Amsterdam Business School

MSc Accountancy & Control – 2023-2024

International Financial Reporting Standards

Lecture Week 2 – Revenue Recognition
Réka Felleg
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Welcome to IFRS – Week 2

Plan for Week 2:

• Revenue Recognition – IFRS 15 Revenue from Contracts with Customers

• Property, Plant and Equipment IAS 16
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Key learning objectives

• Upon completion of Week 2, you should be able to understand and explain:
• The five-step model for measuring and recognizing revenue under IFRS 15
• Separate performance obligations
• Challenging situations to determine the transaction price
• Variable Consideration
• Significant Financing Component
• Relative Stand-Alone Price Method
• Satisfaction of Performance Obligation
• Over time
• Point in time
• Contract Cost
• Licenses
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What is Revenue?
IFRS 15 outlines the accounting treatment for all revenue arising from contracts with
customers and provides a model for the measurement and recognition of gains and losses on
the sale of certain non-financial assets, such as intangible assets, property, plant and
equipment, or investment properties.
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 increases in
equity (not related to transactions with owners)
Revenue Gains
• “Gross inflow of economic benefits • Represent other items that meet
during a period arising in the the definition of income and may,
course of ordinary activities when or may not, arise in the course of
those inflows result in increases in ordinary activities of an entity
equity, other than those relating to • Gains is a net concept
contributions from equity • Usually do not arise from ordinary
participants” activities
• Revenue is a gross concept
• Arises from ordinary activities
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KEY FACTS ABOUT IFRS 15

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Scope

Lease contracts Insurance contracts

(IFRS 16 Leases) (IFRS 4 Insurance Contracts)
IFRS 15 applies to all
contracts with customers
except:
Financial instruments and other Non-monetary exchanges between
contractual rights or obligations entities in the same line of
within the scope of IFRS 9, IFRS business to facilitate sales to
10, IAS 27 & IAS 28 customers or potential customers
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Step 1 – Identify the contract

* Any contract that creates
enforceable rights and obligations
falls within the scope of the standard.

* Written, oral or implied through an

entity's customary business practice

* Arrangements that meet the

definition of a contract: five criteria
[see para 4.3.1]
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No contract according to IFRS 15?

[§4.3.2 Arrangements that do not meet the definition of a contract]

• Contract does not meet the five criteria, and the entity receives
consideration from the customer:

• In this case, revenue recognition is only possible if:

• the entity has completed performing all of its obligations under the
contract and has received all, or substantially all, of the consideration
promised by the customer; or
• the contract has been terminated & non-refundable
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What if the entity has many contracts with the same customer?
[§4.3.3 Contracts that are combined]

Entities have to combine individual contracts entered into at, or near, the same time with
the same customer if they meet one or more of the following criteria:
• the contracts are negotiated as a package
(e.g. where a contract would be loss-making without taking into account the consideration received under
another contract)
• price in one contract is impacted by the price or performance of the other contract
(e.g. where failure to perform under one contract affects the amount paid under another contract)
• some or all of the goods or services promised in the individual contracts form a single
performance obligation
(e.g. specialised with significant customisation and modification)
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Step 2 – Identify the

performance obligations

* Which goods or services are treated

as separate performance obligations?

* Capable of being distinct?

* Create distinct bundles?

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What are separate performance obligations?

[§4.4.1 Separate performance obligations]

In assessing whether a promised good or service (or a bundle of goods and services) is
separate performance obligation, an entity has to meet both of the criteria below:

1. The goods or services are capable of being distinct

Separately selling a good or service on a regular basis indicates that a customer can benefit from that good
or service on its own or with readily available resources.
2. Goods or services are distinct when considered in the context of the entire contract
Indicators:
a) not using the good or service as an input into a process or project that is the output of the contract
(integration).
b) does not significantly modify or customise other promised goods and services in the contract.
c) not highly dependent on other promised goods or services in the contract.
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What are separate performance obligations?

[§4.4.1 Separate performance obligations]
Example: Company A sells a software package to Company B, together with a service contract including
one in-house training at B and access to Company A’s database for a 2-year period. Customer pays
$3,000 for the bundle (beginning period 1). The training takes place at the end of period 1.

Company A assumes that - if it were to charge separately for every component - the selling prices are as
follows:

(1) Software Package € 200

(2) In-house Training € 2,600

(3) Access to database € 800

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Step 3 – Determine the

Transaction Price
* Important: this will be allocated in
step 4

* Important: this is the amount that

will be recognized as revenue once the
performance obligation is satisfied

* In most cases readily determined

* Challenging situations:
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Variable components of price?

[§4.5.1 Variable consideration]

• Variable consideration may include discounts, rebates, refunds, credits, price

concessions, incentives, performance bonuses, penalties or other similar
items. If an entity's entitlement to the consideration is contingent on the
occurrence or non-occurrence of a future event, the transaction price is
considered to be variable.
• Two methods to estimate variable consideration
• Expected Value
• Most Likely Amount
• Constraining the cumulative amount of revenue recognised
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[§4.5.1 Variable consideration]

Example 4.2: Entity A provides transportation to theme park customers to and from
accommodation in the area under a 1-year agreement. It is required to provide
scheduled transportation throughout the year for a fixed fee of $400 000 annually.
Entity A is also entitled to performance bonuses for on-time performance and average
customer wait times. Its performance may yield a bonus from $0 to $600 000 under the
contract. Based on its history with the theme park, customer travel patterns and its
current expectations, Entity A estimates the probabilities for different amounts of bonus
within the range as follows: Bonus amount Probability of outcome
$0 30%
$200 000 30%
$400 000 35%
$600 000 5%
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[§4.5.1 Variable consideration]

Example 4.2:

Expected Value approach: probability weighting the possible outcomes of a contract.

May better predict the expected consideration when an entity has a large number of
contracts with similar characteristics
Most Likely Amount approach: select the amount that is most likely to be received
considering the range of possible amounts. May be the better method to use when there
are a limited number of possible outcomes expected
Bonus amount Probability of outcome
$0 30%
Entity A estimates variable consideration to be
(($200 000 × 30%) + ($400 000 × 35%) + ($600 $200 000 30%
000 × 5%)) = $230 000 But with constraint, include
only $200,000 in the estimated transaction price $400 000 35%
$600 000 5%
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Step 4 – Allocate the

Transaction Price
* Allocate to each separate
performance obligation

* Relative stand-alone selling

price method: allocate based on
the proportion of the stand-alone
selling price of that performance
obligation to the sum of the total
stand-alone selling prices of all
performance obligations.

* Two exceptions to relative

stand-alone selling price
method
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Stand-alone selling prices

[§4.6.1 Stand-Alone Selling Prices]
In applying the relative stand-alone selling price method, an entity must first determine the stand-alone selling
price for each identified performance obligation. The stand-alone selling price is the price at which a good or
service is, or would be, sold separately by the entity. This price is determined by the entity at the
commencement of the contract and is not typically updated subsequently. However, if the contract is modified
and that modification is not treated as a separate contract, the entity would update its estimate of the stand-
alone selling price at the time of the modification.

Under IFRS 15, an entity should use the observable price of a good or service sold separately, when it is readily
available. In situations in which there is no observable stand-alone selling price, the entity must estimate the
stand-alone selling price. Paragraph 79 of IFRS 15 highlights the following methods, which may be, but are not
required to be, used:
• Adjusted market assessment approach
• Expected cost plus margin approach
• Residual approach
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Relative stand-alone selling price method

Example: Company A sells a software package to Company B, together with a service contract including
one in-house training at B and access to Company A’s database for a 2-year period. Customer pays
$3,000 for the bundle (beginning period 1). The training takes place at the end of period 1.

Company A assumes that - if it were to charge separately for every component - the selling prices are as
follows:

(1) Software Package € 200

(2) In-house Training € 2,600

(3) Access to database € 800

• What are the stand-alone selling prices?

• What are the journal entries for the transaction?

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First, we need to separate the transaction into its component parts

Fair Value Allocation of revenue on Allocated amount

Component
(if sold separately) a fair value basis of revenue

Software package 200

In-house training 2,600

Access to database 800

Total 3,600
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First, we need to separate the transaction into its component parts

Fair Value Allocation of revenue on Allocated amount

Component
(if sold separately) a fair value basis of revenue

Software package 200 200/3,600 x 3,000

In-house training 2,600 2,600/3,600 x 3,000
Access to database 800 800/3,600 x 3,000

Total 3,600

Relative stand-alone selling

price method
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First, we need to separate the transaction into its component parts

Fair Value Allocation of revenue on Allocated amount

Component
(if sold separately) a fair value basis of revenue

Software package 200 200/3,600 x 3,000 166

In-house training 2,600 2,600/3,600 x 3,000 2,167
Access to database 800 800/3,600 x 3,000 667

Total 3,600 3,000

Relative stand-alone selling

price method
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When the contract is made (beginning period 1), journal entries are as follows:

Cash 3,000

Revenues 166

Liability (Deferred Revenue, Training) 2,167

Liability (Deferred Revenue, Database) 667

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Journal entry at end of period 1:

Liability (Deferred Revenue, Training) 2,167

Liability (Deferred Revenue, Database) 333.5

Revenues 2,500.5

Note: As the agreement for the database is 2 years, the revenue will be recognized continuously (on a 23
straight-line basis) over the 2 years

Journal entry at end of period 2:

Liability (Deferred Revenue, Database) 333.5

Revenues 333.5

Note: Recognised revenue adds up to 3,000 = 166 + 2,500.5 + 333.5

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There are two exceptions to using the relative stand-alone selling price
method:

• An entity will allocate variable consideration to one or more (but not all)
performance obligations, or one or more (but not all) distinct goods or
services promised in a series of distinct goods or services that forms part
of a single performance obligation, in a contract in some situations.
• An entity will allocate a discount in an arrangement to one or more (but
not all) performance obligations in a contract, if specified criteria are met.
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Step 5 – Satisfaction of
Performance Obligation

* Transfer of good or service

* Customer obtains control

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[§4.7.1] Performance obligations satisfied over time

Paragraph 35 of IFRS 15 provides the criteria to help an entity determine if a
performance obligation is satisfied over time. An entity has to meet one of the
following criteria in order to recognise revenue over time:

a) the benefits provided by the entity's performance are simultaneously received

and consumed by the customer;
b) the customer controls an asset that is being created or enhanced by the entity's
performance; or
c) the asset created has no alternative use to the entity and there is an enforceable
right to payment for the work performed to date.
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[§4.7.3] Performance obligations satisfied at a point in time

For performance obligations in which control is not transferred over time, control is
transferred at a point in time.
In many situations, the determination of the point at which control is transferred is
relatively straightforward.
When complicated: the standard provides a non-exhaustive list of indicators of the
transfer of control:
1. The entity has a present right to payment for the asset.
2. The asset's legal title is held by the customer.
3. Physical possession of the asset has been transferred by the entity.
4. The significant risks and rewards of ownership of the asset reside with the customer.
5. There is customer acceptance of the asset.
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4.8 Contract Cost

[§4.8.1 Contract costs to be capitalized]
IFRS 15 requires an entity to capitalise, as an asset, two types of costs relating to a contract
with a customer:
• any incremental costs to obtain the contract that would otherwise not have been incurred, if
the entity expects to recover them:
• e.g. Sales Commission
• e.g. Bonus
• costs incurred to fulfil a contract with the customer, if certain criteria are met:
a) they are directly related to a specific contract or to a specific anticipated contract (e.g.
direct labour, direct materials);
b) they generate or enhance resources of the entity that will be used in satisfying (or in
continuing to satisfy) performance obligations in the future; and
c) they are expected to be recovered.
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4.9 Other Application Issues

[§4.9.1 Contract modifications]

• Certain modifications are treated as separate, stand-alone contracts, while others are
combined with the existing contract and accounted for together. Two criteria must be
met for a modification to be treated as a separate contract:
a) The scope of the contract increases because of the promise of additional goods or
services that are distinct from those already promised in the original contract.
b) The expected amount of consideration for the additional promised goods or services
reflects the entity's stand-alone selling price(s) of those goods or services.
• Otherwise: treat as modification of contract
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4.9 Other Application Issues

[§4.9.2 Licences of intellectual property]

• Determining whether a licence is distinct

• Determining the nature of the entity's promise

• ‘right to access’ or a ‘right to use’

• Sales or usage-based royalties on licences of intellectual property

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4.9 Other Application Issues

[§4.9.3 Principal versus agent considerations]

The entity must conclude whether the nature of its promise to the customer is:

• to provide the specified goods and services itself (i.e. it is a principal) or if

• its promise is to arrange for another to provide those goods or services (i.e. it is an
agent).
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4.10 Presentation and Disclosures

4.10.1 Presentation of contract assets, contract liabilities and revenue

4.10.2 Disclosure objective and general requirements
4.10.3 Disclosures on contracts with customers
4.10.4 Significant judgements
4.10.5 Assets recognised from the costs to obtain or fulfil a contract
4.10.6 Practical expedients
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Summary of the Lecture