IFRS 15 Quick overview Revenue from contracts with customers

IFRS 15 Quick overview Revenue from contracts with customers – the easy way to obtain an solid overview.

What is the objective of IFRS 15?

To establish principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer.

How does IFRS 15 meet this objective?

The core principle of IFRS 15 is that an entity should recognise revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

Practical expedient – the portfolio

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Legally enforceable contract

Legally enforceable contract – A contract, under the broadest possible definition, is a legally enforceable promise. Contracts are classified in many different ways. For example, a contract may be unilateral (a promise by one party to another) or bi- or multilateral (a set of complementary promises made by and between more than one party).

A contract may be oral or written (although an oral contract is difficult to prove, and some types of contracts must be written). It may be express (a promise made explicitly) or implied (a promise concluded upon based on one’s (normal) business conduct). A type of obligation similar to a contract may even be created, under certain circumstances, by a court in the interests of justice; … 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

Transfer of control for distinct licences

Transfer of control for distinct licences Transfer of control for distinct licences – IFRS 15 indicates that an entity must determine, at contract inception, whether it will transfer control of a promised good or service over time. If an entity does not satisfy a performance obligation over time, the performance obligation is satisfied at a point in time. A performance obligation is satisfied over time if it meets one of the following criteria: Transfer of control for distinct licences

  • The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs – by providing hosting services, for example. Transfer of control for distinct licences
  • The entity’s performance creates or enhances an asset that the customer controls as the asset is created
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Contract asset

Contract assets are defined as an entity’s right to consideration in exchange for goods or services  (i.e. conditional) that the entity has transferred to a customer when that right is conditioned on something other than the passage of time (for example, the entity’s future performance). An entity shall assess a contract asset for impairment in accordance with IFRS 9. An impairment of a contract asset shall be measured, presented and disclosed on the same basis as a financial asset that is within the scope of IFRS 9.

A receivable is an entity’s right to consideration that is unconditional. A right to consideration is unconditional if only the passage of time is required before payment of that consideration is … Read more

Contractually linked instruments

Contractually linked instruments – IFRS 9 provides specific guidance for circumstances in which an entity prioritises payments to the holders of multiple contractually linked instruments that create concentrations of credit risk – i.e. tranches. The right to payments on more junior tranches depends on the issuer generating sufficient cash flows to pay more senior tranches. The standard requires a look-through approach to determine whether the SPPI test is met. [IFRS 9 B4.1.20–26]

The following flow chart illustrates how an entity determines whether a tranche meets the SPPI test. [IFRS 9 B4.1.21, IFRS 9 B4.1.23–25]

Contractually linked instruments

In performing the assessment of financial instruments in the underlying pool, a detailed instrument-by- instrument analysis of the pool may not … Read more

Performance obligations satisfied over time

Performance obligations satisfied over time – 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. Performance obligations satisfied over time

This section is part of step 5 Recognise revenue as or when each performance obligation is satisfied. A vendor satisfies a performance obligation and recognises revenue … Read more

Revenue recognition over time enforceable payment right

Revenue recognition over time enforceable payment right – 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.

This section is part of step 5 Recognise revenue as or when each performance obligation is satisfied. The performance obligation may be satisfied over time when the right to … Read more

Revenue recognition over time

Revenue recognition over time is the defined term. As a result, revenue recognition at a point of time is the valid recognition principle when the definition of revenue recognition over time is not met.  A vendor satisfies a performance obligation and recognises revenue over time when one of the following three criteria is met:

Criterion

Example

1.

The customer simultaneously receives and consumes the benefits provided by the contractor’s performance as the contractor performs.

Routine or recurring services like cleaning services

2.

The contractor’s performance creates or enhances an asset that the customer controls as the asset is created or enhances

Building an asset on a customer’s site

3.

The contractor’s performance does not create an asset with an alternative

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Satisfaction of performance obligations

Satisfaction of performance obligations – An entity recognises revenue only when it satisfies a performance obligation by transferring control of a promised good or service to the customer. Control of an asset refers to the ability of the customer to direct the use of and obtain substantially all of the cash inflows, or the reduction of cash outflows, generated by the goods or services. Control also means the ability to prevent other entities from directing the use of, and receiving the benefit from, a good or service. Satisfaction of performance obligations

The standard indicates that an entity must determine at contract inception whether it will transfer control of a promised good or service over time. If an entity does not … Read more