Best read IFRS 15 Revenue disclosure requirements

IFRS 15 Revenue disclosure requirements
provides the disclosure requirements for IFRS 15 Revenue from Contracts with Customers in 8 Questions & Answers

Check the answers to these 8 questions:

DISCLOSURES IN THE NOTES TO THE FINANCIAL STATEMENTS

1. What are the cross-cutting issues in the preparation of the notes to the annual financial statements?

IFRS References: IFRS 15.110-112

The answers is made in three parts:

A Consider the objective of the disclosure requirements

In IFRS 15, consistently with other Standards, the disclosure requirements rely on a primary objective, accompanied by a list of the minimum information to be presented (subject to materiality).

This primary objective is to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue from ordinary activities and the cash flows arising from contracts with customers.

The objective concerns not only the revenue recognised, but also its translation in terms of cash flows. Explaining the timing differences between revenue accounted for and the corresponding cash flows – in other words, the impacts on balances (for which the minimum disclosure requirements have been strengthened by comparison with previous revenue recognition Standards) – is also a significant issue.

To assess whether the disclosures are sufficient and relevant, an entity should consider this objective and provide additional information not listed in the Standard if necessary (that is, entities must avoid a “check- list” approach).

For example, additional disclosures may be needed in the event of significant in kind consideration (See Non-cash consideration).

B Significant judgements in the application of the Standard

The Standard-setters are fully aware of the importance of the exercise of judgement in applying IFRS 15, and have provided guidance to help preparers in their election of disclosures concerning significant judgements.

Beyond the general requirements for disclosures on the exercise of judgement (cf. IAS 1.122 and IAS 1.125), specific disclosure requirements on this matter are listed by the Standard, relating to:

C Organise the information in a relevant way

As with other IFRSs, a certain leeway is left to the entity in the organisation and content of its notes to the financial statements.

IFRS 15 nevertheless states that disclosures should present a relevant level of aggregation or disaggregation. This enables an entity to avoid providing useless information, which would make useful information harder to locate. This would also prevent the entity from grouping together matters with substantially different characteristics.

Obviously, in general, a degree of consistency should also be sought across the disclosures in the notes to the financial statements provided under IFRS 15. For example, if it is relevant to distinguish several categories when presenting an entity’s revenue sources (qualitative information on performance obligations – cf. question 2 below), it seems relevant to disaggregate the revenue presented (quantitative information) into at least some of these categories.

IFRS 15 explicitly states that an entity need not disclose theoretically required information if it has provided the information elsewhere in accordance with another Standard. An entity may therefore take any opportunity to cross-reference the disclosures in respect of other Standards in order to reduce the volume of its notes.

2. What detailed disclosures should be provided in the notes?

IFRS 15.113-129

IFRS 15 disclosure requirements fall into three categories.

The requirements of the Standard for each of these categories are detailed in the following table:

IFRS 15 Revenue disclosure requirements

Information type

Main disclosures

Explanations

1. Disaggregation of revenue

Discussed in Question 3

1. Contract balances, i.e. receivables, contract assets and contract liabilities

See also below for a complete Q&A list

Best read IFRS 15 Revenue disclosure requirements 1

Best read IFRS 15 Revenue disclosure requirements 2

The effects arising from the relationship between the timing of satisfaction of the entity’s PO and the typical timing of payment on the contract asset and contract liability balances

This obligation aims to explain the link between revenue recognised by the entity and the related payments it receives, satisfying the requirements of the Standard’s objective (cf. question 1 above).

Opening and closing balances

Revenue recognised in the reporting period:

  • Included in the contract liability balance at the beginning of the period
  • Relating to Performance Obligations (POs) satisfied (or partially satisfied) in previous periods

Information about revenue relating to POs satisfied in previous periods (catch-up adjustments) can be difficult to capture through information systems and may (have) require(d) some adaptation of systems and processes.

Qualitative and quantitative disclosures explaining significant changes in the balances

The Standard provides a non-exhaustive list of changes that should be mentioned (changes due to business combinations, cumulative catch-up adjustments, impairment of a contract asset, etc.). Depending on the circumstances, other causes of significant changes may also be relevant.

The information does not necessarily have to be presented in the form of a table.

1. Description of Performance Obligations

See Step 2 Identify the Performance Obligations in the Contract

Nature of the promised goods or services

Significant payment terms (when payment is typically due, whether the contract has a significant financing component, whether the consideration amount is variable, etc.)

Guarantees and associated obligations where applicable

This information can prove particularly useful in understanding an entity’s activity (since it effectively describes its sources of revenue).

1. Transaction price allocated to the remaining POs

See question 4 below

2. Timing of satisfaction of POs

See from Step 5 Recognise revenue:

POs recognised over time,

Measurement of progress in revenue recognition over time,

Determine the date of transfer of control in revenue recognition over time.

Elements making up the transaction price, estimates of variable consideration (methods, inputs, assumptions) and constraints where applicable

Allocation of the transaction price, including allocation of variable consideration / discounts where applicable to a specific part of the contract

This information is particularly useful and important for understanding the judgements exercised in respect of a major aspect of the application of IFRS 15.

2. Transaction price and amounts allocated to the POs

See Step 4 Allocate the Transaction Price

Elements making up the transaction price, estimates of variable consideration (methods, inputs, assumptions) and constraints where applicable

Allocation of the transaction price, including allocation of variable consideration / discounts where applicable to a specific part of the contract

An entity shall explain in the notes whether it is applying the practical expedient relative toe existence of a significant financing component

See Step 3 Practical expedient financing component.

3. Assets recognised for the costs to obtain or fulfil a contract

See: Contract costs,

Practical expedient to recognise no contract costs,

Account for fulfilment contract costs,

Amortisation of capitalised contract costs,

Impairment of capitalised contract costs

Qualitative disclosures:

  • Judgements exercised in determining the amount of the costs incurred to obtain or fulfil a contract
  • Method used for the amortisation of the underlying assets

Quantitative disclosures:

  • Closing balances of assets by main category
  • Amount of amortisation and any impairment losses recognised in the reporting period

An entity shall explain in the notes whether it is applying the practical expedient for the incremental costs to obtain a contract (cf. Account for fulfilment contract costs,).

As a reminder, the impairment losses on receivables and contract assets are recognised in accordance with IFRS 9, while impairment losses on assets recognised for costs to obtain or fulfil a contract fall within the scope of IFRS 15.

3. How should revenue be disaggregated?

IFRS References: IFRS 15.114-115 & IFRS 15.B87-89

An entity shall disaggregate revenue recognised from contracts with customers into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

Beyond this objective, IFRS 15 provides the following indications in its application guidance:

  • the extent of disaggregation depends on the facts and circumstances of the contracts the entity has concluded with its customers. Hence some entities may need to use more than one type of category (for example, showing disaggregation in a matrix format covering several headings) to meet the previously mentioned objective, while other entities may meet the objective by using only one type of category;
  • in its choice, an entity must take into account the way in which disclosures on revenue have been presented for other purposes, whether the information regularly examined by the chief operating decision maker in order to assess the financial performance of operating segments (under IFRS 8) or the information presented outside the financial statements, such as in earnings releases, annual reports or investor presentations.

IFRS 15.B89 gives the following examples of categories that might be appropriate:

  1. type of good or service (for example, major product lines);
  2. geographical region (for example, country or region),
  3. market or type of customer (for example, government and non-government customers, professional customers and private individuals);
  4. type of contract (for example, fixed-price and time-and-materials contracts);
  5. contract duration (for example, short-term and long-term contracts);
  6. date or timing of transfer of goods or services (for example, revenue from goods or services transferred to customers at a point in time and revenue from goods or services transferred over time); and
  7. sales channels (for example, goods sold directly to consumers and goods sold through intermediaries).

In addition, an entity shall provide sufficient information to enable users of financial statements to understand the relationship between the disclosure of disaggregated revenue and revenue information that is disclosed for each reportable segment (in accordance with IFRS 8).

4. What disclosures should be provided for performance obligations that are not yet (or only partially) satisfied?

References: IFRS 15.120-122

IFRS 15 requires the following disclosures for performance obligations that are not yet (or only partially) satisfied (resembling the concept of the “backlog”):

  • the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied (or partially unsatisfied) as of the end of the reporting period (cf. question 2);
  • an explanation of when the entity expects to recognise this amount as revenue, either on a quantitative basis (using the time bands that would be most appropriate for the duration of the remaining performance obligations) or by using qualitative information (cf. question 2).

As a practical expedient, an entity need not disclose that information if:

  • the performance obligation is part of a contract that has an original expected duration of one year or less; or
  • the entity applies the practical expedient consisting of measuring its revenue in the amount to which the entity has a right to invoice.

In this case, the entity must mention the use of this practical expedient in the notes to its financial statements.

5. What disclosures should be provided in the notes to the condensed interim financial statements?

The overall principle of IAS 34 – Interim Financial Reporting is that an entity must explain in its interim report the events and transactions that are significant to an understanding of any changes in its financial position and performance since the end of the last annual reporting period. This principle applies, among others, to contracts with customers.

In addition, IAS 34 requires at least the following disclosures:

  • a disaggregation of the entity’s revenue in application of IFRS 15 (cf. question 3 above);
  • information on impairment losses on assets arising from contracts with customers.

Disclosures about the “backlog” (cf. question 4 above) are not required in the IFRS condensed interim financial statements (unlike US GAAP). Nonetheless, such information should be provided if the “backlog” is impacted over the period by a significant change, and if this information is important in respect of the entity’s activities (for example, cancellation by a customer of a major order for which the entity had reported in detail when obtained due to its strategic importance for its business).

PRESENTATION OF THE STATEMENT OF FINANCIAL POSITION

6. What is a contract asset and how should it subsequently be measured?

IFRS References: IFRS 15.105, IFRS 15.107 & IFRS 15.109

If one or other party to a contract has fulfilled its obligations, the entity shall present the contract on the statement of financial position as a contract asset or a contract liability (cf. question 7 below), depending on the relationship between the entity’s performance and the payment made by the customer.

In practice, a contract asset is therefore presented on the statement of financial position when the entity has “performed” more of its respective obligations than the customer (i.e. transferring the good or service for the entity, transferring the promised consideration for the customer). If the contract contains several performance obligations, the analysis is carried out on an aggregated basis at contract level (see Step 2 Identify the Performance Obligations in the Contract). The entity must present a net contract asset, where applicable.

IFRS 15 also defines a contract asset as an entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer, when that right depends on something other than the passage of time (for example, the future performance of the entity). This clarification serves to distinguish a contract asset from a receivable (cf. question 8 below). An entity must present its receivables separately from contract assets.

The costs to obtain a contract and the costs to fulfil a contract that have been capitalised must also be presented separately from contract assets.

A reminder

When a performance obligation is satisfied, but all the amounts due from the customer have not yet been invoiced by the entity, the question arises of whether the asset accounted for (i.e. an unbilled receivable) is a contract asset or a receivable.

Accoriding to the Basis for Conclusions of the Standard, if the invoicing is simply an administrative task, and there is no reason to consider the entity does not have an unconditional right to that consideration (i.e. only the passage of time is required before payment of that consideration is due) an unbilled amount is a receivable (IFRS 15.BC325).

By way of example, a contract asset is recognised under the following circumstances:

  • in a contract for the sale of a telephone and a subscription, the allocation of the revenue in proportion to the relative stand-alone selling price (See Step 4 Allocate the Transaction Price) results in allocating to the telephone a sum higher that the amount received at the time of the sale of the telephone (in the common case where the purchase of the telephone by the customer has been “subsidised” by the telecommunications operator). The difference between these two amounts constitutes a contract asset since the entity has no right to invoice and receive this difference except over the course of performance of the telephone subscription services;
  • in a long-term construction contract for which the revenue is recognised over time, the revenue recognised minus interim invoices is also a contract asset since the entity’s unconditional right to consideration depends on its performance until the construction is completed;
  • when the consideration in a contract is variable, the amount of revenue recognised before the uncertainty is resolved constitutes a contract asset as the entity’s right to consideration depends on something other than the passage of time.

The term “contract asset” is not mandatory, and an entity can decide to use an alternative label. In this case, it must provide sufficient disclosures so that users of financial statements can distinguish between receivables and contract assets.

IFRS 15 does not require a separate presentation of this item on the statement of financial position. The general principles of IAS 1 apply, meaning that an entity must present this item separately when that presentation is relevant to an understanding of its financial situation.

Specific disclosures on the balances of contract assets are required (cf. question 2).

Finally, a contract asset must be tested for impairment in accordance with IFRS 9. The impairment of a contract asset must be measured, presented and communicated in the same way as a financial asset under IFRS 9, but the information must be presented separately from the impairment arising from other contracts (i.e. contracts that are not with customers).

7. What is a contract liability?

IFRS References: IFRS 15.105-106 & IFRS 15.109

If one or other party to a contract has fulfilled its obligations, the entity shall present the contract on the statement of financial position as a contract asset (cf. question 6 above) or a contract liability, depending on the relationship between the entity’s performance and the payment made by the customer.

In practice, a contract liability is therefore presented on the statement of financial position when the customer has “performed” more of its respective obligations than the entity (i.e. transferring the promised consideration for the customer, transferring the good or service for the entity). If the contract contains several performance obligations, the analysis is carried out on an aggregated basis at contract level (See Step 2 Identify the Performance Obligations in the Contract). The entity must present a net contract liability, where applicable.

IFRS 15 defines a contract liability as an entity’s obligation to transfer to a customer goods or services for which the entity has received consideration (or for which an amount of consideration is due) from the customer.

In practice, contract liabilities therefore include advance payments and deposits received from the customer and deferred revenue.

In contrast, provisions for an onerous contract are presented separately.

The term “contract liability” is not mandatory and an entity can decide to use an alternative label (in which case it may be necessary to indicate the terminology used in the notes).

IFRS 15 does not require a separate presentation of this item on the statement of financial position. The general principles of IAS 1 apply, meaning that an entity must present this item separately when that presentation is relevant to an understanding of its financial situation.

Specific disclosures on the balances of contract liabilities are required (cf. question 2).

8. What is a receivable and how should it subsequently be accounted for?

IFRS References: IFRS 15.108

A receivable is an entity’s right to consideration that is unconditional. A right to consideration is unconditional if only the passage of time is required before payment of that consideration is due.

For example, an entity would recognise a receivable if it has a present right to payment even though that amount may be subject to refund in the future. An entity also recognises a receivable when it concludes a contract that cannot be terminated and a payment is due from the customer before the entity transfers the promised goods or services. In this instance, a receivable is recognised against a contract liability (cf. question 7 above).

In practice, it is not always easy to distinguish between a receivable and a contract asset, in particular in the case of unbilled revenue (cf. question 6 above).

An entity must recognise a receivable in accordance with IFRS 9. At initial recognition of a receivable related to a contract with a customer, any difference between the value of the receivable under IFRS 9 and the amount corresponding to the revenue accounted for must be expensed (for example, as an impairment loss).

Specific disclosures on the balances of receivables are required (cf. question 2).

See also: IFRS Community IFRS 15 Revenue

IFRS 15 Revenue disclosure requirements

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IFRS 15 Revenue disclosure requirements

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