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

Read more

IFRS 9 Retain all risks and rewards

IFRS 9 Retain all risks and rewards is part of a decision model for the derecognition of financial assets. The derecognition can be a full derecognition, a full continued recognition, a full derecognition with recognition of new assets or liabilities retained or a continued involvement. The model is starting here. Derecognition of financial assets IFRS 9 Retain all risks and rewards IFRS 9 Retain all risks and rewards

Step 5 Has the entity retained substantially all risks and rewards? [IFRS 9 3.2.6(b)]

If this comparison demonstrates that the entity’s exposure to the variability in the present value of the future net cash flows (discounted at the appropriate current market interest rate) from the financial asset does not change 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
Read more

Performance obligation

Performance obligation – [IFRS 15 Appendix A – Defined terms]

Such an obligation is a promise in a contract with a customer to transfer to the customer either:

  1. a good or service (or a bundle of goods or services) that is distinct; or
  2. a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.

Context Performance obligation Performance obligation Performance obligation

For revenue to be recognized, the following conditions must be satisfied:

  1. Risks and rewards have been transferred from the seller to the buyer.
  2. The seller does not have control over the goods sold.
  3. The collection of payment from goods or services is reasonably assured.
  4. The amount of revenue can be reasonably measured.
Read more

Offsetting

Offsetting – Identifying, recognising and measuring both an asset and a liability as separate units of account, but presenting them in the statement of financial position as a single net amount.

Offsetting, otherwise known as netting, takes place when entities present their rights and obligations to each other as a net amount in their statements of financial position. (IFRS 7 13A – 13F)

IAS 32 42 is one of few IFRS paragraphs regarding offsetting: A financial asset and a financial liability shall be offset and the net amount presented in the statement of financial position when, and only when, an entity:

  1. currently has a legally enforceable right to set off the recognised amounts; and
  2. intends either to settle
Read more

Continuing involvement

The continuing involvement approach applies if the entity has neither transferred nor retained substantially all the risks and rewards of ownership and control has not passed to the transferee. Under the continuing involvement approach, the entity continues to recognise part of the asset. That part represents the extent of its continuing exposure to the risks and rewards of the transferred asset. That is, the continuing involvement asset will include both obligations to support the risks arising from the asset’s cash flows (for example, if a guarantee has been provided) and the right to receive benefits from these cash flows. A liability is also recognised in these circumstances. IFRS 9 contains some guidance on how to account for certain scenarios.

The Read more

Full derecognition with recognition of new assets or liabilities

Full derecognition with recognition of new assets or liabilities

Full derecognition (transferred off-balance sheet) – with recognition of any new assets or liabilities Full derecognition with recognition of new assets or liabilities

Assets

95% of transfers resulting in full recognition are simple, the entity that has recorded a financial asset receives cash and removes the asset from its financial position.

However, IFRS defines a more fundamental approach to also cover the 5% large, difficult to understand but material transactions. 

An entity that derecognises a financial asset in its entirety includes the difference between the carrying amount of the asset and the consideration received (including any cumulative gain or loss that had been recognised directly in equity) in the income statement.

An entity that derecognises only a part of a Read more

Pass-through conditions

Pass-through conditions – A ‘pass-through’ transfer is a transaction where an entity keeps the legal title and rights to the cash flows from a financial asset (hence condition in IFRS 9.3.2.4(a) is not met), but enters into an arrangement with a third party under which those cash flows will be passed to this third party. Securitisation is a typical example of a ‘pass-through’ transfer.

Helpful hint

Most revolving securitisation transactions that involve a consolidated SPE fail to meet the pass-through conditions. This is because the cash flows from the assets are not passed on to eventual recipients without material delay and are reinvested in new assets that are not cash and cash equivalents, before being passed onto eventual recipients.

The Read more

Revenue from Contracts with Customers short version

Revenue from Contracts with Customers short version – 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. Revenue from Contracts with Customers short version

Revenue is now recognised by a vendor when control over the goods or services is transferred to the customer. In contrast, IAS 18 Revenue based revenue recognition around an analysis of … Read more

Control over structured entities

Control over structured entities Control over structured entities – Although IFRS 10 has no separate guidance on Special Purpose Entities (SPEs), it does have guidance on assessing control over entities for which voting rights do not have a significant effect on returns.

Despite the lack of a definition, entities typically considered to be SPEs in practice normally have some of the characteristics noted in the following table:

Control over structured entities Control over structured entities Control over structured entities

Control over structured entities

Typical features of SPEs

The most widespread use of SPEs is in the financial services industry, in connection with securitisation and other asset-backed financing arrangements. Other common uses include:

  • financial engineering and tax optimisation schemes
  • ring-fencing or sharing the risk of
Read more