IFRS 15 Revenue from Contracts with Customers

STEP 1 Identify the Contract

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;
• Each party’s rights in relation to the goods or services to be transferred can be identified;
• The payment terms and conditions for the goods or services to be transferred can be identified;
• The contract has commercial substance; and
• 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.

Combination of contracts
Contract modifications
Costs to fulfil a contract
Contract enforceability and termination clauses

Specific topics:
– Reassessment of the five identification criteria IFRS 15
– Engineering and Construction: Identify the contract with the customer
– Arrangements where the identification criteria are not met
– Assessing collectibility for a portfolio of contracts
– Contract extensions
– Product delivered without a written contract
– Identifying the customer or collaborative arrangement
– Arrangements with multiple parties
– Revenue not from a contract with a customer
– What are enforceable contracts with customers?

Broader perspective: Contracts on Reference for business

STEP 2 Identify performance obligations

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.

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.

Distinct goods or services,
Promises in a contract,

• Examples:
  • Telecom industry,
  • Construction industry,
  • Building Construction industry,
  • Software industry
  • Property development

Series provision,
Implicit promises in a contract,

Specific topics:
– Automotive: Long-term supply contracts,
– Software and cloud services: Performance obligations,
– Engineering and Construction: Identify the performance obligations in the contract
– What does a performance obligation look like?

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.

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.

Variable consideration,
– Refund liabilities,
– Repurchase options and residual value guarantees,
– Dealer sales vehicles incentives,
– Construction warranties,
Constraining estimates of variable consideration,
– Sales- and usage-based royalties,
The existence of a significant financing component in the contract,
– Example Financing component,
Non-cash consideration,
Consideration payable to a customer.

Specific topics:
Engineering and Construction: Determine the transaction price

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.

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 standalone 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;
• Expected cost plus a margin approach; or
• Residual approach (only permissible in limited circumstances).

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.

Allocating the transaction price based on the stand-alone selling price,
Allocating discounts,
Allocation of variable consideration.

Specific topics:
Engineering and Construction: Allocate the transaction price to the performance obligations

STEP 5 Recognise revenue when each performance obligation is satisfied

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. 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:

• 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.

Factors which may indicate that control is passed at a point in time include, but are not limited to:

• The entity has a present right to payment for the asset;
• The customer has legal title to the asset;
• The entity has transferred physical possession of the asset;
• The customer has significant risks and rewards related to the ownership of the asset; and
• The customer has accepted the asset.

Revenue satisfied over time

Measuring progress toward complete satisfaction of a performance obligation,
– Output method,
– Input method,
Revenue recognition at a point in time.

Specific topics:
Engineering and Construction: Recognise revenue when (or as) satisfying each performance obligation

Revenue from contracts with customers – Overview
Options to purchase additional goods or services
Disaggregation of revenue
Contract assets and contract liabilities
Onerous contracts
Service or insurance contract?
Extra disclosures IFRS 15
Transition to new IFRS 15 Disclosures
Engineering and Construction: From IAS 11 to IFRS 15
Engineering and Construction: Contract costs