IFRS 15 Quick overview Revenue from contracts with customers

IFRS 15 Quick overview Revenue from contracts with customers – the easy way to obtain an solid overview.

What is the objective of IFRS 15?

To establish 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.

How does IFRS 15 meet this objective?

The core principle of IFRS 15 is that an entity should recognise revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

Practical expedient – the portfolio approach IFRS 15 Quick overview Revenue from contracts with customers

IFRS 15 is to be applied on an individual contract basis. However, as a practical expedient, a portfolio approach is permitted for contracts with similar characteristics provided it is reasonably expected that the impact on the financial statements will not be materially different from applying this model to the individual contracts.

What contracts are in the scope of IFRS 15? IFRS 15 Quick overview Revenue from contracts with customers

All contracts with customers except leases, insurance contracts, financial instruments, guarantees and certain non-monetary exchanges. The sale of non-monetary financial assets, such as property, plant and equipment, real estate or intangible assets will also be subject to some of the requirements of the new model.

A contract with a customer may be partially within the scope of IFRS 15 and partially within the scope of another standard, in which case:

  • If the other standards specify how to separate and/or initially measure one or more parts of the contract, then an entity shall apply those separation and measurement requirements first. The transaction price is then reduced by the amounts that are initially measured under other standards.
  • If other standards do not provide guidance on how to separate and/or initially measure one or more parts of the contract, then IFRS 15 will be applied.

What is the IFRS 15 5-steps revenue model? IFRS 15 Quick overview Revenue from contracts with customers

IFRS 15 Quick overview Revenue from contracts with customers

See detailed Step 1 explanations here. A contract can be oral, written or implied by an entity’s business practice. A contract with a customer will fall within the scope of IFRS 15 when all the following criteria are met:

  • The parties to the contract have approved the contract; IFRS 15 Quick overview Revenue from contracts with customers
  • Each party’s rights in relation to the goods or services to be transferred can be identified; IFRS 15 Quick overview Revenue from contracts with customers
  • The payment terms and conditions for the goods or services to be transferred can be identified; IFRS 15 Quick overview Revenue from contracts with customers
  • The contract has commercial substance; and IFRS 15 Quick overview Revenue from contracts with customers
  • The collection of an amount of consideration to which the entity is entitled to in exchange for the goods or services is probable.

If the above criteria are met, a contract shall not be re-assessed unless there is an indication of a significant change in facts or circumstances, however if the contract does not meet the above criteria the entity will continue to re-assess the contract going forward to determine whether the criteria are subsequently met.

A contract modification shall be accounted for as a separate contract if the following conditions are met: IFRS 15 Quick overview Revenue from contracts with customers

  • There is an addition of promised goods or services that are distinct and which increases the scope of the contract; and
  • The price of the goods of the contract increases by an amount of consideration that reflects the entity’s stand-alone selling prices of the additional goods or services and any appropriate adjustments to that price to reflect the circumstances of the particular contract. IFRS 15 Quick overview Revenue from contracts with customers

If the above conditions are not met, a contract modification will be accounted for prospectively or retrospectively (depending on whether the remaining goods or services to be delivered after the modification are distinct from those delivered prior to the modification) by modifying the accounting for the current contract with the customer.

See detailed Step 2 explanations here. At contract inception, an entity shall assess the goods or services that have been promised to the customer, and shall identify as a performance obligation:

  • A good or a 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.

A good or service is distinct if the following criteria are met:

  • The customer can benefit from the good or service on its own or together with other readily available resources; and
  • The entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract.

A series of distinct goods or services has the same pattern of transfer to the customer if the following criteria are met:

  • Each distinct good or service that the entity promises to transfer consecutively to the customer would be a performance obligation that is satisfied over time; and
  • The same method of measuring progress would be used to measure the entity’s progress towards the complete satisfaction of the performance obligation to transfer each distinct good or service in the series to the customer.

Factors for consideration as to whether an entity’s promise to transfer the good or service to the customer is separately identifiable include, but are not limited to:

  • The entity does not provide a significant service of integrating the good or service with other goods or services promised in the contract.
  • The good or service does not significantly modify or customize another good or service promised in the contract.
  • The good or service is not highly dependent on or highly interrelated with other goods or services promised in the contract.

See detailed Step 3 explanations here. The transaction price would be the amount of consideration that an entity expects to be entitled to in exchange for transferring promised goods or services to a customer. An entity will consider the terms of the contract and past customary business practices when making this determination.

If a contract contains a variable amount, the entity will estimate the amount to which it will be entitled under the contract. The consideration can also vary if an entity’s right to consideration is contingent on the occurrence of a future event. The variable consideration is only included in the transaction price to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

Examples of where a variable consideration can arise – Discounts, Rebates, Refunds, Credits, Price concessions, Incentives, Performance bonuses and Penalties.

An adjustment for the time value of money is made to a transaction price for the effects of financing, if present and significant to the contract, for example, where a consideration is paid in advance or in arrears. A practical expedient is available where the interval between the transfer of promised goods or services and the payment by the customer is expected to be less than 12 months. IFRS 15 Quick overview Revenue from contracts with customers IFRS 15 Quick overview Revenue from contracts with customers

See detailed Step 4 explanations here. An entity shall allocate the transaction price to each performance obligation 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. IFRS 15 Quick overview Revenue from contracts with customers

Where a contract has many performance obligations, an entity shall allocate the transaction price to the performance obligations in the contract by reference to their relative stand-alone selling prices. If a stand-alone selling price is not directly observable, an entity will need to estimate it. IFRS 15 suggests various methods that may be used, including:

  • Adjusted market assessment approach; IFRS 15 Quick overview Revenue from contracts with customers
  • Expected cost plus a margin approach; or IFRS 15 Quick overview Revenue from contracts with customers
  • Residual approach (only permissible in limited circumstances). IFRS 15 Quick overview Revenue from contracts with customers

Sometimes the transaction price may include a discount. Any overall discount is allocated between the performance obligations on a relative stand-alone selling price basis. In some circumstances it may be appropriate to allocate the discount to some but not all of the performance obligations.

See detailed Step 5 explanations here. An entity shall recognise revenue when (or as) it satisfies a performance obligation by transferring a promised good or service to a customer, which is when control is passed, either over time or at a point in time. IFRS 15 Quick overview Revenue from contracts with customers IFRS 15 Performance obligation

Control of an asset means having the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset.

An entity recognises revenue over time if one of the following criteria are met: IFRS 15 Quick overview Revenue from contracts with customers

  • The customer simultaneously receives and consumes the benefit provided by the entity as the entity performs;
  • The entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced; or
  • The entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for the performance completed to date.

For a performance obligation satisfied over time, an entity would select an appropriate measure of progress to determine how much revenue should be recognised as the performance obligation is satisfied. IFRS 15 Quick overview Revenue from contracts with customers IFRS 15 Performance obligation

Factors which may indicate that control is passed at a point in time include, but are not limited to: IFRS 15 Quick overview Revenue from contracts with customers

  • The entity has a present right to payment for the asset; IFRS 15 Quick overview Revenue from contracts with customers IFRS 15 Performance obligation
  • The customer has legal title to the asset; IFRS 15 Quick overview Revenue from contracts with customers
  • The entity has transferred physical possession of the asset; IFRS 15 Quick overview Revenue from contracts with customers
  • The customer has significant risks and rewards related to the ownership of the asset; and IFRS 15 Quick overview Revenue from contracts with customers
  • The customer has accepted the asset. IFRS 15 Quick overview Revenue from contracts with customers IFRS 15 Performance obligation

How are contract costs treated under IFRS 15?

  • Incremental cost –If the entity expects to recover incremental costs of obtaining a contract with a customer, it shall recognise those costs as an asset. A practical expedient however exists, allowing these costs to be expensed if the amortisation period would be one year or less.

  • Cost to fulfil a contract –These costs incurred to fulfil a contract with a customer are recognised as an asset only if all these three criteria in IFRS 15 are met:

    • The costs relate directly to a contract or to an anticipated contract that the entity can specifically identify; Contract costs in IFRS 15

    • The costs generate or enhance resources of the entity that will be used in satisfying performance obligations in the future; and Contract costs in IFRS 15

    • The costs are expected to be recovered. Contract costs in IFRS 15

    An asset recognised for these costs shall be amortised on a systematic basis that is consistent with the pattern of transfer of the goods

How is IFRS 15 presented?

An entity shall present the performance of a contract in the statement of financial position as a contract asset or contract liability, depending on the relationship between the entity’s performance and the customer’s payment.

Any unconditional rights to consideration shall be presented separately as a receivable.

Contract assets and receivables together with any impairment shall be accounted for in accordance with IFRS 9 Financial Instruments.

The difference between the initial recognition of a receivable and the amount of revenue should be presented as an expense.

IFRS 15 Quick overview Revenue from contracts with customers

IFRS 15 Quick overview Revenue from contracts with customers

IFRS 15 Quick overview Revenue from contracts with customers

IFRS 15 Quick overview Revenue from contracts with customers

What are the disclosure requirements for IFRS 15?

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 shall be disclosed. Qualitative and quantitative information about all of the following should be disclosed to achieve this:

  • Its contracts with customers;
  • The significant judgements, and changes in judgements, made in applying this standard to those contracts; and
  • Any assets recognised from the costs to obtain or fulfil a contract with a customer.

See also: IFRS 15 on IFRS Community

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