Transfer of control for distinct software licences

Transfer of control for distinct software licences – IFRS 15 provides additional application guidance to help entities determine when control transfers for distinct licences of intellectual property, based on the nature of the promise to the customer. This application guidance is applicable for both perpetual and term software licences.

 

IFRS 15 states that entities provide their customers with either:

Transfer of control for distinct software licences

 

If the licence does not meet all three criteria, the licence is a right to use by default and the entity would recognise revenue at the point in time when the licence is delivered.

The key determinant of whether a licence is a right to access is whether the entity is required to undertake activities that affect the licenced … Read more

Hedge accounting

Hedge accounting If investors purchase a high level of risk security, they may want to reduce risk with an opposing item purchase referred to as a hedge

Accounting policies for financial instruments

Accounting policies for financial instruments – a quite complete overview of all kinds of accounting issues for financial instruments such as measurement categories, initial recognition, amortised costs and effective interest rate, financial assets, impairment, derecognition, financial liabilities, derecognition, and derivatives. Enjoy it!

Summary of significant financial instruments accounting policies

1 Financial assets and liabilities

1.1 Summary of measurement categories

The insurer classifies its financial assets into the following categories:

Business model and cash flow characteristics

Type of financial instruments

Classification

Hold to collect business model and solely payments of principal and interest

Cash and cash equivalents

Amortised cost (AC)

Hold to collect and sell business model and solely payments of principal and interest

Government bonds

Fair value through other

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Measurement of remaining coverage

Measurement of remaining coverage – An entity measures the liability for remaining coverage on initial recognition of a group of insurance contracts eligible for the premium allocation approach (PAA) that are not onerous, as follows (IFRS 17 55]:

  • The premium, if any, received at initial recognition
    Minus Measurement of remaining coverage
  • Any insurance Read more

IFRS 15 Software contract modifications

IFRS 15 Software contract modifications – It is common in the software industry to change the scope or price of the contract. For example, a vendor may license software and provide post-contract customer support (PCS) to a customer in an initial transaction and then license additional software to the same customer at a later time. In general, any change to an existing contract is a modification per the guidance when the parties to the contract approve the modification either in writing, orally, or based on the parties’ customary business practices. A new contract entered into with an existing customer could also be viewed as the modification of an existing contract, depending on the circumstances.

In determining whether a contract has … Read more

Sale of hardware and installation services

Sale of hardware and installation services provides practical insight in revenue recognition of mixed contracts with customers under IFRS 15. Two very similar sales transactions/contracts but one with only one single performance obligation and the other with separate performance obligations.

Case 1 – separate performance obligations Sale of hardware and installation services

Vendor enters into a contract to provide hardware and installation services to Customer. Vendor always sells the hardware with the installation service, but the installation is not complex such that Customer could perform the installation on its own or use other third parties. Sale of hardware and installation services


Does the transaction consist of one or more performance obligations?

More than one – Vendor should account for the … Read more

9 Essential Leases and No leases examples

9 Essential Leases and no leases examples

– shows the difference between cases of entities involved in contracts containing a lease under IFRS 16 Leases and similar but different cases of entities involved in contracts NOT containing a lease under IFRS 16 Leases.

To start setting the stage, the definition of a lease: A contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration.

1. Lease Rail cars

The case
A contract between Customer and a freight carrier (Supplier) provides Customer with the use of 10 rail cars of a particular type for five years. The contract specifies the rail cars; the cars are owned by Supplier. Customer determines when, where and which goods are to be transported using the cars. When the cars are not in use, they are kept at Customer’s premises. Customer can use the cars for another purpose (for example, storage) if it so chooses.

However, the contract specifies that Customer cannot transport particular types of cargo (for example, explosives). If a particular car needs to be serviced or repaired, Supplier is required to substitute a car of the same type. Otherwise, and other than on default by Customer, Supplier cannot retrieve the cars during the five-year period.

The contract also requires Supplier to provide an engine and a driver when requested by Customer. Supplier keeps the engines at its premises and provides instructions to the driver detailing Customer’s requests to transport goods. Supplier can choose to use any one of a number of engines to fulfil each of Customer’s requests, and one engine could be used to transport not only Customer’s goods, but also the goods of other customers (ie if other customers require the transportation of goods to destinations close to the destination requested by Customer and within a similar timeframe, Supplier can choose to attach up to 100 rail cars to the engine).

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Estimating fair value

Estimating fair value – To start this narrative on fair value measurement three things to keep in mind!!!!

  1. Fair value measurement is an estimation process, not a scientific method: Uncertainty is key, what are the expected cash flows, what type of industry is concerned, at what stage of the Business Life Cycle is the business valued. Some (groups of) assets (and liabilities) or (business) units will therefore always have more precise estimates of fair value than others.

  2. Bias will always mystify fair value estimates: Much as we pay lip service to the notion that we can estimate fair value objectively, bias will find its way into fair value estimates. Honesty about the bias is all that we can

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