MFRS 15 Revenue from Contracts with Customers

1. Overview

MFRS 15 specifies how and when an MFRS reporter will recognise revenue as well as
requiring such entities to provide users of financial statements with more informative,
relevant disclosures. The standard provides a single, principles based five-step model to be
applied to all contracts with customers.

MFRS 15 was issued in May 2014 and applies to an annual reporting period beginning on or
after 1 January 2018. On 12 April 2016, clarifying amendments were issued that have the
same effective date as the standard itself.

1.1 Superseded Standards

MFRS 15 replaces the following standards and interpretations:

 MFRS 111, Construction Contracts

 MFRS 118, Revenue
 IC Interpretation 13, Customer Loyalty Programmes
 IC Interpretation 15, Agreements for the Construction of Real Estate
 IC Interpretation 18, Transfers of Assets from Customers
 IC Interpretation 131, Revenue – Barter Transactions Involving Advertising Services.

1.2 Summary of MFRS 15

Core Principle

Recognise revenue to depict the transfer of goods or services to customers in an amount

that reflects the consideration that the company receives, or expects to receive, in exchange
for these goods or services
The Five Step Revenue Recognition Model

To recognise revenue the following five steps should be applied:

Step 4 Step 5
Step 2 Step 3 Allocate the Recognise
Step 1
Identify the transaction price revenue when (or
Identify the Determine the
performance to each as) performance
contract with the transaction price
obligations in the performance obligations are
customer satisfied
contract obligation

1.3 Scope

The scope of the standard includes all contracts with customers to provide goods or services
in the ordinary course of business, except for the following contracts:

 Lease contracts within the scope of MFRS 117 Leases;

 Insurance contracts within the scope of MFRS 4 Insurance Contracts;
 Financial instruments and other contractual rights or obligations within the scope
of MFRS 9 Financial Instruments, MFRS 10 Consolidated Financial Statements,
MFRS 11 Joint Arrangements, MFRS 127 Separate Financial Statements and
MFRS 128 Investments in Associates and Joint Ventures; and

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 Non-monetary exchanges between entities in the same line of business to

facilitate sales to customers or potential customers. For example, this Standard
would not apply to a contract between two oil companies that agree to an
exchange of oil to fulfil demand from their customers in different specified
locations on a timely basis.
[MFRS 15:5]
1.4 Interaction with other standards

A contract with a customer may be partially within the scope of MFRS 15 and partially within
the scope of another standard. In that scenario: [MFRS 15:7]

 if other standards specify how to separate and/or initially measure one or more
parts of the contract, then those separation and measurement requirements are
applied first. The transaction price is then reduced by the amounts that are
initially measured under other standards;
 if no other standard provides guidance on how to separate and/or initially
measure one or more parts of the contract, then MFRS 15 will be applied.

1.5 Key definitions

[MFRS 15: Appendix A]

Contract An agreement between two or more parties that creates enforceable

rights and obligations.

Customer A party that has contracted with an entity to obtain goods or services that
are an output of the entity’s ordinary activities in exchange for
consideration.

Income Increases in economic benefits during the accounting period in the form
of inflows or enhancements of assets or decreases of liabilities that
result in an increase in equity, other than those relating to contributions
from equity participants.

Performance A promise in a contract with a customer to transfer to the customer

obligation either:
 a good or service (or a bundle of goods or services) that is
distinct; or
 a series of distinct goods or services that are substantially the
same and that have the same pattern of transfer to the customer.

Revenue Income arising in the course of an entity’s ordinary activities

stand-alone The price at which an entity would sell a promised good or service
selling price separately to a customer.
(of a good or
service)
Transaction The amount of consideration to which an entity expects to be entitled in
price exchange for transferring promised goods or services to a customer,
excluding amounts collected on behalf of third parties.

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2. Accounting requirements for revenue

2.1 The five-step revenue recognition model

The model:
 introduces key aspects like customer, enforceable contract, performance
obligations, transaction price and price allocation; and
 prescribes the ground rules in evaluating the above aspects to help achieve the
core principle.

Specifically, revenue is recognised:

 over time, in a manner that depicts the entity’s performance obligations; or

 at a point in time, when the control of the goods or services is transferred to the
customer

Illustration 1 – Applying the five-step model

On 3 January 2018, Sigma Bhd signs a contract to sell equipment to Beta Bhd for
RM10,000.
A contract is an agreement between two or more
parties that creates enforceable rights and
Step 1: Identify the contract(s) with a
obligations. In this case, Sigma Bhd has signed a
customer A contract is an agreement
contract to deliver equipment to Beta Bhd on 3
January 2018.

Step 2: Identify the performance Sigma Bhd has only one performance obligation
that is to deliver equipment to Beta Bhd.
obligations in the contract

Transaction price is the amount of consideration

to which an entity expects to be entitled in
Step 3: Determine the transaction price exchange for transferring promised goods or
services to a customer. In this case, the
transaction price is RM10,000

Step 4: Allocate the transaction price to

the performance obligations in the
In this case, the transaction price allocated to the
contract performance obligation is RM10,000

Sigma Bhd recognises revenue of RM10,000 for

Step 5: Recognise revenue when (or as) the sale of the equipment to Beta Bhd when it
the entity satisfies a performance satisfies its performance obligation ( the transfer
obligation of control of the equipment to Beta Bhd)

Illustration 1 above highlights the five-step process used to recognise revenue. In Step 5, a
change of control from Sigma Bhd to Beta Bhd occurs. Beta Bhd now controls the asset
because it has the ability to direct use of and obtain substantially all the remaining benefits
from the equipment. Control also includes Beta’s ability to prevent other companies from
directing the use of, or receiving the benefits from the equipment.

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3. Step 1: Identify the contract with the customer

3.1 Contract criteria

A contract is an agreement between two or more parties that creates enforceable rights
and obligations.

Revenue from a contract with a customer cannot be recognised until a contract exists. A
contract with a customer will be within the scope of MFRS 15 if all the following conditions
are met: [MFRS 15:9]

1. the contract has been approved by the parties to the contract (in writing, orally, or in
accordance with other customary business practices) and are committed to performing
their respective obligations;
2. each party’s rights in relation to the goods or services to be transferred can be
identified;
3. the payment terms for the goods or services to be transferred can be identified;
4. the contract has commercial substance; and
5. it is probable that the consideration to which the entity is entitled to in exchange for
the goods or services will be collected.

If a contract does not meet the above criteria, the entity should recognise the consideration
received as revenue only when:

 the enity has no remaining obligations, receives all or substantial consideration

which is non-refundable
 the contract has been terminated and the consideration is non-refundable

3.2 Enforceability

Enforceability of the rights and obligations in a contract is a matter of law. Contracts can be
written, oral or implied by an entity’s customary business practices. The practices and
processes for establishing contracts vary within and across entities, industries and
jurisdictions.

3.3 Contract term

Some contracts may have no fixed duration and can be terminated or modified by either
party at any time. Other contracts may automatically renew on a periodic basis specified in
the contract. The duration of the contract is the contractual period in which the parties to the
contract have present enforceable rights and obligations.

A contract does not exist if each party to the contract has the unilateral enforceable right
to terminate a wholly unperformed contract without compensating the other party (or
parties). A contract is wholly unperformed if both of the following criteria are met:

(a) the entity has not yet transferred any promised goods or services to the
customer; and
(b) the entity has not yet received, and is not yet entitled to receive, any
consideration in exchange for promised goods or services.

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Example – Assessing the existence of a contract to sell real estate

In an agreement to sell real estate, Omega Bhd assesses the existence of a contract
considering factors such as:
 the buyer’s available financial resources;
 the buyer’s commitment to the contract, which may be determined based on the
importance of the property to the buyer’s operation;
 the seller’s prior experience with similar contracts and buyers under similar
circumstances;
 the seller’s intention to enforce its contractual rights; and
 the payment terms of the arrangement.

If Omega Bhd concludes that it is not probable that it will collect the amount to which it
expects to be entitled, then no revenue is recognised. Instead, Omega Bhd applies the
new guidance on consideration received before a contract exists, and accounts for any
cash collected as a deposit liability.

3.4 Collectability

The assessment of a customer’s credit risk is an important part of determining whether a

contract is valid. In evaluating whether collectability of an amount of consideration is
probable, an entity should consider only the customer’s ability and intention to pay that
amount of consideration when it is due.

Example – Collectability

Dolly Bhd licences an intellectual property to a customer in exchange for a usage-based

royalty. At contract inception, the contract meets all the criteria under MFRS 15.9 and
revenue is recognised based on usage. During the second year of the contract, the
customer continues to use the entity’s licence, but the customer’s financial condition
declines and their ability to pay significantly deteriorates.

Analysis and accounting treatment:

The entity recognises royalty earned in the first year as revenue, as the contract meets the
recognition criteria under MFRS 15. In the second year, the entity determines it is no
longer probable to collect the entitled consideration. Therefore, the entity does not
recognise any further revenue associated with the customer’s future usage of its patent.
The entity accounts for any impairment of the existing receivable under MFRS 9 Financial
Instruments.

3.5 Combined contracts

An entity should combine two or more contracts entered into at or near the same time with
the same customer (or related parties of the customer) and account for the contracts as a
single contract, if one or more of the following criteria are met:

 the contracts are negotiated as a package with a single commercial objective

 the consideration to be paid in one contract depends on the price or performance
of the other contract; or

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 the goods or services promised are a single performance obligation

3.6 Contract modifications

Also referred to as a change order, a variation, or an amendment arise from a change in the
scope or price, or both, of a contract. Modifications are subject to approval by the parties to
the contract, and usually do not take effect until such approval is obtained. This may be in
writing, oral, or implied by normal business practices.

Contract modifications can be accounted for as either:

1) An entirely separate contract;
2) The termination of the original contract and creation of a new contract;
3) Modification of the existing contract; or
4) A combination of 2) and 3) above.

1) Separate Contract

A modification is accounted for as a separate contract when both of the following conditions
exist:
 The scope of the contract increases because of the addition of goods or services
that are distinct; and
 The price of the contract increases by:
o An amount that reflects the entity’s stand-alone prices of the additional
goods or services, and
o including any appropriate adjustments to the price to reflect the relevant
circumstances of the modification

The new separate contract is accounted for using the five-step revenue model
prospectively. The original contract continues to be accounted for under the five-step
revenue model.

Example – Contract modification accounted as a separate contract

Entity A enters contracts with a customer to sell 50 goods for RM5,000 (RM100 per good).
The goods are distinct and are transferred to the customer over a 12-month period. The
parties modify the contract in the fifth month to sell an additional 10 goods for RM95 each
which is the stand-alone selling price on the modification date. The lower stand-alone
price reflects the fact that Entity A no longer has to incur selling expenses to sell the
additional 10 goods.

Analysis and accounting treatment:

The modification to sell an additional 10 goods at RM95 each should be accounted for as
a separate contract because the additional goods are distinct and the price reflects their
stand-alone selling price. The existing contract would not be affected by the modification.

2) Termination and Replacement of an Existing Contract

The modification is treated as a termination and replacement of the existing contract if the
remaining goods or services to be delivered under the existing contract are distinct from
those delivered prior to the contract modification date and the price of the additional goods
or services does not reflect its stand-alone selling price.

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The contract modification is accounted as if it were a termination of the existing contract and
the creation of a new contract. The amount of consideration to be allocated to the remaining
performance obligations is the sum of:
 the consideration included in the estimate of the transaction price of the original
contract that has not been recognised as revenue; and
 the consideration promised as part of the contract modification

Example – Contract modification which is not a separate contract and the remaining
goods or services are distinct

An entity enters into a contract to deliver 120 units of goods at RM100 each over 10
months. The entity has delivered 60 units by the 3rd month. At the beginning of the 5th
month, the entity agreed to deliver 30 more units at RM95 each. It is determined that the
additional 30 units are distinct goods. It is also determined that the consideration for the
additional 30 units does not reflect their stand-alone prices.

Analysis and accounting treatment:

The contract is not a separate contract as the consideration paid for the additional units
(i.e. modification) is not reflective of their stand-alone prices. The additional units are
distinct and hence the contract modification is accounted as if it were a termination of the
existing contract and creation of a new contract to deliver the remaining 90 units (60
undelivered units of the original contract and 30 additional units).

On the date of contract modification, no adjustment is required to previously recorded

revenue. The consideration included in the original contract that has not been recognised
as revenue of RM6,000 (60 x RM100) is added to the contract modification amount of
RM2,850 (30 x RM95). The total is recognised as revenue prospectively for the 90 units to
be delivered. The blended price is RM98.33 per unit [(RM100 x 60 undelivered original
units) + (RM95 x 30 additional units) / 90 total units] will be recognised as revenue when
or as the remaining 90 units are delivered.

3) Modification of an Existing Performance Obligation

A modification of the existing performance obligation under the existing contract arises when
the remaining goods or services to be delivered under the existing contract are not distinct
from the goods or services delivered prior to the contract modification date. In effect, the
original performance obligation is only partially satisfied at the date of the modification.

This modification may result in an adjustment to the entity’s measure of contract

completeness. As such, the modified consideration is recognized as an adjustment to
revenue at the date of the contract modification.

The accounting for the modification is done retrospectively, with the adjustment to revenue
being made on a cumulative catch-up basis.

4. Step 2: Identify the performance obligations in the contract

4.1 Promises in the contract

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Promises to transfer goods or services can be explicitly stated in the contract or be implied
by an entity’s customary business practices, published policies or specific statements that
create a valid expectation that the entity will transfer goods or services to the customer.

Administrative tasks to set up a contract are not performance obligations as they do not
transfer goods or services to the customer.

Examples of promised goods or services (MFRS 15.26):

▪ sale of goods produced by an entity (e.g. inventory of a manufacturer)

▪ resale of goods purchased by an entity (e.g. merchandise of a retailer)
▪ resale of rights to goods or services purchased by an entity (e.g. tickets resold by an
entity acting as a principal)
▪ performing contractually agreed-upon tasks for a customer
▪ goods or services available for a customer to use as and when the customer decides
▪ arranging for another party to transfer goods or services to a customer i.e. acting as
an
agent of another party
▪ granting rights to goods or services to be provided in the future that a customer can
resell or provide to its customer (e.g. an entity selling a product to a retailer promises
to
transfer an additional good or service to an individual purchasing the product from the
retailer)
▪ constructing, manufacturing or developing an asset on behalf of a customer;
▪ granting licences
▪ granting options to purchase additional goods or services (when those options provide
a customer with a material right).

4.2 Determining when promises are performance obligations

After identifying the promised goods and services in a contract, an entity determines which
of those promises will be treated as performance obligations: [MFRS 15.22]

 a good or service (or bundle of goods or services) that is distinct; or

 a series of distinct goods or services that are substantially the same and that
have the same pattern of transfer to the customer.

Therefore promises to transfer goods or services are performance obligations if the goods or
services are:

 distinct (including as part of a bundle); or

 part of a series of distinct goods and services that are substantially the same and
have the same pattern of transfer

If a promised good or service is not distinct, an entity should combine that good or service
with other promised goods or services until it identifies a bundle of goods or services that is
distinct. In some cases, this would result in accounting for all the goods or services promised
in a contract as a single performance obligation (MFRS 15.30)

4.3 Determining whether goods or services are ‘distinct’

MFRS 15:27 has two criteria for determining whether a promised good or service is distinct:

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 the customer must be able to benefit from the good or service on its own, or
together with other readily available resources
 the promise to transfer the good or service is separately identifiable in the
contract.

The customer can benefit

A good or service is capable of being distinct if the customer can benefit from the good or
service either on its own or together with other resources that are readily available to the
customer. This is so, if the good or service could be used, consumed, sold for an amount
that is greater than scrap value or otherwise held in a way that generates economic benefits.
Various factors may provide evidence of a distinct good or service. For example, an entity
regularly selling a good or service separately, indicates that a customer can benefit from the
good or service on its own or with other readily available resources.

Promise to transfer the good or service is separately identifiable in the contract

A promise to transfer the good or service is distinct within the context of the contract if the
entity’s promise to transfer the good or service to the customer is separately identifiable from
other promises in the contract. Factors indicating that the promises to transfer goods or
services are not separately identifiable include:

 the entity provides a significant service of integrating the goods or services with other
goods or services into a bundle of goods or services that represent the combined
output

Example - A customer requires the construction of a wall in a dwelling. The

contract contains provision of raw materials (bricks and mortar) and a building
service. Whilst building services could be provided by another builder, the
promises are not separately identifiable in the contract (the customer requires a
‘finished’ wall not the bricks and mortar) and therefore this is a single performance
obligation.

 one or more of the goods or services significantly modifies or customises, or are

significantly modified or customised by, one or more of the other goods or services
promised in the contract

Example - An entity promises to provide a customer with software that it will

significantly customise to make the software function with the customer’s existing
infrastructure. The entity determines it is providing a fully integrated system and the
customisation service requires it to significantly modify the software in such a way
that the risks of providing the software together with the customisation service are
inseparable.

 the goods or services are highly interdependent or highly interrelated

Example - A company sells specialised equipment and installation services. The

installation is complex and cannot be provided by alternative service providers. The
equipment will not be operational if not installed by the same company

4.4 Series of distinct goods or services

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In certain contracts, multiple distinct goods or services will comprise a single performance
obligation. These distinct goods and services may be identical to each other, or not.
However, this assessment requires going to Step 5 to assess whether the performance
obligation is satisfied over time.

A series of distinct goods or services provided over time (e.g. delivering utilities, cleaning
services etc.) are considered a single performance obligation if they are substantially the
same and have the same pattern of transfer to the customer [MFRS 15.22]. A series of
distinct goods or services has the same pattern of transfer if [MFRS 15.23]:

 each distinct good or service in the series that the entity promises to transfer
consecutively to the customer would be a performance obligation that is satisfied
over time (see below); and
 a single method of measuring progress would be used to measure the entity’s
progress towards complete satisfaction of the performance obligation to transfer
each distinct good or service in the series to the customer.

Example – Series of distinct services treated as a single performance obligation

Entity B contracts to provide property management services for a 5-year period. The
compensation is a percentage of the property rental and reimbursement for the labour
costs of the services.

Analysis

This contract contains multiple distinct services, each being periodic property
management services. Each distinct service is the substantially the same and is provided
as a series.

Entity B next assesses whether the series of distinct services have the same pattern of
transfer to the customer. The property management services are simultaneously received
and consumed by the customer - therefore each distinct service would meet the criteria to
be a performance obligation that would be satisfied over time.

Finally, Entity B implicitly uses labour costs incurred to measure progress for all services
in the series.

In conclusion, the arrangement is a series of distinct services that should be treated as a

single performance obligation that is performed over time.

5. Step 3: Determine the transaction price

The transaction price is the amount to which an entity expects to be entitled in exchange
for the transfer of goods and services. When making this determination, an entity will
consider past customary business practices. [MFRS 15:47]

An entity should consider the terms of the contract and its customary business practices to
determine the transaction price.

An entity also assumes that the goods or services will be transferred to the customer as
promised under the existing contract and that the contract will not be cancelled, renewed or
modified.

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The estimated transaction price is affected by the nature, timing and amount of promised
consideration. Therefore, when determining the transaction price, the entity considers the
effects of:
 Variable consideration, including constraining estimates of variable
consideration;
 The existence of a significant financing component;
 Non-cash consideration; and
 Consideration payable to the customer.

5.1 Variable Consideration and constraining estimates of variable consideration

An amount of consideration can vary because of discounts, rebates, refunds, credits, price
concessions, incentives, performance bonuses, penalties or other similar items. The
promised consideration can also vary if the consideration is contingent on the occurrence or
non-occurrence of a future event. For example, a product was sold with a right of return or a
performance bonus is promised on achievement of a specified milestone

An entity should estimate an amount of variable consideration based on either of [MFRS

15.53]:
Expected Value Most Likely Amount
The sum of probability-weighted amounts in The single most likely amount in a range of
a range of possible consideration amounts possible consideration amounts. This
(e.g. when an entity has a large number of method may be appropriate if the contract
contracts with similar characteristics). has only two possible outcomes (e.g. an
entity either achieves a performance bonus
or does not).

Example - Estimating variable consideration based on the expected value

Entity A enters into a contract with a customer to build an asset for RM200,000 with a
performance bonus of RM50,000 based on the timing of completion. The amount of the
performance bonus decreases by 10% per week for every week beyond the agreed-upon
completion date. The contract requirements are similar to contracts Entity A has
performed previously, and it concludes that the expected value method is most predictive
in this case. Entity A estimates there is a 60% probability of completion by the agreed
date, a 30% probability that it will be delayed by a week, and a 10% probability that it will
be delayed by two weeks. How should Entity A determine the transaction price?

Analysis

The transaction price is the estimate of the consideration entitled for the work performed.
Probability-weighted consideration under the expected value method:
RM250,000 (fixed fee plus full performance bonus) x 60% RM150,000
RM245,000 (fixed fee plus 90% of performance bonus) x 30% RM73,500
RM240,000 (fixed fee plus 80% of performance bonus) x 10% RM24,000
Total probability-weighted consideration RM247,500

The total transaction price of RM247,500 is based on the probability-weighted estimate.

Entity A should update its estimate at each reporting date. This example does not
consider the potential need to constrain the estimate of variable consideration (see below)

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An entity should apply one of the above methods consistently throughout the contract when
estimating the effect of an uncertainty on the amount of variable consideration entitled.
However, if the contract has more than one uncertainty (e.g. price index, completion targets
etc.) the entity may determine the appropriate method for different uncertainties.
Constraint on variable consideration estimates
MFRS 15 imposes a constraint on the estimate of variable consideration. The estimate of
variable consideration can only be recognised to the extent it is highly probable that a
significant revenue reversal will not occur in future periods [MFRS 15.56]. In making
such assessment, an entity should consider the likelihood and the magnitude of the revenue
reversal. Examples of factors that could increase the likelihood or the magnitude of a
revenue reversal include [MFRS 15.57]:

 the amount of consideration is highly susceptible to factors outside the entity’s

influence (e.g. volatility in a market, the judgement or actions of third parties,
weather conditions and a high risk of obsolescence of the promised good or
service)
 the uncertainty about the amount of consideration is not expected to be resolved
for a long period of time
 the entity’s experience (or other evidence) with similar types of contracts is
limited, or has limited predictive value
 the entity has a practice of either offering a broad range of price concessions or
changing the payment terms of similar contracts in similar circumstances
 the contract has a large number and broad range of possible consideration
amounts.

5.2 Significant financing component

A contract with a customer contains a significant financing component if the timing of the
payments provides a significant benefit of financing to either the customer or the entity. A
financing component may be explicitly stated in the contract or implied via the payment
terms agreed to by all parties to the contract. The following diagram provides an example of
when a financing benefit may be attained by either the customer or entity:

Benefit to the Customer (In Arrears) Benefit to the Entity ( In Advance)

•The customer may defer or delay payment •The customer may pay a lower price when
for goods or services received at an earlier the contract is signed and wait a period of
point in time. This provides the customer time for delivery/performance of
with the ability to pay consideration over a goods/services. This provides the entity
period of time, or a point in time in the with up-front consideration
future.

All facts and circumstances relating to a contract must be considered to determine whether a
significant financing component exists, including:
 Any difference between the promised consideration and the cash selling price of
the promised goods or services.
 The combined effects of both of the following:
a) The timing difference between when the entity transfers the promised
goods or services to the customer and when the customer pays; and
b) The prevailing interest rates in the applicable market.

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Example 4 – Adjusting for a significant financing component

Entity B contracts to provide a machine with payments from the customer over 2 years in
monthly instalments of RM4,500 totalling RM108,000. The cash selling price of the
machine would be RM100,000 where payment is on delivery.

Analysis

There is a difference of RM8,000 between the cash selling price of RM100,000 and the
promised consideration (total of monthly instalments) of RM108,000. Entity B assesses
this is the combined effect of the expected length of time to receive the full consideration
and prevailing relevant market interest rates. Therefore Entity B determines the contract
includes a financing component, though the contract does not explicitly refer to an interest
charge.

The implicit rate is computed as 7.5% based on the cumulative interest (RM8,000) and the
settlement period. Entity B determines that the financing component is significant as it
represents 8% of the selling price. Therefore an adjustment is required to adjust the time
value of money.

Entity B recognises:
 Revenue of RM100,000 when the performance obligation is satisfied (i.e. when the
machine is delivered); and
 Interest income on a monthly basis using the effective interest method. The
interest income for each month is based on the outstanding balance receivable.

As a practical expedient, an entity need not adjust the transaction price if it expects to
receive payment within 12 months of transferring the promised good or service.

5.3 Non-cash Consideration

When determining the transaction price of a contract that includes consideration in a form
other than cash (i.e., non-cash consideration), any non-cash consideration is measured at
fair value. If it’s fair value is not reasonably measurable, the entity is required to measure
the consideration by reference to the stand-alone selling price of the goods or services
promised to the customer in exchange for the consideration.

When a customer transfers goods or services (e.g., materials, equipment or labour) in order
to fulfill the contract, the entity must assess whether it obtains control of those goods or
services. Where the entity obtains control, it must account for the contributed goods or
services as non-cash consideration.

5.4 Consideration payable to a customer

Consideration payable to a customer includes [MFRS 15.70]:

 cash amounts that an entity pays, or expects to pay, to the customer or to other
parties that purchase the entity’s goods or services from the customer (i.e. the
customer’s customer)
 credit or other items (e.g., a coupon or voucher) that can be applied against
amounts owed to the entity or to the customer’s customer

6. Step 4: Allocate the transaction price to the performance obligations in the

contracts

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Once the performance obligations are identified and the transaction price determined, the
transaction price is allocated to the performance obligations in proportion to their relative
stand-alone selling prices.

The objective when allocating the transaction price is for an entity to allocate the
transaction price to each performance obligation (or distinct good or service) in an amount
that depicts the amount of consideration to which the entity expects to be entitled in
exchange for transferring the promised goods or services to the customer

6.1 Allocation based on stand-alone selling prices

The allocation of the total transaction price to performance obligations is done by [MFRS
15.76]:
1. Determining the stand-alone selling price of the distinct good or service
underlying each performance obligation; and
2. Allocating the transaction price (Step 3) to each of the performance obligations
(Step 2), in the same proportion as the stand-alone selling prices.

This is done at the inception of the contract.

Example – Allocating the transaction price

Entity A has a contract with customer B to sell computer equipment, provide training and
operate an IT helpdesk. Each of these has been assessed to be separate performance
obligations. The total transaction price has been determined to be RM1,200,000. Entity A
determines that the stand-alone selling price for each distinct good or service is:

RM
Computer equipment 750,000
Training 150,000
Helpdesk 600,000
Total of standalone prices RM1,500,000

The total transaction price is allocated to each service performance obligation as follows:

RM RM
Computer equipment 600,000 1,200,000 x (750,000 / 1,500,000)
Training 120,000 1,200,000 x (150,000 / 1,500,000)
Helpdesk 480,000 1,200,000 x (600,000 / 1,500,000)
Total of transaction price 1,200,000

What is the stand-alone selling price?

This is the price at which an entity would sell a distinct good or service separately on a
stand-alone basis.

The best evidence of the stand-alone selling price is an observable price when the seller
sells that same good or service in similar circumstances and to similar customers. A
contractually stated price or a list price may be the stand-alone selling price

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 MFRS 15 Revenue from Contracts with Customers

If a standalone selling price is not directly observable, the entity will need to estimate it.
MFRS 15 suggests various methods that might be used, including: [MFRS 15:79]

 Adjusted market assessment approach - evaluating the market in which the

entity sells the goods or services and estimating the price that customers would
be willing to pay. This could include referring to competitor prices, adjusted for
the entity’s costs and margins
 Expected cost plus a margin approach - forecasting expected costs plus an
appropriate margin; or
 Residual approach - deducting the observable stand-along selling prices of
other goods or services in the contract from the total transaction price. This
method is only allowed in certain circumstances where price is highly variable or
not yet established.

A combination of the above methods may need to be used to estimate the stand-alone
selling prices if some goods or services in a contract have highly variable or uncertain
standalone selling prices.

Example 5. Expected Cost Plus a Margin and Adjusted Market Assessment

Approaches

Equipment Expert Bhd entered into a contract to sell a piece of equipment to YC Bhd for
RM250,000. The installation of the equipment is part of the contract. Equipment Expert
Bhd sells the equipment on a stand-alone basis without the installation for RM200,000.
The installation service is rarely sold on its own; however, other entities will install similar
equipment for RM40,000 to RM50,000. The entity estimates that it would cost them
approximately RM36,000 to install the equipment with a 25% margin.

Analysis

Since the equipment is sold on a regular basis on its own, there is evidence of its stand-
alone price (RM200,000). Equipment Expert Bhd estimates the installation fee at
RM45,000 (RM36,000 x 1.25) using the expected cost plus a margin approach. This is
within the range of what other entities charge for such a service in accordance with the
adjusted market assessment approach. Therefore, RM45,000 would be a reasonable
estimate for the installation service’s stand-alone price.

Revenue would be allocated to each separate performance obligation using the relative
stand-alone selling price method as follows:

Equipment: RM204,082 ((RM200,000/RM245,000) x RM250,000)

Installation: RM45,918 ((RM45,000/RM245,000) x RM250,000)

Equipment Expert Bhd would need to determine when the performance obligations are
satisfied in order to determine the timing of revenue recognition.

Example 6 – Residual Value Approach

Software Bhd sells the use of its accounting software and consulting services on how to
use the software and basic accounting assistance. The software and the consulting
services are sold as a package most of the time, but prices vary widely from contract to
contract depending on the agreement that was reached with the customer. The use of the

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 MFRS 15 Revenue from Contracts with Customers

software is sold as a stand-alone unit on a regular basis for RM500/month. The consulting
services offered are consistent from contract to contract but are never sold on its own and
Software Bhd determines that the variability of the bundle pricing is solely attributable to
the consulting services offered in the package.

Software Bhd enters in an agreement to provide the use of its software to a customer for 5
years along with consulting services for RM50,000.

Analysis
In this situation we know that the stand-alone selling price of the software can be
determined as the software is sold on its own on a regular basis. However, there is
significant variability in the pricing for the consulting services. Therefore, the residual value
approach would be most appropriate for assigning a stand-alone selling price to the
consulting services obligation in this agreement.

If the software was sold on its own, Software Bhd would have received RM30,000 (12
months x RM500/month x 5 years) over the next five years. Therefore, using the residual
value approach, the selling price of the consulting services would be RM20,000
(RM50,000 - RM30,000).

6.2 Allocation of a discount

A discount arises where the sum of stand-alone selling prices exceeds the promised
consideration in the contract.

In general, the total discount is allocated proportionately to all of the performance obligations
in the contract.

The exception to this general rule is where there is observable evidence that the discount
relates only to specific individual or bundles of performance obligations [MFRS 15.81].

The criteria for allocating a discount to specific performance obligations are [MFRS 15.82]:
 the entity regularly sells each distinct good or service (or a bundle of) in the
contract, on a stand-alone basis;
 the entity regularly sells on a stand-alone basis, a bundle(s) of some of the
distinct goods or services at a discount compared to the stand-alone selling
prices; and
 the discount attributable to each bundle of goods or services described above is
substantially the same as the discount in the contract and an analysis provides
observable evidence of the performance obligation(s) to which that discount
relates

7. Step 5: Recognise revenue when (or as) the entity satisfies a performance
obligation

An entity shall recognise revenue when (or as) the entity satisfies a performance
obligation by transferring a promised good or service (i.e. an asset) to a customer. An
asset is transferred when (or as) the customer obtains control of that asset [MFRS 15.31].

For each performance obligation, an entity should determine, at contract inception, whether
it satisfies the performance obligation [MFRS 15.32]:
 over time
OR

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 MFRS 15 Revenue from Contracts with Customers

 at a point in time

7.1 Control-based revenue recognition approach

MFRS 15 takes a controls-based approach to revenue recognition, where the transfer of a

good or service happens as the customer obtains control of that good or service. This can
happen either over time or at a point in time [MFRS 15.32]. This contrasts with MFRS 118,
where revenue is recognised when an entity transfers significant risks and rewards of
ownership to the customer.

What is control?

Control of an asset is the ability to direct the use of, and obtain substantially all of the
remaining benefits from, the asset or prevent other entities from doing so. The benefits of an
asset are the potential cash flows that can be obtained either directly or indirectly from the
asset, such as by:
 Employing the asset to:
o Create goods or provide services.
o Increase the value of other assets.
o Discharge liabilities or cut costs.
 Selling or exchanging the asset.
 Pledging the asset as collateral against liabilities.
 Holding the asset.

7.2 Performance Obligations Satisfied over Time

An entity recognises revenue over time if one of the following criteria is met: [MFRS 15:35]

Criteria Example
1 the customer simultaneously receives and consumes Routine or recurring
all of the benefits provided by the entity as the entity services
performs
2 the entity’s performance creates or enhances an asset Building an asset on a
that the customer controls as the asset is created customer’s site
3 the entity’s performance does not create an asset with Building a specialised asset
an alternative use to the entity and the entity has an that only the customer can
enforceable right to payment for performance use, or building an asset to
completed to date a customer order

Customer Controls the Asset as it is Created or Enhanced

In assessing whether a customer controls an asset as it is created or enhanced, the entity
must assess whether the definition of control, as described above, has been met. The asset
created or enhanced can be either a tangible or intangible asset.

Right to Payment for Performance Completed to Date

Such a right exists when an entity is entitled to compensation for its performance completed
to date if the customer terminates a contract, unless the entity fails to perform as promised.
Compensation for performance completed to date should approximately equal the selling
price of the goods or services transferred to date.

Reasonable Measures of Progress Revenue for a performance obligation satisfied

over time should only be recognized if the progress towards complete satisfaction of the
performance obligation can be reasonably measured. If reliable information is lacking,
progress cannot be measured reasonably.

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 MFRS 15 Revenue from Contracts with Customers

7.3 Performance Obligations Satisfied at a Point in Time

When a performance obligation is not satisfied over time it is satisfied at a point in time. To
determine the point in time at which control is transferred to the customer and the
performance obligation is satisfied, the entity must consider the requirements for control

In addition, indicators of the transfer of control at a point in time may include; but are not
limited to: [MFRS 15:38]
 The entity has a present right to payment or the asset;
 The customer has legal title to the asset;
 The entity has transferred physical possession of the asset;
 The customer has significant risks and rewards of ownership of the asset; and
 The customer has accepted the asset.
8. Other Revenue Recognition Issues

8.1 Bill and 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. Bill and hold sales result when the buyer is not yet ready to
take delivery but does not take title and accepts billing. For example, a customer may
request a company to enter into such an arrangement because:

 Lack of available space for the product.

 Delays in its production schedule, or
 More than sufficient inventory in its distribution channel.

Based on the contract terms (i.e., delivery and shipping terms), the entity must evaluate
when the entity has fulfilled its performance obligation and has transferred control to the
customer. Control may have transferred even though the entity retains physical possession,
in which case the entity essentially provides custodial services to the customer over the
product. Alternatively, control may only transfer when the product reaches the customer’s
premises or at the time of shipment.

For the customer to obtain control of a product in a bill-and-hold arrangement, all of the
following criteria must be met:

1. The reason for the bill-and-hold arrangement must be substantive.

2. The product must be identified separately as belonging to the customer.
3. The product currently must be ready for physical transfer to the customer.
4. The seller cannot have the ability to use the product or to direct it to another
customer.

If the contract meets the criteria for a bill-and-hold arrangement, the entity may recognise the
revenue
8.2 Principal versus Agent Considerations

The entity is a principal if it controls the specific good or service before transfer to the
customer. However, if legal title is obtained by the entity only momentarily before transfer to
the customer, this is not conclusive evidence that the entity is acting as principal.

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 MFRS 15 Revenue from Contracts with Customers

When acting as a principal, an entity may satisfy part, or all, of its performance obligation to
provide a specified good or service itself, or it may engage another party (e.g. subcontractor)
to do so on its behalf.

Indicators that an entity controls the specified good or service before transfer to the
customer, and is the principal, include but are not limited to:
 The entity is mainly responsible for providing the specified good or service (i.e.,
ensuring that the good or service meets the customer’s specifications);
 The entity is exposed to inventory risk at any point during the fulfillment of the
contract (i.e., either before or after the goods have been transferred to the
customer, if the customer has a right of return); and
 The entity establishes the prices and therefore, the resulting amount of benefit,
for the goods or services.

When an entity that is a principal satisfies a performance obligation, the entity recognises
revenue in the gross amount of consideration to which it expects to be entitled in exchange
for those goods or services transferred.

The agent’s performance obligation is to arrange for the principal to provide these goods or
services to a customer. In this type of situation, amounts collected on behalf of the principal
are not revenue of the agent. The revenue for the agent is the amount of the fee or
commission it receives (usually a percentage of the selling price).

8.3 Consignment Arrangements

Consignment is an arrangement where one party (the consignor) provides goods to a

second party to sell; however, the second party (the consignee) has the right to return all or
a portion of the goods to the first party if the goods are not sold. As a result, the consignor
retains the risks of ownership. The consignee (dealer) is expected to exercise due diligence
in caring for the goods and the dealer has full right to return the goods. The consignee
receives a commission upon the sale and remits the balance of the cash collected to the
consignor.

The consignor recognises a sale and the related revenue upon notification of sale from the
consignee and receipt of the cash. The consigned goods are carried in the consignor’s
inventory, not the consignee’s, until sold.

9. Contract costs

The incremental costs of obtaining a contract must be recognised as an asset if the entity
expects to recover those costs. However, those incremental costs are limited to the costs
that the entity would not have incurred if the contract had not been successfully obtained
(e.g. ‘success fees’ paid to agents). A practical expedient is available, allowing the
incremental costs of obtaining a contract to be expensed if the associated amortisation
period would be 12 months or less. [MFRS 15:91-94]

Costs incurred to fulfil a contract are recognised as an asset if and only if all of the following
criteria are met: [MFRS 15:95]

 the costs relate directly to a contract (or a specific anticipated contract);

 the costs generate or enhance resources of the entity that will be used in
satisfying performance obligations in the future; and the costs are expected to be
recovered.

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 MFRS 15 Revenue from Contracts with Customers

These include costs such as direct labour, direct materials, and the allocation of overheads
that relate directly to the contract. [MFRS 15:97]

Direct costs that are eligible for Costs to be expensed when they are
capitalisation is other criteria are met incurred
 Direct labour – e.g. employee wages  General and administrative costs
 Direct materials – e.g. supplies  Costs that relate to satisfied PO
 Allocation of costs that relate directly  Costs of wasted materials, labour or
to the contract – e.g. depreciation other contract costs
and amortisation
 Costs that are explicitly chargeable  Costs that do not clearly relate to
to the customer under the contract unsatisfied PO
 Other costs that were incurred only
because the entity entered into the
contract – e.g. subcontractor costs

The asset recognised in respect of the costs to obtain or fulfil a contract is amortised on a
systematic basis that is consistent with the pattern of transfer of the goods or services to
which the asset relates. [MFRS 15:99]

10. Presentation in financial statements

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. [MFRS 15:105]

Contract Assets and Liabilities

A contract asset is an entity’s right to consideration in exchange for goods or services the
entity has already transferred to a customer, which is conditional on an event other than
the passage of time (such as the performance of another obligation).

For example, if an entity has completed all its performance obligations and is awaiting
unconditional receipt of payment from the customer (i.e., passage of time), it is considered
a receivable, and not a contract asset. Conversely, if the entity has yet to perform
remaining obligations (i.e., passage of time is not the only conditional event), the expected
payment is a contract asset.

A contract liability represents the value of the contract obligations yet to be performed
subsequent to receipt of payment from the customer. For example, a pre-payment made
by a customer prior to the entity’s performance of an obligation per the contract would be
a contract liability for the entity, until the obligation is performed.

A contract liability is presented in the statement of financial position where a customer has
paid an amount of consideration prior to the entity performing by transferring the related
good or service to the customer. [MFRS 15:106]

Where the entity has performed by transferring a good or service to the customer and the
customer has not yet paid the related consideration, a contract asset or a receivable is
presented in the statement of financial position, depending on the nature of the entity’s right
to consideration. A contract asset is recognised when the entity’s right to consideration is
conditional on something other than the passage of time, for example future performance of
the entity. A receivable is recognised when the entity’s right to consideration is unconditional
except for the passage of time.

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 MFRS 15 Revenue from Contracts with Customers

Contract assets and receivables shall be accounted for in accordance with MFRS 9. Any
impairment relating to contracts with customers should be measured, presented and
disclosed in accordance with MFRS 9. Any difference between the initial recognition of a
receivable and the corresponding amount of revenue recognised should also be presented
as an expense, for example, an impairment loss. [MFRS 15:107-108]

11. Disclosures

The disclosure objective stated in MFRS 15 is for 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. Therefore,
an entity should disclose qualitative and quantitative information about all of the following:
[MFRS 15:110]
 its contracts with customers;
 the significant judgments, and
 changes in the judgments, made in applying the guidance to those contracts; and
any assets recognised from the costs to obtain or fulfil a contract with a customer.

Entities will need to consider the level of detail necessary to satisfy the disclosure objective
and how much emphasis to place on each of the requirements. An entity should aggregate
or disaggregate disclosures to ensure that useful information is not obscured. [MFRS
15:111]

In order to achieve the disclosure objective stated above, the Standard introduces a number
of new disclosure requirements. Further detail about these specific requirements can be
found at MFRS 15:113-129.

12. Effective date and transition

The standard should be applied in an entity’s MFRS financial statements for annual reporting
periods beginning on or after 1 January 2018. Earlier application is permitted. An entity that
chooses to apply MFRS 15 earlier than 1 January 2018 should disclose this fact in its
relevant financial statements. [MFRS 15:C1]

When first applying MFRS 15, entities should apply the standard in full for the current period,
including retrospective application to all contracts that were not yet complete at the
beginning of that period. In respect of prior periods, the transition guidance allows entities an
option to either: [MFRS 15:C3]
 apply MFRS 15 in full to prior periods (with certain limited practical expedients being
available); or
 retain prior period figures as reported under the previous standards, recognising the
cumulative effect of applying MFRS 15 as an adjustment to the opening balance of
equity as at the date of initial application (beginning of current reporting period).

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