Changes in contracted transaction price under IFRS 15

Changes in contracted transaction price under IFRS 15 can occur for various reasons. The standard requires entities to determine theChanges in contracted transaction price under IFRS 15transaction price at contract inception. However, there could be changes to the transaction price after contract inception. For example, when a contract includes variable consideration, entities need to update their estimate of the transaction price at the end of each reporting period to reflect any changes in circumstances. Changes in the transaction price can also occur due to contract modifications. Changes in contracted transaction price under IFRS 15

Changes in the total transaction price

As stated in IFRS 15 88-89, changes in the total transaction price are generally allocated to the performance obligations on the same basis as the initial allocation, whether they are allocated based on the relative stand-alone selling price (i.e., using the same proportionate share of the total) or to individual performance obligations under the variable consideration exception discussed here. Amounts allocated to a satisfied performance obligation should be recognised as revenue, or a reduction in revenue, in the period that the transaction price changes. Changes in contracted transaction price under IFRS 15

Stand-alone selling prices

Stand-alone selling prices are not updated after contract inception, unless the contract has been modified. Furthermore, any amounts allocated to satisfied (or partially satisfied) performance obligations should be recognised in revenue in the period in which the transaction price changes (i.e., on a cumulative catch-up basis). This could result in either an increase or decrease to revenue in relation to a satisfied performance obligation or to cumulative revenue recognised for a partially satisfied over time performance obligation.

The following example illustrates this concept for a partially satisfied over-time performance obligation: Changes in contracted transaction price under IFRS 15

Changes in contracted transaction price under IFRS 15

Entity A, a construction company, enters into a contract with a customer on 1 January 20X1 to build three specific amenities at a community centre, a swimming pool, playground and a parking lot, for CU3,000,000. Entity A will earn a bonus of CU250,000 if it completes the swimming pool by 1 May 20X1.

At contract inception

At contract inception, Entity A concludes that the swimming pool, playground and parking lot are each distinct and, therefore, represent separate performance obligations. Entity A also concludes that the CU250,000 bonus needs to be allocated entirely to the swimming pool because the criteria in IFRS 15 85 for the variable consideration allocation are met.

Bonus

However, Entity A does not expect it will be entitled to the CU250,000 bonus related to the completion of the swimming pool by 1 May 20X1 due to factors outside of Entity A’s control, including inclement winter weather and the swimming pool supplier’s backlog. Therefore, Entity A uses the most likely amount method to estimate variable consideration and does not include the bonus in the transaction price.

Allocation of the transaction price

As at 1 January 20X1, Entity A allocates the transaction price to the performance obligations on a relative stand-alone selling price basis, as follows:

Performance obligation

Allocation of the transaction price

Swimming pool

CU2,000,000

Playground

CY750,000

Parking lot

CU250,000

Total

CU3,000,000

Performance obligations satisfied over time

Entity A concludes that each of the performance obligations are satisfied over time because they meet the criteria in IFRS 15 35 (refer to further discussions on evaluating whether performance obligations are satisfied over time). Due to the nature of Entity A’s business, it determines that an input method based on costs incurred is an appropriate measure of progress over time.

Completion determined

As at 31 March 20X1, Entity A determines that it has incurred 60% of the total expected costs to complete each of its performance obligations. Therefore, Entity A recognises CU1,800,000 (CU3,000,000 x 60%) as revenue.

Reassessment of variable consideration

In addition, as at 31 March 20X1, Entity A reassesses its estimate of variable consideration in the contract (including the constraint) and believes it will be able to complete the swimming pool by 1 May 20X1, because the significant uncertainties related to the weather and the supplier have been resolved.

Update transaction price

Entity A updates its transaction price to include the CU250,000 bonus related to the swimming pool in accordance with IFRS 15 59. Therefore, Entity A updates the transaction price as at 31 March 20X1, as follows:

Performance obligation

Allocation of the transaction price

Swimming pool

CU2,250,000

Playground

CY750,000

Parking lot

CU250,000

Total

CU3,250,000

Changed transaction price

Due to the change in the transaction price related to the swimming pool performance obligation, Entity A recognises CU150,000 (CU250,000 x 60%) as revenue on a cumulative catch-up basis as at 31 March 20X1.

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Contract modification

If the change in the transaction price is due to a contract modification, the contract modification requirements in IFRS 15 18-21 must be followed (see a discussion on contract modifications here).

Variable consideration

However, when contracts include variable consideration, it is possible that changes in the transaction price that arise after a modification may (or may not) be related to performance obligations that existed before the modification. For changes in the transaction price arising after a contract modification that is not treated as a separate contract, an entity must apply one of the two approaches: Changes in contracted transaction price under IFRS 15

Change attributable to variable consideration promised

If the change in transaction price is attributable to an amount of variable consideration promised before the modification and the modification was considered a termination of the existing contract and the creation of a new contract, the entity allocates the change in transaction price to the performance obligations that existed before the modification.

Change to performance obligation to modified contract

In all other cases, the change in the transaction price is allocated to the performance obligations in the modified contract (i.e., the performance obligations that were unsatisfied and partially unsatisfied immediately after the modification). Changes in contracted transaction price under IFRS 15

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The first approach

The first approach is applicable to a change in transaction price that occurs after a contract modification that is accounted for in accordance with IFRS 15 21(a) (i.e., as a termination of the existing contract and the creation of a new contract) and the change in the transaction price is attributable to variable consideration promised before the modification. For example, an estimate of variable consideration in the initial contract may have changed or may no longer be constrained. Changes in contracted transaction price under IFRS 15

Allocation

In this scenario, the Board decided that an entity should allocate the corresponding change in the transaction price to the performance obligations identified in the contract before the modification (e.g., the original contract), including performance obligations that were satisfied prior to the modification (IFRS 15 BC83).

Corresponding change

That is, it would not be appropriate for an entity to allocate the corresponding change in the transaction price to the performance obligations that are in the modified contract if the promised variable consideration (and the resolution of the associated uncertainty) were not affected by the contract modification. Changes in contracted transaction price under IFRS 15

The second approach

The second approach (i.e., IFRS 15 90(b)) is applicable in all other cases when a modification is not treated as a separate contract (e.g., when the change in the transaction price is not attributable to variable consideration promised before the modification). Changes in contracted transaction price under IFRS 15

Changes in contracted transaction price under IFRS 15

Changes in contracted transaction price under IFRS 15

Changes in contracted transaction price under IFRS 15 Changes in contracted transaction price under IFRS 15 

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