The best way for IFRS 15 Measuring progress to completion

IFRS 15 Measuring progress to completion

– how to do it, what to use, learn it all

Introduction

For each performance obligation satisfied over time, revenue must be recognised over time (IFRS 15.39-45 & IFRS 15.B14-B19). To do so, an entity shall measure the progress towards complete satisfaction of the performance obligation.

The measurement of progress has the objective of faithfully depicting an entity’s performance in transferring control of the goods or services promised to the customer (that is, the extent to which the performance obligation is satisfied).

An entity shall apply a single method of measuring progress for each performance obligation satisfied over time, and shall apply that method consistently to similar performance obligations and in similar circumstances.

At the end of each reporting period, an entity shall remeasure its progress towards complete satisfaction of each performance obligation satisfied over time.

In July 2015 the Joint Transition Resource Group (TRG a combined effort by IASB and FASB to detect problems raised by the implementation of the revenue recognition standards) clarified that the principle of applying a single method of measuring progress for a given performance obligation is also applicable to a combined performance obligation, i.e. one that contains multiple non-distinct goods or services.

Hence, it is not appropriate to apply several methods depending on the stage of performance, even if these methods all belong to one of the two major categories of methods presented below (output methods vs input methods), for example a method measuring progress on the basis of hours expended, and a method measuring progress on the basis of labour costs incurred.

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Related IFRS posts

IAS 36 Other impairment issues

IAS 36 Other impairment issues – When looking at the step-by-step IAS 36 impairment approach it comes down to the following broadly organised steps: IAS 36 How Impairment test

  • What?? – Determining the scope and structure of the impairment review, explained here,
  • If and when? – Determining if and when a quantitative impairment test is necessary, explained here,
  • IAS 36 How Impairment test or understanding the mechanics of the impairment test and how to recognise or reverse any impairment loss, if necessary, which is explained here

IAS 36 Other impairment issues discusses other common application issues encountered when applying IAS 36, including those related to:

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Investment valued at cost

A method of accounting for an investment, whereby the investment is recognised at cost. The investor recognises revenue from the investment only to the extent that the investor is entitled to receive distributions from accumulated surpluses of the investee arising after the date of acquisition. Entitlements due or received in excess of such surpluses are regarded as a recovery of investment, and are recognised as a reduction of the cost of the investment.

Equity method

The equity method is a method of accounting whereby the investment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the investor’s share of the investee’s net assets. The investor’s profit or loss includes its share of the investee’s profit or loss and the investor’s other comprehensive income includes its share of the investee’s other comprehensive income.

Deemed cost

Deemed cost is an amount used as a surrogate for cost or depreciated cost at a given date. Subsequent depreciation or amortisation assumes that the entity had initially recognised the asset or liability at the given date and that its cost was equal to the deemed cost.

To put it short – the introduction of deemed cost is a practical simplification to smoothen the first-time adoption of International Financial Reporting Standards.

But IFRS 1 BC 41 says:

Some measurements in accordance with IFRSs are based on the accumulation of past costs or other transaction data. If an entity has not previously collected the necessary information, collecting or estimating it retrospectively may be costly.  To avoid excessive cost, ED 1 proposed … Read more

Valuation techniques Cost approach

Valuation techniques Cost approach reflects the amount that would be required currently to replace the service capacity of an asset (current replacement cost)

Fair Value of Tangible Assets

Fair Value of Tangible Assets – In the event of Business Combinations tangible assets (current – non-current) are best valued with the market or income approaches. If adequate data are not available to derive an indication of value through these methods, an appraiser may use the replacement cost method, which adjusts the original cost for changes in the price level to determine its current replacement cost. The current replacement cost is then adjusted due to physical use or functional obsolescence. Cash-generating unit (CGU) Cash-generating unit (CGU)

Property, Plant and Equipment (PP&E) must be recognized at fair value for current capacity. Accumulated depreciation is not carried forward. An appraiser may use the cost approach, in which a market participant would pay no more for an asset … Read more

Adjusted net asset method

Adjusted net asset method The adjusted net asset method is used to value a business based on the difference between the fair market value of the business assets and its liabilities. Depending on the particular purpose or circumstances underlying the valuation, this method sometimes uses the replacement or liquidation value of the company assets less the liabilities.

Under this method, the analyst adjusts the book value of the assets to fair market value (generally measured as replacement value or liquidation value) and then reduces the total adjusted value of assets by the fair market value of all recorded and unrecorded liabilities. Both tangible and identifiable intangible assets are valued in determining total adjusted net assets.

If the analyst will be relying on other professional Read more