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
IFRS News Special Edition June 2014 2
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
IFRS News Special Edition June 2014 3
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
IFRS News Special Edition June 2014 4
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)
IFRS News Special Edition June 2014 5
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’
IFRS News Special Edition June 2014 6
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
IFRS News Special Edition June 2014 7
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
IFRS News Special Edition June 2014 8
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
IFRS News Special Edition June 2014 9
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
IFRS News Special Edition June 2014 10
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
IFRS News Special Edition June 2014 11
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
IFRS News Special Edition June 2014 12
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
IFRS News Special Edition June 2014 13
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
IFRS News Special Edition June 2014 14
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.
IFRS News Special Edition June 2014 15
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
IFRS News Special Edition June 2014 16
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
IFRS News Special Edition June 2014 17
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)
IFRS News Special Edition June 2014 18
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
IFRS News Special Edition June 2014 19
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.
IFRS News Special Edition June 2014 20
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
IFRS News Special Edition June 2014 21
©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.