IFRS 15 — Revenue from Contracts with Customers

SUMMARY

IFRS 15 Revenue from Contracts with

Customers

Overview

IFRS 15 Revenue from Contracts with Customers was issued on 28 May 2014. It superdes:

 IAS 18 Revenue;

 IAS 11 Construction contracts;

 IFRIC 13 Customer Loyalty Programmes;

 IFRIC 15 Agreements for the Construction of Real Estate;

 IFRIC 18 Transfers of Asts from Customers; and

 SIC-31 Revenue – Barter Transactions Involving Advertising Services.

IFRS 15 will improve comparability of reported revenue over a range of industries, companies and

geographical areas globally.

Objective

To establish principles that an entity shall apply to report uful information to urs of financial statements

Defined terms

IFRS 15 defines the following terms that form an integral part of this IFRS.

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

Customer – A party that has contracted with an entity to obtain goods or rvices that are an output of the

entity’s ordinary activities in exchange for consideration.

Income – Increas in economic benefits during the accounting period in the form of inflows or

enhancements of asts or decreas of liabilities that result in an increa in equity, other than tho

relating to contributions from equity participants.

Performance obligation – A promi in a contract with a customer to transfer to the customer either:

a) A good or rvice (or a bundle of goods or rvices) that is distinct; or

b) A ries of distinct goods or rvices that are substantially the same and that have the same pattern of

transfer to the customer.

Revenue – Income arising in the cour of an entity’s ordinary activities.

Transaction price (for a contract with a customer) – The amount of consideration to which an entity expects

to be entitled in exchange for transferring promid goods or rvices to a customer, excluding amounts

collected on behalf of third parties.

The revenue model

The standard introduces a revenue model in which the core principle is that an entity should recogni

revenue to depict the transfer of promid goods or rvices to the customer in an amount that reflects the

consideration to which the entity expects to be entitled in exchange for tho goods or rvices.

To recogni revenue the following five steps should be applied:

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Identify the Identify the Determine the Allocate the Recogni

contract(s) performance transaction transaction revenue when

with the obligations in pricepricea performance

customerthe contractobligation is

satisfied

Step 1: Identify the contract(s) with the customer

A contract can be oral, written or implied by an entity’s business practice. A contract with a customer will fall

within the scope of IFRS 15 when all the following criteria are met:

 The parties to the contract have approved the contract;

 Each party’s rights in relation to the goods or rvices to be transferred can be identified;

The model is to be applied on an individual contract basis. However, as a practical expedient, a portfolio

approach is permitted for contracts with similar characteristics provided it is reasonably expected that the

impact on the financial statements will not be materially different from applying this model to the individual

contracts.

A contract modification shall be accounted for as a parate contract if the following conditions are met:

 There is an addition of promid goods or rvices that are distinct and which increas the scope of the

contract; and

 The price of the goods of the contract increas by an amount of consideration that reflects the entity’s

stand-alone lling prices of the additional goods or rvices and any appropriate adjustments to that

price to reflect the circumstances of the particular contract.

Example – Determining whether goods or rvices are distinct

This is an adaptation from IFRS 15, Illustrative examples, Example 11.

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

 Software licence;

 Installation rvice (includes changing the web screen for each ur);

 Software updates; and

 Technical support for 2 years.

The entity lls the above parately. The installation rvice is routinely performed by other entities and does not

significantly modify the software. The software remains functional without the updates and the technical support.

Are the goods or rvices promid to the customer distinct in terms of IFRS 15?

The software is delivered before the other goods or rvices and remains functional without the updates and the technical

support, therefore the entity concludes that the customer can benefit from each of the goods and rvices either on their

own or together with the other goods and rvices that are readily available.

The promi to transfer each good and rvice to the customer is parately identifiable from each other. In particular, the

Example – Volume discount incentive

This is an adaptation from IFRS 15, Illustrative examples, Example 24.

Big Bed enters in a contract with a customer to ll beds for $400 per bed on 1 January 2017. If the customer purchas

more than 1000 beds in a calendar year, the contract states that the price per unit is retrospectively reduced to $380 per

unit. As a result of this the consideration in the contract is variable.

As at 31 March 2017, Big Bed lls 80 beds to the customer, therefore Big Bed estimates that the customer’s purcha will

not exceed the 1000 bed threshold required for the volume discount in the calendar year.

When considering the requirements of IFRS 15 (in particular paragraphs 56 – 58) and the significant experience Big Bed

has with this product and the entity’s purchasing pattern, it was concluded that it is highly probable that a significant reversal

in the cumulative amount of revenue recognid ($400 per bed) will not occur when the uncertainty is resolved (i.e. when the

total amount of purchas is known). Conquently, the entity recognis revenue of $32,000 (80 beds x $400) for the first

quarter ended 31 March 2017.

Example – Allocating a discount to one or more performance obligations

This is an adaptation from IFRS 15, Illustrative examples, Example 34.

A fashion outlet named Fashionable regularly lls scarves, shoes and handbags individually, thereby establishing stand-

alone lling prices as illustrated below.

In addition, Fashionable regularly lls shoes and handbags together for

$60.

Scarf Shoes Handbag

$40 $55 $45

Fashionable enters into a contract with a customer to ll all three

products in exchange for $100. Fashionable will satisfy the performance

obligations for each of the products at different points in time.

The contract includes a discount of $40 on the overall transaction. This

Total = $140

discount will be allocated proportionately to all three obligations when

allocating the transaction price using the relative stand-alone lling price

method. However, becau Fashionable regularly lls shoes and handbags together for $60 and Scarves for $40, it has

evidence that the entire discount should be allocated to the promis to transfer shoes and handbags in accordance with

paragraph 82 of IFRS 15.

If Fashionable transfers control of the shoes and handbags at the same point in time, then Fashionable could as a practical

matter account for the transfer of tho products as a single performance obligation. That is, the entity could allocate $60 of

the transaction price to the single obligation and recogni revenue of $60 when shoes and handbags are simultaneously

transferred to the customer.

If the contract requires Fashionable to transfer the control of the shoes and handbags at different points in time, then the

amount of $60 is individually allocated to the products bad on their stand-alone lling price as follows:

Contract cost

Incremental costs of obtaining a contract

If the entity expects to recover incremental costs of obtaining a contract with a customer, the entity shall

recogni tho costs as an ast. The incremental costs are tho costs that an entity incurs to obtain a

contract that it would not have incurred if the contract had not been successfully obtained, for example, a

sales commission. A practical expedient however exists, allowing the incremental costs of obtaining a

contract to be expend if the amortisation period would be one year or less.

Example – Incremental costs of obtaining a contract

This is an adaptation from IFRS 15, Illustrative examples, Example 36.

A consulting rvices entity, wins a competition bid to provide consulting rvices to a new customer. The following costs

were incurred by the entity to obtain the contract:

$

External legal fees for due diligence 15,000

Travel costs to deliver the proposal 25,000

Commissions paid to sales employees 10,000

Where a customer has paid an amount of consideration prior to the entity transferring the related good or

rvice to the customer, a contract liability will be prented in the statement of financial position.

Where the customer has not yet paid the related consideration for the transfer of a good or rvice, a

contract ast (right to consideration is conditional on something other than the passage of time) or

receivable (right to consideration is unconditional except for the passage of time) is prented in the

statement of financial position. Contract asts and receivables together with any impairment shall be

accounted for in accordance with IFRS 9 Financial Instruments. The difference between the initial

recognition of a receivable and the amount of revenue should be prented as an expen.

Disclosure