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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Contract Modifications under IFRS 15

Contract Modifications under IFRS 15 – Just two practical examples, to better understand all kind of things for IFRS 15.

On 1 January 20X1, Wireless Company enters into a two-year contract with a customer for a 2-gigabyte (GB) data plan with unlimited talk and text for CU60/month and a subsidised handset for which the customer pays CU200. Contract Modifications under IFRS 15

The handset has a stand-alone selling price of CU600. Contract Modifications under IFRS 15

For purposes of this illustration, the time value of money has not been considered, the stand-alone selling price of the wireless plan is assumed to be the same as the contractual price and the effect of the constraint on variable consideration is not considered. … Read more

Series provision

Series provision – 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. Series provision

Under IFRS 15 a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer are accounted for as a single performance obligation.

As … Read more

Step 4 Allocate the transaction price

Step 4 Allocate the transaction price to each specific performance obligation is the fourth step in the process required by IFRS 14 Revenue from contracts with customers in order to properly recognise 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.

IFRS 15 introduced a five step process for recognising revenue, as follows: Step 4 Allocate the 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

After determining the transaction price in Step 3, companies in step 4 … Read more

Variable consideration of the transaction price

Variable consideration of the transaction price – 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. Variable consideration of the transaction price

This section is part of step 3 determining the transaction price. Instead of the amount of consideration specified in a contract being fixed, the 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

Dealer sales vehicle incentives

Dealer sales vehicle incentives – To apply IFRS 15, original equipment manufacturers (OEMs) will need to change the way they evaluate incentives. Original equipment manufacturers 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.

Original equipment manufacturers frequently offer sales incentives in contracts to sell vehicles to dealers. These sales incentives may be cash rebate bonuses or another type of incentive available to dealers and retail customers (who purchase the vehicle from the dealer). They may also include free, or heavily discounted, goods or services provided to retail customers, such as free satellite radio or free maintenance for a specified period. Dealer sales Read more

Repurchase options and residual value guarantees

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. … Read more

Contract modifications and variable consideration

Contract modifications and variable consideration are discussed on this page.

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. Contract modifications and variable consideration

Contract modification

A contract modification arises when the parties approve a change in the scope and/or the price of a contract (eg a … Read more

Technology reseller arrangements

Technology reseller arrangements – IFRS 15 also changed 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 arrangement is … Read more