IFRS 15

REVENUE FROM
CONTRACTS WITH
CUSTOMERS

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 Learning Objectives
At the completion of studying this chapter, you will
be able to:
• Understand revenue recognition issues
• Identify the five steps in the revenue recognition process
• Identify contract costs
• Describe presentation and disclosure regarding revenue.
• distinguish between the accounting treatment of revenue
recognition under US GAAP and IFRS

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 THE OBJECTIVE OF IFRS 15
 The objective of IFRS 15:
 to establish the principles that :
― an entity shall apply to report useful information to

users of financial statements about the nature,

amount, timing and uncertainty of revenue and
cash flows arising from a contract with a customer.
― recognising, measuring and disclosing revenue

arising from a contract with a customer that are

not dealt with specifically in another IFRS.

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 THE SCOPE OF IFRS 15
 IFRS 15 Revenue from Contracts with Customers applies to all
contracts with customers except for:
 leases IFRS 16;

 insurance contracts IFRS 4;

 financial instruments and other contractual rights or

obligations IFRS 9; interest and dividend income IFRS 9; IFRS
10 Consolidated Financial Statements; IFRS 11 Joint
Arrangements; IAS 27 Separate Financial Statements; IAS 28
Investments in Associates and Joint Ventures;
 Nonmonetary exchanges to facilitate sales to customers

 Certain transactions may fall partially within the scope of

IFRS 15 and partially within the scope of other standards 4
 Effective date
 Annual reporting periods beginning on or after
January 1, 2018, including interim reporting
periods therein (FY 2018)
 Early application is permitted

 LIST OF APPLICABLE IFRS

Topic List Standards
Revenue From Contracts with Customers IFRS 15
Accounting Policies, Changes in
Accounting Estimates and Errors ISA 8
Fair Value IFRS 13
Presentations of Financial Statements ISA 1
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 REVENUE MEASUREMENT
 Revenue is measured as the fair value of the consideration
received or receivable.
 The nature, timing and amount of consideration promised by a
customer affect the estimate of the transaction price.
 When determining the transaction price, an entity shall consider
the effects of all of the following:
 variable consideration;
 constraining estimates of variable consideration;
 significant financing component in the contract;
 non-cash consideration; and
 consideration payable to a customer.
 Amounts received on behalf of other parties (e.g. VAT, amounts
collected on behalf of the principal in agency arrangements) are
not economic benefits flowing to the entity and do not result in
increases in equity. Therefore, they do not constitute revenue.6
 REVENUE RECOGNITION
 The primary issue in accounting for revenue is
determining when to recognize revenue.
 Revenue is recognized when it is probable that
future economic benefits will flow to the entity and
these benefits can be measured reliably.
 IFRS 15 identifies the core principle that:
 an entity recognizes revenue to depict the transfer
of promised goods or services to customers in an
amount that reflects the consideration to which
the entity expects to be entitled in exchange for
those goods or services.
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 REVENUE RECOGNITION

Revenue Recognition Situations

Sale of asset
Type of Sale of product Performing a Permitting use
other than
from inventory service of an asset
Transaction inventory

Revenue from
Description Revenue from Revenue from Gain or loss on
interest, rents,
of Revenue sales fees or services disposition
and royalties

Timing of Services As time passes

Date of sale (date Date of sale
Revenue performed and or assets are
of delivery)
billable used or trade-in
Recognition

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The Five-step Model Framework
 An entity recognizes revenue in accordance with that core
principle by applying the following steps:

Identify the Allocate the Recognize

Identify the
performance Determine transaction revenue when (or
contract
obligations the price to as) the entity
with a
in the transaction performance satisfies a
customer
contract price (Step 3) obligations
(Step 1) performance
(Step 2) (Step 4)
obligation (Step 5)

The Five-step Model Framework

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Identify Contract with Customers—Step 1

 Contract:
Agreement between two or more parties that creates
enforceable rights or obligations.
Can be written, oral, or implied from customary
business practice.
Company applies the revenue guidance to a contract
according to the following criteria:
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Contract with Customers—Step 1
• A contract with a customer will be within the scope of
IFRS 15 if all the following conditions are met:
 the contract has been approved by the parties to the
contract;
 each party’s rights in relation to the goods or services
to be transferred can be identified;
 the payment terms for the goods or services to be
transferred can be identified;
 the contract has commercial substance; and

 it is probable that the consideration to which the entity

is entitled to in exchange for the goods or services will
be collected. 11
Contract with Customers—Step 1

• ContractModifications
•Change in contract terms while it is ongoing.
•Companies determine
whether a new contract (and performance
obligations) results or
whether it is a modification of the existing contract.
• Prospective Modification
Company should
- account for effect of change in period of
change as well as future periods if change
affects both.
- not change previously reported results.
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 Contract with Customers—Step

1
Example: ABC Company is an experienced manufacturer of equipment
used in the construction industry range from small to large individual
pieces of automated machinery to complex systems containing numerous
components. Unit selling prices range from Birr 600,000 to 4,000,000 and
are quoted inclusive of installation and training. ABC has the following
arrangement with Yoha construction Company:
a. Yoha purchases equipment from ABC for a price of Birr 2,000,000and
chooses ABC to do the installation charges the same price for the
equipment irrespective of whether it does the installation or not. The
price of the installation service is estimated to have a fair value of Birr
20,000.
b. The fair value of the training sessions is estimated at Birr 50,000.
c. Yoha is obligated to pay ABC the 2,000,000 upon the delivery and
installation of the equipment.
d. ABC delivers the equipment on September 1, 2015, and completes the
installation of the equipment on November 1, 2015. Training related to
the equipment starts once the installation is completed and last for one
year. The equipment has a useful life of 10 years.
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 Contract with Customers—Step
1
 Under step 1 of the model, ABC determines that its
agreement with Yoha creates enforceable rights and
obligations based on the following:
 Both parties have approved the contract, either in
writing, orally or in accordance with other customer
business practices;
 The right s to goods and services and the payment
terms are identified in the contract;
 The contract has commercial substance; and

 Collection of the consideration from Yoha is

probable.
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Identify Performance Obligations—Step 2
 A performance obligation is a contract to provide a product or
service to a customer.
 This promise may be explicit, implicit or possibly based on
customary business practice.
 The entity should assess the goods or services that have been
promised to the customer either:
 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.
 A performance obligation to transfer goods and services is
satisfied when the goods or services are delivered to the
customer and the customer thereby obtains control over the
promised goods or services.
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Identify Performance Obligations—Step 2
 What are the performance obligations of ABC for
purposes of accounting for sale of the equipment?
 They are three separate product or services, that is, the
equipment, installation, and training are distinct and not
interdependent- and each of these items has a standalone
selling price.

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Determining Transaction Price—Step 3

Transaction price
Amount of consideration that company expects to receive
from a customer.
In a contract is often easily determined because customer
agrees to pay a fixed amount.
Other contracts, companies must consider:
- Variable consideration
- Time value of money
- Non-cash consideration
- Consideration paid or payable to customers

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Determining Transaction Price—Step 3
Variable Consideration
Price dependent on future events.
- May include discounts, rebates, credits, performance
bonuses, or royalties.
Companies estimate amount of revenue to recognize.
- Expected value
- Most likely amount
Companies only recognize variable consideration if
1. they have experience with similar contracts and are able to
estimate the cumulative amount of revenue, and
2. based on experience, they do not expect a significant reversal
of revenue previously recognized.
If these criteria are not met, revenue recognition is constrained.
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 Variable Consideration

ESTIMATING VARIABLE CONSIDERATION

Facts: Peabody Construction Company enters into a contract with a
customer to build a warehouse for Birr 100,000, with a performance bonus of
Birr 50,000 that will be paid 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 that Peabody has performed previously, and
management believes that such experience is predictive for this contract.
Management estimates that there is a 60% probability that the contract will
be completed by the agreed-upon completion date, a 30% probability that it
will be completed 1 week late, and only a 10% probability that it will be
completed 2 weeks late.
Question: How should Peabody account for this revenue arrangement?

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 Variable Consideration
Question: How should Peabody account for this revenue arrangement?

Management has concluded that the probability-weighted method is the

most predictive approach:
60% chance of Birr 150,000 = Birr 90,000
30% chance of Birr 145,000 = 43,500
10% chance of Birr 140,000 = 14,000
Birr 147,500

Most likely outcome, if management believes they will meet the

deadline and receive the Birr 50,000 bonus, the total transaction price
would be?
Birr 150,000 (the outcome with 60% probability)

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Determining Transaction Price—Step 3
Time Value of Money
When contract involves a significant financing component.
- Interest accrued on consideration to be paid over time.
- Fair value determined either by measuring the consideration
received or by discounting the payment using an imputed
interest rate.
- Company reports as interest expense or interest revenue.
Non-Cash Consideration
Goods, services, or other non-cash consideration.
- Customers sometimes contribute goods or services, such as
equipment or labor,
- Companies generally recognize revenue on the basis of the fair
value of what is received.
Consideration Paid or Payable to Customers
May include discounts, volume rebates, coupons, free products.
In general, these elements reduce the consideration received and the
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revenue to be recognized.
Allocating Transaction Price to separate
performance obligations —Step 4
• Where a contract has multiple performance
obligations, an entity will allocate the transaction
price to the performance obligations in the contract
by reference to their relative standalone selling
prices.
• If a standalone selling price is not directly
observable, the entity will need to estimate it by
various methods including:

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Allocating Transaction Price to separate
performance obligations —Step 4

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Recognize Revenue when (or as) the entity
Satisfies a Performance Obligation—Step 5
• A company satisfies its performance obligation
when the customer obtains control of the goods
or services.
• Control of an asset is defined as the ability to
direct the use of and obtain substantially all of
the remaining benefits from the asset.
• Companies satisfy performance obligation either
 at a point in time or

 over a period of time.

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Revenue Recognition at a point in Time

 Illustration: On July 1, 2016 Glorious Company sold goods to

Maruf Company for Birr 1,000,000 in exchange for a 3 year,
zero interest bearing note with a face amount of Birr
1,331,000. The goods have an inventory cost on Glorious’s
books of Birr 650,000.
Instruction:
a. How much revenue should Glorious Company record on July
1, 2016?
b. How much revenue should it report related to this transaction
on December 31, 2016?

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Solution:
 Glorious should record revenue of Birr 1,000,000 on July 1, 2016 which is
the fair value of the inventory.
The entry to record Glorious’s sale to Maruf Company is as follows:
July 1, 2016 Notes Receivable 1,331,000
Sales Revenue 1,000,000
Discount on Notes Receivable 331,000
The related entry to record the cost of goods sold is as follows.
Cost of Goods Sold 650,000
Inventory 650,000
Glorious makes the following entry at the end of the year to record interest
Revenue.
Dec 31, 2016 Discount on Notes Receivable 50,000
Interest Revenue (10% x ½ x 1,000,000) 50,000

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 Illustration: Samsung Company offers its customers a 2%
volume discount if they purchased at least Birr 1,000,000 of
its product during the calendar year. On March 31, 2016,
Samsung has made sales of Birr 200,000 to Metro Company.
In the previous 2 years, Samsung sold over Birr 1,500,000 to
Metro Company in the period April1 to December 31.
Instruction:
How much revenue should Samsung recognize for the first 3
months of 2016?

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 Solution:
 In this case, Samsung should reduce its revenue by Birr 4,000 (Birr 200,000)
because it is probable that it will provide this abate. Revenue is therefore Birr
196,000 (200,000 -4,000). To not recognize this volume discount overstates
Samsung’s revenue for the first 3 months of 2016.
The entry to record Samsung's sales to Metro Company is as follows:
March 31, 2016 Account Receivable 196,000
Sales Revenue 196,000
Assuming that Samsung’s customers meet the discount threshold, Samsung makes the
following entry:
Cash 196,000
Account Receivable 196,000
If Samsung customer’s fails to meet the discount threshold, Samsung makes the
following entry upon payment
Cash 200,000
Account Receivable 196,000
Sales Discounts Forfeited 4,000**
**Sales Discounts Forfeited is reported in the “Other income and expense” section of the Profit
or loss statement.
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 Illustration: ABC Company is an experienced manufacturer of equipment
used in the construction industry. ABC’s products range from small to
large individual pieces of automated machinery to complex systems
containing numerous components. Unit selling prices range from Birr
600,000 to 4,000,000 and are quoted inclusive of installation and training.
ABC has the following arrangement with Yoha construction Company:
a. Yoha purchases equipment from ABC for a price of Birr 2,000,000and
chooses ABC to do the installation charges the same price for the
equipment irrespective of whether it does the installation or not. The
price of the installation service is estimated to have a fair value of Birr
20,000.
b. The fair value of the training sessions is estimated at Birr 50,000.
c. Yoha is obligated to pay ABC the 2,000,000 upon the delivery and
installation of the equipment.
d. ABC delivers the equipment on September 1, 2015, and completes the
installation of the equipment on November 1, 2015. Training related to
the equipment starts once the installation is completed and last for one
year. The equipment has a useful life of 10 years.
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 Cont’d

Instruction:
a. What are the performance obligations for purposes of
accounting for sale of the equipment?
b. If there is more than one performance obligation, how
should the payment of Birr 2,000,000is allocated to
various components?

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Solution:
a. They are three separate product or services, that is, the
equipment, installation, and training are distinct and not
interdependent- and each of these items has a standalone
selling price.
b. The total revenue of Birr 2,000,000 should be allocated to the three
components based on their relative fair values. In this case, the fair
value of the equipment should be considered Birr 2,000,000, the
installation fee is Birr 20,000, and the training is Birr 50,000. The
total fair to consider is birr 2,070,000 (Birr 2,000,000 + Birr 20,000
+ Birr 50,000). The allocation is as follows.
Equipment 2,000,000/2,070,000 x 2, 000, 0000 =
1,932,367
Installation 20,000/2,070,000 x 2,000,000 = 19,324
Training 50,000/2,070,000 x 2,000,000 = 48,309
 ABC makes the following entry on November 1, 2015, to record both sales
revenue and service revenue on the installation, as well as unearned service
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revenue.
 Cont’d
Nov1, 2015 Cash 2,000,000
Service Revenue (installation) 19,324
Unearned Service Revenue 48,309
Sales Revenue 1,932,367
Assuming the cost of the equipment is Birr 1,500,000, the entry to record the
cost of goods sold as follows.
Nov1, 2015 Cost of Goods Sold 1,500,000
Inventory 1,500,000
The journal entry to recognize the training revenue for two months in 2015 as
follows
Dec 31, 2015 Unearned Service Revenue 8,052
Service Revenue (training) (4,026 x 2) **
8,052
** ABC recognizes the training revenues on a straight-line basis starting on
November 1, 2015, or Birr 4,026 (48,309/12) per month for one year.
Therefore, ABC recognizes revenue at December 31, 2015, in the amount of
Birr 1,959,743 (Birr 1,932,367 + Birr 19,324 + Birr 8,052).
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 Cont’d

ABC makes the following journal entry to recognize the training

revenue in 2016, assuming adjusting entries are made at
year-end.
Dec 31, 2016;
Unearned Service Revenue 40,257
Service Revenue (training) (48,309 – 8,052) 40,257

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 Illustration: Xerox Company sells 100 products for Birr 100
each to Almuni Company for cash. Xerox allows Almuni to
return an unused product within 30 days and receive a full
refund. The cost of each product is birr 60. To determine the
transaction price, Xerox decides that the approach that is most
predictive of the amount of consideration to which it will be
entitled is the most likely amount. Using the most likely
amount, Xerox estimates that's:
I. Three products will be returned.
II. The costs of recovering the products will immaterial.
III. The returned products are expected to be resold at a profit.

Instruction: How should Xerox record this sale?

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Solution:
 Upon transfer of control of the product, Xerox recognizes
1. Revenue of Birr 9,700(Birr 100 x 97 products expected not
to be returned)
2. A refund liability for Birr 300 (Birr 100 x 3products
expected to be returned), and
3. An asset of Birr 180(Birr 60 x 3 products) for its right to
recover products from customers on setting the refund
liability. Hence, the amount recognized in cost of sales for
97 products is Birr 5,820 (Birr 60 x 97).
 Xerox records the sale as follows.
Cash 10,000
Sales Revenue 9,700
Refund Liability 300
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 Cont’d
 Xerox also records the related cost of goods sold with the following
entry.
Cost of Goods Sold 5,820
Estimated Inventory Returns 180
Inventory 6,000
 When a return occurs, Xerox should reduce the Refund Liability and
Estimated Inventory Returns account. In addition, Xerox recognizes
the returned inventory in a Returned Inventory account as shown in
the following entries for the return of two products.
Refund Liability (2 x Birr 100) 200
Account Payable 200
Refund Inventory (2 x Birr 60) 120
Estimated Inventory Returns 120 36
REVENUE RECOGNITION OVER TIME
 Under certain circumstances companies recognize
revenue over time.
 The most notable context in which revenue may be
recognized over time is long-term construction
contract accounting.
 Long-term contracts frequently provide that seller
(builder) may bill purchaser at intervals.
 A company recognizes revenue over time if it can
reasonably estimate its progress toward satisfaction
of the performance obligations.
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REVENUE RECOGNITION OVER TIME
 Methods for measuring progress
 Output methods
 units-of- work-performed method (ratio of units of work
performed to date to estimated total unit of work in project)
 Input methods
 efforts-expended method (ratio of labor hours, machine
hours or material quantities used to the total units of that
measure of work required to complete the contract),
 cost-to-cost method (ratio of actual contract costs incurred
during the reporting period to total estimated contract
costs).

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REVENUE RECOGNITION OVER TIME

 Company recognizes revenues and gross profits each

period based upon the progress of the construction—
referred to as the percentage-of-completion method.
 Company recognizes revenues and gross profit when
the contract is completed, referred to as the cost-
recovery (zero-profit) method.

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COSTS TO FULFILL THE CONTRACT
• The incremental costs of obtaining a contract must be recognized as
an asset if the entity expects to recover those costs.
• Costs incurred to fulfill a contract are recognized as an asset if and
only if all of the following criteria are met:
 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.

• These include costs such as direct labor, direct materials, and the
allocation of overheads that relate directly to the contract.
• The asset recognized in respect of the costs to obtain or fulfill a
contract is amortized on a systematic basis. 40
COSTS TO FULFILL THE CONTRACT
 Example: A media company owns and operates radio stations. The
main revenue stream is advertising revenue. Contracts are signed
with various businesses for the sale of airtime.
 The account executives obtain these contracts and are
compensated through a 5% commission on the total contract price
for each new contract signed. Executive X has obtained a new two-
year advertising contract with Company ABC. Total contract costs
related to this contract are as follows:
 Legal fees (contract drafting (incurred on a “no win, no fee” basis))
Birr10,000
 Commission (paid to the account executive) Birr7,500
 Meals and entertainment (incurred during the sales process) Birr1,750
 Creative Director’s time (salary allocation of Creative Director to develop
on-air ad) Birr 1,500
 Actors (amounts paid to external actors to record the on-air ad) Birr 750
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COSTS TO FULFILL THE CONTRACT
 The legal fees and commission will be considered an “incremental cost of
obtaining a contract” because these costs were only incurred as a result of
obtaining the contract. Had the contract not been obtained, these costs
would not have been incurred.
 If the legal fees had been incurred prior to obtaining the contract, they
would not be capitalized.
 The meals and entertainment costs are not eligible to be capitalized
because they would have been incurred regardless of whether the
contract had been obtained.
 The costs related to the Creative Director’s time and the costs associated
with hiring actors are direct labor costs associated with providing the
advertising services and are considered to be costs directly related to the
contract and are not covered by any other standard.

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PRESENTATION AND DISCLOSURE
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.
• Any difference between the initial recognition of a receivable
and the corresponding amount of revenue recognized should
also be presented as an expense, for example, an impairment
loss.

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PRESENTATION AND DISCLOSURE
Disclosures
• Companies disclose qualitative and quantitative information about the
following:
 Contracts with customers.
 Significant judgments.
 Assets recognized from costs incurred to fulfill a contract.
 Reconciliation of contract balances.
 Remaining performance obligations.
 Cost to obtain or fulfill contracts.
 Other qualitative disclosures.

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COMPARISON OF IFRS 15 AND US GAAP
• In May 2014, the IASB and FASB issued a converged standard on
revenue recognition entitled Revenue from Contracts with Customers.
• The boards achieved their goal of reaching the same conclusions on
all requirements for the accounting for revenue from contracts with
customers.
• However, there are some minor differences in the standards:
 collectability threshold;

 interim disclosure requirements;

 early application and effective date;
 impairment loss reversal; and
 non-public entity requirements

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