IFRS 15 Revenue

Md Mashiur Rahaman ACA

Senior Manager- Finance, Hirdaramani Bangladesh (Kenpark & Regancy)
Agenda
1. The five step model
2. Performance obligations satisfied over time
3. Financing component in the contract
4. Intellectual Property (IP)
5. Repurchase agreements
6. Warranties
7. Principal vs agent
8. Contract modifications
9. Contract costs
10. Presentation and disclosures
The five step model overview
STEP
Identify the contract with a customer
1

STEP
Identify the performance obligation
2

STEP
Determine the transaction price
3

STEP
Allocate the transaction price
4

STEP
Recognise revenue
5
Example-1: Five step model
Question: On 1 December 20X1, Wade receives an order from a customer for a computer as well as 12 months' of technical
support. Wade delivers the computer (and transfer sits legal title) to the customer on the same day.
The customer paid $420 up front. If sold individually, the selling price of the computer is $300 and the selling price of the
technical support is$120.
Required: Apply the 5 stages of revenue recognition, per IFRS15, to determine how much revenue Wade should recognize in the
year ended 31 December 20X1.

Answer of the example:

Step 1 – Identify the contract: There is an agreement between Wade and its customer for the provision of goods and services.

Step 2–Identify the separate performance obligations within a contract: There are two performance obligations (promises)
within the contract:
The supply of a computer
The supply of technical support.

Step 3 – Determine the transaction price: The total transaction price is $420.

Step 4 – Allocate the transaction price to the performance obligations in the contract: Based on standalone selling prices,
$300 should be allocated to the sale of the computer and $120 should be allocated to the technical support.

Step 5– Recognise revenue when (or as) a performance obligation is satisfied: Control over the computer has been passed
to the customers the full revenue of $300 allocated to the supply of the computer should be recognised on 1 December 20X1.
The technical support is provided overtime, so the revenue allocated to this should be recognised over time. In the year ended
. 4
31 December 20X1, revenue of $10 (1/12 × $120) should be recognised from the provision of technical support.
Example-2: Five step model
Question Solution
Shred sells a machine and one The selling price of the machine is $95,000 based on observable evidence.
year’s free technical support for There is no observable selling price for the technical support. Therefore, the stand-
$100,000. The sale of the
machine and the provision of alone selling price needs to be estimated.
technical support have been A residual approach (Balancing) would attribute $5,000 ($100,000 – $95,000) to the
identified as separate technical support. However, this does not approximate the stand-alone selling price of
performance obligations. Shred similar services (which normally make a profit).
usually sells the machine for
A better approach (Proportionate) for estimating the selling price of the support
$95,000 but it has not yet started
selling technical support for this would be an expected cost plus a margin (or mark-up) approach. Based on this, the
machine asast and -alone product. selling price of the service would be $30,000 ($20,000 × 150%).
Other support services offered by The total of standalone selling prices of the machine and support is $125,000
Shred attract a mark-up of 50%. ($95,000 + $30,000). However, total consideration receivable is only $100,000. This
It is expected that the technical
support will cost $20,000. means that the customer is receiving a discount for purchasing a bundle of goods and
services of 20% ($25,000/$125,000).
IFRS 15 assumes that discounts relate to all performance obligations within a contract,
Required: How much of the
transaction price should be unless evidence exists to the contrary.
allocated to the machine and how
much should be allocated to the
technical support? The transaction price allocated to the machine is $76,000 ($95,000 × 80%).
The transaction price allocated to the technical support is $24,000 ($30,000 × 80%).

The revenue will be recognised when (or as) the performance obligations are satisfied.
5
Example-3: Five step model
Question Solution
Golden Gate enters into a contract with a major The payment made to the customer is not in
chain of retail stores. The customer commits to exchange for a distinct good or service.
buy at least $20 million of products over the next Therefore, the $1 million paid to the customer
12 months. The terms of the contract require must be treated as a reduction in the transaction
Golden Gate to make a payment of $1 million to price.
compensate the customer for changes that it will
need to make to its retail stores to accommodate The total transaction price is essentially being
the products. reduced by 5% ($1m/ $20m). Therefore, Golden
Gate reduces the price allocated to each good by
By the 31 December 20X1, Golden Gate has
5% as it is transferred.
transferred products with a sales value of $4
million to the customer.
By 31 December 20X1, Golden Gate should have
Required: How much revenue should be recognised revenue of $3.8 million ($4m × 95%).
recognized by Golden Gate in the year ended 31
December 20X1?

6
Financing component in a contract (example)
Question Solution
Rudd enters into a contract Due to the length of time between the transfer of control of the asset and the payment
with a customer to sell date, this contract includes a significant financing component.
equipment on 31 The consideration must be adjusted for the impact of the financing transaction. A discount
rate should be used that reflects the characteristics of the customer i.e. 10%.
December 20X1. Control
Revenue should be recognised when the performance obligation is satisfied.
of the equipment transfers As such revenue, and a corresponding receivable, should be recognized at $826,446 ($1m
to the customer on that × 1/1.102) on 31 December 20X1.
date. The price stated in The receivable is subsequently accounted for in accordance with IFRS 9 Financial
the contract is $1 million Instruments i.e recognize finance income subsequently over the periods.
and is due on 31 December Journal:
20X3. 31 Dec 20X1:
Receivable Dr $826,446
Market rates of interest Revenue Cr $826,446
available to this particular 31 Dec 20X2:
customer are 10%. Receivable Dr $82,645
Finance income Cr $82,645
Required: Explain how this
transaction should be 31 Dec 20X3:
accounted for in the Receivable Dr $90,909
financial statements of Finance income Cr $90,909
Rudd.
(At 31 Dec 20x 3, Receivable $826,446+ $82,645+ $90,909=1000,000)
Performance obligations satisfied over time
Criteria for recognizing over the time (one of the following)
✓ Customer simultaneously receives and consumes the benefits as the entity performs. (Another entity not to
substantially re-perform)
✓ The customer controls the asset as the entity creates or enhances it. (Control over WIP)
✓ The entity’s performance does not create an asset with an alternate use and there is a right to payment
for performance to date.

Measuring performance over time

Input method Output Method

✓ Cost incurred, ✓ Surveys,
✓ Labour Hours, ✓ Milestones
reached,
✓ Machine
Hours ✓ Unit delivered

8
Example-1: Performance obligations satisfied over time

Question Solution
Fiskerton has entered into a sales contract for the At the inception of the contract, Fiskerton must
construction of an asset with a customer whereby determine whether its promise to construct the
the customer pays an initial deposit. The deposit asset is a performance obligation satisfied over
is refundable only if Fiskerton fails to complete time. Fiskerton only has rights during the
the construction of the asset. The remainder is production of the asset over the initial deposit
payable on delivery of the asset. If the customer paid. They have no enforceable rights to the
defaults on the contract prior to completion, remaining balance as construction takes place.
Fiskerton has the right to retain the deposit. The Therefore they would not be able to receive
managing director believes that, as completion of payment for work performed to date. Additionally,
the asset is performed over time, revenue should Fiskerton has to repay the deposit should they
be recognised accordingly. He has persuaded the fail to complete the construction of the asset in
accountant to include the deposit and a percentage accordance with the contract. There is a single
of the remaining balance for construction work in performance obligation which is only met on
revenue to date. delivery of the asset to the customer. Revenue
should not be recognised on a stage of completion
basis but must be deferred and recognised at a
point of time. That is on delivery of the asset to
the customer.
9
 Example-2: Performance obligations satisfied over time
Question Solution
On 31 March 20X1, Crawford In assessing whether revenue is recorded over time, it is
enters into a contract to construct important to note that the factory under construction is
a specialized factory for a
Same as previous one

specialised. Therefore, the asset being created has no

customer. The customer paid an
upfront deposit which is only alternative use to the entity.
refundable if Crawford fails to
complete construction in line with However, Crawford only has an enforceable right to the deposit
the contract. The remainder of the received and therefore does not have a right to payment for
price is payable when the customer work completed to date.
takes possession of the factory. If
the customer defaults on the
contract before completion of the Consequently, Crawford must account for the sale of the unit as
factory, Crawford only has the right a performance obligation satisfied at a point in time, rather than
to retain the deposit. over time.

Required: Should Crawford

Revenue will most likely be recognised when the customer
recognize revenue from the above
transaction overtime or at a point takes possession of the factory (although a detailed
in time? assessment should be made of the date when the customer
assumes control). 10
Example-3: Performance obligations satisfied over time
Question:
On 1 April 20X7, Pardew pie, a construction company, began work on a project which was expected to take 18 months
to complete. The contract price was agreed at £21 million and total contract costs were estimated to be £16 million.
Pardew pie uses independent quantity surveyors to certify the cumulative sales value of construction work at the end
of each month . The accounting policy of Pardew is to consider the outcome of contracts to be capable of reliable
estimation when they are at least 40% complete.
At 31 December 20X7 amounts relating to the contract were as follows:

Certified sales value of work completed 14,700

Invoices raised to customer 13,000

Progress payment received 11,500

Contract costs incurred 12,000

Estimate of additional contract costs to complete 6,000

a) Explain, with calculations where appropriate, how the amounts in respect of this contract should be presented
in the statement of profit or loss and statement of financial position of Pardew pie for the year to 31
December 20X7 if the stage of completion of the contract is calculated by reference to the following:
➢ Contract costs incurred as a proportion of total estimated contract costs
➢ The certified sales value of the work completed as a proportion of the total contract price.
b) Explain briefly why the two accounting policies result in different amounts in the 20X7 financial statements.
11
Example-3 Performance obligations satisfied over time
Solution:
o Although contract costs originally estimated at £16 million are now estimated at £18 million (12,000 + 6,000), the
contract is still estimated to generate a profit of £3 million (21,000 - 18,000). Contract revenue and expenses should be
recognised by the stage of completion method.
o Using the contract costs method (input method), the contract is 2/3 (12,000 as a proportion of 18,000) complete, in
excess of the 40% cut-off point. So 2/3 of contract revenue and contract profit should be recognised in profit or
loss, so £14 million (2/3 x 21,000) and £2 million (2/3 x 3,000) respectively.
o In the statement of financial position, gross amounts due from customers should be presented as contract costs incurred
plus recognised profits less invoices raised to customers (see below for calculations). Trade receivables should include
£1.5 million (13,000 invoiced less 11,500 payments received).
o Using the certified sales value method (output method), the contract is 70% (14,700 as a proportion of 21,000)
complete, in excess of the 40% cut-off point. So contract revenue of £14.7 million should be recognised in profit or
loss, together with cost of sales of £12 million (the costs incurred). A profit of £2.7 million should be recognised.
o In the statement of financial position, gross amounts due from customers should be presented in the same
way as for the contract costs method (see below for calculations) and trade receivables should include
the same £1.5 million.
12
Example-3: Performance obligations satisfied over time
Statement of financial position Contract costs Work certified
Statement of profit Contract costs£'000 Work certified£'000 Gross amount receivable from
or loss customer
12,000 12,000
Revenue 14,000 14,700 Costs incurred
Cost of sales (12,000) (12,000) Recognised profits 2,000 2,700
14,000 14,700
Profit 2,000 2,700 (13,000) (13,000)
Invoices raised to customer
Progress billings 1,000 1,700
Trade receivables (13,000-11,500) 1,500 1,500

An alternative presentation of profit and cost of sales under the work certified basis would be to calculate cost of sales as a proportion of total
expected costs, rather than actual costs incurred to date:
Statement of financial position Work certified
Gross amount due from
Statement of profit or loss Work certified customers
Revenue 14,700
Cost of sales (18m x 0.7) (12,600) Cost incurred 12,000
Profit 2,100 Recognized profit 2,100
14100
Invoices raised to customer (13000)
Progress billing 1100

(b) The contract costs method assumes that the same profit margin is earned on all parts of a construction contract. The certified sales method can,
and in this instance does, take account of the margin on certain parts of a contract being higher than on others, perhaps because the customer places a
higher value on those parts.

Point to note:
Over the life of the contract, the profit is the same under both methods; it is just its allocation to the reporting periods in which work is done which is
different.
13
Licences of intellectual property
STEP

2
Is the licence distinct from other goods or services in the contract?

No Yes

Apply revenue recognition

criteria to the combined Assess nature of licence
bundle

Provides right Provides

to access right to use
STEP Revenue recognition
5 depends on items in the
bundle
Over time Point in time
Sales with a right of return
When an entity makes a sale with a right of return it recognises

Asset for carrying

Revenue net of Liability for expected amount of expected
expected return return less recovery cost

Expected return are estimated using the variable consideration guidance

Example-1:Sales with a right of return
Question Solution
Nardone enters into 50 contracts The fact that the customer can return the product means that the consideration is
with customers. Each contract variable.
includes the sale of one product for Using an expected value method, the estimated variable consideration is $48,000
(48 products × $1,000). The variable consideration should be included in the
$1,000. The cost to Nardone of each transaction price because, based on Nardone’s experience, it is highly probable that
product is $400. Cash is received a significant reversal in the cumulative amount of revenue recognised ($48,000) will
upfront and control of the product not occur.
transfers on delivery. Customers can Therefore, revenue of $48,000 and are fund liability of $2,000($1,000×2
return the product within 30 days to products expected to be returned) should be recognised.
receive a full refund. Nardone can Nardone will derecognize the inventory transferred to its customers. However, it
sell the returned products at a should recognise an asset of $800 (2 products × $400), as well as a corresponding
profit. credit to cost of sales, for its right to recover products from customers on settling
the refund liability.
Nardone has significant experience
in estimating returns for this Journal:
product. It estimates that 48 1. Bank Dr. 50,000
products will not be returned. Revenue Cr. 48,000
Describe accounting issues as per Refund liability Cr. 2,000
IFRS-15

2. Inventory Dr. 800

COGS Cr. 800 16
Repurchase agreements: forwards and call options

Forward
Call option
(i.e. a seller’s obligation
(i.e. a seller’s right to
to repurchase the
repurchase the asset)
asset)
The customer does not obtain control of the
asset

Asset repurchased for less than original selling price?

Yes No

Lease arrangement Financing arrangement

Change from risk and rewards approach to transfer of

control approach
Repurchase agreements: Details
Repurchase agreements generally come in three forms:
a. an entity’s obligation to repurchase the asset (a forward);
b. an entity’s right to repurchase the asset (a call option); and
c. an entity’s obligation to repurchase the asset at the customer’s request (a put option).
A forward or a call option: The entity shall account for the contract as either of the following:
(a) a lease in accordance with IFRS 16 Leases if the entity can or must repurchase the asset for an amount that is less than the
original selling price of the asset, unless the contract is part of a sale and leaseback transaction. If the contract is part of a sale
and leaseback transaction, the entity shall continue to recognise the asset and shall recognise a financial liability for any
consideration received from the customer. The entity shall account for the financial liability in accordance with IFRS 9; Or
(b) a financing arrangement, if the entity can or must repurchase the asset for an amount that is equal to or more than the
original selling price of the asset.

A put option:
a. If the customer does not have a significant economic incentive to exercise its right at a price that is lower than the original
selling price of the asset, the entity shall account for the agreement as if it were the sale of a product with a right of return.

b. If the repurchase price of the asset is equal to or greater than the original selling price and is more than the expected market
value of the asset, the contract is in effect a financing arrangement.
Warranties
Does the customer have the option to purchase the Yes
warranty separately? STEP

Performance obligation 2

No
STEP
Are services in addition to assurance that the product Yes
(i.e. service warranty) 4
complies with agreed specifications provided as part of
warranty?
No

Not a separate performance obligation

(i.e. assurance warranty) Apply
IAS 37
Warranties Apply
IAS 37
Factors to consider when making the assessment:

Is it required by law? Length of the warranty? What tasks are performed?

If a customer does not have the option to purchase a warranty separately, an entity shall account for the warranty in
accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets
✓ Whether the warranty is required by law—if the entity is required by law to provide a warranty, the existence of
that law indicates that the promised warranty is not a performance obligation because such requirements typically
exist to protect customers from the risk of purchasing defective products.
✓ The length of the warranty coverage period—the longer the coverage period, the more likely it is that the
promised warranty is a performance obligation because it is more likely to provide a service in addition to the
assurance that the product complies with agreed-upon specifications.
✓ The nature of the tasks that the entity promises to perform—if it is necessary for an entity to perform specified
tasks to provide the assurance that a product complies with agreed-upon specifications (for example, a return
shipping service for a defective product), then those tasks likely do not give rise to a performance obligation.
Warranties – example
Car manufacturer N sells to Customer A

Car Standard warranty: Extended warranty:

3 years or 36,000 miles extra 3 years or up to 70,000
miles for CU5,000

How many performance obligations are there in the contract?

Warranties – example solution
Performance obligations

AND

Car and standard warranty Extended warranty

▪ The customer has the option to

Standard warranty is an assurance purchase the extended warranty
type warranty separately.

Apply ▪ The extended warranty provides

IAS 37 additional services to the customer.
Principal versus agent
Acting as principal
An entity is acting as a principal when individually or in combination perform followings:

Discretion to
establish prices Primary
for specified responsibility to
goods or services provide specified
Inventory risk goods or services Credit risk

Acting as agent
An entity is acting as an agent when it is not exposed to the significant risks and rewards associated with the sale of goods or
rendering of services. One feature that indicates that an entity is an agent is that the amount the entity earns is predetermined, eg,
fixed fee per transaction or percentage of amount billed to the customer.

When Principal:
Entire sales price as revenue
Accounting Treatment
When Agent:
Only commission as revenue Commission
Customer options and unexercised rights
Does the option provide a material right the customer would
Customer options for otherwise not receive?
additional goods or services
Yes – account for as a performance obligation. Revenue
(e.g. sales incentives, loyalty recognised when future goods or services transferred or
points, contract renewal options) option expires.

Expect to be entitled to breakage amount?

Customers’ unexercised
rights (breakage) Yes – recognise breakage No – recognise as revenue
amount as revenue in when likelihood
(e.g. gift vouchers, non- proportion to pattern of of customer exercise
refundable tickets) rights exercised. becomes remote.
Example-1 Customer options and unexercised rights
Example:
During the year ABC introduced a customer loyalty scheme. For every $100 that a customer spends they receive 100 points.
The points can be redeemed against future purchases that the customer makes. 100 points will allow the reduction of $10
from the normal price. The points have to be redeemed within two years. It is expected that only 60% of the points will be
redeemed. Since the loyalty scheme has been introduced revenue has been $200,000 which initially recognized as revenue. By
the reporting date customers have redeemed 50,000 points. When preparing the financial statements the finance director has
made no accounting adjustments in respect of the loyalty scheme. What will be adjusting journal at year end as per IFRS 15?

Solution
Value of all entitled points = $(200,000x10/110) = $18,182
Total estimated points is to be redeemed = 200,000x60% = 120,000 points
Points already redeemed = 50,000 points
Points which yet to be redeemed = (120,000-50,000) = 70,000 points
Deferred Revenue for the points which yet to be redeemed = $(18,182x70,000/200,000) = $6,364
Therefore Revenue is to be recognized for the period = $(200,000- 6,364) = $193,636

Journal:
Revenue Dr. $6,364
Deferred Revenue Cr. $6,364
25
Non-refundable fees and customer acceptance
Does the fee relate to the upfront transfer of a promised good or
service?
Non-refundable upfront fees

(e.g. joining fees, activation fees,

setup fees) No – advance payment for future goods or services.

Can the entity objectively determine that control of a good or service

Customer acceptance has been transferred in accordance with the contract?
(e.g. trial period, cancellation
clauses or remedial action that Consider the entity’s experience with similar contracts,
can be taken by a customer) remaining performance obligations.
 Consignment and bill and hold arrangements

Is delivered inventory still controlled by the entity? (e.g. control not

Consignment arrangements
transferred until sale or expiry of a specified period)?
(e.g. delivery to a dealer or
distributor prior to sale end to Yes – revenue is not recognised on delivery of the products to
customer) the intermediary.

Consider whether:
Bill and hold arrangements ▪ The reason for arrangement is substantive.
▪ The product is separately identified.
(i.e. entity bills customer but ▪ The product is ready for physical transfer.
retains physical possession) ▪ The entity does not have the ability to use the product or direct it
to another customer.
Example:Consignment and bill and hold arrangements

Question Solution
On 31 December 20X1, Clarence delivered The performance obligation is not satisfied over time because the
the January edition of a magazine (with a supermarket does not simultaneously receive and benefit from the asset.
total sales value of $100,000) to a Clarence therefore satisfies the performance obligation at a point in time
supermarket chain. Legal title remains with and will recognise revenue when it transfers control over the assets to the
Clarence until the supermarket sells a supermarket.
magazine to the end consumer. The
supermarket will start selling the magazines The fact that the supermarket has physical possession of the magazines
to its customers on 1 January 20X2. Any at 31 December 20X1 is an indicator that control has passed.
magazines that remain unsold by the Also, Clarence will invoice the supermarket for any issues that are stolen
supermarket on 31January 20X2 are and so the supermarket does bear some of the risks of ownership.
returned to Clarence.
However, as at 31 December 20X1, legal title of the magazines has not
The supermarket will be invoiced by passed to the supermarket. Moreover, Clarence has no right to receive
Clarence in February 20X2 based on the payment until the supermarket sells the magazines to the end consumer.
difference between the number of issues
they received and the number of issues Finally, Clarence will be sent any unsold issues and so bears significant
that they return.
risks of ownership (such as the risk of obsolescence).
All things considered, it would seem that control of the magazines has not
Required: Should Clarence recognize passed from Clarence to the supermarket chain. Therefore, Clarence
revenue from the above transaction in the should not recognise revenue from this contract in its financial statements
year ended 31 December20X1?
for the year ended 31 December 20X1.

28
Contract modifications
Is the contract modification No Do not account for contract
approved? modification until approved

Yes

Does it add distinct goods or

services that are priced No Are the remaining goods or services
commensurate with their stand- distinct from those already transferred?
alone selling prices?
Yes No
Yes

Account for as
Account for as separate termination of existing Account for as part of
contract contract and creation of the original contract
new contract
Contract costs
Costs to obtain a contract Costs to fulfil a contract

Capitalise incremental costs if: Capitalise as fulfilment costs if:

Incurred only as result of

✓
Not in the scope of
obtaining the contract
✓ another standard

✓ Recovery is expected
✓ Directly related

Generate or enhance
(e.g. sales commission)
✓ resources

✓
Practical Amortisation period < 1 year? Recovery is expected
expedient Expense costs as incurred
Costs to fulfil a contract
✓ 
Direct costs that are eligible for Costs to be expensed when incurred
capitalisation if other criteria are met
General and administrative costs – unless
Direct labour (e.g. employee wages) explicitly chargeable under
the contract
Costs that relate to satisfied performance
Direct materials (e.g. supplies)
obligations

Allocation of costs that relate directly to the Costs of wasted materials, labour, or other
contract (e.g. depreciation and amortisation) contract costs

Cost that are explicitly chargeable to the

customer under the contract
Costs that do not clearly relate to unsatisfied
Other costs that were incurred only because performance obligations
the entity entered into the contract (e.g.,
subcontractor costs)
Amortisation and impairment
Amortisation period
▪ Systematic basis consistent with the pattern of transfer.
▪ Considers anticipated contracts (e.g. renewal options).

Impairment

Remaining Costs directly related

Carrying
amount
 consideration amount − to providing goods or
expected to be services
received
If conditions improve, impairment can be reversed
Presentation
Contract asset or contract liability is recognised when the:
• Entity performs by transferring goods or services; or
• Customer performs by paying consideration to entity.

(net) contract asset (net) contract liability

Rights and obligations
if rights > obligations if obligations > rights

Receivable Capitalised contract costs

Presented Separate
Unconditional right Distinguished from
according to presentation from
to consideration contract assets
nature or function contract assets
Disclosure
Objective: help users understand the nature, amount, timing and uncertainty of revenue and cash
flows arising from contracts with customers.

Significant judgements and changes

Contracts with customers
in judgements
Determining the timing of satisfaction of
Disaggregation of revenue
performance obligations

Changes in contract assets, liabilities and costs Determining the transaction price

Determining amounts allocated to

Performance obligations
performance obligations

Assets recognised from the costs to obtain or fulfil a contract

 Thank you

Md Mashiur Rahaman ACA

Senior Manager- Finance, Hirdaramani Bangladesh (Kenpark & Regancy)
Former Assistant Manger, Accounts, AKG
Former Associate, Audit and Advisory, KPMG Bangladesh
Cell: 01830-034856
mashiurrahamanctg90@gmail.com