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IFRS 15 Revenue from Contracts with Customers - PKF

S U M M A R Y IFRS 15 Revenue from Contracts with Customers 1 Overview IFRS 15 Revenue from Contracts with Customers was issued on 28 May 2014. It supersedes: 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 Assets 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 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 . Scope The new Revenue model would apply to all Contracts with Customers except leases, insurance Contracts , financial instruments, guarantees and certain non-monetary exchanges.

IFRS 15 Revenue from Contracts with Customers 2 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 services that are an output of the ...

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Transcription of IFRS 15 Revenue from Contracts with Customers - PKF

1 S U M M A R Y IFRS 15 Revenue from Contracts with Customers 1 Overview IFRS 15 Revenue from Contracts with Customers was issued on 28 May 2014. It supersedes: 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 Assets 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 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 . Scope The new Revenue model would apply to all Contracts with Customers except leases, insurance Contracts , financial instruments, guarantees and certain non-monetary exchanges.

2 The sale of non-monetary financial assets, such as property, plant and equipment, real estate or intangible assets will also be subject to some of the requirements of the new model. A contract with a customer may be partially within the scope of IFRS 15 and partially within the scope of another standard, in which case: If the other standards specify how to separate and/or initially measure one or more parts of the contract , then an entity shall apply those separation and measurement requirements first. The transaction price is then reduced by the amounts that are initially measured under other standards. If other standards do not provide guidance on how to separate and/or initially measure one or more parts of the contract , then IFRS 15 will be applied. Effective date IFRS 15 is effective for annual periods beginning on or after 1 January 2017 with early application permitted.

3 It applies to existing Contracts that are not yet complete as of the effective date and new Contracts entered into on or after the effective date. Therefore, in the first year of adoption, the current year figures will be measured and disclosed as if the new Revenue model had always been applied. IFRS 15 Revenue from Contracts with Customers 2 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 services that are an output of the entity s ordinary activities in exchange for consideration. 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 Performance obligation A promise in a contract with a customer to transfer to the customer either: a) A good or service (or a bundle of goods or services) that is distinct; or b) A series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer . Revenue Income arising in the course 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 promised goods or services 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 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.

5 To recognise Revenue the following five steps should be applied: 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 services to be transferred can be identified; The payment terms and conditions for the goods or services to be transferred can be identified; The contract has commercial substance; and The collection of an amount of consideration to which the entity is entitled to in exchange for the goods or services is probable. If the above criteria are met, a contract shall not be re-assessed unless there is an indication of a significant change in facts or circumstances, however if the contract does not meet the above criteria the entity will continue to re-assess the contract going forward to determine whether the criteria are subsequently met.

6 STEP 1 Identify the contract (s) with the customerSTEP 2 Identify the performance obligations in the contractSTEP 3 Determine the transaction priceSTEP 4 Allocate the transaction priceSTEP 5 Recognise Revenue when a performance obligation is satisfied IFRS 15 Revenue from Contracts with Customers 3 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 separate contract if the following conditions are met: There is an addition of promised goods or services that are distinct and which increases the scope of the contract ; and The price of the goods of the contract increases by an amount of consideration that reflects the entity s stand-alone selling prices of the additional goods or services and any appropriate adjustments to that price to reflect the circumstances of the particular contract .

7 If the above conditions are not met, a contract modification will be accounted for prospectively or retrospectively (depending on whether the remaining goods or services to be delivered after the modification are distinct from those delivered prior to the modification) by modifying the accounting for the current contract with the customer . Step 2: Identify the performance obligations in the contract At contract inception, an entity shall assess the goods or services that have been promised to the customer , and shall identify as a performance obligation: A good or a 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 . A good or service is distinct if the following criteria are met: The customer can benefit from the good or service on its own or together with other readily available resources; and The entity s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract .

8 A series of distinct goods or services has the same pattern of transfer to the customer if the following criteria are met: Each distinct good or service that the entity promises to transfer consecutively to the customer would be a performance obligation that is satisfied over time; and 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 . Factors for consideration as to whether an entity s promise to transfer the good or service to the customer is separately identifiable include, but are not limited to: The entity does not provide a significant service of integrating the good or service with other goods or services promised in the contract . The good or service does not significantly modify or customize another good or service promised in the contract .

9 The good or service is not highly dependent on or highly interrelated with other goods or services promised in the contract . IFRS 15 Revenue from Contracts with Customers 4 Step 3: Determine the transaction price The transaction price would be the amount of consideration that an entity expects to be entitled to in exchange for transferring promised goods or services to a customer . An entity will consider the terms of the contract and past customary business practices when making this determination. If a contract contains a variable amount, the entity will estimate the amount to which it will be entitled under the contract . The consideration can also vary if an entity s right to consideration is contingent on the occurrence of a future event. The variable consideration is only included in the transaction price to the extent that it is highly probable that a significant reversal in the amount of cumulative Revenue recognised will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

10 An adjustment for the time value of money is made to a transaction price for the effects of financing, if present and significant to the contract , for example, where a consideration is paid in advance or in arrears. A practical expedient is available where the interval between the transfer of promised goods or services and the payment by the customer is expected to be less than 12 months. Examples of where a variable consideration can arise Discounts Rebates Refunds Credits Price concessions Incentives Performance bonuses Penalties Example Determining whether goods or services 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 service (includes changing the web screen for each user); Software updates; and Technical support for 2 years.


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