Contract modifications in power and utilities – Best IFRS 15 Revenue recognition

Contract modifications in power and utilities

One of the most judgemental aspects of implementing IFRS 15 for power and utilities entities is applying the contract modifications guidance to arrangements, such as ‘blend and extend’ arrangements.

Blend and extend arrangements

Blend and extend arrangements are common in the power and utilities industry. In a blend and extend arrangement, the buyer and seller negotiate amended pricing of an existing contractual arrangement, including extending the term of the existing arrangement. It is common for the buyer to benefit from a lower blended price (original price blended with the extension period price which is at a lower rate per unit) and for the seller to benefit from an extended term (original term plus the extension period term).

Management will need to evaluate these types of modifications in order to determine how and when they will be accounted for under the contract modification provisions in IFRS 15.

Blend and extend modifications will typically fall into one of the following scenarios:

  1. The modification creates a separate contract from the existing arrangement. This would be the case if the modification results in an increase in the amount of distinct goods (such as units of electricity to be delivered), and the additional consideration reflects the reporting entity’s stand-alone selling price of the additional promised goods.
  2. The modification represents a termination of the existing agreement and the creation of a new agreement, to be accounted for prospectively. This would be the case if the modification results in an increase in the amount of distinct goods (such as units of electricity to be delivered), but the additional consideration does not reflect the reporting entity’s stand-alone selling price of the additional promised goods (for example, the price per unit of the new distinct goods is different from the market due to the blended price).

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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

Contract Modifications under IFRS 15

Contract Modifications under IFRS 15

INTRO – Contract Modifications under IFRS 15 – A ‘contract modification’ occurs when the parties to a contract approve a change in its scope, price, or both. The accounting for a contract modification depends on whether distinct goods or services are added to the arrangement, and on the related pricing in the modified arrangement. This page discusses both identifying and accounting for a contract modification, including comprehensive examples.

1 Identifying a contract modification

A contract modification is a change in the scope or price of a contract, or both. This may be described as a change order, a variation, or an amendment. When a contract modification is approved, it creates or changes the enforceable rights and obligations of the parties to the contract. Consistent with the determination of whether a contract exists in Step 1 of the model, this approval may be written, oral, or implied by customary business practices, and should be legally enforceable. [IFRS 15.18]

If the parties have not approved a contract modification, then an entity continues to apply the requirements of IFRS 15 to the existing contract until approval is obtained.

If the parties have approved a change in scope, but have not yet determined the corresponding change in price – i.e. an unpriced change order – then the entity estimates the change to the transaction price by applying the guidance on estimating variable consideration and constraining the transaction price (see variable consideration and the constraint) in Step 3 of IFRS 15. [IFRS 15.19]

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Series provision

Series provision – 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.Series provision

Under IFRS 15 a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer are accounted for as a single performance obligation.

As … Read more

Introduction IFRS 17 Insurance contracts

Introduction IFRS 17 Insurance contracts – More than 20 years in development, IFRS 17 represents a complete overhaul of accounting for insurance contracts. The new standard applies a current value approach to measuring insurance contracts and recognises profit as insurers provide services and are released from risk. Introduction IFRS 17 Insurance contracts

The profit or loss earned from underwriting activities are reported separately from financing activities. Detailed note disclosures explain how items like new business issued, experience in the year, cash receipts and payments, and changes in assumptions affected the performance and the carrying amount of insurance contracts. Introduction IFRS 17 Insurance contracts

IFRS 17 establishes principles for the recognition, measurement, presentation and disclosure of insurance contracts issued, reinsurance contracts Read more

IFRS 15 Contract modifications Decision tree

IFRS 15 Contract modifications Decision tree guides you through the treatment of changes in contracts under IFRS 15 Revenue from contracts with customers.

Parties to an arrangement frequently agree to modify the scope or price (or both) of their contract. If that happens, an entity must determine whether the modification is accounted for as a new contract or as part of the existing contract. Generally, it is clear when a contract modification has taken place, but in some circumstances, that determination is more difficult. [see IFRS 15 18 – 19]

Account for contract modifications timely

IFRS 15 indicates that an entity may have to account for a contract modification prior to the parties reaching final agreement on changes in … Read more

Arrangements that do not meet the definition of a contract

What happens with arrangements that do not meet the definition of a contract under IFRS 15. How are these accounted for? What IFRSs are used in such a case? If an arrangement does not meet the criteria to be considered a contract under the standard, it must be accounted for as stipulated in IFRS 15 15 – 16 (recognition of the consideration received as revenue if certain events have been met or as a liability until one of these events have been met), using the following decision tree: Arrangements that do not meet the definition of a contract


Arrangements that do not meet the definition of a contract

If the arrangements identifies as a IFRS 15 Contract with customers go to Step 2 – 5

References:

  • Contract qualifying criteria –
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Contract modifications and variable consideration 1 best 2 complete

Contract modifications and variable consideration are sometimes not easy to distinguish from one another. So here is a discussion bringing them together.

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. Contract modifications and variable consideration

Contract modifications

A contract modification arises when the parties approve a change … Read more

What can happen to a contract with a customer?

What can happen to a contract with a customer? – 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.

In step 1 Identify the contract there are some specifically identified circumstances to capture the day-to-day complexities of selling products and services to customers into useful financial reporting:

  1. Combination
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