IFRS 15 – REVENUE FROM CONTRACTS
WITH CUSTOMERS
OBJECTIVE
IFRS
15 sets the principles to apply when reporting about the nature, the amount,
the timing, and the uncertainty of revenue and cash flows from a contract with
a customer.
IFRS
15 excludes:
1.
Leases (IFRS 16)
2.
Insurance contract (IFRS 17)
3.
Financial instruments and other rights and obligations within the scope of IFRS
9, IFRS 10, IFRS 11, IAS 28
4.
Non-monetary exchange between entities within the same business to facilitate
sales.
5
STEPS TO RECOGNISE REVENUE
‘CIDAR’
C – Contract with
customer identification
I –
Identify the performance obligation(s) in the contract
D – Determine the
transaction price
A –
Allocate the transaction price to the performance obligation(s) in the contract
R – Recognise revenue
when or as the entity satisfies a performance obligation.
STEP ONE - Contract with customer
identification
Contract
is an agreement between two parties that creates enforceable rights and
obligations.
IFRS
15 is applied to contracts with the following five characteristics:
1.
Parties to the contract have approved the contract and are committed to
perform.
2.
Each party’s rights to the goods or services transferred are identified.
3.
The payment terms are identified.
4.
The contract has a commercial substance.
5.
It is probable that an entity will collect the consideration.
IFRS
15 provides guidance about contract combinations and contract modification.
Contract combination is
when one accounts for two or more contracts as a single contract and not
separately.
Contract modification
is the change in the contract’s scope, price or both scope and price.
A
contract modification shall be accounted for as a separate contract if the
following conditions are met:
1.
There is an addition of promised goods or services that are distinct.
2.
The price of the goods of the contract increases by an amount of consideration.
STEP TWO - Identify the performance
obligation(s) in the contract
Performance obligation
is any good or service that contract promises to transfer to the customer
either:
a.
a good or service, or their bundle that is distinct
b.
a series of distinct goods or services that are substantially the same and have
the same pattern of transfer.
A good or service is distinct if
the following criteria are met:
1.
The customer can benefit from the good or service on its own or together with
other readily available resources.
2.
The entity’s promise to transfer the good or service is separately identifiable
from the other promises.
Factors
to consider whether an entity’s promise to transfer the good or service to the
customer is separately identifiable include
a.
The entity does not provide a significant service of integrating the good or
service with other goods or services promised in the contract.
b.
The good or service is not highly dependent or highly interrelated with other
goods or services promised in the contract.
c.
The good or service does not significantly modify or customize another good or
service promised in the contract.
A
series of distinct goods or services has the same pattern of transfer to the
customer if the following criteria are met:
1.
Each distinct good or service is satisfied overtime.
2.
The same method of measuring progress would be used to measure the entity’s
progress towards the complete satisfaction of the performance obligation to
transfer each distinct good or service in the series to the customer.
STEP THREE - Determine the
transaction price
Transaction price is
the amount of consideration to which an entity expects to be entitled in
exchange for transferring promised goods or services to a customer excluding
amounts collected on behalf of third parties.
How to estimate the transaction
price of a contract?
1.
Use the contract price as your initial basis.
2.
Then, take into account the following:
a.
Variable consideration
b.
Significant financing component
c.
Non-cash consideration
d.
Consideration payable to the customer
STEP FOUR - Allocate the
transaction price to the performance obligation(s) in the contract
The
general rule for allocating the transaction price to the performance
obligation(s) in the contract is based on the relative stand-alone selling price(s) of the performance obligation(s).
Exception
to this general rule is when allocating discounts and when allocating
considerations with variable amounts.
A stand-alone selling price
is a price at which an entity would sell a promised good or service separately
to the customer and not in a bundle.
Methods
for estimating stand-alone selling price include:
1.
Adjusted market assessment approach
2.
Expected cost plus a margin approach
3.
Residual approach
STEP FIVE - Recognise revenue when
or as the entity satisfies a performance obligation
A
performance obligation is satisfied when a promised good or service is
transferred to a customer. When this condition is achieved, then control is
passed.
A
performance obligation can be satisfied either overtime or at point in time.
Criteria to be met to recognise
revenue overtime
1.
The customer simultaneously receives and consumes all of the benefits provided
by the entity.
2.
An entity’s performance creates or enhances an asset that the customer controls
as the asset is created.
3.
The entity’s performance does not create an asset with an alternative use to
the entity and the entity has an enforceable right to payment for performance
completed to date.
Criteria to be met to recognise
revenue at point in time
1.
The entity has a present right to payment for the asset.
2.
The customer has legal title to the asset.
3.
The asset is accepted by the customer.
4.
The customer has significant risks and rewards related to the ownership of the
asset.
5.
The entity has transferred physical possession of the asset.
CONTRACT COSTS
IFRS
15 provides guidance about two types of costs related to the contract:
1. Costs to obtain a contract
Costs
to obtain a contract are the incremental costs to obtain a contract. Examples
include legal fees, sales commissions and many others.
2. Costs to fulfill a contract
Costs
to fulfill a contract are cost which are recognised as an asset based on the
attainment of certain conditions. These conditions include:
a.
the costs relate directly to a the contract.
b.
the costs generate or enhance resources of the entity that will be used in
satisfying performance obligations in the future.
c.
the costs are expected to be recovered.
DISCLOSURES
An
entity should disclose:
1.
its contracts with customers.
2.
the significant judgments, and changes in the judgments, made in applying the
guidance to those contracts.
3.
any assets recognised from the costs to obtain or fulfill a contract with a
customer