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IFRS 15 – Revenue from

contract with customers
Effective date: 1 January 2018

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Superseded Currently effective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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The 5-step model – Illustrated by fpt telecom

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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The 5-step model – Illustrated by FPT Telecom

Identify the Determine Allocate TP Revenue

Identify POs
contracts the TP to POs recognition

• 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

FPT Telecom – Journal entries

POs Stand-alone selling price Allocating PT to Revenue Billing
(SASP) POs
Wi-fi modem 300,000 276,923 276,923 0
Network services 170,000 x 12 = 2,040,000 1,883,077 156,923 180,000
Total 2,340,000 2,160,000

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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Step 1 – Identify the contract(s)

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 *

Contract modification Contract combination

• 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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Termination of old contract;

Creation of new contract

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Step 2 – identify performance obligation(s)

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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Explicit vs. Implicit obligations – Illustrated example: ABC Co *

ABC Corp., producer of cleaning machines, sells their cleaning machines to various companies.
Determine the performance obligations in the following contracts:
1) In contract with the client A, ABC promises to deliver 10 cleaning machines for total price of CU 200
000. The contract A contains a clause about free repair and maintenance service within 2 years after
purchase.
2) In contract with the client B, ABC promises to deliver 5 cleaning machines for total price of CU 100
000. No warranty is promised in the contract, however, ABC Corp. is well-known for its perfect
customer services and providing 1-year free repair services in the past.
3) In contract with the client C, ABC promises to deliver 50 cleaning machines for total price of CU 1
000 000. No warranty is promised in the contract, and ABC usually does not provide any free services in
the country of client C. However, after the contract is signed, ABC offers free maintenance service to a
client C as a bonus for big order.
. Required: Identify performance obligations of ABC Corp. in each scenarios.

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.

• Entity is not using goods/services as an input to produce

• Goods/services is
separately identifiable or deliver combined output.
Business model
from other • Goods/services does not significantly modify or
of entity
goods/services in the customize another good/service.
contract • Goods/services could not be transferred independently.

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Distinct criteria – Illustrated example – MWI Corp

How many obligations? How many obligations?

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Distinct criteria – Illustrated example

Example 1
The government contracted a construction company to build a hospital. There are
many steps from laying down foundation, construct wards, surgery rooms, etc.
How many POs in this project?

Distinct criteria – Illustrated example

Example 2
Oracle enters a contract with UEH to provide an ERP system, in which Oracle
provide software license, installation services, 1 month technical support, and 2 year
software updates.
How many POs in this contract?

Answer: 3 performance obligations

-Software license and 2 year updates;
-installation services;
-1 month technical support

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Step 3 – determine transaction price

Transaction price (TP)

Amount of consideration 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 (i.e. VAT).

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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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TP – variable consideration – Illustrated

A Construction company is contracted to build an office building on or before a deadline. If Ai
Quoc meets the deadline, the contract price is $100m. Every 10 days delay, the contractor is
required to compensate the customer by $5m. There is 70% chance that the deadline can be
met. 15% chance delay 10 days, 10% chance delay 20 days and 5% chance delay 30 days.
Required
a. What should be the estimated contract price?
b. In year one, the company completed 60% of the job. How much revenue should be
recognised?
c. By the end of year two, company completed 90% of the job, and re-estimated that 95% that
it can meet the deadline and only 5% chance that it would delay by 10 days. How much
revenue should be recognised in year 2?

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TP – Significant financing component *

Entities determine the significance of a financing component at an individual contract level

rather than at a portfolio level.
Factors indicate significant financing component:
• Timing difference between goods or services transferred and payments due
• Prevailing market interest rate
Except when:
• The timing of the transaction is at the discretion of the customer (Gift card).
• A substantial portion of the consideration is variable and not under the control of the entity or
customer (Sales-based loyalty)
• Difference between the promised consideration and the cash selling price of the goods or
services is due to something other than financing (Withholding payment for guarantee
obligation)

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TP – Consideration payable to customer

For distinct goods or services, account for an added obligation.

Not for distinct goods or services, e.g. discount, or refund, reduce the transaction
price

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TP – Example of Consideration payable to customer

Example 1: A manufacturer launches hair colour products in a retail chain store with
a contract of 4 years. At initial, manufacturer piles products of $4m to all the stores
of the retail chain stores, who request manufacturer to pay a ― listing fee‖ of $1m
for the new product launch.
Example 2: A retailer sells a tablet to customer A for $100 on January 1 and agrees to
reimburse customer A for the difference between the purchase price and any lower
price offered by a certain direct competitors during the 3-month period following
the sale. On a probability-weighted basis, the retailer estimates it will reimburse the
customer $5.

Step 4 – allocate TP to PO(s)

Stand – alone selling price

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Estimate stand-alone price *

Adjusted market Expected cost

Residual
assessment plus margin
allocate the remaining
forecasted fulfilment costs,
transaction price to the goods
Available exchange price on a adds margin at the amount
or services that do not have
market the market would be willing
observable standalone selling
to pay
prices

Suitable in situations where a

suitable in situations where
competitor offers similar Suitable where the other two
the direct fulfilment costs are
goods or services to use as a approaches are not applicable
clearly identifiable
basis in the analysis

Self reading

Estimate stand-alone price – Illustrated example *

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

Estimate stand-alone price – Illustrated example *

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

Estimate stand-alone price – Illustrated example *

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

Estimate stand-alone price – Illustrated example *

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.

Step 5 – recognize revenue

Over time or a point in time

Contract costs

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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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Contract cost - Example

Ex 1: A UK university offers a HCM agent of $300k ―commission to introduce one
student to study a 4-year degree. How should the University account for it?
Ex 2: A human resource company signed a 3-year contract with a customer to
manage the payroll, monthly salary payment and MPF at monthly fee of $100k. It had
incurred the following costs:
 Computer hardware equipment $300
 Human resource software $200
 Design service $150
 Data cleaning and conversion $100
.  How to treat the various costs?

Revenue recognition for some special cases

 Coupon  Re-estimate variable consideration
 Free product rebate  Customer loyalty programs
 Coupon on print advertisement  Gift card

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Example – Coupon (Exercises 1)

A retailer sells vacuum cleaners to customers at $100,000 and provides a
coupon for 60% The retailer estimates that 80% of the customers will
exercise the option for the purchase of, on average, $30,000 of
discounted additional products.
Required: Prepare journal entry at the date of sale of the vacuum cleaner.

Example– Free product rebate (Exercises 2)

Phi Thanh Van Cosmetics Co. sells skin care products to customers at
$2,000 per set. If customers buy 3 sets at a time and fill in an on-line
application form within 1 week after purchase, she would become VIP and
be given a welcome gift that worth of $200 sales value after successful
registration. The vendor estimates , based on recent experience, that 80%
of the customers will complete the on-line registration and receive the
free gift..
Required: Prepare journal entry at the date of sale of a skin care set.
.

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Example– Coupon on print advertisement (Exercises 3)

Manufacturer sells 1,000 boxes of chocolate to supermarkets chain at $10 each.
Supermarkets sell at $15 to customers. The manufacturer issues coupons in
newspapers and magazines to allow customers $2 dollar reduction in price by
presenting the coupon within 3 months after issue. The manufacturer would
compensate supermarkets for loss of $2 revenue. The manufacturer estimates
400 coupons would be redeemed
Required
How should the manufacturer account for this contract when chocolate is
. transferred to the supermarkets?

Example– Re-estimate variable consideration (Exercises 4)

An FMCG entity sold shampoo to a customer for $10 per unit on 2 Jan 20x6. If the
customer buys 1,000 units in a calendar year, the price per unit is retrospectively
reduced to $9. In the 1st quarter, the customer bought 75 units only. The entity
estimated the customer cannot exceed the 1,000-unit threshold.
The customer was then acquired by a listed company and become part of a bigger group.
On 1 Jun 20x6, the customer bought 500 units. The entity now estimated the customer
would exceed the 1,000-unit threshold.
Required:
How should this transaction be accounted for?

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Example– Customer loyalty programs (Exercises 5)

A supermarket chain has a customer loyalty program which granted 1 loyalty point for every $10
purchase. Each point is redeemable for $1 discount on future purchase. During period 1
customers purchased $100,000 and earned 10,000 points Supermarket estimated 95% would be
redeemed for products in future.
By period 1 , 4,500 points have been redeemed.
In period 2, another 4,000 points redeemed. Cumulatively there is 8,500 points redeemed. Now
supermarket estimated total redemption 9,700 points would be redeemed
Required:
How should this transaction be accounted for in period 1 and period 2?

Example– Gift card (Exercises 6)

A customer buys $100 gift card from a coffee chain store. Valid up to one
year from the date of purchase. Coffee chain store estimates customers
would redeem $90 of the gift card and $10 will expire unused (10%
breakage). Coffee chain store has no obligation to remit unused fund or
any unused gift cards.
In the period, $50 of the gift card has been redeemed.
Required: How should the gift card be accounted for?

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Example – Sale return

Cell phone manufacturers sells 300 new model of handsets to a retail chain store
at $100 each. Cost of manufacturing is $60 each. Manufacturer allows the retail
chain to return any unsold products in 6 months with full refund. Manufacturer
uses expected value method and estimates.
 40% 8 mobiles return
 45% 9 mobiles return
 15% 18 mobiles
Cost of recovering the returned handsets is $80. The unsold handsets, would then
be exported and sold to second-tier markets, at a discounted price of $20 each. (at
a loss of $40 each)
. Required: Accounting for above information (For the manufacturer)

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