Extra disclosures IFRS 15 contracts

Extra disclosures IFRS 15 contracts – This part relates to a complete explanation of IFRS 15 Revenue from contracts with customers in respect of Engineering & Construction contracts, see Revenue from Engineering & Construction contracts.

Contract balances

The disclosures related to contract balances are extensive and intended to enable users to understand the relationship between the revenue recognised and changes in overall balances of total contract assets and liabilities in a particular reporting period. Extra disclosures IFRS 15 contracts Contract assets: An entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer when that right is conditioned on something other than the passage of time (for example, the entity’s future performance), and Extra disclosures IFRS 15 contracts
Contract liabilities: An entity’s obligation to transfer goods or services to a customer for which the entity has received consideration (or the amount is due) from the customer. Extra disclosures IFRS 15 contracts

For example, disclosures required include revenue recognised in the reporting period that was included in the contract liability balance at the beginning of the period; revenue recognised in the reporting period from performance obligations satisfied (or partially satisfied) in previous periods (e.g., changes in transaction price; an explanation of the timing of satisfaction of performance obligations compared to the typical timing of payment; and an explanation of the significant changes in the contract asset and liability balances during the period (e.g., due to business combinations, cumulative catch-up adjustments, impairment).

An entity shall disclose all of the following: Extra disclosures IFRS 15 contracts

  • the opening and closing balances of receivables, contract assets and contract liabilities from contracts with customers, if not otherwise separately presented or disclosed; Extra disclosures IFRS 15 contracts
  • revenue recognised in the reporting period that was included in the contract liability balance at the beginning of the period; and Extra disclosures IFRS 15 contracts
  • revenue recognised in the reporting period from performance obligations satisfied (or partially satisfied) in previous periods (for example, changes in transaction price). Extra disclosures IFRS 15 contracts

An entity shall provide an explanation of the significant changes in the contract asset and the contract liability balances during the reporting period. The explanation shall include qualitative and quantitative information. Examples of changes in the entity’s balances of contract assets and contract liabilities include any of the following:

  • changes due to business combinations; Extra disclosures IFRS 15 contracts
  • cumulative catch-up adjustments to revenue that affect the corresponding contract asset or contract liability, including adjustments arising from a change in the measure of progress, a change in an estimate of the transaction price (including any changes in the assessment of whether an estimate of variable consideration is constrained) or a contract modification;
  • impairment of a contract asset; Extra disclosures IFRS 15 contracts
  • a change in the time frame for a right to consideration to become unconditional (ie for a contract asset to be reclassified to a receivable); and Extra disclosures IFRS 15 contracts
  • a change in the time frame for a performance obligation to be satisfied (ie for the recognition of revenue arising from a contract liability). Extra disclosures IFRS 15 contracts

Extra disclosures IFRS 15 contracts

Transaction price allocated to remaining performance obligations

Entities must disclose the aggregate amount of the transaction price allocated to the remaining performance obligations and an explanation of when they expect to recognise the amounts through both quantitative and qualitative disclosures.

Something else -   Accounting policies

Extra disclosures IFRS 15 contracts

Significant judgements Extra disclosures IFRS 15

The standard specifically requires disclosure of significant judgements and estimates made in determining the transaction price; allocating the transaction price to performance obligations; and determining when performance obligations are satisfied. Extra disclosures IFRS 15

For E&C entities that recognise revenue at a point in time, but conclude that this occurs in advance of passing of legal title, disclosure will be required of the significant judgements made in evaluating at what point in time the customer obtains control of an asset. Extra disclosures IFRS 15

Assets recognised from the costs to obtain or fulfil a contract Extra disclosures IFRS 15

The standard requires disclosure of information about assets recognised from the costs to obtain or fulfil a contract. These disclosures are intended to explain the types of costs recognised as assets (e.g., sales commissions) and how those assets are subsequently amortised or impaired. Extra disclosures IFRS 15 contracts

Extra disclosures IFRS 15 contracts

Practical expedients Extra disclosures IFRS 15

There are several practical expedients within the standard that may lead to financial results that differ from a full application of the standard. As such, entities are required to disclose where these expedients have been used. For example, if an entity elects to use the practical expedient associated with determining whether a significant financing component exists, the entity must disclose those facts. Extra disclosures IFRS 15 contracts

Consideration

IFRS 15 significantly increases the volume of disclosures required in entities’ financial statements, particularly for annual financial statements. For some E&C entities there may be no change in the timing of revenue recognition under IFRS 15, but the new disclosure requirements may, nonetheless, require significant additional effort (e.g., changes to systems, internal controls, policies and procedures) to collect and disclose the required information.

In light of the expanded disclosure requirements and the potential need for new systems to capture the data needed for these disclosures, entities may wish to prioritise this portion of their implementation plans.

Something else -   Step 4 Allocate the transaction price

Combining contracts

Under IFRS 15, an entity will generally apply the model to an individual contract with a customer. However, IFRS 15 requires entities to combine contracts entered into at or near the same time with the same customer if they meet one or more of the following criteria: Extra disclosures IFRS 15 contracts

  • The contracts are negotiated as a package with a single commercial objective.
  • The amount of consideration to be paid in one contract depends on the price or performance of the other contract.
  • The goods or services promised in the contracts (or some goods or services promised in each of the contracts) are a single performance obligation (see below). Extra disclosures IFRS 15 contracts

The Boards clarified that negotiating multiple contracts at the same time is not sufficient evidence to demonstrate that the contracts represent a single arrangement. Extra disclosures IFRS 15 contracts

The criteria in IAS 11 Construction contracts and IFRS 15 Revenue from contracts with customers are similar. However, unlike IAS 11 IFRS 15 does not require concurrent or sequential performance (IAS 11.9). Furthermore, IAS 11 required that all criteria be met before combining contracts.. IFRS 15 only requires that one or more of the criteria to be met.

Contract modifications

Parties to E&C arrangements frequently agree to change orders that modify the scope or price (or both) of a contract. Contractors also regularly submit claims to customers when unanticipated additional costs are incurred as a result of delays, errors or changes in scope caused by the customer. Extra disclosures IFRS 15 contracts

IFRS 15 states that “a contract modification exists when the parties to a contract approve a modification that either creates new, or changes existing, enforceable rights and obligations of the parties to the contract”.10 Approvals of a modification may be written, oral or implied by the entity’s customary business practices. Extra disclosures IFRS 15 contracts

Generally, if a contract modification has not been approved, IFRS 15 is not applied to the modification until the approval occurs. However, the standard also states that an entity may have to account for a contract modification prior to the parties reaching final agreement on changes in scope or pricing (or both). Extra disclosures IFRS 15 contracts

Instead of focusing on the finalisation of a modified agreement, these requirements focus on the enforceability of the changes to the rights and obligations in the contract. That is, once the entity determines that the revised rights and obligations are enforceable, the entity is required to account for the contract modification. Extra disclosures IFRS 15 contracts

If the parties to a contract have approved a change in the scope of the contract, but have not yet determined the corresponding change in price, an entity will have to estimate the change to the transaction price arising from the modification in accordance with the requirements for estimating variable consideration Extra disclosures IFRS 15 contracts

Performance obligations

An entity shall disclose information about its performance obligations in contracts with customers, including a description of all of the following: Extra disclosures IFRS 15 contracts

  • when the entity typically satisfies its performance obligations (for example, upon shipment, upon delivery, as services are rendered or upon completion of service), including when performance obligations are satisfied in a bill-and-hold arrangement;
  • the significant payment terms (for example, when payment is typically due, whether the contract has a significant financing component, whether the consideration amount is variable and whether the estimate of variable consideration is typically constrained in accordance with paragraphs 56–58);
  • the nature of the goods or services that the entity has promised to transfer, highlighting any performance obligations to arrange for another party to transfer goods or services (ie if the entity is acting as an agent);
  • obligations for returns, refunds and other similar obligations; and Extra disclosures IFRS 15 contracts
  • types of warranties and related obligations. Extra disclosures IFRS 15 contracts

Also read: Disclosures IFRS 15

Something else -   Determining stand-alone selling prices

Extra disclosures IFRS 15 contracts

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Something else -   IFRS 10 Principal versus agent considerations

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