Ifrs 15

IFRS 15

Krina Shah

1. Overview of IFRS 15 - Revenue from Contracts with Customers

IFRS 15 specifies how and when an IFRS reporter will recognise revenue as well as requiring such

entities to provide users of financial statements with more informative, relevant disclosures. The

standard provides a single, principles based five-step model to be applied to all contracts with

customers.

A contract with a customer may be partially within the scope of IFRS 15 and partially within the scope

of another standard. In that scenario:

? if other standards specify how to separate and/or initially measure one or more parts of the

contract, then those separation and measurement requirements are applied first. The transaction

price is then reduced by the amounts that are initially measured under other standards;

? if no other standard provides guidance on how to separate and/or initially measure one

or more parts of the contract, then IFRS 15 will be applied.

2. So, know we know what the objective and scope of this standard is. So, Let’s move little bit

further and understand what the important terms are and there meaning:

1. What is Contract?

An agreement between two or more parties that creates enforceable rights and obligations.

2. What do you mean by Customer?

A party that has contracted with an entity to obtain goods or services that are an output of

the entity’s ordinary activities in exchange for consideration.

3. What is Income?

Increases in economic benefits during the accounting period in the form of inflows or

enhancements of assets or decreases of liabilities that result in an increase in equity, other

than those relating to contributions from equity participants.

4. What is Performance Obligation?

A promise in a contract with a customer to transfer to the customer either:

? a good or service (or a bundle of goods or services) that is distinct; or

? a series of distinct goods or services that are substantially the same and that have the

same pattern of transfer to the customer.

5. Finally, what do you mean by Revenue?

Income arising during an entity’s ordinary activities.

6. What is Transaction Price?

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.

3. When to recognise rise revenue and at what amount revenue should be recognised?

Entities will apply a five-step model to determine when to recognise revenue. The modal specifies

that revenue should be recognised when (or as) an entity transfers control of goods or services to

a customer at the amount to which entity expects to be entitled. Depending on whether certain

criteria are met, revenue is recognised:

- Over time, in a manner that depicts the entity’s performance; or

- At a point in time, when control of the goods or services is transferred to the customer.

Step 1: Identify the contract with the customer

A contract with a customer will be within the scope of IFRS 15 if all the following conditions are

met:

1. the contract has been approved by the parties to the contract;

2. each party’s rights in relation to the goods or services to be transferred can be identified;

3. the payment terms for the goods or services to be transferred can be identified;

4. the contract has commercial substance; and

5. it is probable that the consideration to which the entity is entitled to in exchange for the goods

or services will be collected.

Example: In an agreement to sell real estate, Company X assesses the existence of a contract,

considering factors such as:

- the buyer’s available financial resources;

- the buyer’s commitment to the contract, which may be determined based on the importance

of the property to the buyer’s operations;

- the seller’s prior experience with similar contracts and buyers under similar circumstances;

- the seller’s intention to enforce its contractual rights; and

- the payment terms of the arrangement

If X Concludes that it is not probable that it will collect the amount to which it expects to be

entitled, then no revenue is recognised. Instead, X applies the new guidance on consideration

received before a contract exists and is likely to initially account for any cash collected as a deposit

liability.

Step 2: Identify the performance obligations in the contract

At the inception of the contract, the entity should assess the goods or services that have been

promised to the customer, and identify as a performance obligation:

? a good or service (or bundle of goods or services) that is distinct; or

? a series of distinct goods or services that are substantially the same and that have the same

pattern of transfer to the customer.

A good or service is distinct if both of the following criteria are met:

Factors for consideration as to whether a promise to transfer goods or services to the customer is

not separately identifiable include, but are not limited to:

? the entity does provide a significant service of integrating the goods or services with other goods

or services promised in the contract;

? the goods or services significantly modify or customise other goods or services promised in the

contract;

? the goods or services are highly interrelated or highly interdependent.

Example: An entity, a software developer, enters into a contract with a customer to transfer the

following:

1. Software licence;

2. Installation service (includes changing the web screen for each user);

3. Software updates; and

IFRS 15

Krina Shah

4. Technical support for 2 years.

The entity sells the above separately. The installation service is routinely performed by other entities

and does not significantly modify the software. The software remains functional without the updates

and the technical support.

Step 3: Determine the transaction price

The transaction price is the amount to which an entity expects to be entitled in exchange for the

transfer of goods and services. When making this determination, an entity will consider past

customary business practices.

Transaction Price:

- Non- cash Consideration: If customer gives any non-cash consideration against the goods and

services given, then the non-cash consideration should be measured at Fair value if that can

be estimated. If the price cannot be estimated, then it is selling price of goods or services given

or agreed in exchange for non-cash consideration.

- Variable Consideration: in variable consideration there is a risk of revenue to entities as

reversal of revenue, in determining the value how much amount needs to be considered

under variable consideration.

- Significant Financing Component: For contracts with a significant financing component,

entities adjust the promised amount of consideration to reflect the time value of money.

- Consideration payable to Customer: Entities needs to determine whether consideration

payable to a customer represents a reduction of the amount, a payment for a distinct good or

services, or a combination of the two.

Before calculating the transaction price, we must determine whether the consideration is Variable?

If yes, the variable consideration amount should be estimated using expected value or most likely

amount and also determine the portion of that amount for which it is highly probable that a significant

revenue reversal will not subsequently occur (if any).

Example – Volume discount incentive

Step 4: Allocate the transaction price to the performance obligations in the contracts

Where a contract has multiple performance obligations, an entity will allocate the transaction price to

the performance obligations in the contract by reference to their relative standalone selling prices. If

a standalone selling price is not directly observable, the entity will need to estimate it. IFRS 15 suggests

various methods that might be used, including:

? Adjusted market assessment approach

? Expected cost plus a margin approach

? Residual approach (only permissible in limited circumstances).

Any overall discount compared to the aggregate of standalone selling prices is allocated between

performance obligations on a relative standalone selling price basis. In certain circumstances, it may

be appropriate to allocate such a discount to some but not all of the performance obligations.

Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation

Revenue is recognised as control is passed, either over time or at a point in time.

Control of an asset is defined as the ability to direct the use of and obtain substantially all of the

remaining benefits from the asset. This includes the ability to prevent others from directing the use of

and obtaining the benefits from the asset. The benefits related to the asset are the potential cash

flows that may be obtained directly or indirectly. These include, but are not limited to:

? using the asset to produce goods or provide services;

? using the asset to enhance the value of other assets;

? using the asset to settle liabilities or to reduce expenses;

? selling or exchanging the asset;

? pledging the asset to secure a loan; and

? holding the asset.

An entity recognises revenue over time if one of the following criteria is met:

- the customer simultaneously receives and consumes the benefits provided by the entity’s

performance as the entity performance

- the entity’s performance creates or enhances an asset that the customer controls as the asset

is created or enhanced.

- the entities 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.

Further anlaysis of IFRS 15 we will do it in next article.

- Krina Shah

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