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PDF - Revenue From Contract With Customers (IFRS 15)
PDF - Revenue From Contract With Customers (IFRS 15)
Contents
Overview
The 5-step model illustrated by FPT Telecom
Step 1 – Identify the contract(s)
Step 2 – Identify the performance obligation(s) (POs)
Step 3 – Determine the transaction price (TP)
Step 4 – Allocate the TP to POs
Step 5 – Recognize revenue
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Self reading
Overview
Superseded Currently effective
IAS 18 – Revenue IFRS 15 – Revenue from contract
IAS 11 – Construction contracts with customers
SIC 31 – Revenue Barter transaction (Equivalent US GAAP – ASC 606)
involving advertising services
IFRIC 13 – Customer loyalties programs
IFRIC 15 – Agreements for the
construction of real estate
IFRIC 18 – Transfers of assets from
customers
Overview
A customer
“a party that contracts with an entity to obtain goods or services that are an output of the entity’s
ordinary activities in exchange for consideration”
Contractors – But not customers
Lessee (IFRS 16 – Leases; IAS 17 - Lease contract)
Insured party (IFRS 4 – Insurance contracts)
Investors (IAS 27 – Separate financial statements; IAS 28 – Investment in associates
and joint ventures; IFRS 3 – Business combination; IFRS 9 – Financial instruments;
IFRS 10 – Consolidated financial statements; IFRS 11 – Joint arrangements)
Purchaser of PPE (IAS 16), Intangible asset (IAS 38)
Non – monetary exchanges between entities in the same line of business to facilitate
sales to customers or potential customers.
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FPT Telecom
01/02/2018, Ted subscribed for FPT
Telecom’s F6 plan, paid monthly, for 12
months. (Source: Internet)
FPT normally sells the Wi-Fi modem for
VNĐ300.000 and provides the same
network service for VNĐ170.000 per month
without the modem which can be used for
other network providers.
How should FPT Telecom recognize revenue from
the contract with Ted?
Stand-alone selling price: is the price at which the entity would sell a promised good or service
separately to a customer
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• Contract with Ted • Provide Wi-fi • 180,000 x 12 = • Wi-fi modem: • Wi-fi modem: when
modem 2,160,000 VNĐ 276,923 VNĐ transferred
• Network service • Network service: • Network service:
1,883,077 VNĐ monthly
Journal entries
01/02/2018 28/02/2018
Contract asset 276,923 Cash 180,000
Revenue 276,923 Contract asset 23,077
Revenue 156,923
Contract asset: Entity’s right to consideration in exchange for goods or services that
. the entity has transferred to a customer when that right is conditioned on something
other than the passenger of time, for example, the entity’s future performance.
This is not an ordinary trade receivables, but a conditional asset
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Attributes of a contract
*
A contract is an agreement between two or more parties that creates enforceable rights
and obligations.
An entity shall account for a contract with a customer that is within the scope of this
Standard only when all of the following criteria are met:
Parties to the contract have either orthographically or orally approved the contract and
are committed to perform their respective obligations;
The entity can identify each party’s rights regarding the goods or services to be
transferred;
The entity can identify the payment terms for the goods or services to be transferred;
The contract has commercial substance;
It is probable that the entity will collect the consideration to which it will be entitled
in exchange for the goods or services that will be transferred to the customer.
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Contract modification *
• Change in the scope or price (or both) • The contracts are negotiated as a package
of a contract that is approved by the with a single commercial objective;
parties to the contract. • The amount of consideration to be paid in
• Contract modification may exist even one contract depends on the price or
the parties have a dispute. Entity shall performance of the other contract; or
consider all relevant facts and other • The goods or services promised in the
evidence to dertemine the modification. contracts are a single performance obligation.
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Performance obligations
Promise in a contract with a customer to transfer to the customer either distinct
goods/services or series of distinct goods/services.
Distinct can be both explicit (in the contract) and implicit (based on practices or
policies)
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Distinct criteria
• Goods/services is A customer should be able to benefit from the good or service
Nature of capable of being • on its own; or
goods/services distinct. • in combination with other available in-hand resources.
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TP – variable consideration
Transaction price can be fixed or variable.
Why variable? Bonus, discount, rebate, incentive.
How to estimate variable consideration?
• Expected value method – Large number of similar transaction; Or
• The Most likely outcome method – Only 2 possible outcomes
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Not for distinct goods or services, e.g. discount, or refund, reduce the transaction
price
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Self reading
Vendor Y sells two items: product A and telephone support. Product A is a tangible product used in
a production process. Telephone support is available for one year after delivery of all products. On
January 1, Vendor Y enters into an arrangement with Customer U to provide Product A on
February 1.
Telephone support also begins on February 1 and lasts for one year. Total arrangement
consideration is $6,000, due on delivery of product A. Telephone support does not have an
established price and is not sold separately to customers. Assume that the customers do not renew
the telephone support after year 1 (i.e. there are no standalone sales of support). Vendor Y
concludes that it has enough information on past selling prices to customers on Product A to
support a standalone selling price. The majority of sales of product A to customers in the same
region as Customer U were within the range of $5,000 to $5,500. Vendor Y decides to use the
lower end of the range to establish standalone selling price. The telephone support has not been
sold on a standalone basis and will have to be estimated
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Self reading
Adjusted Market Assessment Approach. Under the adjusted market assessment approach, Vendor Y
searches for competitors that sell similar telephone support services on a standalone basis.
Assume that Vendor Y finds information that two competitors are selling these services on a
standalone basis between a price range of $1,200 to $1,500.
Based on this information, Vendor Y should consider the price that it could charge similar
customers based on a number of factors: market share, expected profit margin,
customer/geographic segments, distribution channel, etc. After considering these factors,
Vendor Y estimates that it could sell the telephone services for $1,250 to customers with a
similar profile to Customer U. The estimated standalone selling price would be $1,250
under this approach
Self reading
Expected Cost Plus Margin Approach. Under the cost plus margin approach, Vendor Y determines
all of the direct and indirect costs associated with providing the telephone support. The costs
considered include, but are not limited to, the personnel employed to provide the support,
the costs to provide the telephone lines, the telephones and computer equipment needed to
provide the support, etc. After considering all these costs, Vendor Y concludes that the
telephone support will cost $900. After determining the cost, Vendor Y should determine an
appropriate margin that the market would be willing to pay by considering a number of
factors, including: industry sales price averages, market conditions, profit objectives, margin
achieved on similar products, etc. After considering these factors, Vendor Y determines an
appropriate margin in the industry would be $500. The estimated standalone selling price
would be $1,400 under this approach.
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Self reading
Residual Approach. The residual approach should only be used if (1) the entity does not have an
established price for the telephone support and it has not been sold previously on a
standalone basis or (2) the entity sells the same good or service to multiple customers for a
wide variety of prices (highly variable).
Even if one of the two criteria is met, the company should maximize observable inputs to
make an estimate as illustrated in the adjusted market assessment approach and the expected
cost plus margin approach. If none of these are appropriate, the residual approach can be
used. Under the residual approach, Vendor Y determines the standalone selling price of the
telephone support by reducing the transaction price ($6,000) by the amount of the
observable standalone selling prices, or in this case, Product A ($5,000). The remaining
amount of $1,000 would be considered the standalone selling price of the telephone support
under this approach.
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Revenue recognition
At a point of time Over time
Customer simultaneously receives Control of goods or services is
and consumes as the entity performs transferred over time
Customer controls the asset enhanced
or created by the entity
Entity does not create an asset with
an alternative use and has an
enforceable right to payment.
Contract costs
Cost to obtain a contract Cost to fulfill a contract
Capitalize and amortize in relation to Capitalize if costs relate directly to
revenue recognition. contract, generate/enhance resources
Example: sales commissions, legal used in satisfying performance
fees, bonuses for employee. obligations in the future, and are
expected to recover.
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