Saturday, September 5, 2015

IFRS 15 Revenue from Contracts with Customers

Overview:
IFRS 15 Revenue from the Contracts with Customers was issued on 28 May 2014. It supersedes:
-IAS 18 Revenue
-IAS 11 Construction contracts
IFRS 15 will improve comparability of reputed revenue over  a range of industries, companies and geographical areas globally.
Effective date:
IFRS 15 is effective for annual periods beginning on or after 1 January 2017 with early application permitted.
Objective:
This IFRS 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 customers
Scope:
The new revenue model would apply to all contracts except leases, insurance contracts, financial instruments, guarantees and certain non-monetary exchanges.
Key definitions:
Contract-An agreement between two or more parties that creates enforceable rights and obligations.
Income-Increases in economic benefits during the accounting period in the form of increasing assets or decreasing liabilities
Performance obligation-A promise in a contract to transfer to the customer either:
- a good or service 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.
Revenue-Income arising in the course of an entity’s ordinary activities.
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.
Revenue Recognition - IFRS 15 - 5 steps
Step 1: Identify the contract(s) with a customer
-The contract must be approved by all involved
-Everyone’s rights can be identified
-It must have commercial substance

-The consideration will probably be paid
Step 2: Identify the separate performance obligations in the contract
-This will be goods or services promised to the customer
-These goods / services need to be distinct and create a separately identifiable obligation
  Distinct means:
      -The customer can benefit from the goods/service on its own AND
      -The promise to give the goods/services is separately identifiable (from other promises)
  Separately identifiable means:
      -No significant integrating of the goods/service with others promised in the contract
      -The goods/service doesn’t significantly modify another good or service promised in the contract.
      -The goods/service is not highly related/dependent on other goods or services promised in the contract.
Step 3: Determine the transaction price
How much the entity expects, considering past customary business practices
Variable Consideration
If the price may vary (eg. possible refunds, rebates, discounts, bonuses, contingent consideration etc) - then estimate the amount expected.
However variable consideration is only included if it’s highly probable there won’t need to be a significant revenue reversal in the future (when the uncertainty has been subsequently resolved)
However, for royalties from licensing intellectual property - recognise only when the usage occurs
Step 4: Allocate the transaction price to the separate performance obligations
If there’s multiple performance obligations, split the transaction price by using their standalone selling prices. (Estimate if not readily available)
How to estimate a selling Price
- Adjusted market assessment approach
- Expected cost plus a margin approach
- Residual approach (only permissible in limited circumstances).
If paid in advance, discount down if it’s significant (>12m)
Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation
Revenue is recognised as control is passed, over time or at a point in time.
This could be over time or at a specific point in time.
What is Control
It’s the ability to direct the use of and get almost all of the benefits from the asset.
This includes the ability to prevent others from directing the use of and obtaining the benefits from the asset.
Benefits could be:
- Direct or indirect cash flows that may be obtained directly or indirectly
- Using the asset to enhance the value of other assets;
- Pledging the asset to secure a loan
- Holding the asset.
So remember we recognise revenue as asset control is passed (obligations satisfied) to the customer
This could be over time or at a specific point in time.
To be Continued.....
Sources: www.acowtancy.com, PKF other online resources

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