluateswhetherapromisedassethasan alternative use to it at contract inception byconsideringwhetheritcanreadilyredirectthepartiallycompletedassettoanothercustomerthroughouttheproductionprocess.Inaddition,therighttopaymentshouldbeenforceable,andavendorconsidersthecontractualterms,aswellasanylegislationorlegalprecedentthatcouldoverridethoseterms,inassessingtheenforceabilityof thatright.

Step5:Recogniserevenuewhenorasanentitysatisfiesperformanceobligations

Transfer over time or at a point in time

Transferofcontrolofgood orservicetocustomer

Determining the timing of transfer

Doescustomercontroltheassetasitiscreated

orenhanced?

Doescustomerreceiveandconsumethebenefits

astheentityperforms?

Doesassethaveanalternativeusetotheentity?

N

N

Y

Y

N

Y

Doesentityhavetheenforceablerighttoreceivepaymentforworktodate?

Y

N


Anentityrecognisesovertimerevenuethatisassociatedwithaperformanceobligationthatissatisfiedovertimebymeasuringitsprogresstowardcompletionofthatperformanceobligation.Theobjectiveofthismeasurementistodepictthepatternbywhichtheentitytransferscontrolofthegoodsorservicestothecustomer.TheentitymustupdatethismeasurementovertimeascircumstanceschangeandaccountsforthesechangesasachangeinaccountingestimateunderIAS8‘AccountingPolicies,ChangesinAccountingEstimatesandErrors’.

IFRS 15 discusses two classes of methods that areappropriateformeasuringanentity’sprogresstowardcompletionofaperformanceobligation:• outputmethodsand• inputmethods.

Methods for measuring an entity’s progress toward completion:

Method Description Examples

Output methods (revenue • revenuecouldberecognisedatamount • surveysof

recognisedbydirectly invoicedonlyifthiscorrespondsdirectlywith performance

measuringthevalueof thevalueofthegoodsorservicestransferred todate,

thegoodsandservices todate milestones

transferredtodateto • theunitsproducedorunitsdeliveredmethod reachedor

thecustomer) couldprovideareasonableproxyfortheentity’s unitsproduced

performanceprovidedanywork-in-processor

finishedgoodscontrolledbythecustomerare

appropriatelyincludedinthemeasureofprogress.

Input methods (revenue • itmaybeappropriatetorecogniserevenueon • resources

recognisedbasedonthe astraight-linebasisifefforts/inputsare consumed,

extentofeffortsorinputs expendedevenlyovertheperformanceperiod labourhours

towardsatisfyinga • IFRS15requiresthatifanentityselectsan expended,

performanceobligation inputmethodsuchascostsincurreditmust costsincurred,

comparedtothe adjustthemeasureofprogressforanyinputs machinehours

expectedtotalefforts thatdonotdepictperformance,forexample usedortime

orinputsneeded) costsincurredthat: lapsed

– donotcontributetoprogress(eg

wastedmaterials)

– arenotproportionatetoprogress(egsome

non-distinctgoodsprocuredfromanother

supplierwithlimitedinvolvementbytheentity).

Entity has present right to payment

Legal title Customer

acceptance Indicators of control transfer

Customer has significant

risk and rewards

Physical possession


Ability to reasonably measure progress Anentityrecognisesrevenueforaperformanceobligationsatisfiedovertimeonlyifitcanreasonablymeasureitsprogresstowardcompletionofthatperformanceobligation.Anentityisnotabletoreasonablymeasureitsprogresstowardcompletionifitlacksreliableinformationthatisrequiredtoapplyanappropriatemethod of measurement. Insomecases,suchasduringtheearlystagesofacontract,anentitymightnotbeabletoreasonablymeasureitsprogresstowardcompletion,butmaystillexpecttorecoveritscostsincurredinsatisfyingtheperformanceobligation.Anentityisthenpermittedtorecogniserevenuetotheextentofcostsincurreduntilitcanreasonablymeasureitsprogress.

Control transferred at a point in timeInsituationswherecontroloveranasset(goodsorservices)istransferredatasinglepointintime,anentityrecognisesrevenuebyevaluating when the customer obtains control of the asset.

Inperformingtheevaluation,anentityshouldconsiderindicatorsofcontrol,including,butnotlimitedto,thefollowing:• theentityhasapresentrighttoreceivepaymentfortheasset

• thecustomerhaslegaltitletotheasset• thecustomerhasphysicalpossessionof

the asset• thecustomerhasassumedthesignificantrisksandrewardsofowningtheasset

• thecustomerhasacceptedtheasset.

Control indicators


Other topics

Contract costsCosts to fulfil a contractIfcostsincurredinfulfillingacontractwithacustomer are covered under another Standard (suchasIAS2‘Inventory’andIAS16‘Property,Plant,andEquipment’),anentityaccountsforthose costs in accordance with those Standards. Ifnot,anentityrecognisesanassetforsuchcosts,providedallofthecriteriaintheadjacenttable are met.

Incremental costs of obtaining a contractUnderIFRS15,anentitycapitalisestheincrementalcostsofobtainingacontractifitexpectstorecoverthosecosts.Incrementalcostsofobtainingacontractarecoststhatanentitywould not have incurred if it had not obtained the contract(forexample,somesalescommissions).Coststhatanentityincursregardlessofwhetheritobtainsacontractareexpensedasincurred,unlessthecostsareexplicitlychargeabletothecustomerregardlessofwhethertheentityobtainsthe contract. Asapracticalexpedient,IFRS15allows

anentitytoexpensetheincrementalcostsofobtainingacontractasincurrediftheamortisationperiodoftheassetthattheentitywouldhaveotherwiserecognisedisoneyearorless.

Costs to fulfil a contract

Costs are capitalised if the following conditions are met:

• thecostsrelatedirectlytoacontract,including:

– directlabour

– directmaterials

– allocationsthatrelatedirectlytothecontractorcontractactivities(forexample,contract

managementandsupervisioncostsanddepreciationoftoolsandequipmentusedinfulfilling

thecontract)

– coststhatareexplicitlychargeabletothecustomer

– othercoststhattheentityincursonlybecauseitenteredintothecontract(egpaymentsto

subcontractors)

• thecostsgenerateorenhanceresourcesoftheentitythatwillbeusedtosatisfyperformance

obligationsinthefuture

• theentityexpectstorecoverthecosts.

Costs to be expensed as incurred:

• generalandadministrativecoststhatarenotexplicitlychargeabletothecustomer

• costsofwastedmaterials,labour,orotherresourcesthatwerenotreflectedinthecontractprice

• coststhatrelatetosatisfiedperformanceobligations

• costsrelatedtoremainingperformanceobligationsthatcannotbedistinguishedfromcostsrelated

tosatisfiedperformanceobligations.


Amortisation and impairmentUnderIFRS15,anentityamortisescapitalisedcontractcostsonasystematicbasisconsistentwiththepatternoftransferringthegoodsorservicesrelatedtothosecosts.Ifanentityidentifiesasignificantchangetotheexpectedpatternoftransfer,itupdatesitsamortisationtoreflectthatchangeinestimateinaccordancewithIAS8. Anentityrecognisesanimpairmentlossinearningsifthecarryingamountofanassetexceedstheremainingamountofconsiderationthattheentityexpectstoreceiveinconnectionwiththerelatedgoodsorserviceslessanydirectlyrelatedcontractcostsyettoberecognised.Whendeterminingtheamountofconsiderationitexpectstoreceive,anentityignorestheconstraintonvariableconsiderationpreviouslydiscussed,andadjustsfortheeffectsofthecustomer’screditrisk. Beforerecognisinganimpairmentlossundertherevenuerecognitionguidance,anentityrecognisesimpairmentlossesassociatedwithassetsrelatedtothecontractthatareaccountedforunderotherguidance,suchasIAS2.Anentitywouldreverseapreviouslyrecognisedimpairmentlosswhentheimpairmentconditionsnolongerexistorhaveimproved.

Practical insight – contract costsIFRS15’sguidanceoncontractfulfilmentcostsissimilartoIAS11’s.However,IFRS15appliestoallcustomercontractsnotonlytoconstructioncontracts.ThetreatmentofcontractcostsforservicesissomewhatmixedunderIAS18,anddependsinpartontheextenttowhichserviceprovidersapplyIAS11’sguidance(IAS18statesthattherequirementsofIAS11are“generallyapplicabletotherecognitionofrevenueandtheassociatedexpensesforatransactioninvolvingtherenderingofservices”). IFRS15’sguidanceonthecostsofobtainingorsecuringacontractappearmorerestrictivethanIAS11’sbutapplytoabroaderrangeofcontracts.IFRS15requiresimmediateexpensingofthosecoststhatwillbeincurredregardlessofwhetheracontractiswonorlost(egmostbidcosts).Bycontrast,underIAS11thecostsofsecuringacontractareincludedincontractcostsiftheyrelatedirectlytoacontract,canbeseparatelyidentifiedandmeasuredreliablyanditisprobablethatthecontractwillbeobtained.

WarrantiesIfacustomerhastheoptiontoseparatelypurchaseawarranty,thenanentityaccountsforthatwarrantyasaperformanceobligation.Ifacustomerdoesnothavetheoptiontoseparatelypurchaseawarranty,thentheentityaccountsforthewarrantyusingthecostaccrualguidanceinIAS37‘Provisions,ContingentLiabilitiesandContingentAssets’unlessallorpartofthewarrantyprovidesthecustomerwithanadditionalservicebeyondtheassurancethattheproductwillcomplywithagreed-uponspecifications.IFRS15providesthefollowingexamplesoffactorsthatanentitymustconsider

indeterminingwhetherawarrantyprovidesacustomerwithanadditionalservice:

Warranty obligations

Factor Description

Whether the warranty Alegalrequirementtoprovideawarrantyindicatesthatitisnota

is required by law performanceobligationbecausesuchlawsaretypicallyintendedto

protectthecustomerfromtheriskofpurchasingadefectiveproduct

Term of the warranty Thelongerthecoverageperiod,themorelikelyawarrantyisa

coverage period performanceobligation

Nature of the tasks the Ifanentitymustperformcertaintaskstoprovideassurancetothe

entity promises to perform customerthattheproductcomplieswithagreed-uponspecifications,

under the warranty thoseservicesdonotlikelyconstituteaseparateperformanceobligation.

License is distinct and is accounted for

separately from other promises

License is not distinct and is accounted for together with other promises as a single performance obligation. Entity assesses whether control transfers over time or at a point in time

Control is transferred at a point in time Control is transferred over time

Account for the warranty as a performance obligation

Account for the service as a separate performance obligation

Account for the warranty using the cost accrual guidance in IAS 37

Accounting for warranties

Doesthecustomerhavetheoptionto

separatelypurchaseawarranty?

Doesallorpartofthewarrantyprovidethe

customerwithanadditionalservicebeyond

theassurancethattheproductwillcomply

withagreed-uponspecifications?

Y

N

N

Y


Ifanentitydeterminesthatawarrantyprovidesaservicethatisseparatefromassuranceontheproduct’scompliancewithagreed-uponspecifications,thatserviceisconsideredtobeaseparateperformanceobligation.Theentityallocatesaportionofthetransactionpricetothatserviceunlessitcannotreasonablyaccountfortheassuranceandserviceportionsofthewarrantyseparately.Ifanentitydeterminesthatitcannotreasonablyseparatetheassuranceandservicecomponentsofawarranty,itaccountsforbothtogetherasasingleperformanceobligation.

Practical insight – warranty obligationsIAS18andIAS11havenospecificguidanceonwhetherwarrantyobligationsareseparatedeliverables.However,althoughIFRS15hasmoredetailedguidancewebelieveitislargelyconsistentwithacceptedpracticesforstandardandextended-typewarrantiesunderexistingIFRSs. Inourexperiencestandard-typewarrantiesarenottypicallyregardedasseparatedeliverablesandareinsteadaccountedforbyaccruingestimatedcostsunderIAS37.Forextended-typewarrantiestheapplicationofIAS11and18requiresjudgementbutinourexperiencethesearecommonlyidentifiedasseparatedeliverables,withallocatedrevenuerecognisedoverthecoverageperiod.

LicensingUnderIFRS15revenuefromlicensingrightstotheentity’sintellectualproperty(egsoftware,technology,motionpictures,music,franchises,patents,trademarksandcopyrights)isrecognisedeitherovertimeoratapointintime,dependingon:• theseparabilityornon-separabilityofanyotherpromisesinthecontract• thenatureoftheentity’sperformanceunderthelicense.

Ifthecontractincludesotherpromisesthatarenon-separablefromtherightofaccessoruse,thelicenseisnotdistinct.Theentitythenaccountsforthebundleofpromisesasasingleperformanceobligation.Itappliesthecontrolguidancetodetermineiftransfertakesplace(andrevenueisthenrecognised)overtimeoratapointintime.

Righttousetheentity’sintellectualpropertyasitexistswhenlicenceisgranted.

Righttoaccesstheentity’sintellectualpropertyasitexiststhroughoutthelicenceperiod.

Doescontractincludepromisesthatarenon-

separablefromlicense?

Y Y

N

Y

Assess nature of entity’s promise related to the license

Revenue from licensing


RightsofreturnandrepurchaseobligationsAnentitymaysellgoodsandalso:• grantthecustomerarighttoreturntheasset• promise,orobtainanoptiontorepurchasetheasset(arepurchaseagreement).

Sale with a right of return Insomecontracts,anentitytransferscontrolofaproducttoacustomerandalsograntsthecustomertherighttoreturntheproductforvariousreasons(suchasdissatisfactionwiththeproduct)andreceiveanycombinationofthefollowing:• fullorpartialrefundofanyconsiderationpaid• acreditthatcanbeappliedagainstamountsowed,orthatwillbeowed,totheentity

• anotherproductinexchange.

Broadly,theentityrecognisesrevenueforthesearrangementsnetofestimatedreturns.Todothisitrecognises:• revenueforthesoldproducts,reducedforestimatedreturns(theguidanceonvariableconsiderationapplies)

• arefundliability• anasset,initiallymeasuredatthecarryingamountoftheinventorylesscostsofrecovery,andcorrespondingadjustmenttocostofsales.

Therefundliabilityandassetareupdatedattheendofeachreportingperiodforchangesinexpectations,withcorrespondingadjustmentsasrevenue(orreductionsofrevenue).

Practical insight – product exchangesExchangesbycustomersofoneproductforanotherofthesametype,quality,condition,andprice(forexample,onecolourorsizeforanother)arenotconsideredreturnsforthepurposesofIFRS15.

Ifthelicenseisdistinct,thenatureofthepromise(aseitherarighttoaccessorarighttousetheentity’sintellectualproperty)determineswhetherthelicenseresultsinaperformanceobligationthatissatisfiedovertimeoratapointintime.Ifthelicenseisapromisetoprovidearighttoaccesstheintellectualproperty,theperformanceobligationissatisfiedovertime.Alicenseisapromisetoprovide accesstotheentity’sintellectualpropertyifallofthefollowingconditionsaremet:• thereisarequirementorimplicitunderstandingthattheentitywillundertakeactivitiesthatwillsignificantlychangetheunderlyingintellectualproperty

• thecustomerisexposedtopositiveornegativeeffectsasthoseactivitiestakeplace• theactivitiesdonottransferagoodorservicetothecustomerastheyoccur.

Iftheseconditionsarenotpresent,thenthepromiseisarighttousetheintellectualpropertyasitexistswhenthelicenceisgranted.Inthiscase,theperformanceobligationissatisfiedatapointintime,similartothesaleofagood.IFRS15explainsthatotherpromisesinthecontract,restrictionsontime,geographyoruseandguaranteesthattheentityhasavalidpatentovertheintellectualpropertyarenotconsideredinmakingthisdetermination.

Practical insight – licensing arrangementsIAS18provideslimitedguidanceonlicensingarrangements.IAS18’sguidanceisconsistentwithIFRS15inasfarasrevenueissometimesrecognisedovertime(egonastraight-linebasisoverthelifeoftheagreement)andsometimesatapointintime.UnderIAS18thisdependsonthe“substanceoftheagreement”,althoughthereislittleexplanationastohowsubstanceshouldbeassessed. IAS18alsonotesthatanassignmentofrightsforafixedfeeunderanon-cancellablecontractwhichpermitsthelicenseetoexploitthoserightsfreelyandwherethelicensorhasnoremainingobligationstoperformis,insubstance,asale(egalicensingagreementfortheuseofsoftwarewhenthelicensorhasnoobligationssubsequenttodelivery,orgrantingofrightstoexhibitamotionpicturefilminmarketswherethelicensorhasnocontroloverthedistributorandexpectstoreceivenofurtherrevenuesfromtheboxofficereceipts). Accordingly,underbothIFRS15andIAS18theexistenceofcontinuingobligationsisa criticalfactor.

Contract is accounted for as a

financing arrangement

Contract is accounted for as

a lease

Contract is accounted for as a sale with a right of return

Entity’s obligation to repurchase the asset at the customer’s request (a put option)

Entity’s right or obligation to repurchase the asset

(a forward or call)


Repurchase agreementsSometimesanentitywillenterintoacontracttosellanassetand also promises or has the option to repurchase the asset (oranassetthatissubstantiallythesameoranotherassetofwhichtheassetthatwasoriginallysoldisacomponent).Anentitywillneedtoevaluatetheformofthepromise

torepurchasetheassetindeterminingtheaccounting(forexample,aforward,callorputoption).Ifacontractincludesaforward(entityobligationto

repurchase)oracalloption(entityrighttorepurchase),anentityaccountsforthecontract(1)asaleaseifitcanormust repurchase the asset for an amount that is less than the originalsellingprice;or(2)asafinancingarrangementifitcanormustrepurchasetheassetforanamountthatisequaltoormorethantheoriginalsellingprice.Ifacustomerisgrantedarighttorequireanentityto

repurchasetheasset(putoption)atapricethatislessthantheoriginalsellingprice,theentityassesseswhetherthecustomerhasasignificanteconomicincentivetoexerciseitsright.Thisassessmentconsidersvariousfactorsincludingtherelationshipbetweentherepurchasepriceandtheexpectedmarketvalueatthedateofrepurchase.Iftherepurchasepriceisexpectedtosignificantlyexceedmarketvaluethenasignificanteconomicincentiveexists.Theagreementisthenaccountedforasalease(becausethecustomeriseffectivelypayingtheentityfortherighttousetheassetforaperiodoftime),unlessthecontractisapartofasale-leaseback (seebelow).Ifthecustomerdoesnothaveasignificanteconomic

incentivetoexercisetheputoption,theentityaccounts fortheagreementasasalewitharightofreturn(seeguidanceabove).

Ifacontractgrantsthecustomeraputoptionandtherepurchasepriceoftheassetisequaltoorgreaterthantheoriginalsellingpriceandismorethantheexpectedmarketvalueoftheasset,thecontractisconsideredtobeafinancingarrangement.Theentitycontinuestorecognisetheassetandrecognisesaliabilityinitiallymeasuredattheoriginalsellingprice of the asset.

Repurchase agreements

Repurchaseprice≥originalsellingpriceand>expectedmarketvalueatrepurchasedate?

Repurchaseprice≥originalsellingprice?

YN N

Y Y

Y

Isitpartofasale-leaseback? Doescustomerhaveasignificanteconomicincentivetoexerciseoption?

N N


Practical insight – comparison with IFRIC 13 ‘Customer Loyalty Programmes’IFRS15’sguidanceinthisareacoversthesameissuesasIFRIC13(whichitsupersedes).Thenewguidanceisgenerallysimilarandisexpectedtohavelittleornopracticaleffectontheaccountingformanyloyaltyschemes.However,IFRS15:• addressesabroaderrangeofarrangements(suchasindividualdiscount

awardsthatmightnotbeviewedas‘programmes’forIFRIC13purposes)• hasmoreguidanceonwhensucharrangementsarea‘materialright’• hasmoredetailedrequirementsonallocatingthetransactionprice.

Sale-leaseback transactionsAsale-leasebacktransactionwithaputoptionthathasanexercisepricelessthantheoriginalsalespriceisaccountedforasafinancingtransactionrather than as a lease if the holder of the putoptionhasasignificanteconomicincentivetoexercisetheoption.

Customer options for additional goods or services Anentitymaysellgoodsorservicesandalso provide customers with options toacquireadditionalgoodsorservicesfreeoratadiscount–forexamplesalesincentives,awardcreditsorpoints,renewal options or other discounts. Such optionsareaperformanceobligationforthepurposeofIFRS15if,andonlyif,theyrepresenta‘materialright’.Thefollowingarenotconsideredtobematerialrights:• adiscountorotherrightthatthe

customer could receive without enteringintothecontract

• adiscountthatisnomorethantherangeofdiscountstypicallygivenforthosegoodsorservicesto that class of customer in that geographicalareaormarket

• anoptiontoacquireanadditionalgoodorserviceatapricethatwouldreflectthestandalonesellingpriceforthatgoodorservice.

If a customer option is a material rightthentheentityshouldallocatepart of the transaction price to that performanceobligationonarelativestandalonesellingpricebasis.Ifthestandalonesellingpriceisnotdirectlyobservable,asisoftenthecase,itmustbe estimated. The estimate should reflect the discount the customer wouldobtainwhenexercisingtheoption,adjustedfor:• anydiscountthatthecustomercouldreceivewithoutexercisingthe option

• thelikelihoodthattheoptionwillbeexercised.

Revenue allocated to customer options isrecognisedwhentheoptionsareexercisedorexpire.

IFRS 15 also provides a practical expedientthatappliestosomecustomerrightstorenewacontractonpre-agreedterms.Insuchcasestheentityispermittedtoallocatethetransactionpricetotheoptionalgoodsorservicesbyreferencetothegoodsorservicesexpectedtobeprovidedandthecorrespondingexpectedconsideration.


Presentation and disclosure

PresentationUnderIFRS15,anentitypresentsacontractinitsstatementoffinancialpositionasacontractliability,acontractasset,orareceivable,dependingontherelationshipbetweentheentity’sperformanceandthecustomer’spaymentatthereportingdate.Anentitypresentsacontractasacontract

liabilityifthecustomerhaspaidconsideration,orifpaymentisdueasofthereportingdatebuttheentityhasnotyetsatisfiedaperformanceobligationbytransferringagoodorservice.Conversely,iftheentityhastransferredgoodsorservicesasofthereportingdatebutthecustomerhasnotyetpaid,theentityrecogniseseither a contract asset or a receivable. An entityrecognisesacontractassetifitsrighttoconsiderationisconditionedonsomethingotherthanthepassageoftime;otherwise,anentityrecognisesareceivable.

DisclosureIFRS15requiresmanynewdisclosuresaboutcontractswithcustomers.Thefollowingtableprovidesasummary:

Disclosures

Disclosure area Summary of requirements

General • revenuerecognisedfromcontractswithcustomers,

separatelyfromitsothersourcesofrevenue

• impairmentlossesonreceivablesorcontractassets.

Disaggregation • categoriesthatdepictthenature,amount,timing,

of revenue anduncertaintyofrevenueandcashflows

• sufficientinformationtoenableusersoffinancial

statementstounderstandtherelationshipwithrevenue

informationdisclosedforreportablesegmentsunder

IFRS8‘OperatingSegments’.

Information about • includingopeningandclosingbalancesofcontract

contract balances assets,contractliabilities,andreceivables(ifnot

separatelypresented)

• revenuerecognisedintheperiodthatwasincludedin

contractliabilitiesatthebeginningoftheperiodand

revenuefromperformanceobligations(whollyorpartly)

satisfiedinpriorperiods

• explanationofrelationshipbetweentimingofsatisfying

performanceobligationsandpayment

• explanationofsignificantchangesinthebalancesof

contractassetsandliabilities.

Disclosure area Summary of requirements

Information about • whentheentitytypicallysatisfiesperformanceobligations

performance • significantpaymentterms

obligations • natureofgoodsandservices

• obligationsforreturns,refundsandsimilarobligations

• typesofwarrantiesandrelatedobligations

• aggregateamountoftransactionpriceallocatedto

remainingperformanceobligationsatendofperiod*.

Information about • judgementsimpactingtheexpectedtimingof

significant satisfyingperformanceobligations

judgements • methodsusedtorecogniserevenueforperformance

satisfiedovertime,andexplanation

• thetransactionpriceandamountsallocatedto

performanceobligations(egestimatingvariable

considerationandassessingifconstrainedand

allocatingtoperformanceobligations).

Assets recognised • judgementsmadeindeterminingcostscapitalised

from the costs to • amortisationmethodused

obtain or fulfil • closingbalancesbymaincategoryand

a contract amortisationexpense.

*notrequiredif(i)performanceobligationispartofacontractwhichhasanoriginalexpecteddurationoflessthanoneyear;or(ii)entityappliesexpedienttorecogniserevenueatamountitisentitledtoinvoicewhenthiscorrespondsdirectlywithvaluetothecustomerfromentity’sperformance


©2014GrantThorntonInternationalLtd.Allrightsreserved.“GrantThornton”referstothebrandunderwhichtheGrantThorntonmemberfirmsprovideassurance,taxandadvisoryservicestotheirclientsand/orreferstooneormorememberfirms,asthecontextrequires.GrantThorntonInternationalLtd(GTIL)andthememberfirmsarenotaworldwidepartnership.GTILandeachmemberfirmisaseparatelegalentity.Servicesaredeliveredbythememberfirms.GTILdoesnotprovideservicestoclients.GTILanditsmemberfirmsarenotagentsof,anddonotobligate,oneanotherandarenotliableforoneanother’sactsoromissions.

Effectivedateandtransition

IFRS15iseffectiveforannualreportingperiodsbeginningonorafter1January2017.Earlyadoptionispermitted. Entitiesarerequiredtoapplythenewrevenuestandardeither:• retrospectivelytoeachpriorperiodpresented,subjecttosomepracticalexpedientsor

• retrospectively,withthecumulativeeffectofinitialapplicationrecognisedinthe current period.

Anentitythatchoosestorestateonlythecurrentperiodisrequiredtoprovidethefollowingadditionaldisclosuresintheinitialyearofadoption:• byfinancialstatementlineitem,thecurrentyearimpactofapplyingthenew

revenue standard • anexplanationofthereasonsbehindthesignificantimpacts.

special on revenue ifrs news - grant thornton …...revenue standard is here at last the iasb has...

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