F7 - C7 Revenue Full

CHAPTER 7
REVENUE (IFRS 15)

Learning objectives
• Explain and apply the principles of recognition of revenue:
o (i) Identification of contracts
o (ii) Identification of performance obligations
o (iii) Determination of transaction price
o (iv) Allocation of the price to performance obligations
o (v) Recognition of revenue when/as performance obligations are satisfied.
• Explain and apply the criteria for recognising revenue generated from contracts where performance
obligations are satisfied over time or at a point in time.
• Describe the acceptable methods for measuring progress towards complete satisfaction of a performance
obligation
• Explain and apply the criteria for the recognition of contract costs.
• Apply the principles of recognition of revenue, and specifically account for the following types of transaction:
o (i) principal versus agent
o (ii) repurchase agreements
o (iii) bill and hold arrangements
o (iv) consignments
• Prepare financial statement extracts for contracts where performance obligations are satisfied over time.
OVERVIEW
OVERVIEW
1. Terminologies
II. Recognition & measurement
1. Recognition
2. Five-step model
2.1 Identify contracts with the customers The contracts with the customers must satisfy 5 following criteria
2.1 Identify contracts with the customers
Example 1: Identify the contract
Hawkeye has a fiscal year end of 31 December 20X8. On 30 September 20X8, Hawkeye signed a contract
with a customer to provide them with an asset on 31 December 20X8. Control over the asset passed to the
customer on 31 December 20X8. The customer will pay $10m on 30 June 20X9. By 31 December 20X8,
Hawkeye did not believe that it was probable that it would collect the consideration that it was entitled to.
Required: Identify that whether this is a contract

2.1 Identify contracts with the customers
Approved by all parties Hawkeye signed a contract with a customer
Rights & obligations are Hawkeye provide customer with an asset on

identified 31 December 20X8 and Customer: Pay $10m
on 30 June 20X9
NOT A
Payment terms Pay $10m on 30 June 20X9 CONTRACT
Commercial substance This is a contract to purchase asset
Hawkeye did not believe that it was probable

Probable collectability
that it would collect the consideration
2.2 Identify separate performance obligations
There are two cases that occur when identify single performance obligations
Example 2: Identify the following cases are distinct goods/services or series of distinct goods/services
1. Stark plc is contracted to build a resort for a customer. It will design the building, purchase materials,
prepare the site, construct the property, install writing and air conditioning and finish the property.
2. Stark plc is contracted to provide office equipment as well as technical support for the customer. The
customer agrees to pay more money for the technical support
1. Although each element of the construction process is
Example 2: Identify the following cases are capable of being distinct. However, the company
distinct goods/services or series of distinct provides a significant service in integrating the input
goods/services processes to produce a property (performance obligation
that is satisfied over time) => Series of distinct
1. Stark plc is contracted to build a resort for goods/services
a customer. It will design the building, There is a single performance obligation, being the
purchase materials, prepare the site, construction of the property.
construct the property, install writing and air
conditioning and finish the property. 2.Stark can receive benefit from office equipment or
technical support
2. Stark plc is contracted to provide office The customer agrees to pay office equipment and
equipment as well as technical support for technical support separately. => The good or service is
the customer. The customer agrees to pay separately identifiable => Distinct goods/services.
more money for the technical support
There are 2 single performance obligations in this case
2.3 Determine transaction price

Significant financing component
Timing of Discount financing component

Determine payment with to Present value using rate that
transaction price significant customer would be able to
financing benefit borrow
In determining the transaction price, an entity must consider if the timing of payments provides the customer or the entity
with a significant financing benefit.
If there is a significant financing component, then the consideration receivable needs to be discounted to present value
using the rate at which the customer would be able to borrow
AMOUNT LENGTH OF TIME
Difference btw Difference btw
promised transfer of the promised Payment date

Cash selling price goods or services to the
consideration
customer
Rudd Co enters into a contract with a Due to the length of time between the transfer of control of the asset
customer to sell equipment on 31 and the payment date, this contract includes a significant financing
December 20X1. Control of the equipment component.
transfers to the customer on that date.
The price stated in the contract is $1m The consideration must be adjusted for the impact of the financing
and is due on 31 December 20X3. transaction. A discount rate should be used that reflects the rate
available to the customer i.e. 10%.
Market rates of interest available to this
particular customer are 10%. Revenue should be recognised when the performance obligation is
satisfied.
Required:
Explain how this transaction should be As such revenue, and a corresponding receivable, should be
accounted for in the financial statements recognized at $826,446 ($1 m × 1/1.102) on 31 December 20X1.
of Rudd Co for the year ended 31
December 20X1.
Each year, the discount on the receivable will be unwound by 10%, recognising the increase as finance income, and increasing
the value of the receivable (debit receivable, credit finance income).
$
1 January 20X2 b/f 826,446
20X2 Finance income @10% 82,645
––––––––
31 December 20X2 Receivable balance 909,091
20X3 Finance income @10% 90,909
––––––––
31 December 20X3 Receivable balance 1,000,000
––––––––
On 31 December 20X3 the balance will be received (debit bank, credit receivable), clearing the outstanding balance.
VARIABLE CONSIDERATION
The consideration receivable can often include amounts such as:
• Awards for early or timely delivery and penalties for late delivery (common in industries such as construction)
• Volume based rebates or stepped-pricing (common in industries such as retail or manufacturing)

VARIABLE CONSIDERATION
START OF estimate the amount of consideration to which it expects to be entitled on the

CONTRACT contract
Most likely
Expected value
outcome
based on probability-weighted appropriate where there are few
amounts possible outcomes
The most appropriate method should be selected for each contract, and then must be applied consistently
throughout the contract term
NON-CASH CONSIDERATION
Where the transaction price in a contract with a customer includes non-cash consideration, the entity must measure that
non-cash consideration at FAIR VALUE
If the fair value of the non-cash consideration CANNOT be reasonably estimated, the entity must measure it indirectly, by
reference to the stand-alone selling price of the goods or services promised to the customer in exchange for the
consideration.
CONSIDERATION PAYABLE TO A CUSTOMER
Consideration payable to a customer includes:
• Cash amounts that the entity pays, or expects to pay, to the customer (or to other parties that purchase the
entity’s goods or services from the customer)
• Credit or other items (for example, a coupon or voucher) that can be applied against amounts owed to the
entity (or to other parties that purchase the entity’s goods or services from the customer).
Consideration payable to a customer is accounted for as a reduction of the transaction price and, therefore
of revenue, unless the payment to the customer is in exchange for a distinct good or service.
• A reporting entity might be paying a customer for a distinct good or service if the reporting entity is purchasing
something from the customer that is normally sold by that customer.
• Management also needs to assess whether the consideration it pays for distinct goods or services from its
customer represents the fair value of those goods or services.
• Consideration paid that is in excess of the fair value of the goods or services received reduces the
transaction price of the arrangement with the customer because the excess amounts represent a discount
to the customer.
• A reporting entity that is not able to determine the fair value of the goods or services received should
account for all of the consideration paid or payable to the customer as a reduction of the transaction
price since it is unable to determine the portion of the payment that is a discount provided to the customer.
MobileCo sells 1,000 phones to Retailer for $100,000. The contract includes an
advertising arrangement that requires MobileCo to pay $10,000 toward a specific
advertising promotion that Retailer will provide. Retailer will provide the advertising on
Distinct good or
strategically located billboards and in local advertisements. MobileCo could have elected
service received
to engage a third party to provide similar advertising services at a cost of $10,000.
How should MobileCo account for the payment to Retailer for advertising?
Account for the payment to Retailer consistent with other purchases of advertising services.
The payment from MobileCo to Retailer is consideration for a distinct service provided by Retailer and reflects fair
value.
The advertising is distinct because MobileCo could have engaged a third party who is not its customer to perform
similar services. The transaction price for the sale of the phones is $100,000 and is not affected by the payment
made to Retailer.
MobileCo sells 1,000 phones to Retailer for $100,000. The contract includes an
advertising arrangement that requires MobileCo to pay $10,000 toward a specific
advertising promotion that Retailer will provide. Retailer will provide the advertising on
Distinct good or
strategically located billboards and in local advertisements. MobileCo could have elected
service received in
to engage a third party to provide similar advertising services at a cost of $8,000.
excess of FV
How should MobileCo account for the payment to Retailer for advertising?
The amount of the payment that represents fair value of the advertising service ($8,000) is accounted for
consistent with other purchases of advertising services because it is consideration for a distinct service.
The excess amount of the payment over the fair value of the services ($2,000) is a reduction of the transaction
price for the sale of phones. The transaction price for the sale of the phones is $98,000.
Company B manufactures a food product. It enters into a one-year contract to sell goods
to a customer that is a nationwide chain of supermarkets.
NO distinct good or The supermarket chain commits to buy at least $15 million of products during the year.
service received
The contract also requires Company B to make a non-refundable payment of $1.5 million
to the supermarket chain at the inception of the contract (the payment will compensate the
supermarket chain for the changes it needs to make to its shelving to accommodate
Company B’s products).
Company B sells $2 million of goods to the supermarket chain in the first month of the
contract.
As Company B does not obtain control of any rights to the supermarket chain’s
shelves, it concludes that the payment to the supermarket chain is not in exchange
for a distinct good or service that is being provided by the supermarket chain.
=> determines that the $1.5 million payment is a reduction of the transaction price.
NO distinct good or
service received As Company B transfers goods to the customer, it must reduce the transaction price
for each good by 10% ($1.5 million/$15 million).
In the first month of the contract, Company B must recognise revenue of $1.8
million, which is the $2 million invoiced less $0.2 million (for the consideration
payable to the supermarket chain, calculated as 10% of the $2 million of goods
sold).
Payment to supermarket: Dr Prepayment/ Cr Cash: $1.5m

Month 1: Dr Cash $2m/ Cr Revenue $1.8m & Cr prepayment $0.2m
Example 3:
Taplop Co supplies laptop computers to large businesses. On 1 July 20X5, Taplop Co entered into a contract with
TrillCo, under which TrillCo was to purchase laptops at $500 per unit. The contract states that if TrillCo purchases
more than 500 laptops in a year, the price per unit is reduced retrospectively to $450 per unit. Taplop's year end
is 30 June.
(a) As at 30 September 20X5, TrillCo had bought 70 laptops from Taplop. Taplop Co therefore estimated that
TrillCo's purchases would not exceed 500 in the year to 30 June 20X6, and TrillCo would therefore not be
entitled to the volume discount.
(b) During the quarter ended 31 December 20X5, TrillCo expanded rapidly as a result of a substantial acquisition,
and purchased an additional 250 laptops from Taplop Co. Taplop Co then estimated that TrillCo's purchases would
exceed the threshold for the volume discount in the year to 30 June 20X6.
Required: Calculate the revenue Taplop Co would recognise in:

(a) Quarter ended 30 September 20X5
(b) Quarter ended 31 December 20X5
(a) It was highly probable that a significant reversal in the cumulative amount of revenue recognised ($500 per laptop)
would not occur when the uncertainty was resolved, that is when the total amount of purchases was known.
 Taplop Co should recognise revenue of $35,000 (=70 x $500) for the first quarter ended 30 September 20X5.
(b) It would be reasonable to conclude that TrillCo's purchases would exceed the threshold for the volume discount in
the year to 30 June 20X6, and therefore that it was appropriate to retrospectively reduce the price to $450 per laptop.
By contrast, revenue will be adjusted in quarter 2 (not retrospectively adjust in quarter 1)
Taplop Co should therefore recognise revenue: $109,000 that come from:

• Revenue of additional 250 laptops = 250 laptops x $450 = $112,500
• Less the change in transaction price for the reduction of the price of the laptops sold in the quarter ended 30
September 20X5 = $3,500 (70 laptops x$50)
2.4 Allocate transaction price to POs
Transaction price must allocate based on stand-alone price of each performance obligation
2.5 Recognize revenue when PO is satisfied
The entity satisfies a performance obligation by transferring control of a promised good or service to
the customer (IFRS 15: para. 31).
A performance obligation can be satisfied at a point in time, such as when goods are delivered to the
customer or over time.
determine the point in time at which a customer obtains control

Recognize at a point in time
of a promised asset
Control of an asset: ability to direct the use of, and obtain
substantially all of the remaining benefits
 The entity has a present right to payment for the asset

 The customer has legal title to the asset
Transfer  The entity has transferred physical possession of the asset
control  The customer has the significant risks and rewards of ownership of
the asset
 The customer has accepted the asset
Example 4: Apply 5 steps model
Wayne Co sells a cable TV system to Reus under the following terms on January 20X8. Reus has to pay a monthly fee
of $160 for 12 months. Reus receives a cable TV set top box and access to all the TV channels. The contract does not
contain any other conditions and, once signed, the receipt of the consideration is unconditional. Wayne Co sells the
set top box by itself for $500 and charges monthly access to the TV service without the set top box for $130 a month.
Required: What amount of revenue should Wayne Co recognize in the year ended 31 March 20X8?
Step 1: Identify contract This is an agreement between Wayne and Reus for the
provision of 12 months period.
• Deliver a set top box

Step 2: Identify separate POs within contract
• Deliver cable TV access for 12 months
Step 3: Determine transaction price The total transaction price is $1,920 ($160 × 12 months).
Step 4: Allocate transaction price
Step 5: Recognize revenue

Step 5: Recognize revenue
• Box has been passed to the Reus so the full goods revenue of $466 should be recognized on 31 March 20X8.
• Access is provided over time (12 months), so revenue from this should be recognized over time. In the year
ended 31 December 20X8, revenue of $362 (3/12 x $1,454) should be recognized.
Debit Cash $480 ($160x3)

Debit Trade receivable $348
Cr Revenue $828 ($466 + $362)
III. Presentation & Disclosure
1. Presentation
• Contracts with customers will be presented in an entity's statement of financial position as a contract liability,
a contract asset or a receivable, depending on the relationship between the entity's performance and the
customer's payment.
• A contract liability is recognised and presented in the statement of financial position where a customer has
paid an amount of consideration prior to the entity performing by transferring control of the related good
or service to the customer.
• When the entity has performed but the customer has not yet paid the related consideration, this will give
rise to either a contract asset or a receivable.
• Where revenue has been invoiced a receivable is recognized, where revenue has been earned but not
invoiced, it is recognised as a contract asset
III. Presentation & Disclosure
2. Disclosure
IV. Common types of transaction
1. Sell goods with a right of return
An entity transfers control of a product to a customer and also grants the customer the right to return the product for
various reasons (such as dissatisfaction with the product)
Recognition for A full or partial

refund of any consideration paid
A retailer sells 100 items for £10, with a cost per item of £8 resulting in a margin of £2 per item. It anticipates that 12
of those items will be returned for a cash refund or exchanged for a different item.
Although gross profit is unaffected, revenue, which is likely to be a key performance indicator, may be significantly reduced.
Therefore, it is clear that estimating expected levels of returns will be a critical estimate, especially for businesses selling to the
public.
Retailer B sells 100 products at a price of $50 each. The sales contract allows the customer to return any undamaged
products within 30 days and receive a full refund in cash. Each product costs $10.
B estimates that three products will be returned and a subsequent change in the estimate will not result in a
significant revenue reversal.
The costs of recovering the products will not be significant and the products can be resold at a profit.
Required: How to account for this transaction when:

a) Transfer of the products to the customer reflects company's expectation that three products will be returned;
b) Two products returned;
c) One product unreturned (expiry of the right of return products)
a) Initially, for the transfer of products with a right of return, an entity will recognize as follow.
b) Subsequently, two products returned
c) Subsequently, one products unreturned

2. Warranties
In case of warranties, entity should

determine whether the warranties
is recognized as provision under
IAS 37 or not
2. Warranties
Example 6: Warranties
Mobile Co sells hand phones to the customers with price of $400. Mobile Co has the policy of 1-year warranty,
which is embedded in the purchase of hand phones.
Mobile Co also provide the users the warranty package called Extended warranty package which could be
purchased separately from the hand phone at the price of $50 per year.
Required: How should Mobile Co recognise the revenue from the contract?
2. Warranties
2. Warranties
Question
On 29 June 2018, Retailer C is running a special promotion on its washing machines. The selling price of the
washing machine is $1,000. Customers will receive a free 24-month extended warranty, in addition to the 12-
month standard warranty. The same 24-month extended warranty can be purchased from the manufacturer for
$200.
How should Retailer C account for the sale? Assume that the standalone selling price of the washing
machine is $1,000.
2. Warranties
A portion of the selling price needs to be allocated to the extended warranty based on the relative standalone
selling price.
Retailer C will recognise $833 when the washing machine is sold. $167 is deferred until the warranty obligation is
satisfied.
3. Principal vs Agent
There are some indicators to determine whether an entity is principal or not:
• Party is primarily responsible for fulfilling the contract.
• The entity has inventory risk before or after the goods have been ordered by a customer, during shipping or
on return.
• The entity has discretion in establishing prices for the other party’s goods or services and, therefore, the
benefit that the entity can receive from those goods or services is limited.
• The entity is exposed to credit risk for the amount receivable from a customer in exchange for the other
party’s goods or service
3. Principal vs Agent
4. Consignment
Consignment arrangement occurs when an entity delivers a product to another party, the product may be held
in a consignment arrangement if that other party has not obtained control of the product
4. Consignment
4. Consignment
Example 8: Consignment arrangement
A wholesaler sells goods to a retailer for $42,000 on credit on 31 August 20X1 and accounts for them as a sale
revenue immediately. The wholesaler sells at a mark-up of 20% on cost.
The retailer will sell the goods to the final customer but can return any unsold goods for a refund. No goods
were sold to the final customer on 30 September 20X1.
After that, 40% of the goods were sold to the final customer at 31 December 20X1.
Required: What are the adjustments needed to correct the wholesaler’s financial statements for the year ended
31 December 20X1?
4. Consignment
At the year ended 31 December 20X1, only 40% of the goods were sold to the final customer, so only 40% of the sale
($42,000) should be recognized as revenue.
The wholesaler accounted for $42,000 as a sale revenue immediately at 31 August 20X1 is wrong.
The wholesaler sells at a mark-up of 20% on cost:

Sale $42,000 120%
COGS ($42,000 x 100/120) $35,000 100%
Profit ($42,000 x 20/120) $7,000 20%
The adjustments needed to correct the wholesaler’s financial statements for the year ended 31 December 20X1 are as
follow:
Dr Revenue ($42,000 – $42,000 x 40%) $25,200

Cr Trade receivable $25,200
Dr COGS ($35,000 – $35,000 x 40%) $21,000

Cr Inventory $21,000
5. Bill & hold arrangement
A bill-and-hold arrangement is a contract under which an entity bills a customer for a product but the entity retains
physical possession of the product until it is transferred to the customer at a point in time in the future.
(*) For a customer to have obtained control of a product in a bill and hold arrangement, the following criteria must all be met:
• The reason for the bill-and-hold must be substantive (for example, requested by the customer).
• The product must be separately identified as belonging to the customer.
• The product must be ready for physical transfer to the customer.
• The entity cannot have the ability to use the product or to transfer it to another customer
Example 9: Bill-and-hold arrangements

An entity enters into a contract with a customer on 1 January 20X8 for the sale of a machine and spare
parts. The manufacturing lead time for the machine and spare parts is two years.
On 31 December 20X9, the customer pays for the machine and spare parts, but only takes physical
possession of the machine. Although the customer inspects and accepts the spare parts, the customer
requests that the spare parts be stored at the entity’s warehouse because of its close proximity to the
customer’s factory.
The customer has legal title to the spare parts and the parts can be identified as belonging to the customer.
Furthermore, the entity stores the spare parts in a separate section of its warehouse and the parts are ready
for immediate shipment at the customer’s request. The entity expects to hold the spare parts for two to
four years and the entity does not have the ability to use the spare parts or direct them to another
customer
Required: Identify whether the entity should recognize revenue for the contract on 31 December 20X9?
The entity can recognize revenue on 31 December 20X9 because criteria are met:
• The customer requests that the spare parts be stored at the entity’s warehouse => “The reason for the bill-
and-hold must be substantive” is satisfied
• The customer has legal title to the spare parts and the parts can be identified as belonging to the customer
=> “The product must be separately identified as belonging to the customer” is satisfied
• The parts are ready for immediate shipment at the customer’s request => “The product must be ready for
physical transfer to the customer” is satisfied
• The entity does not have the ability to use the spare parts or direct them to another customer => “The entity
cannot have the ability to use the product or to transfer it to another customer” is satisfied
6. Repurchase agreement
A repurchase agreement is a contract in which an entity sells an asset and also promises or has the
option (either in the same contract or in another contract) to repurchase the asset.
6. Repurchase agreement (FORWARD & CALL)
If an entity has an obligation (a forward) or a right (a call option) to repurchase an asset, then a customer does not
have control of the asset. This is because the customer is limited in its ability to direct the use of, and obtain the
benefits from, the asset despite its physical possession
6. Repurchase agreement (FORWARD & CALL)
Scenario A: Accounting for Forwards or Call Options
An entity enters into a contract to sell an asset to a customer for $1,200. The contract provides an option for the
entity to repurchase the asset in three years for a price of $1,300. The transaction is not part of a sale-leaseback
arrangement. The company uses a 5 percent discount rate for similar transactions. Should this transaction be
accounted for as a lease agreement or a financing arrangement?
This transaction should be accounted for as a. The option is classified as a call option since the company has the
right to exercise the option.
At first glance, it appears that the repurchase price is more than the original selling price, but the present value of
the repurchase price discounted at 5 percent for three years is $1,123. Since the repurchase price is lower than
the original selling price, and the transaction is not part of a sale-leaseback arrangement, the transaction is a
lease.
6. Repurchase agreement
Case A – Call option: financing

An entity enters into a contract with a customer for the sale of a tangible asset on 1 January 20X7 for CU1
million.
The contract includes a call option that gives the entity the right to repurchase the asset for CU1.1 million on
or before 31 December 20X7
Control of the asset does not transfer to the customer on 1 January 20X7 because the entity has a right to
repurchase the asset => customer is limited in its ability to direct the use of, and obtain substantially all of the
remaining benefits from, the asset. => the entity accounts for the transaction as a financing arrangement,
because the exercise price is more than the original selling price => entity does not derecognise the asset and
recognises the cash received as a financial liability.
The entity also recognises interest expense for the difference between the exercise price (CU1.1 million) and the
cash received (CU1 million), which increases the liability.
On 31 December 20X7, the option lapses unexercised; therefore, the entity derecognises the liability and
recognises revenue of CU1.1 million
6. Repurchase agreement – PUT OPTION
Scenario B: Accounting for a Put Option as a Financing Arrangement
An entity enters into a contract to sell an asset to a customer for $1,500. The contract provides an option for the
customer to require the entity to repurchase the asset in three years for $1,600 (assume this price takes into
account the time value of money). The transaction is not part of a sale-leaseback arrangement. The expected
market value of the asset in three years is $1,400. Should this transaction be accounted for as a lease agreement,
financing arrangement, or sale with right of return?
+ This transaction should be accounted for as a financing arrangement.

+ The option is classified as a put option since the customer has the right to exercise the option.
+ The repurchase price is more than the original price of the asset and the expected market value of the
asset, making the transaction a financing arrangement (the customer is providing financing to the company).
+ The company will recognize a liability of $1,500 for the consideration received from the customer. If the
customer exercises the option in three years, the company records $100 ($1,600 – $1,500) of interest
expense and reverses the liability. If, however, at the end of the three years the customer decides not to
exercise the option, the company recognizes $1,500 of revenue and reverses the liability
Scenario C: Accounting for a Put Option as a Sale with Right of Return
Assume the same facts as scenario B, except the expected market value of the asset in three years is $1,650.
Under these circumstances, there is not a significant incentive to exercise the option because the customer
can sell the asset for more in the market ($1,650) than it would receive from exercising the option ($1,600).
In this case, the transaction is treated as a sale with a right of return
Case B – Put option: lease

An entity enters into a contract with a customer for the sale of a tangible asset on 1 January 20X7 for CU1 million.
the contract includes a put option that obliges the entity to repurchase the asset at the customer’s request for
CU900,000 on or before 31 December 20X7. The market value is expected to be CU750,000 on 31 December 20X7.
Inception of the contract: the entity assesses whether the customer has a significant economic incentive to
exercise the put option, to determine the accounting for the transfer of the asset.
 The entity concludes that the customer has a significant economic incentive to exercise the put option because
the repurchase price significantly exceeds the expected market value of the asset at the date of repurchase.
The entity determines there are no other relevant factors to consider when assessing whether the customer
has a significant economic incentive to exercise the put option.
 Consequently, the entity concludes that control of the asset does not transfer to the customer, because the
customer is limited in its ability to direct the use of, and obtain substantially all of the remaining benefits from,
the asset.
=> The entity accounts for the transaction as a lease in accordance with IFRS 16 Leases
V. Recognition of revenue over time
1. Contract cost
Incremental costs of obtaining

a contract
CAPITALIZED
costs of fulfilling a contract if they do not COST
fall within the scope of another standard
(such as IAS 2 Inventories) and the entity
expects them to be recovered.
amortised as revenue is recognized: expense
to COS as the contract progresses
Contract costs comprise:

• costs that relate directly to the specific contract
• costs that are attributable to contract activity in general and can be allocated to the contract
• such other costs as are specifically chargeable to the customer under the terms of the contract.
1. Contract cost
revenue and costs should be recognised according to the

Profit
progress of the contract
Expected the whole loss should be recognised immediately, recording a

outcome Loss
provision as an onerous contract.
– Revenue should be recognised to the level of recoverable costs

Unknown (usually costs spent to date).
– Contract costs should be recognised as an expense in the period
in which they are incurred.
In the majority of cases, this will mean that revenue and cost of
sales will both be stated at costs incurred to date, with no profit
or loss recorded.
Step 1 – Calculate overall profit or loss
Step 2 – Determining the progress of a contract
• Input methods – based on the inputs used = Contract costs incurred to date/ total expected costs.
• Output methods – based on performance completed to date = Value of the work certified to date/ total
contract price.
Where progress cannot be measured

Revenue should be recognised only to the extent of contract costs incurred that will probably be recoverable.
Step 3 – Statement of profit or loss (if profitable)
If a contract is in the second year, it is important to remember that any revenue/costs recognised in previous
years should be deducted from the cumulative revenue/costs.
=> This will give the figures to be recognised in the current year
Step 4 – Statement or financial position
At the year end, there will either be a contract asset or liability, recorded in current assets or current liabilities.
Note that these figures are cumulative and not annual.
If an item of property, plant and equipment is used in the contract, the asset will be held at carrying amount at the
year-end. The depreciation will be charged to the statement of profit or loss according to the progress made
towards satisfying the contract
Alternative terms
• Contract asset = receivable and work-in-progress to be used.

If revenue > cash received => included in trade receivables.
If costs to date > cost of sales => included within inventory, as work-in-progress.
• Contract liability (deferred income): cash received > the revenue recognised to date
• Contract is loss-making => a provision recorded to recognise the full loss. This can either be termed
as a contract liability or a provision.
On 1 January 20X1, Baker entered into a contract with a customer to construct a specialised building for
consideration of $2m plus a bonus of $0.4m if the building is completed within 18 months. Estimated costs to
construct the building were $1.5m. If the contract is terminated by the customer, Baker can demand payment for
the costs incurred to date plus a mark-up of 30%. On 1 January 20X1, as a result of factors outside of its control,
Baker was not sure whether the bonus would be achieved.
At 31 December 20X1 Baker had incurred costs of $1m. They were still unsure as to whether the bonus target
would be met. Baker measures progress towards completion based on costs incurred. At 31 December 20X1
Baker had received $1 million from the customer.
Required:
How should this transaction be accounted for in the year ended 31 December 20X1?
Constructing the building is a single performance obligation.
The bonus is variable consideration. It is excluded from the transaction price because it is not highly probable that a
significant reversal in the amount of cumulative revenue recognised will not occur. The construction of the building should
be accounted for as an obligation settled over time.
Baker should recognise revenue based on progress towards satisfaction of the construction of the building
On 1 January 20X1, Castle entered into a contract with a customer to construct a specialised building for
consideration of $10m. Castle is not able to use the building themselves at any point during the construction.
At 31 December 20X1, Castle had incurred costs of $6m. Costs to complete are estimated at $6m. Castle
measures progress towards completion based on costs incurred.
At 31 December 20X1 Castle had received $3 million from the customer.
Required:
CASTLE
On 1 January 20X1 Amir entered into a contract with a customer to construct a stadium for consideration
of $100m. The contract was expected to take 2 years to complete.
At 31 December 20X1 Amir had incurred costs of $24m. Costs to complete are estimated at $20m. In
addition to these costs, Amir purchased plant to be used on the contract at a cost of $16m. This plant was
purchased on 1 January 20X1 and will have no residual value at the end of the 2 year contract.
Depreciation on the plant is to be allocated on a straight line basis across the contract.
Amir measures progress on contracts using an output method, based on the value of work certified to
date.
At 31 December 20X1, the value of the work certified was $45 million, and the customer had paid $11.4m.
Required:
AMIR
AMIR
Summary
Summary
Test your understanding
Merryview specialises in long-term contracts. In each contract Merryview is entitled to receive payments reflecting the progress of the work, so revenue
should be recognised over time.
One of its contracts, with Better Homes, is to build a complex of luxury flats. The price agreed for the contract is $40 million and its scheduled date of
completion is 31 December 20X2. Details of the contract to 31 March 20X1 are:
Commencement date 1 July 20X0
Contract costs: $000
Architects’ and surveyors’ fees 500
Materials delivered to site 2,800
Direct labour costs 3,500
Overheads are apportioned at 40% of direct labour costs
Estimated cost to complete
(excluding depreciation – see below) 14,800
Plant and machinery used exclusively on the contract cost $3,600,000 on1 July 20X0. At the end of the contract it is expected to be transferred to a
different contract at a value of $600,000. Depreciation is to be based on a time-apportioned basis. Better Homes made a progress payment of
$12,800,000 to Merryview on 31 March 20X1.
At 31 March 20X2 the details for the construction contract have been summarised as:
$000
Contract costs to date (i.e. since the start of the contract) excluding all depreciation 20,400
Estimated cost to complete (excluding depreciation) 6,600
A further progress payment of $16,200,000 was received from Better Homes on 31 March 20X2. Merryview accounts for profit on its construction
contracts using the input method, measured using the percentage of the cost to date compared to the total estimated contract cost.
Required:
Prepare extracts from the financial statements of Merryview reflecting the impact of the contract with Better Homes for:
(i) the year to 31 March 20X1
(ii) the year to 31 March 20X2.
Merryview

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CHAPTER 7

REVENUE (IFRS 15)

Example 1: Identify the contract

Required: Identify that whether this is a contract

Approved by all parties Hawkeye signed a contract with a customer

Rights & obligations are Hawkeye provide customer with an asset on

Commercial substance This is a contract to purchase asset

Hawkeye did not believe that it was probable

2.3 Determine transaction price

Significant financing component

Timing of Discount financing component

Significant financing component

AMOUNT LENGTH OF TIME

Difference btw Difference btw

promised transfer of the promised Payment date

Significant financing component

Significant financing component

The consideration receivable can often include amounts such as:

• Volume based rebates or stepped-pricing (common in industries such as retail or manufacturing)

START OF estimate the amount of consideration to which it expects to be entitled on the

CONSIDERATION PAYABLE TO A CUSTOMER

Consideration payable to a customer includes:

CONSIDERATION PAYABLE TO A CUSTOMER

CONSIDERATION PAYABLE TO A CUSTOMER

CONSIDERATION PAYABLE TO A CUSTOMER

CONSIDERATION PAYABLE TO A CUSTOMER

CONSIDERATION PAYABLE TO A CUSTOMER

Payment to supermarket: Dr Prepayment/ Cr Cash: $1.5m

Required: Calculate the revenue Taplop Co would recognise in:

Taplop Co should therefore recognise revenue: $109,000 that come from:

2.5 Recognize revenue when PO is satisfied

determine the point in time at which a customer obtains control

 The entity has a present right to payment for the asset

• Deliver a set top box

Step 4: Allocate transaction price

Step 5: Recognize revenue

Debit Cash $480 ($160x3)

1. Sell goods with a right of return

Recognition for A full or partial

1. Sell goods with a right of return

Required: How to account for this transaction when:

b) Subsequently, two products returned

c) Subsequently, one products unreturned

In case of warranties, entity should

There are some indicators to determine whether an entity is principal or not:

• Party is primarily responsible for fulfilling the contract.

Example 8: Consignment arrangement

The wholesaler sells at a mark-up of 20% on cost:

Dr Revenue ($42,000 – $42,000 x 40%) $25,200

Dr COGS ($35,000 – $35,000 x 40%) $21,000

Example 9: Bill-and-hold arrangements

Scenario A: Accounting for Forwards or Call Options

Case A – Call option: financing

Scenario B: Accounting for a Put Option as a Financing Arrangement

+ This transaction should be accounted for as a financing arrangement.

Scenario C: Accounting for a Put Option as a Sale with Right of Return

Case B – Put option: lease

Incremental costs of obtaining

Contract costs comprise: