IFRS 15:

Revenue from
Contracts with
Customers
Definition of Income
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
Definition of Revenue

Revenue: Income
arising in the course
of an entity’s ordinary
activities
 Revenue
Recognition
5 Step Approach

5 Step Approach to Revenue Recognition:

Revenue in accordance with IFRS 15 shall be recognized using 5
step approach:
1) Step 1: Identify the contract with the customer;
2) Step 2: Identify the performance obligation(s);
3) Step 3: Determine the transaction price;
4) Step 4: Allocate the transaction price to the performance
obligations;
5) Step 5: Recognize revenue when (or as) the performance
obligations are satisfied
Step 1: Identify the contract with the customer

a) A contract exists (a contract is an agreement between two or more parties

that creates enforceable rights and obligations); and
b) All of the following criteria are met (para. 9):
- The parties have approved the contract (in writing, orally or implied by the
entity’s customary business practices);
- The entity can identify each party’s rights
- The entity can identify payment terms
- The contract has commercial substance (risk, timing or amount of future
cash flows expected to change as result of contract)
It is probable that entity will collect the consideration (customer’s ability and
intention to pay that amount of consideration when it is due)
Accounting if contract is not identified:

If the criteria in (b) are not met and consideration has already been received
from the customer, the entity should recognize the consideration received as
revenue when :

• The entity has no remaining obligations to the customer and substantially all
of the consideration has been received and is not refundable; or
• The contract has been terminated and consideration is not refundable.

Otherwise the entity should recognize a liability for the amount of the
consideration received
Step 2: Identify a Performance Obligation
At contract inception, an entity should assess the goods and services
promised in a contract with a customer and should identify as a performance
obligation each promise to transfer to the customer either:

• A good or service (or a bundle of goods or services) that is distinct (i.e. the
customer can benefit from good or service on its own or together with other
readily available resources and the entity’s promise is separately identifiable
from other promises in the contract); or

• A series of distinct goods or services that are substantially the same and
that have the same pattern of transfer to the customer.

If a promised good or service is not distinct, an entity should

combine that good or service with other promised goods and services until it
identifies a bundle of goods or services that is distinct
Activity 1:
Office Solutions, a limited company, has developed a communications software
package called CommSoft. Office Solutions has entered into a contract with Logisticity
to supply the following:
(1) License to use CommSoft
(2) Installation service – this may require an upgrade to the computer operating
system, but the software package does not need to be customized
(3) Technical support for three years
(4) Three years of updates for CommSoft

Office Solutions is not the only company able to install CommSoft, and the technical
support can also be provided by other companies. The software can function without
the updates and technical support.
Required:
Explain whether the goods or services provided to Logisticity are distinct in
accordance with IFRS 15.
Step 3: Determining Transaction Price

The transaction price is the amount to which the entity expects

to be ‘entitled.
In determining the transaction price, consider the effects of:

(a) The existence of a significant financing component

(b) Non-cash consideration
(c) Consideration payable to a customer
(d) Variable consideration
Include any variable consideration in the transaction price if it is highly
probable that significant reversal of cumulative revenue will not occur
Step 3: Discussions & Explanation

(a) The existence of a significant financing component

Step 3: Discussions & Explanation

(b) Non-cash consideration

Step 3: Discussions & Explanation

(c) Consideration payable to a customer

Step 3: Discussions & Explanation

(d) Variable consideration

Include any variable consideration in the transaction price if it is highly
probable that significant reversal of cumulative revenue will not occur
Activity: Consideration
1)
Bodiam is a manufacturer of consumer goods. On 30 November 20X7, Bodiam
entered into a one-year contract to sell goods to a large global chain of retail
stores.

The customer committed to buy at least $30 million of products over the one
year contract. The contract required Bodiam to make a non-refundable
payment of $3 million to the customer at the inception of the contract. The $3
million payment is to compensate the customer for the changes required to
its shelving to accommodate Bodiam’s products. Bodiam duly paid this $3
million to the customer on 30 November 20X7.
Required
Explain how Bodiam should account for the $3 million payment to its
customer.
Activity: Consideration
On 1 July 20X7, Bodiam entered into a contract with another customer to sell Product
A for $200 per unit. If the customer purchases more than 1,000 units of Product A in a
12-month period, the contract specifies that the price is retrospectively reduced to
$180 per unit. For the quarter ended 30 September 20X7, Bodiam sold 75 units of
Product A to the customer.

At that date, Bodiam concluded that the customer’s purchases would not exceed the
1,000- unit threshold required for the volume discount and correctly recorded revenue
of $15,000 ($200 × 75).
In October 20X7, the customer acquired another company and in the quarter ended
31 December 20X7, Bodiam sold an additional 500 units of Product A to the customer.
In light of this, Bodiam concluded that the customer’s purchases are now highly likely
to exceed the 1,000-unit threshold in the 12 months to 30 June 20X8.

Required: Determine, explaining the relevant accounting principles, what transaction

price Bodiam should use to record sales of Product A for the quarter ended 31
December 20X7, and discuss whether at 31 December 20X7, any adjustment to
revenue is required in respect of sales recorded in the previous quarter.
Step 4: Allocate transaction price to
performance obligations
- Allocate Transaction price to performance obligations on the
basis of stand-alone selling price
- Need to consider bundle of goods offered

Example:
A company sells a car including servicing for two years for
$21,000. The car is sold without servicing for $20,520 and annual
servicing is sold for $540.
Required: How is the transaction price split over the different
performance obligations?
Step 5: Recognise revenue when (or as)
performance obligation satisfied
- A performance obligation can be recognized Over time or at a
point in time.

- A performance obligation is satisfied when the entity

transfers a promised good or service (ie an asset) to a
customer.

- An asset is considered transferred when (or as) the customer

obtains control of that asset.

- Control of an asset refers to the ability to direct the use of ,

and obtain substantially all of the remaining benefits from, the
asset.
Satisfaction of a PO over time
- Recognize revenue using Stage of Completion Method.
- An entity transfers control of a good or service over time
and, therefore, satisfies a performance obligation and
recognises revenue over time if one of the following criteria is
met.
o The customer simultaneously receives and consumes the
benefits provided by the entity’s performance as the entity
performs; or
o The entity’s performance creates or enhances an asset (eg
work in progress) that the customer controls as the asset is
created or enhanced; or
o The entity’s performance does not create an asset with an
alternative use to the entity and the entity has an enforceable
right to payment for performance completed to date
Satisfaction of a PO at a point in time
- This is applicable when control of asset is transferred.
- To determine the point in time when a customer obtains
control of a promised asset and an entity satisfies a
performance obligation, the entity would consider indicators of
the transfer of control that include, but are not limited to, the
following:
- The entity has a present right to payment for the asset;
- The customer has legal title to the asset;
- The entity has transferred physical possession of the asset;
- The customer has the significant risks and rewards of
ownership of the asset; and
- The customer has accepted the asset.
Example:
Gerrard has entered into a sales contract with a customer to
construct a specialised asset. The customer has paid a deposit to
Gerrard which is only refundable if Gerrard fails to complete the
construction. The rest of the consideration for the asset is
payable when the asset is delivered to the customer. If the
customer defaults on the contract prior to completion, Gerrard
has the right to retain the deposit.
Required:
Discuss whether Gerrard should recognise revenue from this
contract by measuring progress towards completion of the asset
Contract Costs:
Costs of obtaining a contract:

Incremental costs of obtaining a contract are recognised as an

asset if the entity expects to recover them
Contract Costs:
Costs to fulfil a contract:
If the costs to fulfil a contract are not within the scope of another
standard (eg IAS 2 Inventories , IAS 16 Property, Plant and
Equipment or IAS 38 Intangible Assets ), they should be
recognised as an asset only if they meet all of the following:
o The costs relate directly to a contract or an anticipated
contract that the entity can specifically identify;
o The costs generate or enhance resources of the entity that will
be used in satisfying (or in continuing to satisfy) performance
obligations in the future; and
o The costs are expected to be recovered.
Contract Costs:
Amortization of Impairment Costs:
Amortize asset on the same basis as the goods or services are
transferred;
If the benefits are expected to arise in less than one year, then
the entire cost shall be recognized as expense when incurred
Impairment loss on the contract asset shall be recognized when
the carrying amount exceeds:
- Remaining consideration from exchange of goods / services:
less
- Estimated costs to providing goods / services
Presentation:
Contract Asset:
Recognized when the entity transfers goods / services before
customer pays.

Contract Liability:
If customer pays before entity transfers goods or services

Recievable:
Recognize when unconditional right to receive consideration is
established
1) Sale with a Right of Return

Recognise all of following:

o Revenue for the transferred products in the amount of
consideration to which the entity expects to be entitled (ie
revenue not recognised for products expected to be returned);
o A refund liability ; and
o An asset (and corresponding adjustment to cost of sales) for its
right to recover products from customers on settling the refund
liability.
2) Warranties

o If customer has the option to purchase a warranty separately ,

treat as separate performance obligation under IFRS 15.

o If customer does not have the option to purchase a warranty

separately , account for the warranty in accordance with IAS
37.

o If a warranty provides the customer with a service in addition

to
the assurance that the product complies with agreed-upon
specifications, the promised service is a performance
obligation.
3) Principal vs Agent

o If the entity controls the specified goods or service before

transfer to a customer, it is a principal and revenue recognised
should be the gross amount of consideration.
o If the entity arranges for goods or services to be provided by
the other party , it is an agent ( para. B36 ) and revenue
recognised should be the fee or commission earned .
o Indicators that an entity controls the goods or services before
transfer and therefore is a principal include:
o The entity is primarily responsible for fulfilling the promise to
provide the specified good or service;
o The entity has inventory risk; and
o The entity has discretion in establishing the price for the
specified good or service
4) Non Refundable Upfront Fee

o If it is an advance payment for future goods and services,

recognize revenue when future goods and services provided
Example 1:

Fancy Goods Co (FG) operates a website that enables customers

to purchase goods from a range of suppliers. The suppliers set
the price that is to be charged and deliver directly to the
customers, who have paid in advance. FG’s website facilitates
payment by customers and the entity is entitled to commission
of 5% of the sales price.

FG has no further obligation to the customer after arranging for

the products to be supplied.

Required: Discuss whether FG is a principal or an agent.

Example 2:
On 31 December 20X7, Lansdale sold Product X to a customer for
$12,100 payable 24 months after delivery. The customer
obtained control of the product at contract inception. However,
the contract permits the customer to return the product within
90 days. The product is new and Lansdale has no relevant
historical evidence of product returns or other available market
evidence.

The cash selling price of Product X is $10,000, which represents

the amount that the customer would pay upon delivery of the
same product sold under otherwise identical terms and
conditions as at contract inception. The cost of the product to
Lansdale is $8,000.
Required : Advise Lansdale on how to account for the above
transaction.