HKFRS 15 Revenue - Nelson CPA

1 17/11/20161 2013 2016 Nelson Consulting Limited1 HKFRS 15 Revenuefrom Contracts with Customers (Part 1)16 November 2016 LAM Chi Yuen Nelson FCPA(Practising), CFA Charter HolderMBA MSc BBA ACIS ACS CGMA CPA( ) CTA FCA FCCA FCPA(Aust.) FHKIoDFSCA FTIHK MHKSI 2013 2016 Nelson Consulting Limited2 HKFRS 15 Issued in 2014 HKFRS 15 establishes a comprehensive framework for determining whento recognise Revenue and how muchrevenue to recognise. The core principle is that an entity recognises Revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services Under HKFRS 15, an entity applies a 5 step approachin recognising revenueStep 5: Recognise Revenue when or as performance obligation is satisfiedStep 4: Allocate the transaction priceStep 3: Determine the transaction priceStep 2: Identify the performance obligationsStep 1.

2 Identify the contract with a customer17/11/20162 2013 2016 Nelson Consulting Limited3 HKFRS 15 Issued in 2014 Effective Date An entity shall apply HKFRS 15 for annual reporting periods beginning on or after 1 January 20172018. (HKICPA Update No. 174) Earlier application is permitted. If an entity applies HKFRS 15, it shall disclose that 5: Recognise Revenue when or as performance obligation is satisfiedStep 4: Allocate the transaction priceStep 3: Determine the transaction priceStep 2: Identify the performance obligationsStep 1: Identify the contract with a customer 2013 2016 Nelson Consulting Limited4 HKFRS 15 Issued in 2014 HKFRS 15 supersedes the following Standards:a.

3 HKAS 11 Construction Contractsb. HKAS 18 Revenuec. HK(IFRIC) Int13 Customer Loyalty Programmesd. HK(IFRIC) Int15 Agreements for the Construction of Real Estatee. HK(IFRIC) Int18 Transfers of Assets from Customersf. HK(SIC) Int31 Revenue Barter Transactions Involving Advertising ServicesStep 5: Recognise Revenue when or as performance obligation is satisfiedStep 4: Allocate the transaction priceStep 3: Determine the transaction priceStep 2: Identify the performance obligationsStep 1: Identify the contract with a customer17/11/20163 2013 2016 Nelson Consulting Limited5 Contents in HKFRS 15 Issued in 2014A.

4 Objective B. ScopeC. Recognition Identifying the contract (Step 1) Identifying performance obligations (Step 2) Satisfaction of performance obligations (Step 5)D. Measurement Determining the transaction price (Step 4) Allocating the transaction price to performance obligations (Step 5)E. Contract costsF. Presentation G. Disclosure Topics of Today, Part 1 More complicated in Part 2 Full set of presentation (with colour) can be found 2013 2016 Nelson Consulting Limited6 Brief Summary of ChangesExisting PracticeHKFRS 15 Using IAS 11and18, IFRICInt. 13, 15, and 18, and SIC 31 Using HKFRS 15, one standard only Inconsistent and diversifiedpractices Singleand unified 5 steprevenue recognition model Risk and reward approach in satisfyingrecognition Control approach in satisfyingthe performance obligation Limited guidance onmultiple element arrangements, variable consideration, licences and etc.

5 More guidanceon separating elements, allocating the transaction price, licences, and etc. New estimates and judgements required New set of disclosure requirements17/11/20164 2013 2016 Nelson Consulting Limited7 There is an assessment that the steps in 5 step model may be most likely to affect the following specific industries:Brief Summary of ChangesAdapted from KPMG s First Impression on IFRS 15 issued in June 2014 2013 2016 Nelson Consulting Limited8A. Objective The objective of HKFRS 15 is to establish the 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 ( HKFRS ) To meet the objective The core principle of HKFRS 15 is that an entity shall recognise Revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

6 ( HKFRS ) When applying HKFRS 15, an entity shall consider the terms of the contract and all relevant facts and circumstances apply HKFRS 15, including the use of any practical expedients, consistently to contracts with similar characteristics and in similar circumstances. ( HKFRS )17/11/20165 2013 2016 Nelson Consulting Limited9A. Objective HKFRS 15 specifies the accounting for an individual contractwith a customer However, as a practical expedient, an entity may applyHKFRS 15to a portfolio of contracts(or performance obligations) with similar characteristics if the entity reasonably expectsthat the effects on the financial statements of applying HKFRS 15 to the portfolio would not differ materiallyfrom applying HKFRS 15 to the individual contracts (or performance obligations)

7 Within that portfolio When accounting for a portfolio, an entity shall use estimates and assumptions that reflect the size and composition of the portfolio. ( HKFRS ) 2013 2016 Nelson Consulting Limited10B. Scope An entity shall apply HKFRS 15 to all contracts with customers, except the following: lease contractswithin the scope of HKAS 17 Leases; insurance contractswithin the scope of HKFRS 4 Insurance Contracts; financial instruments and other contractual rights or obligationswithin the scope of HKFRS 9 Financial Instruments, (or HKAS 39 if HKFRS 9 not yet applied) HKFRS 10 Consolidated Financial Statements, HKFRS 11 Joint Arrangements, HKAS 27 Separate Financial Statementsand HKAS 28 Investments in Associates and Joint Ventures.

8 And non monetary exchangesbetween entities in the same line of businessto facilitate salesto customers or potential customers For example, HKFRS 15 would not apply to a contract between two oil companies that agree to an exchange of oil to fulfil demand from their customers in different specified locations on a timely basis. ( )17/11/20166 2013 2016 Nelson Consulting Limited11B. Scope An entity shall apply HKFRS 15 to a contract (other than a contract listed above) only if the counterparty to the contract is a customer. ( HKFRS ) HKFRS 15 defines: A contractis an agreement between two or more parties that creates enforceable rights and obligations A customeris 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 2013 2016 Nelson Consulting Limited12B.

9 ScopeExample A counterparty to the contract would not be a customer if, for example, the counterparty has contracted with the entity to participate in an activity or processin which the parties to the contract share in the risks and benefitsthat result from the activity or process (such as developing an asset in a collaboration arrangement) rather than to obtain the output of the entity s ordinary activities. ( HKFRS )17/11/20167 2013 2016 Nelson Consulting Limited13B. Scope A contract with a customer may be partially within the scope of HKFRS 15 and partially within the scope of other Standards outside the HKFRS 15 scope a.

10 If the other Standards specify how to separate and/or initially measureone or more parts of the contract, then an entity shall first apply the separation and/or measurement requirements in those Standards An entity shall exclude from the transaction price the amount of the part (or parts) of the contract that are initially measured in accordance with other Standards and shall apply HKRS 86 to allocate the amount of the transaction price that remains (if any) to each performance obligation within the scope of HKFRS 15 and to any other parts of the contract identified as point (b) belowb. If the other Standards do not specify how to separate and/or initially measureone or more parts of the contract, then the entity shall apply HKFRS 15to separate and/or initially measure the part (or parts) of the contract ( HKFRS ) 2013 2016 Nelson Consulting Limited14B.