Commodity finance IFRS the 6 best examples

Commodity finance IFRS the 6 best examples – A key issue is whether the contract to deliver a non-financial item (the commodity) falls within the scope of IFRS 9 Financial Instruments. Although IFRS 9 would appear to apply only to financial assets and financial liabilities, certain contracts for non-financial items are also within its scope.

The scope of IFRS 9

In determining whether the transaction is within the scope of IFRS 9, key guidance is set out in IFRS 9 2.4. IFRS 9 2.4 notes that

This Standard shall be applied to those contracts to buy or sell a non-financial item that can be settled net in cash or in another financial instrument, or by exchanging financial instruments, Read more

General model of measurement of insurance contracts

The general model of measurement of insurance contracts in IFRS 17 is based on estimates of the fulfilment cash flows and contractual service margin.

Step 5 Recognise the revenue when the entity satisfies each performance obligation

Step 5 Recognise the revenue when the entity satisfies each performance obligation the the end of the process in revenue recognition as introduced by IFRS 15 Revenue from contracts with customers. Step 5 Recognise the revenue

IFRS 15 The revenue recognition standard provides a single comprehensive standard that applies to nearly all industries and has changed revenue recognition quite significant. Step 5 Recognise the revenue

IFRS 15 introduced a five step process for recognising revenue, as follows: Step 5 Recognise the revenue

  1. Identify the contract with the customer
  2. Identify the performance obligations in the contract
  3. Determine the transaction price for the contract
  4. Allocate the transaction price to each specific performance obligation
  5. Recognise the revenue when the entity satisfies each performance obligation

In step five, Read more

Construction contract

A construction contract is a contract specifically negotiated for the construction of (a combination of) assets that are closely interrelated in terms of design

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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IFRS vs US GAAP Revenue recognition

IFRS VS US GAAP Revenue recognition – In May 2014, the FASB and IASB issued their long-awaited converged standards on revenue recognition, Revenue from Contracts with Customers. The revenue standards, as amended, were effective for calendar year-end companies in 2018 (2019 for non-public entities following US GAAP). The new model impacts revenue recognition under both US GAAP and IFRS, and, with the exception of a few discrete areas as summarized below, eliminates many of the existing differences in accounting for revenue between the two frameworks. Nearly all industries having contracts in the scope of the new standards are affected, and some will see pervasive changes.

Standards Reference 

US GAAP 

IFRS

ASC 340-40 Contracts with customers

ASC 606 Revenue from contracts

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Identify Telecom industry performance obligations

Identify Telecom industry performance obligations – This is an example in a small series for illustrating the concepts in What is a good or service that is distinct?

Example one:

A telecoms company enters into a contract for the sale of a mobile device and connection to its mobile network. The contract, which lasts for two years, gives the customer:

  • X minutes of calls per month; Identify Telecom industry performance obligations
  • Y gigabytes of data per month; and Identify Telecom industry performance obligations
  • Z texts per month. Identify Telecom industry performance obligations

The telecoms company frequently sells mobile devices without connecting them to the network. Although different combinations of minute, data and texts are available, it is not possible to … Read more

Constraining estimates of variable consideration

Constraining estimates of variable consideration – One of the most significant departures from prior GAAP is the treatment of variable consideration. In the past, revenue could only be recognized in the amount of the fixed or determinable portion of the sales price, not any variable consideration. The new revenue standard is instead based on the core principle that revenue is Highly probable Highly probable Highly probable Highly probable the amount the company expects to receive based upon the contract.

It allows a company to recognize estimated variable consideration as revenue subject to a “constraint” rule, which stipulates that the estimated amount must be adjusted downward to exclude any amount for which it is “probable” (U.S. GAAP) or “highly probable” (IFRS) that a significant reversal will occur. Constraining estimates Read more

Sales and Usage based royalties

Sales and Usage based royalties – 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. Sales and Usage based royalties

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. Sales and Usage based royalties

This section is part of step 3 determining the transaction price. When an entity earns royalties based on the extent to … Read more

Long-term supply contracts

Long-term supply contracts – To apply IFRS 15, automotive parts suppliers (APSs) will need to change the way they evaluate long-term supply contracts. APSs need to use significant judgement when they identify separate performance obligations (i.e., units of account), which may be different from those identified under IAS 18.

Tooling equipment

APSs commonly enter into long-term arrangements with Original Equipment Manufacturers (OEMs) to provide specific parts, such as seat belts or steering wheels. An arrangement typically includes the construction for the tooling, which is required to be used when manufacturing the parts to meet the OEM’s specifications. In many cases, the APS will construct and transfer the legal title for the tooling to the OEM after construction, even though they … Read more