IFRS 15 Revenue From Contract With Customers

Revenue from Contracts
with Customers
IFRS 15
What will you learn?
By completing this module, you will be
able to: 1) Changeover and Scope of IFRS 15
2) Five step model of revenue recognition
3) Contract cost- identification & recognition
of cost
4) Evaluate the quality of disclosures
Agenda
Changeover and Scope

Five step model of revenue
recognition
Contract costs
Know your journals
Presentation and disclosures
The closing
What’s changed
Pre IFRS 15 IFRS 15

Sale of goods or services Sales to customers
IAS 18, IFRIC 13, 15 Consolidation Consolidation

IFRS 15
IAS 11 guidance guidance
Gains and losses Sales to non-customers
Consolidation Consolidation
IAS 16 IAS 40 IAS 16 IAS 40
guidance guidance
 IFRIC 15 type requirements removed and replaced by new over time criteria.
 More guidance on separating goods and services bundled in a contract.
 More guidance on measuring transaction price.
 No IAS 11 equivalent to guide accounting when revenue is recognised over time.
Revenue from contracts with customer
Change of Revenue Recognition Standard
When and How to recognise revenue
Before the change After the change
 IAS 18 Revenue
 IAS 11 Construction Contracts
 SIC 31 Revenue – Barter Transaction

Involving Advertising Services IFRS 15
 IFRIC 13 Customer Loyalty Programs  Revenue from contracts

with Customers
 IFRIC 15 Agreement for the Construction

of Real Estate 1 January 2018
 IFRIC 18 Transfer of Assets from

Customers
Scope
Portfolio of contracts
Part of a contract Contract 1
IFRS 15
Other

Contract 2
Contract 3  De-recognition of
non-financial assets

IFRS
Contract 4
Certain types of non-

Insurance contract
 
Contractual rights monetary exchanges
and obligations in the
Lease contract
 
scope of another
IFRSs

Scope of IFRS 15
Scope Includes Scope Excludes

IFRS 15 applies ALL CONTRACTS
with CUSTOMERS IFRS 15 applies ALL CONTRACTS with CUSTOMERS
except for:
Part of a contract

IFRS 15 Other IFRS
 Lease contract
Portfolio of contracts
 Insurance contract

Contract 1
Contract 2  Contractual rights and obligations in the scope of
another IFRSs

Contract 3
Certain types of non-monetary exchanges
De-recognition of non-
 financial assets

A question for you: Scope
How should an entity account for a contract that is partially

in the scope of another standard that includes specific
allocation guidance?
IFRS 15 is applied to any residual after the other standard

has been applied.

Agenda

Five step model of revenue
recognition
Contract costs
Know your journals
The closing
The five step model overview
STEP
Identify the contract with a customer
1
STEP
Identify the performance obligation
2
STEP
Determine the transaction price
3
STEP
Allocate the transaction price
4
STEP
Recognise revenue
5
Revenue from contracts

10 with customer
The five step model overview
STEP STEP STEP STEP STEP

1 2 3 4 5
Identify the Identify the Determine the Allocate the

contract with Recognise
performance transaction transaction
a customer revenue
obligation price price

STEP
Identify the contract 1
... collection of consideration is ... rights to goods or services

considered probable. and payment terms can be
identified.
A contract
exists if...
... it is approved and the parties

are committed to their
... it has commercial substance. obligations.

12 with customer
STEP
Identify the contract with a customer 1
Contract =agreement between 2 or more parties creating enforceable rights

+ obligations
Forms of contract: A contract can be
 Written
 Oral or
 Implied by an entity's customary business practices

13 with customer
STEP
Identify the contract with a customer 1
Attributes to identify the contract with a customer
 Parties have approved the contract and are committed to perform;
 Each party’s rights to the goods/services can be identified;
 The payment terms for goods and services can be identified;
 The contract has a commercial substance; and
 It is probable that an entity will collect the consideration – here, you need to
evaluate the customer’s ability and intention to pay.

STEP
Combining contracts 1
Contracts may be combined and accounted for as a single contract.

IFRS 15
Contract 1 Contract 2
Contracts are combined if entered into at or near the same time with the
same customer and one or more of the following criteria are met.
Goods and services

Negotiated as Consideration in one
are a single
package with a single contract depends on
performance
commercial objective. the other contract.
obligation.

STEP
Contract modifications 1
Is the contract modification No Do not account for contract

approved? modification until approved
Yes
Does it add distinct goods or

No Are the remaining goods or
services that are priced
services distinct from those already
commensurate with their stand-
transferred?
alone selling prices?
Yes No
Yes
Account for as
Account for as termination of existing Account for as part of
separate contract contract and creation the original contract
of new contract

STEP
A question for you: contract modifications 1
A construction entity agrees in writing with its customer to change

the floor plan of a building after construction commences. The
contract is being treated as a single performance obligation for
which performance is satisfied over time.
How should the change be accounted for?
As an adjustment to the original contract.

Here, it is neither add any distinct services from the original contract
nor separate from the work already done. Therefore, no separate
contract required to account for.

STEP
Identify performance obligations 2
Performance obligation (PO) = promise to deliver good or service that is
Criterion 1: Criterion 2:
Capable of being distinct Distinct within context of the contract
Can the customer benefit from the good + Promise to transfer the good or service is
or service either on its own or together separately identifiable from other
with readily available resources? promises in the contract?
Yes No
Not distinct – combined with other

Distinct performance obligation
goods and services

STEP
Identify performance obligations - series exception 2
A series of distinct goods or services is treated as a single performance obligation if the

criteria below are met.
+ + =
Distinct goods or Each distinct good or Same pattern of Single performance
services are service is satisfied transfer obligation
substantially the same over time

STEP
Single performance obligation? 2
= + + +
Contract to Bricks Windows Fittings Construction
build a house service
Criterion 1 – Benefit on its Criterion 2 – Good or service

own or with other resources is separately identifiable

Do the goods and
services individually
meet the criteria? Each material could be used with Entity is providing a significant
another readily available item. integration service.

STEP
Multiple performance obligations? 2
Contract
Installation services are also

offered by third party providers.
+
Machine Standard installation
Criterion 1 – Benefit on its Criterion 2 – Good or service

own or with other resources separately identifiable
 
Does the machine
meet the performance
Machine can be used with other
obligation criteria? No significant integration service;
available inputs (such as third
installation is a standard service.
party installation).

STEP
A question for you: performance obligation 2
Goods or services provided to a customer’s customer:

Car manufacturer provides an End customer receives
incentive to dealers for each car they
purchase:
 Dealer can offer two free services to +
any customer who purchases a car.
Car Free servicing
Is the offer of two free services a performance obligation of the car manufacturer?
Yes, because:
 Car meets the definition of a performance obligation; and
 Right to offer free services can be used with an asset that the dealer has already obtained
(i.e. the car).

STEP
Determine the transaction price 3
Variable consideration and the Consideration payable to a

constraint customer
…reduction to the transaction price

unless it’s a payment for a distinct
Transaction good or service.
Price
Non-cash consideration Significant financing
component
…measured at fair value unless it

cannot be reliably measured.
Exception: Variable consideration is not estimated for sales- or usage-based royalties

on licences of intellectual property.

STEP
Transaction Price =The 'transaction price' is the amount of consideration to which an

entity expects to be entitled in exchange for transferring goods or
services to a customer. The transaction price excludes amounts
collected on behalf of third parties - e.g. certain sales taxes.
How to determine transaction price?

Variable consideration, including
constraining estimates of
In determining variable consideration
the transaction
Significant financing component
price, an entity or the time value of money
considers the
Consideration payable to the
effect of these At fair value
customer; and
facts
Non-cash consideration

24 with customer
STEP
An entity sells 100 products at a price of CU50 each and receives CU5,000 on 15 June.
Under the contract the customer is allowed to return any undamaged products within 30
days and receive a full refund in cash. The entity estimates five products will be returned.
The entity’s experience is sufficient such that it is highly probable that a significant reversal
of cumulative revenue recognised will not occur over the return period. What amount does
the entity recognise as revenue on 15 June?
Answer: CU 4,750 = (100*50) - (5*50)

25 with customer
STEP
Variable consideration 3
Variable consideration can be
Performance Many
Discounts Credits Incentives
bonuses more...
Variable consideration is estimated using most appropriate method of either:
Expected value Most likely amount

STEP
Estimating variable consideration 3
Transaction price
Contract to Fixed amount: Completion bonus: Performance bonus:

build a jet CU100 CU100 CU0 – CU100
Fixed Completion Performance

How would the amount bonus bonus
entity estimate
variable Most likely Expected
Not variable
consideration? amount value

STEP
Estimating variable consideration 3
Real estate developer D constructs an office building. The payment terms

are as follows:
■ Fixed price – On completion of construction, X pays CU200 million to D.
■ Rental guarantee – For each of the first three years following completion
of construction, D pays to X any shortfall between CU10 million and the
rentals due from tenants in that year, subject to an annual limit of CU3
million.
How should D account for the rental guarantee?
Answer: D accounts for the rental guarantee as variable consideration – i.e. D would
adjust the CU200 million downward for any expected payments from the rental guarantee.

STEP
Constraint on variable consideration 3
Estimate of variable
consideration …included in
transaction price
Amount that is ‘highly probable will

CU100 not result in significant reversal’… CU75
Qualitative  The risk of a reversal arising from an uncertain future event.

Assessment  The magnitude of the reversal if the uncertain event occurs.

STEP
Applying the constraint indicators 3
Estimate variable consideration

 First model of this jet type
constructed and put into
service.
 Expected delivery of first jet:
five years from inception.
Contract to Completion bonus Performance bonus
build a jet CU100 CU80
At contract inception, how much variable consideration is included in the transaction price?
Likely nil because…
Use of jet is Significant period

No experience with Large range of
outside entity’s before uncertainty
similar contracts. possible amounts.
control. will be resolved.

STEP
Significant financing component 3
Interest expense Practical expedient available Interest income

– no adjustment required
Payment in advance t0 Payment in arrears

t -12 t +12
months Performance months
To make the assessment all relevant factors are considered – in particular the:
 Difference between the transaction price and the cash selling price of the goods or services;
 Combined effect of the length of time between payment and performance and the prevailing interest rates;
 Other reasons for the payment terms.
Discount  Rate that would be used in a separate financing transaction between the entity
rate and customer.

STEP
Significant financing component 3
Contract to Contract price: Expected delivery date: Cash price: CU100 if

construct CU80 paid on 2 years from contract payment on delivery.
equipment contract inception inception
Does the Yes because…

transaction
price include a Significant period Cash price is No indicators
significant between delivery different from advance is for
financing and payment. transaction price. another reason.
component?

STEP
Allocate transaction price to performance obligations 4
Allocate based on relative

Determine stand-alone selling prices
stand-alone selling prices
Best evidence If not available
Performance obligation 1
Observable price Estimate price
Performance obligation 2
Performance obligation 3 Adjusted market

Expected cost plus

assessment
a margin approach
Fair value measurement approach
Residual approach only if

selling price is highly variable or
uncertain

STEP
Allocate transaction price to performance obligations 4
An entity enters into a contract to provide a customer with a software licence and
post-contract customer support (PCS). The licence and PCS are identified as
performance obligations. The entity’s pricing for the licence varies for each contract
entered into, based on negotiations with individual customers. An observable selling
price is available for the PCS.
Can the entity use the residual approach when allocating the transaction price?
Answer: Yes, because the transaction price of the licence is highly variable.

STEP
Estimating the selling price 4
Two year contract – CU650 Entity sells phone and plan separately
Phone Data, calls and CU350 12 month plan for CU15 per
texts plan month – CU360 (24XCU15)
Methods for
estimating Observable Adjusted
Cost plus Residual
 
stand alone price market
selling price
Transaction price allocated to phone = CU650 x (CU350/CU710) = CU320

Transaction price allocated to plan = CU650 x (CU360/CU710) = CU330
Recognise revenue: STEP
Performance obligations satisfied over time 5
An performance obligation is satisfied over time if either:
Customer simultaneously receives and

Routine or recurring
1 consumes the benefits as the entity
services.
performs.
The customers controls the asset as the Asset built on

2
entity creates or enhances it. customer’s site.
The entity’s performance does not create an

3 asset with an alternate use and there is a Asset built to order.
right to payment for performance to date.

STEP
Over time criteria 5
Contract to build Customer can cancel Right to payment to Quarterly payments

specialised with 30 days' notice cover costs incurred arrangement
equipment if contract cancelled
Do the terms meet

the no alternate
No alternate use Right to payment
use and right to
payment criteria?  
Payment needs to approximate selling price of goods and services transferred
to date (i.e. payment amount should include a profit margin)..

STEP
Measuring performance over time 5
For each performance obligation an entity chooses a method that depicts its performance.
Output method Input method
 Surveys  Costs incurred

 Milestones reached  Labour hours
 Units delivered  Machine hours
 Units delivered and similar methods not appropriate if work in progress is material.
 Adjustments required for wastage and uninstalled materials when cost method used.

STEP
Performance obligations satisfied at a point in time 5
Recognise revenue when customer obtains control of the promised asset.
Indicators that control has transferred include the customer has…
A present
Physical
obligation to Legal title
possession
pay
Risks and
Accepted the
rewards of
asset
ownership
Exception: Separate requirements for distinct licences of intellectual property.

STEP
IAS 18 Vs IFRS 15 5
IFRS 15 vs IAS 18
IFRS 15 implements a uniform method in IAS 18 states different recognition
recognizing all types of revenue. methods for different type of revenue like
sale of goods, rendering of services,
interest, royalty, dividends etc.
Reporting Criteria
Reporting criteria will be recognized Reporting criteria is decided on whether
based on the contract and performance revenue is received from goods,
obligation. services, interest, royalties or dividends.

Agenda

Five step model of revenue recognition
Contract costs
Know your journals
The closing

Contract Costs – What’s Changed?
IAS 11 IFRS 15
 Acceptable to measure revenues and  No automatic link between revenue and cost.
costs applying POC with balance sheet
 Costs incurred that relate to satisfied or
‘true up’.
partially satisfied performance obligation are
expensed as incurred.

Contract Costs
Revenue Cost recognition

recognition
Point in time  Costs capitalised when they represent:

− Costs to fulfil a contract;
− Costs to obtain a contract; or
− Capitalised in accordance with another standard e.g. IAS 2.
 Costs are expensed when control of the goods or services are
transferred to the customer.
 Costs capitalised prior to the existence of the contract are

Over Time expensed to the extent they relate to past performance.
 Costs incurred after commencement of performance are
generally expensed as incurred.

Contract costs
Costs to obtain a contract Costs to fulfil a contract
Capitalise incremental costs if: Capitalise as fulfilment costs if:
Incurred only as result


Not in the scope of
of obtaining the contract
 another standard
 Recovery is expected
 Directly related
Generate or enhance
(e.g. sales commission)
 resources

Practical Amortisation period < 1 year? Recovery is expected
expedient Expense costs as incurred

Costs to fulfil a contract
 Direct costs that are eligible for

capitalisation if other criteria are met
 Costs to be expensed when incurred
General and administrative costs –

Direct labour (e.g. employee wages) unless explicitly chargeable under
the contract
Costs that relate to satisfied performance
Direct materials (e.g. supplies)
obligations
Allocation of costs that relate directly to

Costs of wasted materials, labour, or
the contract (e.g. depreciation and
other contract costs
amortisation)
Cost that are explicitly chargeable to the

customer under the contract
Costs that do not clearly relate to
Other costs that were incurred only unsatisfied performance obligations
because the entity entered into the
contract (e.g., subcontractor costs)

Amortisation and impairment
Amortisation period
 Systematic basis consistent with the pattern of transfer.
 Considers anticipated contracts (e.g. renewal options).
Impairment
Remaining Costs directly

Carrying
amount
 consideration − related to providing
amount expected to goods or services
be received
If conditions improve, impairment can be reversed

When and How to Implement IFRS 15?
1 January 2018 = mandatory effective date
How to make a transition?
Full retrospective adoption Modified retrospective adoption
= retrospectively to each prior = retrospectively with cumulative effect at

reporting period the date of initial application

Impacts for changes in revenue recognition
What does it impact for YOU/YOUR business?
Upgrade Amend business Change in

Change in KPI
accounting systems contract Tax/Dividend policy

Agenda

Contract costs
Know your journals
The closing

Know your journals
♦ Revenue Recognition
♦ Respective cost recording

Agenda

Contract costs
Know your journals
The closing

Presentation
Contract asset or contract liability is recognised when the:

♦ Entity performs by transferring goods or services; or
♦ Customer performs by paying consideration to entity.
(net) contract asset (net) contract liability

Rights and obligations
if rights > obligations if obligations > rights
Receivable Capitalised contract costs
Unconditional Distinguished Presented Separate

right to from contract according to presentation from
consideration assets nature or function contract assets

Presentation
An entity has a contract to provide CU250,000 of services to a customer. The entity has
performed CU200,000 in services as at 30 June. The customer has paid consideration of
CU100,000 to date and based on the payment terms of the contract is not required to pay the
remainder of the transaction price until all services have been delivered. What does the entity
present on its statement of a financial position as at 30 June?
Answer: A contract asset of CU100,000

Disclosure
Assists users understand the nature, amount, timing and uncertainty of revenue and cash flows
arising from contracts with customers.
Significant judgements and changes

Contracts with customers
in judgements
Determining the timing of satisfaction of
Disaggregation of revenue
performance obligations
Changes in contract assets, liabilities

Determining the transaction price
and costs
Determining amounts allocated to
Performance obligations
performance obligations
Assets recognised from the costs to obtain or fulfil a contract

Agenda

Contract costs
Know your journals
The closing

When can one apply IFRS 15 to a portfolio of contracts with similar
characteristics?
A portfolio approach is not permitted under IFRS 15

If it reasonably expects applying IFRS 15 to a portfolio would not
differ materially from applying it to individual contracts
If accounting for the contracts individually would result in undue

costs for the entity
If the goods or services in the contracts are delivered to the same

customer

A good is a performance obligation if:
The customer can benefit from the good on its own
The good is separately identifiable from other goods in the contract
The good has a separately identifiable fair value

The customer can benefit from the good on its own and the good is
separately identifiable from other promises in the contract

Under IFRS 15, the transaction price would be adjusted for which
of the following:
Bundled goods and services
 Time value of money
Undelivered goods and services
Customer credit risk

Which of the following statements is a true statement about the
requirements for recognising revenue included in IFRS 15?
Revenue is recognised when the risk and rewards of ownership pass

to the customer
An entity first assesses if control has transferred at a point in time, if

this is not the case then revenue is recognised over time

An entity first assesses if one of three criteria indicating control
transfers over time is met. If none are met, revenue is recognised at
a point in time
Revenue from the sale of a good is only recognised when the legal
title of a good has been transferred

Which of the following is an example of contract costs that would
not be eligible for capitalisation (assuming the criteria are met)?
Sales commission
 Wasted materials
Payments to subcontractors
Supplies used in providing the goods or services

Which of the following is a true statement relating to contract
assets?
A contract asset arises if the entity’s obligations exceed its right to
consideration under the contract
A contract asset is an unconditional right to consideration
Contract assets can be presented together with receivables
 A contract asset arises if the entity’s right to consideration exceeds

its obligations under the contract

Which of the following significant judgements or changes in
judgements are required to be disclosed?
Determining if a contract exists
Identification of the customer
 Determining amounts allocated to performance obligations
Determining the expected margin on the contract

1) Contracts must be enforceable, have
commercial substance and be approved by
the parties to the contract.
2) Revenue is recognised as control is passed,
either over time or at a point in time.
3) Contract terms and legal environment are
important
4) The incremental costs of obtaining a contract
must be recognised as an asset if the entity
expects to recover those costs.
5) An entity to disclose sufficient information to
enable users of financial statements to
understand the nature, amount, timing and
uncertainty of revenue and cash flows arising
from contracts with customers

IFRS 15 Revenue From Contract With Customers

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Revenue from Contracts

Changeover and Scope

Pre IFRS 15 IFRS 15

IAS 18, IFRIC 13, 15 Consolidation Consolidation

Gains and losses Sales to non-customers

Before the change After the change

 IAS 11 Construction Contracts

 SIC 31 Revenue – Barter Transaction

 IFRIC 13 Customer Loyalty Programs  Revenue from contracts

 IFRIC 15 Agreement for the Construction

 IFRIC 18 Transfer of Assets from

Certain types of non-

Revenue from contracts with customer

Scope Includes Scope Excludes

Revenue from contracts with customer

How should an entity account for a contract that is partially

IFRS 15 is applied to any residual after the other standard

Revenue from contracts with customer

Changeover and Scope

Revenue from contracts

STEP STEP STEP STEP STEP

Identify the Identify the Determine the Allocate the

Revenue from contracts with customer

... collection of consideration is ... rights to goods or services

... it is approved and the parties

Revenue from contracts

Contract =agreement between 2 or more parties creating enforceable rights

Forms of contract: A contract can be

 Implied by an entity's customary business practices

Revenue from contracts

Attributes to identify the contract with a customer

 Parties have approved the contract and are committed to perform;

 Each party’s rights to the goods/services can be identified;

 The payment terms for goods and services can be identified;

 The contract has a commercial substance; and

Revenue from contracts with customer

Contracts may be combined and accounted for as a single contract.

Goods and services

Revenue from contracts with customer

Is the contract modification No Do not account for contract

Does it add distinct goods or

Revenue from contracts with customer

A construction entity agrees in writing with its customer to change

As an adjustment to the original contract.

Revenue from contracts with customer

Performance obligation (PO) = promise to deliver good or service that is

Not distinct – combined with other

Revenue from contracts with customer

A series of distinct goods or services is treated as a single performance obligation if the

Revenue from contracts with customer

Criterion 1 – Benefit on its Criterion 2 – Good or service

Revenue from contracts with customer

Installation services are also

Criterion 1 – Benefit on its Criterion 2 – Good or service

Revenue from contracts with customer

Goods or services provided to a customer’s customer:

Revenue from contracts with customer

Variable consideration and the Consideration payable to a

…reduction to the transaction price

Answer: CU 4,750 = (10050) - (550)