Performance obligation

Bill-and-hold arrangements in IFRS 15

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Bill-and-hold arrangements

Bill-and-hold arrangements occur when an entity bills a customer for a product that it transfers at a point in time, but retains physical possession of the product until it is transferred to the customer at a future point in time. This might occur to accommodate a customer’s lack of available space for the product or delays in production schedules. [IFRS 15.B79]

To determine when to recognize revenue, an entity needs to determine when the customer obtains control of the product. Generally, this occurs at shipment or delivery to the customer, depending on the contract terms (for discussion of the indicators for transfer of control at a point in time, see Performance obligations satisfied at a point in time from Step 5 IFRS 15 in the link). The new standard provides criteria that have to be met for a customer to obtain control of a product in a bill-and-hold arrangement. These are illustrated below. [IFRS 15.B80–B81]

Bill-and-hold arrangements

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5 steps in IFRS 15 – best quick read

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5 steps in IFRS 15

Under IFRS 15 Revenue from contracts with customers, entities apply the 5 steps in IFRS 15 to determine when to recognize revenue, and at what amount. The model specifies that revenue is recognized when or as an entity transfers control of goods or services to a customer at the amount to which the entity expects to be entitled. Depending on whether certain criteria are met, revenue is recognized:

  • over time, in a manner that best reflects the entity’s performance; or
  • at a point in time, when control of the goods or services is transferred to the customer.

IFRS 15 provides application guidance on numerous related topics, including warranties and licenses. It also provides guidance on when to capitalize the costs of obtaining a contract and some costs of fulfilling a contract (specifically those that are not addressed in other relevant authoritative guidance – e.g. for inventory).

5 steps in IFRS 15 – What is IFRS 15?

Step 1: Identify the contract with a customer

A contract with a customer is in the scope of IFRS 15 when the contract is legally enforceable and certain criteria are met. If the criteria are not met, then the contract does not exist for purposes of applying the general model of IFRS 15, and any consideration received from the customer is generally recognized as a deposit (liability). Contracts entered into at or near the same time with the same customer (or a related party of the customer) are combined and treated as a single contract when certain criteria are met.

A contract with a customer is in the scope of IFRS 15 when it is legally enforceable and meets all of the following criteria. [IFRS 15.9]

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Revenue definition

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Revenue definition

Revenue is defined in IFRS 15 as: ‘Income arising in the course of an entity’s ordinary activities‘.

IFRS 15 establishes 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.

The application of the core principle in IFRS 15 is carried out in five steps:

revenue definition

The five-step model is applied to individual contracts. However, as a practical expedient, IFRS 15 permits an entity to apply the model to a portfolio of contracts (or performance obligations) with similar characteristics if the entity reasonably expects that the effects would not differ materially from applying it to individual contracts.

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Contract Modifications under IFRS 15

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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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IFRS 15 Revenue Disclosures Examples

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IFRS 15 Revenue Disclosures Examples

IFRS 15 Revenue Disclosures Examples provides the context of disclosure requirements in IFRS 15 Revenue from contracts with customers and a practical example disclosure note in the financial statements. However, as this publication is a reference tool, no disclosures have been removed based on materiality. Instead, illustrative disclosures for as many common scenarios as possible have been included.

Please note that the amounts disclosed in this publication are purely for illustrative purposes and may not be consistent throughout the example disclosure related party transactions.

Users of the financial statements should be given sufficient information to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. To achieve this, entities must provide qualitative and quantitative information about their contracts with customers, significant judgements made in applying IFRS 15 and any assets recognised from the costs to obtain or fulfil a contract with customers. [IFRS 15.110]

Disaggregation of revenue

[IFRS 15.114, IFRS 15.B87-B89]

Entities must disaggregate revenue from contracts with customers into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. It will depend on the specific circumstances of each entity as to how much detail is disclosed. The Reporting entity Plc has determined that a disaggregation of revenue using existing segments and the timing of the transfer of goods or services (at a point in time vs over time) is adequate for its circumstances. However, this is a judgement and will not necessarily be appropriate for other entities.

Other categories that could be used as basis for disaggregation include:IFRS 15 Revenue Disclosures Examples

  1. type of good or service (eg major product lines)
  2. geographical regions
  3. market or type of customer
  4. type of contract (eg fixed price vs time-and-materials contracts)
  5. contract duration (short-term vs long-term contracts), or
  6. sales channels (directly to customers vs wholesale).

When selecting categories for the disaggregation of revenue entities should also consider how their revenue is presented for other purposes, eg in earnings releases, annual reports or investor presentations and what information is regularly reviewed by the chief operating decision makers. [IFRS 15.B88]

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Sale with a right of return in IFRS 15

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Sale with a right of return in IFRS 15

Under IFRS 15 Revenue from contract with customers, when an entity makes a sale with a right of return it recognises revenue at the amount to which it expects to be entitled by applying the variable consideration and constraint guidance set out in Step 3 of the model (see Step 3 Determine the transaction price). The entity also recognises a refund liability and an asset for any goods or services that it expects to be returned.

  • An entity applies the accounting guidance for a sale with a right of return when a customer has a right to:
    a full or partial refund of any consideration paid;
  • a credit that can be applied against amounts owed, or that will be owed, to the entity; or
  • another product in exchange (unless it is another product of the same type, quality, condition and price – e.g. exchanging a red sweater for a white sweater). [IFRS 15.B20]

An entity does not account for its stand-ready obligation to accept returns as a performance obligation. [IFRS 15.B21–B22]

In addition to product returns, the guidance also applies to services that are provided subject to a refund.Sale with a right of return

The guidance does not apply to:

  • exchanges by customers of one product for another of the same type, quality, condition and price; and
  • returns of faulty goods or replacements, which are instead evaluated under the guidance on warranties. [IFRS 15.B26–B27]

When an entity makes a sale with a right of return, it initially recognises the following: [IFRS 15.B21, B23, B25]

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Non-monetary transactions IFRS 15 Complete and Exemplary Read

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Non-monetary transactions IFRS 15

Barter transactions are the exchange of goods or services, in exchange for other goods or services

IFRS References: IFRS 15, IAS 16, IAS 38, IAS 40 Non-monetary transactions IFRS 15

If an entity enters into a non-monetary exchange with a customer as part of its ordinary activities, then generally it applies the guidance on non-cash consideration in the IFRS 15 Revenue standard. Non-monetary transactions IFRS 15

Non-monetary exchanges with non-customers do not give rise to revenue. If a non-monetary exchange of assets with a non-customer has commercial substance, then the transaction gives rise to a gain or loss. The cost of the asset acquired is generally the fair value of the asset surrendered, adjusted for any cash transferred. Non-monetary transactions IFRS 15

Simple bartering involves no cost as this involves exchanging goods and/or services of the same value.

A barter exchange operates as a broker and bank in which each participating member has an account that is debited when purchasesNon-monetary transactions IFRS 15 are made, and credited when sales are made. Compared to one-to-one bartering, concerns over unequal exchanges are reduced in a barter exchange.

The exchange plays an important role because it provides the record-keeping, brokering expertise and monthly statements to each member. Commercial exchanges make money by charging a commission on each transaction on either the buy or sell side, or a combination of both. Non-monetary transactions IFRS 15

In general, one requirement remains in tact in non-monetary transactions, revenue cannot be recognised if the amount of revenue is not reliably measurable. Non-monetary transactions IFRS 15

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IFRS 15 Measuring progress to completion – Best complete explanation

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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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