Contract modifications and variable consideration

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.

A contract modification arises when the parties approve a change in the scope and/or the price of a contract (eg a change order). In IFRS 15 this exercise is part of step 1 Identify the contract. The … Read more

Step 3 Determining Transaction Price

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

IFRS 15 introduced a five step process for recognising revenue, as follows:Step 3 Determining Transaction Price

  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

 


Step 3, determining the transaction price for the contract, describes the promise a customer makes to pay for the performance obligations identified in the contract. IFRS 15 47 defines transaction price as the amount of consideration the entity expects to be entitled to, in … Read more

Step 4 Allocate the transaction price to each specific performance obligation

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

IFRS 15 introduced a five step process for recognising revenue, as follows:Step 4 Allocate the transaction price to each specific performance obligation

  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


After determining the transaction price in Step 3, companies in step 4 need to allocate that transaction price to the specific performance obligations identified in the contract. The transaction price is allocated to the performance obligations based on its relative standalone selling price. The … Read more

Technology reseller arrangements

IFRS 15 also could change practice for entities that sell their products through distributors or resellers (collectively referred to in this section as resellers). It is common in the technology industry for entities to provide resellers with greater rights than end-customers. For example, an entity may provide a reseller with price protection and extended rights of return.

Under IFRS 15, entities will need to first evaluate when control of the product transfers to the end-customer. To do this, first, entities may need to assess whether their contracts with resellers are consignment arrangements, under which control likely would not transfer until delivery to the end-customer (see Consignment arrangements). The standard provides three indicators that an … Read more

Repurchase options and residual value guarantees

Original Equipment Manufacturers (OEMs) may have a right or obligation to repurchase vehicles as part of a contract with a customer or may provide residual value guarantees to certain customers. Examples include repurchase options on sales of fleet vehicles or residual value guarantees to fleet customers or third-party purchasers of vehicles (e.g., finance companies). While the economics of a repurchase agreement and a residual value guarantee may be similar, the accounting outcome could be quite different under IFRS 15.

Repurchase agreements Repurchase options and residual value guarantees

Some agreements include repurchase provisions, either as part of the original sales contract or as a separate contract that relates to the original sales contract. These provisions affect how an entity… Read more