discussion paper tax implications related to the ... · 1.1 background of mfrs 15 1.1.1 rationale...

DISCUSSION PAPER

TAX IMPLICATIONS RELATED TO THE

IMPLEMENTATION OF MFRS 15 REVENUE FROM

CONTRACTS WITH CUSTOMERS

Prepared by: Joint Tax Working Group on MFRS

Date of issue:

The Malaysian Institute of Certified Public Accountants

Tax Implications Related to the Implementation of MFRS 15 Revenue from Contracts with Customers

Disclaimer: This document is meant for the purpose of discussion only and the Malaysian Institute of Accountants, The Malaysian Institute of Certified Public Accountants and the Chartered Tax Institute of Malaysia (“the Institutes”) are not, by means of this document, rendering any professional advice or services. This document is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a professional advisor. Whilst every care has been taken in compiling this document, the Institutes make no representations or warranties (expressed or implied) about the accuracy, suitability, reliability or completeness of the document for any purpose. The Institutes, their Councils and Council members, Committees and Committee members, Working Groups and Working Group members, employees and agents accept no liability to any party for any loss, damage or costs howsoever arising, whether directly or indirectly from any action or decision taken (or not taken) as a result of any person relying on or otherwise using this document or arising from any omission from it. The views given or expressed in this document may not be shared by the Inland Revenue Board or the Ministry of Finance. The views are provided gratuitously and without liability to any person whatsoever. Copyright © (month) 2018 by the Malaysian Institute of Accountants (MIA), The Malaysian Institute of Certified Public Accountants (MICPA) and the Chartered Tax Institute of Malaysia (CTIM). All rights reserved. No part of this publication may be reproduced or transmitted by any or other means, including electronic, mechanical, photocopying and recording or in any information storage and retrieval system, without the prior written permission of the publishers.

Tax Implications Related to the Implementation of MFRS 15 Revenue from Contracts with Customers

Contents

Page No.

1 1. Introduction

1.1 Background of MFRS

1.1.1. Rationale

1.1.2. Scope of MFRS

1.1.3. Main features

1.1.4. Effective date

2 Changes introduced by MFRS 15

3 Tax treatment before and after implementation

Tax Implications Related to the Implementation of MFRS 15: Revenue from Contracts with Customers

1

1. INTRODUCTION 1.1 BACKGROUND OF MFRS 15

1.1.1 Rationale

The objective of MFRS 15 is to establish the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer.

1.1.2 Scope of MFRS 15 MFRS 15 shall apply to ALL contracts with customers, except the following:

(a) Lease contracts

MFRS 16 Leases

(b) Insurance contracts

MFRS 4 Insurance Contracts

(c) Financial instruments and other contractual rights or obligations

MFRS 9 Financial Instruments, MFRS 10 Consolidated Financial Statements, MFRS 11 Joint Arrangements, MFRS 27 Separate Financial Statements and MFRS 28 Investments in Associates and Joint Ventures

(d) Non-monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers

Not applicable

1.1.3 Main features

The core principle of MFRS 15 is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity recognises revenue by applying the following steps: (a) Step 1: Identify the contract(s) with a customer. A contract is an

agreement between two or more parties that creates enforceable rights and obligations. The contract must meet all of the following:

• be approved by the parties;

• have commercial substance;

• each party’s rights and obligations are identified;


2

• payment terms are outlined; and

• results in collection being probable.

(b) Step 2: Identify the performance obligations in the contract. Each performance obligation is a separate promise to transfer to the customer either a distinct good(s), a distinct service(s), a bundle of distinct goods or services, or a series of distinct goods or services. A good or service is distinct if both of the following criteria are met:

• A customer can benefit from its use on its own or with readily available resources.

• An entity’s promise to transfer the goods or services to the customer is separately identifiable from other promises in the contract (i.e. the goods or services are distinct in the context of the contract).

(c) Step 3: Determine the transaction price. The transaction price is the amount of consideration the entity expects to receive in exchange for the transfer of goods and/or services.

(d) Step 4: Allocate the transaction price to the performance obligations in the contract. The allocation is typically based on the relative stand-alone selling price (observable or estimated) for each distinct good or service. Stand-alone selling price is the price at which the good or service would be sold separately to a customer.

(e) Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation. A performance obligation is satisfied when control of the good or service is transferred to the customer. This may be either at a single point in time or over time. If an entity does not satisfy its performance obligation over time, it satisfies it at a point in time.

1.1.4 Effective date

MFRS 15 is effective for annual periods beginning on or after 1 January 2018. Earlier application is permitted. If an entity applies MFRS 15 earlier, it shall disclose that fact.

2. SALIENT CHANGES INTRODUCED BY MFRS 15

2.1 Salient changes introduced by MFRS 15 are as follows:

(a) Timing of revenue recognition Pre-MFRS 15, the timing of revenue recognition from the sale of goods is based primarily on the transfer of risks and rewards. MFRS 15 focuses on when control of those goods has been transferred to the customer where revenue is recognised either at a point in time or over time. This may result in a change of timing for revenue recognition.


3

(b) Bundling and unbundling of goods and/or services

MFRS 15 requires entities to identify the performance obligations in the contract. Each identified separate performance obligation is allocated a transaction price and the revenue of each separate performance obligation is recognised either at a point in time or over time.

(c) Determining the transaction price MFRS 15 requires entities to consider the effects of the following in determining the transaction price:

• Variable consideration (and the constraints) such as discounts or rebates;

• Significant financing component;

• Non-cash consideration; and

• Consideration payable to a customer such as coupons or vouchers.

3. TAX TREATMENT BEFORE AND AFTER IMPLEMENTATION

3.1 POTENTIAL APPROACHES ON DETERMINING THE TAX TREATMENT UPON ADOPTION OF MFRS 15

3.1.1 There are 2 potential approaches that have been discussed by the Joint Tax

Working Group on MFRS in determining the tax treatment upon adoption of MFRS 15. The approaches are as follows:

(a) Maintaining existing tax treatment

Under this approach, tax adjustments need to be made to the accounting revenue in applying the provisions under the Income Tax Act 1967.

(b) Partial convergence approach This approach accepts the separate performance obligations identified for accounting purposes and the allocation of revenue among the separate performance obligations (e.g. sale of goods and services) but applies the timing recognition of the separate components of income in accordance with Section 24 of the Income Tax Act 1967.

3.1.2 A taxpayer who elects to apply the partial convergence approach will have to apply the approach consistently in its tax computations for all future years of assessment.

3.1.3 Please note that the partial convergence approach has not been discussed

with nor agreed by the Ministry of Finance and Inland Revenue Board.


4

3.2 ILLUSTRATION

3.2.1 Examples of the application of MFRS 15 to different industries and the two approaches to determining the tax treatment explained in paragraph 3.1.1 above are illustrated in the Appendices.

TAX ISSUES ARISING FROM THE CHANGE OF ACCOUNTING TREATMENT

INDUSTRY : AUTOMOTIVE

Description of transaction

Accounting treatment

APPENDIX A

(i) Sale of motor vehicle with free maintenance

A distributor sells one unit of motor vehicle A to its dealer with a free 3-year maintenance service at RM190,500. The standalone

selling price of the vehicle and 3-year maintenance service are RM190,500 and RM1,500 respectively. The sales contract signed on

15.12.2017 provides that payment of the RM190,500 shall be owing to the distributor upon delivery of the vehicle. The vehicle was

delivered to the dealer on 01.01.2018. The distributor’s financial year (FY) ends on 31 December. The dealer obtains control over the

vehicle including its risks and rewards upon receipt of the vehicle.

Number of performance obligation (PO)

There are two POs, i.e. sale of the vehicle (“PO 1”) and provision of the 3-year maintenance (“PO 2”).

Allocation of transaction price

The total sales price of RM190,500 is to be allocated to each PO based on their relative stand-alone selling price as follows:

• PO 1

= RM190,500/(RM190,500 + RM1,500) x RM190,500

= RM189,012

• PO 2

= RM1,500/(RM190,500 + RM1,500) x RM190,500

= RM1,488

Recognition of revenue for each PO

• PO 1

RM189,012 is to be recognised at a point in time, i.e. on 01.01.2018 when the dealer receives the vehicle.

• PO 2

RM1,488 is to be recognised over time, i.e. over the 3-year period from 01.01.2018 to 31.12.2020. Therefore, RM496 (i.e. RM1,488 / 3

years) is to be recognised for each of the FYs ending 31.12.2018, 31.12.2019 and 31.12.2020.



APPENDIX A


Dr Cr Dr Cr Add Less Add Less

RM RM RM RM RM RM RM RM

Trade receivables 190,500 190,500

Revenue 190,500 189,012

Contract liabilities 1,488 1,488 1,488

Contract liabilities 496

Revenue 496 992 992

Contract liabilities 496

Revenue 496 496 496

MFRS 15

Revenue recognised on 1.1.2018

Free services recognised in FY 2018

Free services recognised in each FY

2019 & 2020

Accounting entries Approach (a) per

Income Tax Act -

Tax Adjustment

Approach (b) Partial

convergence

- Tax adjustmentPre MFRS 15



APPENDIX A


Tax treatment

Approach (a): Tax adjustment as per Income Tax Act 1967

Approach (b): Tax adjustment as per partial convergence method

Under existing tax treatment, the amount allocated to the provision of free maintenance services (RM1,488) is treated as income

attributable to the provision of goods rather than services. The full contracted sum of RM190,500 should be taxable in YA 2018 upon

delivery of the vehicle on 01.01.2018 pursuant to Section 24(1)(a). As the 3-year maintenance service is contractually free, no debt

will arise in respect of the service and therefore, no income is to be brought to tax in respect of maintenance services.

As RM190,500 is to be brought to tax in YA 2018, RM992 (RM1,488 - RM496) is to be added back to the tax computation for YA 2018

and RM496 is to be deducted from the tax computation for each of YA 2019 and YA 2020.

As the full amount allocated to the provision of free maintenance services (RM1,488) is taxable in YA 2018 as the debt has arisen in

the YA, RM992 is to be added back to the tax computation for YA 2018 and RM496 is to be deducted from the tax computation for

each of YA 2019 and YA 2020. The tax adjustment is similar to that under the existing tax treatment.

Under the partial convergence approach, the amount allocated to the provision of free maintenance services (RM1,488) is treated as

income attributable to the provision of services for tax purposes. The full amount of RM1,488 should be taxable in YA 2018 when the

debt arises pursuant to Section 24(1)(b) regardless of whether services have been rendered.





FY 2018

Probability-weighted consideration

RM100,000 x 800 units x 60% RM48.0mil

RM90,000 x 900 units x 40% RM32.4mil

Total probability-weighted consideration RM80.4mil (A)

Probability-weighted number of units

800 units x 60% 480 units

900 units x 40% 360 units

Total probability-weighted number of units 840 units (B)

Estimated price per unit [A / B] RM95,714 (C)

Revenue recog. for 700 units [C x 700] RM67.0mil

APPENDIX A(ii)

(ii) Volume Discounts

A distributor entered into a contract to sell motor vehicles to a dealer. The contract is for the period from 01.01.2018 to 30.06.2019.

It was agreed that unit price of the motor vehicle is RM100,000 and if the dealer purchases more than 800 units, the distributor shall

give a RM10,000 rebate/discount for all units purchased during the contract period. The discount is to be credited to the dealer’s

account at the end of the contract period, i.e. 30.06.2019. At contract inception and as at 31.12.2018, the distributor believes that

there is a 60% probability that the dealer will purchase 800 units and a 40% probability that the dealer will purchase 900 units. The

distributor closes its accounts on 31 December. As at 31.12.2018, the distributor has sold and delivered 700 units to the dealer.

Another 150 units are sold and delivered to the dealer from the period of 01.01.2019 to 30.06.2019. Under the contract, the price for

each unit becomes owing to the distributor upon delivery of the vehicle.



APPENDIX A(ii)


FY 2019

Revenue for 150 units [C x 150 units] RM14.4 mil

Less: Adjustment to account for discount

[(RM95,714 - RM90,000) x 850 units] (RM4.9mil)

Net revenue for FY 2019 RM9.5 mil


RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000

Not applicable


Revenue 70,000 67,000

Contract liabilities 3,000 3,000


Revenue 6,500 14,400

Trade receivables (discount) 8,500 8,500

Contract liabilities 600 600

Contract liabilities 3,600 3,600

P&L - adjustment against revenue 4,900

Revenue recognised for 700 units

sold in FY 2018

Revenue recognised for 150 units

sold in FY 2019

Accounting entriesApproach (a) per

Income Tax Act -

Tax adjustment


convergence

- Tax adjustmentPre MFRS 15 MFRS 15



APPENDIX A(ii)


Tax treatment

Approach (a) - Tax adjustment as per Income Tax Act 1967

YA 2018

YA 2019

Approach (b) - Tax adjustment as per partial convergence method (subject to agreement by MOF/IRB)

Partial convergence method is not applicabl as the example does not involve more than one performance obligation.

Contracts with contingent discounts which straddle over two or more basis periods are likely to give rise to a lower revenue

recognition in the initial basis period. In this example, the revenue recognised for FY2018 at the probability-weighted consideration is

lower than the debt owing for the basis period for YA 2018 by RM3 million. Under existing tax treatment, the amount of debt that has

arisen of RM70 million is to be brought to tax in YA 2018. The total discount to be given for the 700 units of vehicles amounting to

RM7 million (RM10,000 x 700 units) represents 'outgoings' which are deductible in YA 2019.

The amount owing to the distributor of RM70 million arising up to 31.12.2018 represents the gross income to be brought to tax

[Section 24(1)(a)]. Hence, a tax adjustment is required ot be made by adding back RM3 million to the YA 2018 tax computation.

Debt owing for delivery of 150 units of RM13.5 mil (RM90,000 x 150 units) represents gross income to be brought to tax [Section

24(1)(a)]. Discount to be given for the 700 units amounting to RM7 million is deductible in YA 2019. Therefore, gross income net of

deductible outgoing is RM6.5 mil (RM13.5 mill less RM7 mil). A tax adjustment is required to be made by deducting RM3 million in the

tax computation for YA 2019.

TAX ISSUES ARISING FROM THE CHANGE OF ACCOUNTING TREATMENT APPENDIX B

INDUSTRY : IT



(i) Software developer

Under MFRS 118 Revenue Recognition, the timing of revenue recognition from the sale of goods is based primarily on the transfer of significant risks and rewards of

ownership of the goods. MFRS 15 instead focuses on when control of goods is transferred to customers. A customer obtains control when he has the ability to direct

the use of the asset and to obtain substantially all of the benefits embodied in the asset.The difference in approach may result in a change in timing of revenue

recognition.

A software developer (the Company) enters into a contract with a customer to perform the following at a fixed contract price of RM1million:

a) transfer a software license; and

b) perform an installation service and provide unspecified software updates and technical support (online and via phone) over a period of 2 years.

• The Company grants the rights to access intellectual property (i.e. software license access), installation service and technical support separately.

• The installation service includes changing the web screen specific for each type of user and its basic layout settings. The installation service is routine and can also

be performed by other companies and does not significantly modify the software sold to customers.

• The software remains functional without the updates and the technical support. The Company concludes the software and the installation service are separate

outputs/ works promised by the Company instead of inputs used to produce a combined output. Further, other companies can also perform the installation services.

• The Company has an option for advance billing and progressive billing. The company has opted for advance billing.

Identify the number of performance obligations:

Under MFRS 15 Revenue Recognition, there are four (4) performance obligations in the contract:

a) the grant of software license;

b) an installation service;

c) software updates; and+A30

d) technical support.


INDUSTRY : IT


* allocated using weighted average basis

Revenue recognition:

Allocate the contract price of RM1million to the 4 performance obligations in the contract:


INDUSTRY : IT




1. The software license access and an installation service

Dr Accounts receivable 666,667

Cr Revenue – software license access & installation service 333,334

Cr Deferred (Unearned) revenue 333,333 333,333

666,667 666,667

2. Software updates and technical support


Cr Revenue – software updates & technical support 222,222

Cr Deferred (Unearned) revenue 111,111 111,111

333,333 333,333

1. The software license access and an installation service


Cr Revenue – installation service 250,000

Cr Revenue – software license access 208,334

Cr Deferred (Unearned) revenue 208,333 208,333 208,333

666,667

2. Dr Accounts receivable 166,667

Cr Revenue – software updates 83,334

Cr Deferred (Unearned) revenue - software updates 83,333 83,333 83,333

166,667

3. Software updates and technical support


Cr Revenue – technical support 111,111

Cr Deferred (Unearned) revenue 55,555 55,555 55,555

1,000,000 166,666

Pre MFRS 15


Income Tax Act - Tax

adjustment


Convergence - Tax

adjustmentPre MFRS 15 MFRS 15

MFRS 15


INDUSTRY : IT


Tax treatment


Approach (b): Tax adjustment as per partial convergence method (subject to agreement by MOF/IRB)

Under this approach, the allocation of the contract price to the four performance obligations would be acceptable for tax purposes and taxed according to the

timing under Section 24. In this example, there is no difference to the tax adjustments required compared to approach (a).

Tax adjustment would be made to add back amounts in the deferred/unearned revenue accounts amounting to RM347,221 (RM208,333 + RM83,333 + RM55,555).

In YA 2019, tax adjustment would have to be made to deduct an amount of RM347,221 which is credited to the P&L in 2019 as the same amount had already been

brought to tax in YA 2018.

Under existing tax treatment, when a debt in respect of the contract entered into with the client arises upon billing the client for the contract sum of RM 1 million,

the total amount of the debt of RM1 million becomes taxable in YA 2018 under Section 24.


INDUSTRY : MANUFACTURING




RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000

Not applicable

Dr Cash 100 100

Cr Deferred income 100

Cr Contract liability 100

Dr Contract asset 300

Dr Contract liability * 100

Cr Revenue 400 400

APPENDIX C

During contract inception, a 10%

down payment was made:

As at year end, 40% of the work was

completed:

(i) Contract manufacturing



adjustment

Company A manufactured product Z based on Customer B's specification for RM1,000,000. The contract was signed on 07.05.2018. At

the inception of the contract, Customer B paid a 10% down payment to Company A. At the end of year 2018, 40% of the work was

completed. The entire manafacturing process took around 10 months and the product was completed by end of February 2019. The

finished product Z was delivered to Customer B on 05.03.2019. Company A's financial year ("FY") ends on 31 December.

In accordance with MFRS 15, if the company determines that it satisfies a performance obligation to manufacture goods under the

contract over time, it will recognise revenue over time (i.e. over the manufacturing period) rather than at a point in time (i.e. when the

product is delivered). Normally where the manufactured goods have no alternative use to the Company and the Company has rights to

payment on the performance, the overtime criteria would have been met.


Convergence - Tax


Year 1 (FY 2018)



APPENDIX C

(i) Contract manufacturing

Year 2 (FY 2019)

Dr Trade receivables 900 900

Dr Deferred income 100

Cr Contract asset 300 300

Cr Revenue 1,000 600

Contract liability * 100

Tax treatment



Subsequently when 100% of work is

done, and goods are delivered and

invoiced:

For tax purposes, business income shall be taxable when the goods are sold i.e. when the goods are delivered to the customers.

Where an entity is required to recognise the revenue attributable to a manufacturing contract over time, the business income

recognised prior to the delivery of goods should not be subject to tax under current tax principles. As such, necessary tax adjustment

is required to be made to reverse out/deduct the 40% revenue recognised in the accounts in YA2018. The entire amount of revenue

for the contract would eventually be subject to tax upon delivery of the goods.

Where a down payment of 10% is received at the inception of the contract, the amount recognised under contract liability should not

be brought to tax as the goods are yet to be delivered. In the event that it is recognised as revenue over time upon partial completion

of the work (e.g. 40%), the business income should also not be subject to tax until the goods are delivered. Hence, the entity is

required to keep track of the 10% down payment received in the tax computation and subject the relevant amount to tax when goods

are delivered. An adjustment to bring to tax the 40% revenue has to be made in YA 2019.

The partial convergence method is not applicable as the example does not involve more than 1 performance obligation.







Dr Trade receivable 10,000 10,000

Cr Revenue 10,000 8,000

Cr Contract liability 2,000 2,000 2,000

Dr Contract liability 1,000 1,000 1,000

Cr Revenue 1,000

Year 2 (FY 2019)

Dr Contract liability 1,000 1,000 1,000

Dr Revenue 1,000

APPENDIX C (ii)

(ii) Multiple performance obligations

Company W sold a machine to Customer C with a 2-year free maintenance service at RM10,000. The stand-alone selling prices of the

machine and 2-year maintenance service are RM10,000 and RM2,500 respectively. The sale contract signed on 15.08.2018 provides

that the payment of RM10,000 shall be owing to Company W upon delivery of the machine. The machine was delivered to Customer C

on 06.09.2018. Company W's FY ends on 31 December.

Pre-MFRS 15, free yearly maintenance services for 2 years was normally not considered as a separate revenue stream. Upon delivery

of the machine, the full revenue would be recognised.

Under MFRS 15, the sale of machinery and free services are treated as 2 performance obligations. The transaction price will be

allocated between sale of machine and maintenance services based on the stand-alone selling prices of the 2 performance obligations.

The timing of recognition of revenue for both performance obligations may not be the same.



adjustment


Convergence - Tax


Year 1 (FY 2018)

Upon delivery of machinery

RM2,500 / (RM10,000 +

RM2,500) x RM10,000

First year maintenance service

Second year maintenance service



APPENDIX C (ii)

(ii) Multiple performance obligations

Tax treatment



As the sale of machine amounting to RM10,000 is to be brought to tax in YA 2018 upon delivery of the machine, RM2,000 credited to

the contract liability account is to be added to the tax computation in YA 2018.

Upon recognition of revenue when free services are subsequently performed in Year 1 and Year 2, necessary tax adjustments are

required to be made accordingly in the respective years of assessment to not bring the revenue attributable to the free services to tax

as the free services with allocated price of RM2,000 have been brought to tax in YA 2018.

As the full amount allocated to the provision of services (RM2,000) is taxable in YA 2018 as the debt has arisen in the YA, RM2,000 is to

be added back to the tax computation in YA 2018. Similar to the adjustment under approach (a), necessary tax adjustments to not

bring to tax the amount allocated to free services in the subsequent two YAs have to be made as the amounts have been taxed in YA

2018.

Under existing tax treatment, the sale of machine and provision of free services are viewed as one contract. As such the entire

contract sum shall be taxable upon delivery of the machine in accordance with Section 24(1)(a). Under the partial convergence

approach, the amounts allocated to the provision of services is treated as income attributable to the provision of services for tax

purposes and is taxable in YA 2018 when the debt arises regardless of whether the service has been rendered under section 24(1)(b).







Not applicable

Dr Trade receivable 1,000 1,000

Cr Revenue 1,000 900

Cr Contract liability 100 100

Dr Contract liability 100 100

Dr Revenue 100

Cr Trade receivable 100 100

Dr Contract liability 100

Cr Revenue 100 100

(iii) Incentives and rebates (variable considerations/material rights)

Company Q sold a unit of laptop of RM1,000 to Customer D and gave him a voucher entitling him to a 10% discount on any purchase

up to a value of RM1,000 in its store during the next 60 days. Company Q treats the discount voucher as a separate performance

obligation and allocates RM100 to the voucher.

Pre-MFRS 15, incentive payments are taken up as a reduction of revenue when the specified amountof the incentive can be reliably

measured.

Under MFRS 15, variable consideration is considered upfront.

APPENDIX C (iii)



adjustment


Convergence - Tax


Sales of goods (incentives and

rebates are not able to be reliably

measured):

When incentive and rebates

become reliably measured /

crystallised:

When incentives and rebates are

not met



(iii) Incentives and rebates (variable considerations/material rights)

APPENDIX C (iii)

Tax treatment



The partial convergence approach is not applicable as the example does not involve more than one performance obligation.

For tax purposes, the goods sold together with volume rebates that convey a material right is viewed as one contract and the entire

contract sum shall be taxable upon delivery of goods.

Pre-MFRS 15 Regime

As the volume rebates will only be taken up as a reduction of revenue when they are reliably measured, no tax adjustment is required

in the year when the entity recognises revenue upon delivery of good and the volume rebates are not able to be reliably measured.

Under MFRS 15 Regime

If the entity determines that the arrangement with volume rebates conveys a material right to the customer, this constitutes a

separate performance obligation, to which the entity allocates a portion of transaction price to volume rebates.

For tax purposes, the portion attributable to volume rebates recognised under contract liabilities of RM100 (as shown in the example

above) is viewed as a single selling contract with its revenue. The entire contract sum, including the portion attributable to volume

rebates should be brought to tax upon delivery of goods and subsequent revenue recognition upon expiration of the incentive for

volume rebate would not be taxable. Necessary tax adjustments are required to account for the volume rebates which are regarded as

a separate performance obligation under MFRS 15 regime.

In a case where the volume rebates are realised i.e. paid/payable, the amount reversed under contract liabilities will be adjusted for

tax purposes as a reduction of the taxable income.

TAX IMPLICATIONS RELATED TO IMPLEMENTATION OF MFRS 15 - ILLUSTRATIONS APPENDIX D

INDUSTRY : TELECOMMUNICATION (TELCO)


A contract offered by a telco typically consists of two performance obligations which is a mobile device and subscription for services.

However, there are cases, where there are more than two performance obligations.

For example, a telco enters into a two-year contract with a customer for:

(i) subscription service plan of RM1,920 (i.e with a price of RM80/month); and

(ii) mobile device with a price of RM1,000.

The stand-alone selling price of the subscription services and mobile device is RM1,920 (RM80/month) and RM1,200 respectively.

For the purpose of this illustration, the cash collected upfront is RM1,000.

Mobile Device

Service Plan

Total Consideration

^ (1,200/3,120) x 2,920 = 1,123

* (1,920/3,120) x 2,920 = 1,797

1,000 1,200

1,920

(i) Bundled contracts

Consideration for

bundled contract

Allocated transaction

price

2,920 2,920

1,123^

1,797*

Stand-alone selling price

(SSP)

3,120

1,920





Under MFRS 15, the allocated transaction price for the mobile device of RM1,123 is recognised as revenue when the customer takes

possession of the mobile device (at the time of sale).

The allocated transaction price for the service plan of RM1,797 is recognised over the two-year contract term (RM74.88/month).

A contract asset of RM123 is established at the time the mobile device revenue is recognised, representing the difference between

the revenue recognised and cash received (i.e. RM1,123 – RM1,000). The contract asset is reduced each month by the portion of the

monthly service fee that was allocated to the mobile device of RM5.12 (i.e RM123/24months).



Mobile device

Dr. Cash (B/S) 1,000.00 1,000.00

Dr. Contract asset (B/S) 123.00 123.00

Cr. Revenue (P/L) 1,000.00 1,123.00

Service Plan

Dr. Cash (B/S) 80.00 80.00

Cr. Service Revenue (P/L) Cr. Service Revenue (P/L) 80.00 74.88

Cr. Contract asset (B/S) Cr. Contract asset (B/S) 5.12 5.12

*Under MFRS 15 regime, this double entry for service plan will recur in the 2 nd month until the 24 th month as the customer

has entered into a two-year contract with the telco.

No separate tax adjustment

required


Income Tax Act -

Tax adjustment


Convergence - Tax





Tax treatment

Generally, business income is assessable to tax if it is derived/deemed to be derived from Malaysia. The gross income

of a person from a source of his for the basis period for the year of assessment shall be the gross income from that

source for that period.

[Section 4(a), Section 12 and Section 22 of the Income Tax Act, 1967 (ITA) refers].

Pursuant to Section 24(1) of the ITA, where in the relevant period a debt owing to the relevant person arises in respect of –

(a) any stock in trade sold in or before the relevant period in the course of carrying on a business;

(aa) any stock in trade parted with by any element of compulsion including on requisition or compulsory acquisition

or in a similar manner, in or before the relevant period;

(b) any services rendered or to be rendered at any time in the course of carrying on a business; or

(c) the use or enjoyment of any property dealt or to be dealt with at any time in the course of carrying on a business,

the amount of the debt shall be treated as gross income of the relevant person from the business for the relevant period.





Mobile Device

RM1,123 is the price allocated to the device as per example given. Notwithstanding that, the telco

should only be taxed on RM1,000 as that is the amount being advertised and invoiced to the customer [Section 24(1)(a) of

the ITA refers].

Service Plan

The telco invoices the customer RM80 on a monthly basis. The monthly service fees of RM80 consists of the following:

(i) Allocated transaction price of RM74.88 (RM1,797/24 months); and

(ii) Contract asset of RM5.12 (RM123/24 months).

Even though RM123 is debited to the contract asset when the telco enters into a two-year contract with the customer, the

contract asset of RM123 is not part of the actual selling price of the mobile device (the actual price of the asset sold is RM1,000).

RM123 is in fact included in the service fee as shown in the following double entries:

Dr. Cash (B/S) RM80

Cr. Service Revenue (P/L) RM74.88

Cr. Contract Asset (B/S) RM 5.12

(Being recognition of monthly subscription fees)

As such, for service revenue, the telco should be taxed on the monthly service fee of RM80 (RM74.88+RM5.12) which is the

amount invoiced to the customer on a monthly basis [Section 24(1)(b) of the ITA refers].





Alternatively, the telco maybe given the option to accept the allocation of revenue between goods and services based on

the accounting treatment accorded under MFRS 15 and apply the timing for recognition of income in accordance with Section 24.

Mobile Device

Based on the above, the allocated transaction price for mobile device is RM1,123. The amount reflected in the Profit & Loss Account

is the transaction price for the mobile device based on MFRS 15.

Notwithstanding that the amount being advertised by the telco is RM1,000, the telco may opt to bring to tax RM1,123 as sale of

mobile device at the time of sale. Therefore, no further tax adjustment is required in respect of the mobile device.

Note: In this case, the telco will bring to tax RM123 (RM1,123 - RM1,000) earlier as compared to Option 1 above.

Service Plan

For service plan, the allocated transaction price is RM74.88 (monthly subscription fee) . The amount reflected in the

Profit & Loss Account is the transaction price for the service plan based on MFRS 15.

Notwithstanding that the monthly subscription fees being advertised by the telco is RM80 for the service plan, the telco may opt to

bring to tax RM74.88 on a monthly basis. This is because the difference of RM5.12 (RM80 - RM74.88) has been brought to tax

at the point of selling the mobile device (i.e included in RM123 which was derived by RM5.12 x 24months). Hence, no further

tax adjustment is required in respect of the service plan.

TAX IMPLICATIONS RELATED TO IMPLEMENTATION OF MFRS 15 - ILLUSTRATIONS APPENDIX D (ii)



Telcos typically incur significant costs related to the set-up, activation and installation of equipment for customer contracts.


Under MFRS 15, the incremental costs of obtaining a contract (i.e., costs that would not have been incurred if the contract

had not been obtained), are recognised as an asset if the entity expects to recover them. These incremental costs

would then be amortised over the expected customer life.

(ii) Costs incurred to obtain and fulfil a contract




For example, commission costs paid to an authorised distributor of RM100 (who signs up a customer for a two year

contract on behalf of a telco and the expected customer life is two years), should be amortised over a two-year period

(i.e RM50 annually).



Dr. Commission (P/L) 100.00 Not applicable

Cr. Cash (B/S) 100.00

(Being commission paid to authorised distributor)

Year 1

Dr. Other receivables (B/S) 100.00

Cr. Cash (B/S) 100.00

(Being commission paid to authorised distributor)

Year 1

Dr. Commission (P/L) 50.00 50.00

Cr. Other receivables (B/S) 50.00

(Being amortisation of commission paid in year 1)

Year 2

Dr. Commission (P/L) 50.00 50.00

Cr. Other receivables (B/S) 50.00

(Being amortisation of commission paid in year 2)


Income Tax Act -

Tax adjustment


Convergence - Tax





Tax treatment

Generally, all outgoing and expenses wholly and exclusively incurred during that period by that person in the production

of gross income from that source is allowed a tax deduction [Section 33(1) of the ITA refers].


In respect of the costs incurred to obtain and fulfill a contract, such as commission costs paid to an authorised distributor,

the taxpayer should be allowed a deduction of RM100 when the telco first incurred the expenditure, nothwithstanding that

the commission cost is amortised over a period of two years.

Hence, in year 1, a separate tax adjustment is required to allow a further RM50 so that a total of RM100 is allowed.

In year 2, to disallow RM50 in view that a deduction of RM100 has been claimed in year 1.


The partial convergence method is not applicable as the example does not involve more than one performance obligation.

TAX IMPLICATIONS RELATED TO IMPLEMENTATION OF MFRS 15 - ILLUSTRATIONS APPENDIX D (iii)



Telcos frequently charge non-refundable upfront activation fees to facilitate the customer’s access to the network. Such fees

are typically bundled with an initial period of airtime service contract, of say two years. If the customer renews his contract

after two years, the customer does not need to pay for activation fees again.


Under MFRS 15, telcos will need to exercise judgement in evaluating the average contract period of their customers

before the customers terminate their contracts. The telcos would then allocate the upfront fees over the “expected”

contract period.

(iii) Non-refundable upfront fees




For example, based on historical trend, a telco determines that its customers will renew their contracts for a further one year

after the initial contract period of two years, before they terminate their contracts. In such cases, the telco will recognise the

upfront fees of RM90 over a period of three years.



Dr. Cash (B/S) 90.00 Not applicable

Cr. Upfront fee (P/L) 90.00

(Being recognition of upfront fees upon receipt)

Year 1

Dr. Cash (B/S) 90.00

Cr. Deferred revenue/Other liabilities (B/S) 90.00

(Being recognition of upfront fees upon receipt)

Year 1

Dr. Deferred revenue/Other liabilities (B/S) 30.00

Cr. Upfront fee (P/L) 30.00 60.00

(Being recognition of upfront fees in year 1)

Year 2




Year 3





Income Tax Act -

Tax adjustment


Convergence - Tax





Tax treatment

Pursuant to Section 24(1A) of the ITA, where in the relevant period, any sum is received by a relevant person in the course

of carrying on a business in respect of any services to be rendered or the use or enjoyment of any property to be dealt

with in the relevant period or in any following basis period, the sum shall be treated as the gross income of the relevant

person from the business for the relevant period the sum is received nothwithstanding that no debt is owing to the

relevant person in respect of such services or such use or enjoyment.


Based on the ITA, the non-refundable upfront fees of RM90 are taxable and should be brought to tax upon receipt, with

effect from year of assessment 2016 [Section 24(1A) of the ITA refers].

In year 1, a separate tax adjustment is required to tax RM60 so that a total amount of RM90 is being brought to tax.

In year 2 and year 3, tax adjustment is required to deduct RM30 in the respective years to avoid the same amount being

taxed twice.


The partial convergence method is not applicable as the example does not involve more than one performance obligation.

TAX IMPLICATIONS RELATED TO IMPLEMENTATION OF MFRS 15 - ILLUSTRATIONS APPENDIX D (iv)



MFRS 15 is effective for financial periods beginning on or after 1 January 2018, with earlier application being permitted.

(iv) Transitional adjustments

30 November 2019

(24th month)

31 December 2018

(13th month)

1 December 2017

(1st month)

◆

1 January 2018(2nd month)

1 December 2017 – 30 November 2019 [24 months]





Based on the example discussed in bundled contracts transaction, assuming that the telco did not adopt MFRS 15 on

1 December 2017, when they executed a bundled contract with their customer, the double entry would be as follows:



1 December 2017 (1 st month)Mobile Device

Dr. Cash (B/S) 1,000.00

Cr. Revenue (P/L) 1,000.00

(Being recognition of revenue from sales of mobile device for the first month)

Service Plan

Dr. Cash (B/S) 80.00

Cr. Service Revenue (P/L) 80.00

(Being recognition of revenue from sales of service plan for the first month)

1 January 2018 (2 nd month)

Mobile Device

Dr. Contract Asset (B/S) 123.00

Cr. Retained earnings (B/S) 123.00 123.00

(Being recognition of contract asset for bundled contract)

Service Plan

Dr. Retained earnings (B/S) 5.12 5.12

Cr. Contract Asset (B/S) 5.12

(Being offset of contract asset for the month of December 2017 against the retained earnings)

The contract asset of RM117.88 (RM123 – RM5.12) will be fully set off by 30 November 2019. The double entries for the

next 23 months are as follows:

January 2018 (2 nd month) – November 2019 (24 th month)

Dr. Cash (B/S) 5.12 5.12

Cr. Contract Asset (B/S) 5.12

(Being amount offset against contract asset upon collection / invoice of monthly subscription fees of RM80)


Income Tax Act -

Tax adjustment


Convergence - Tax





Tax treatment

Under MFRS15 regime, the revenue recognised for accounting purposes in respect of the service plan is RM74.88,

notwithstanding that the amount being invoiced on a monthly basis is RM80.


In view of the above, for tax purposes, the telco should have a mechanism to keep track of RM5.12 from the 2nd month

to the 24th month which was included in the amount collected/invoiced through the monthly service fee billings.

This is because RM5.12 relates to the service plan revenue and hence it shall be brought to tax pursuant to Section 24(1)(b)

of the ITA.


The telco maybe given the option to accept the allocation of revenue between goods and services based on

the accounting treatment accorded under MFRS 15 (similar to the explanation discussed in bundled contracts).

Hence, to bring to tax RM117.88 (RM123 - RM5.12) as RM5.12 which was included in the service revenue

of RM80 has been brought to tax in the 1st month (i.e December 2017).

discussion paper tax implications related to the ... · 1.1 background of mfrs 15 1.1.1 rationale...

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