Reassessment of the five identification criteria IFRS 15

Reassessment of the five identification criteria IFRS 15 – IFRS 15 Revenue from Contracts with Customers (contents page is here) introduced a single and comprehensive framework which sets out how much revenue is to be recognised, and when. The core principle is that a vendor should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the vendor expects to be entitled in exchange for those goods or services. See a summary of IFRS 15 here. Reassessment of the five identification criteria IFRS 15

A reassessment of the five identification criteria IFRS 15 is only necessary when concerns arise from a change in facts and circumstances that is considered to be significant. So an entity is not always Reassessment of the five identification criteria IFRS 15required to reassess whether an existing contract meets the five identification criteria. (IFRS 15 13) If on reassessment an entity determines that the criteria are no longer met, then it ceases to apply the standard to the contract from that date, but does not reverse any revenue previously recognised.

Deterioration of customer’s credit-worthiness Reassessment of the five identification criteria IFRS 15

An entity does not reassess the Step 1 collectability criteria unless there is a significant change in facts and circumstances that results in a significant deterioration in the customer’s creditworthiness. For example, a significant deterioration in a customer’s ability to pay because it loses one of its customers that accounts for 75 percent of its annual sales would be likely to lead to a reassessment. Reassessment of the five identification criteria IFRS 15

The determination of whether there is a significant deterioration in the customer’s credit-worthiness will be situation-specific and will often be a matter of judgement. The evaluation is not intended to capture changes of a more minor nature – that is, those that do not call into question the validity of the contract. Nor does it capture changing circumstances that might reasonably fluctuate during the contract term (especially for a long-term contract) that do not have a significant effect.

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If the entity determines that collectability is no longer probable, then it discontinues revenue accounting and follows the guidance on accounting for consideration received when a contract does not exist.

If and when the reassessment results in the collectability criterion not being met, the entity is precluded from continuing to recognise revenue under the contract until collectability returns to become probable and the five identification criteria are met again. Also the entity assesses any related contract assets or accounts receivable for impairment. Reassessment of the five identification criteria IFRS 15

One of the important objectives of IFRS 15 9, is to filter out contracts that may not be valid and that do not represent genuine transactions, and therefore recognising revenue for those contracts would not provide a faithful representation of such transactions. The requirements therefore preclude an entity from recognising any revenue until the contract is either complete or cancelled or until a subsequent reassessment indicates that the contract meets all of the criteria in IFRS 15 9. The boards noted that this approach is similar to the ‘deposit method’ that was previously included in US GAAP and that was applied when there was no consummation of a sale.

Collectability assessment required for contracts with a significant financing component RThird party serviceseassessment of the five identification criteria IFRS 15

The assessment of collectability in Step 1 of the model applies equally to contracts with or without a significant financing component. This is regardless of the fact that credit-worthiness is factored into the discount rate and therefore the transaction price for a contract with a significant financing component. Reassessment of the five identification criteria IFRS 15

Example identify a contract with customers Reassessment of the five identification criteria IFRS 15

Per the Fishing Act 1952 the Department of Fishing (DoF) may impose a levy on persons engaged in fishing activities. Any levy imposed under this section shall be payable by such persons engaged in the sea fish industry, in such proportions and at such times as may be prescribed; and the amount payable by any person on account of the levy shall be a debt due from him to the DoF and recoverable accordingly.

In return for imposing the levy, the DoF will issue a licence to the persons engaged in fishing activities for one year. This levy is not classified as a tax by the Office of National Statistics.

If DoF were to apply the IFRS 15 criteria to identifying a contract for their levy revenue:

  • The legislation is the approved contract which enables the DoF to impose a levy and for the person engaged in fishing activities (customer) to pay the levy. The legislation provides the enforceability on both parties,
  • The DoF can identify that they will have rights to consideration from imposing the levy as a result of the customer engaging in fishing activities. The obligation on DoF is to provide a licence,
  • DoF can identify payment terms as the levies are agreed with Ministers and published on the website each year,
  • The contract (i.e. legislative requirements) has commercial substance as the amount of DoF’s future cash flows is expected to change as a result of the levy being imposed on persons engaged in fishing activities,
  • It is probable that DoF will collect the consideration to which it will be entitled to.

As all the criteria are met, there is a contract in place.

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Reassessment of the five identification criteria IFRS 15

Reassessment of the five identification criteria IFRS 15 

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