IFRS 15

REVENUE FROM CONTRACT WITH

CUSTOMERS
Background
�Issued in May 2014 jointly with FASB
◦ IFRS and US GAAP now aligned in this area

�Effective for financial periods beginning on or after

1 January 2018

�Replaces all revenue guidance currently in IFRS

Background
Old: ‘Risk and rewards’ model
New: Control model

At it’s simplest:
Recognise revenue once
control of ‘the promise’/ performance obligation
is passed to the customer
at the amount you actually expect to receive
 Understanding an accounting standard:

• History: Why issued

Introduction (INs) • Overview: summary of main features
• Incredibly useful (especially revision / key issue)

Objective • Ultimate purpose standard is aiming to achieve

• Specific transactions included and excluded

Scope • Normally, if covered by separate standard it’s
scope out

• Initial recognition: Identifying transaction (tx)

and specific recognition criteria
Recognition • Unit of account (level of aggregation of tx)
• Derecognition
 Understanding an accounting standard:

• Specific inclusions on day-1 recognition

Measurement • Subsequent measurement (e.g. depreciation)
• Measurement on derecognition

• Standard specific matters not covered

Other anywhere else

• Specific inclusions and exclusions

Presentation and • ‘Laundry list’
disclosure • Recommended disclosures

Effective date & • How and when to start accounting for a new
transitional provisions standard when you adopt it the first time
 Understanding an accounting standard:

IFRSs:
• Definitions (Included just after scope in IASs)
Appendix A

• Application guidance on how to apply the main

IFRSs: guidance contained in the body of the standard
Appendix B (you need to know this as well – especially NB!
for revenue and FI)

Basis for conclusion • Documents how & why the IASB decided on the
final guidance included in the IFRSs and IASs
(BCs in Part B) • You do not need to study this

Implementation guidance • Aka “gold” and “magic” and “crib notes”

and Illustrative examples • Illustrates HOW to apply guidance using worked
(IGs and Ies in Part B) examples; not for all standards
 IFRS 15 Para 2
IFRS 15: core principle
Objective:
Prescribes how to account for revenue from a
CONTRACT with a CUSTOMER
WHEN
Achieved by:
�recognising revenue to depict (show) the transfer of
promised goods or services (G/S) to customers
�in an amount that reflects the consideration to which
the entity expects to be entitled in HOW
exchange for those G/S MUCH

Transfer = based on control

 IFRS 15 Para 33
What is control?

Obtain
Ability to
substantially
direct the
all benefits Control
use
from asset

Control also includes the ability to prevent other entities from

directing the use of, and obtaining benefits from, the asset
 IFRS 15 Para 5
Scope
�IFRS
What 15:scope
is in

• Contracts with customers

• Party who has contracted with the entity
• To obtain goods or services that are
• An output of the entity’s ordinary activities
• In exchange for consideration

• Sale of some non-financial assets not an output of entity’s ordinary

activities (e.g. PPE)

What is not in scope

• Leasing contracts
• Financial instruments
• Non-monetary exchange
 Acco200

5-STEP MODEL IFRS 15, para IN7

STEP 1 STEP 2 STEP 3 STEP 4 STEP 5

Identify the
Identify the performanc Determine Allocate the Recognise
the transaction
contract e price to the
the revenue
with the obligations transaction as/when PO is
performance
customer in the price obligations
satisfied
contract

C PO TP A R
Recognitio Measuremen Measureme
n Recognition t nt Recognition
1 2

5
 2

5
 2

3
CAN’T GET TO
DESTINATION

5
1 2

4
5
1 2

STILL CAN’T GET

TO DESTINATION

5
4
In the context of IFRS 15

• Identify the contract(s) with the customer

1

• Identify the performance obligations in the

2 contract

• Determine the transaction price

3

• Allocate the transaction price to the performance

4 obligations

• Recognise revenue as/ when each performance

5 obligation is satisfied
In the context of IFRS 15

Can’t with
• Identify the contract(s) identify contract as
the customer
1 defined in para 9 = can’t
recognise
• Identify the performance revenue.
obligations in the
2 contract
Even if all the other elements
areprice
• Determine the transaction present…
3

STOPprice
• Allocate the transaction after step
to the 1 and
performance
4 obligations conclude
• Recognise revenue as/ when each performance
5 obligation is satisfied
In the context of IFRS 15

• Identify the contract(s) with the customer

1

• Identify the performance obligations in the

2 contract

• Determine the Prove stepprice

transaction 1 & 2; fail step 3
3
STOPprice
• Allocate the transaction after
to step 3 and
the performance
4 obligations conclude
• Recognise revenue as/ when each performance
5 obligation is satisfied
 STEP 1
Identify the contract(s) with
the customer
C
IFRS 15: The 5-step model

• Identify the contract(s) with the customer

1

• Identify the performance obligations in the

2 contract

• Determine the transaction price

3

• Allocate the transaction price to the performance

4 obligations

• Recognise revenue as/ when each performance

5 obligation is satisfied
STEP 1 Step 2 Step 3 Step 4 Step 5

Identifying the contract

�A contract can be written, oral or implied by the
entity’s business practice
STEP 1 Step 2 Step 3 Step 4 Step 5

Contract: 5 criteria IFRS 15.9

If ALL following 5 criteria are met:

1. Parties to the contract have approved the contract
AND are committed to perform;
2. Each parties rights in relation to the G/S to be
transferred can be identified;
3. Payment terms and conditions for G/S to be
transferred can be identified;
4. Contract has commercial substance; and
5. It is probable that the entity will collect the
consideration to which the entity is entitled to
STEP 1 Step 2 Step 3 Step 4 Step 5

Unpacking elements of IFRS 15.9

�‘Committed to perform’
◦ Consider termination clauses
● If both parties have a unilateral right to terminate a
‘wholly unperformed’ contract without compensating the
other party – i.e. executory contract that both can terminate
◦ Not a contract for IFRS 15
�Payment terms identified
◦ Not a requirement for the transaction price to be fixed or
stated in the contract.
STEP 1 Step 2 Step 3 Step 4 Step 5

Unpacking elements of IFRS 15.9

�Collectability
● i.e. customers INTENTION AND ABILITY to pay
◦ Evaluated at contract inception
● Subsequent changes in ability to = IFRS 9: Impairments

◦ Assessment is applied to the consideration to which the

entity is entitled to (i.e. ‘transaction price’)
STEP 1 Step 2 Step 3 Step 4 Step 5

Example: Collectability
� A pharmaceutical company sells 5 000 units of prescription
medication to a customer in a new region for USD 1 000 000.
� This is the first sale of the drug in this region (i.e. no past history).
� The region is currently experiencing economic difficulty however
expectations are that the region will recover in the next 2 – 3 years.
� The company hopes to forge good relationships with the customer
which may lead to sales to other customers in the region in the
future.

� At contract inception the company does not expect to recover the

full USD 1 000 000 from the customer due to the economic
difficulties experienced in the region.
� Entity is likely to accept a lower amount of consideration
(probably USD 400 000) from the customer in full and final
settlement.
Question: Is this a contract i.t.o. IFRS 15?
STEP 1 Step 2 Step 3 Step 4 Step 5

Answer: Collectability
⮚ Yes, IFRS 15.9(e) is met
• At inception the entity anticipates that it will offer a
price concession to customer
• Consideration is variable
• Purchase consideration is not USD 1 000 000
• Best estimate of consideration to be
received is USD 400 000 ant
if i c
f sig n i n
o t
Area dgemen e
ju tic
prac
STEP 1 Step 2 Step 3 Step 4 Step 5

Is there always a contract?

�Can one apply IFRS 15 without a contract?
�Buy a pair of jeans at Jag?

◦ A contract can be written, oral or implied by

entities customary business practices

● Price on the tag Offer

● You pay cash Acceptance of offer
● Till slip Identifies items purchased,
terms & conditions, right of return
etc.
 Step 1 Step 2 Step 3 Step 4 Step 5

Is there always a contract?

STEP 1 Step 2 Step 3 Step 4 Step 5

Contract not identified? IFRS 15.15

� IFRS 15.9 criteria not met?
◦ Reassess on a continual basis whether they are
subsequently met

� What if: IFRS 15.9 criteria not met and entity receives
payment (i.e. consideration)
◦ Not automatically revenue;
◦ Only recognise revenue if:
❖ Entity has no performance obligations + substantially
all consideration was received + non refundable; or
❖ Contract was terminated + amount received is non
refundable
STEP 1 Step 2 Step 3 Step 4 Step 5

No contract but cash received

Debit ‘Cash’ and credit?
Recognise consideration received as a liability until
Recognise consideration received as a liability until
event in Par 15 occurs or Par 9 criteria are subsequently
event in Par 15 occurs or Par 9 criteria are subsequently
met (refer previous slide)
met (refer previous slide)
▪
▪ Liability represents obligation to either transfer
Liability represents obligation to either transfer
goods/services in the future or refund consideration
goods/services in the future or refund consideration
received
received
▪
▪ Liability is measured at consideration received from
Liability is measured at consideration received from
customer
customer
 STEP 2
Identify the performance
obligations in the contract
PO
IFRS 15: The 5-step model

• Identify the contract(s) with the customer

1

• Identify the performance obligations in the

2 contract

• Determine the transaction price

3

• Allocate the transaction price to the performance

4 obligations

• Recognise revenue as/ when each performance

5 obligation is satisfied
Step 1 STEP 2 Step 3 Step 4 Step 5

Identifying the ‘promises’

� IFRS 15 applies an ‘allocated transaction price model’
Therefore, it is important to identify a meaningful unit of
account

� At contract inception the entity assesses/ ‘looks at’ the

goods and services in the contract so as to identify the
individual ‘promises’ (performance obligations / POs)
that the entity has committed to transfer to the
customer

� At the end of this step the entity should be in a position

to ID how many PO it needs to keep track of
Step 1 STEP 2 Step 3 Step 4 Step 5

Identifying the ‘promises’

�Only identify (as performance obligations) those
promises that transfer a G/S to the customer

�Activities necessary to set up the contract before

the entity can deliver the G/S to the customer are
not performance obligations
◦ E.g. administrative activities, research
Step 1 STEP 2 Step 3 Step 4 Step 5

Identifying performance obligations

The entity identifies each PO that is:
1. A good/ service that is distinct; or
2. A series of distinct G/S that
● are substantially the same; and
● have the same pattern of transfer to the customer
Step 1 STEP 2 Step 3 Step 4 Step 5

What is DISTINCT? IFRS 15.27

a) customer can benefit from the good or service either
on its own or together with other resources that are
readily available to the customer (15.28)
− Readily available resource: customer already has/could
acquire separately from the entity or another entity

G/S regularly sold separately is evidence

of customer being able to benefit

AND
b) the entity’s promise to transfer G/S is separately
identifiable from other promises in the contract
Step 1 STEP 2 Step 3 Step 4 Step 5

I.e. what is DISTINCT? IFRS 15.27

a) G/S capable of being distinct

AND

b) G/S is distinct in context of the contract

i.e. separately identifiable: consider para 15.29

Should address BOTH

requirements
Step 1 STEP 2 Step 3 Step 4 Step 5

Example 1: ‘Distinct’
� A software developer enters into a contract with a customer
to transfer a software licence, perform an installation
service and provide online and telephonic software support
via its call centre.
� The developer regularly sells the licence, installation service
and support services separately.
� The installation service is routinely performed by other
entities and does not modify the software significantly

Question
� How many separate performance obligations should the
software developer identify?
Step 1 STEP 2 Step 3 Step 4 Step 5

Remember:
G/S are distinct if:
a) The customer can benefit from the G/S on its own or
together with other readily available resources; AND
b) The entity’s promise to transfer the G/S is separately
identifiable from other promises in the contract

At the end of the day ‘distinct’ items are different, separate,

dissimilar from one another
Step 1 STEP 2 Step 3 Step 4 Step 5

Example 1: ‘Distinct’
� Assessment (a):
◦ Software package remains functional without the
installation by only the developer
● I.e. any company/ developer could install it
◦ Customer can benefit from installation and technical
support services separately (they are not linked)

� Assessment (b):
◦ Each of the promises are separately identified from
other promises in the contract – listed separately in
agreement

� Performance obligations therefore:

1. Software licence
2. Installation service
3. Technical support services
Step 1 STEP 2 Step 3 Step 4 Step 5

SEPARATELY IDENTIFIABLE = not integrated

a) entity does NOT provide a significant service of

integrating the G/S with other G/S promised; OR
− i.e. POs can be consumed independently of one
another

IFRS 15.29(a)
 Step 1 STEP 2 Step 3 Step 4 Step 5

SEPARATELY IDENTIFIABLE = not customised

b) G/S does NOT significantly modify or customise

another G/S promised in the contract; OR
− i.e. one PO does not improve another PO

IFRS 15.29(b)
 Step 1 STEP 2 Step 3 Step 4 Step 5

SEPARATELY IDENTIFIABLE = not interrelated

c) G/S is NOT highly dependent on, or highly

interrelated with, other G/S promised
− i.e. you could consume one PO without necessarily
having to consume the other

IFRS 15.29(c)
Step 1 STEP 2 Step 3 Step 4 Step 5

Example 2: ‘Distinct’
� Promised G&S are same as example 1, except:
◦ The contract specifies that, as part of the installation
services, the software will be substantially customised
by adding a new functionality;
◦ This will enable the software to interface with
existing software applications used by the customer
◦ Customised installation services could be provided by
any knowledgeable software company

Question
� How many separate performance obligations should the
software developer identify?
Step 1 STEP 2 Step 3 Step 4 Step 5

Example 2: ‘Distinct’
� Assessment:
◦ Terms of the contract result in promise to provide a significant
service of integrating licenced software into existing software
◦ Entity therefore using licence and customisation services
as inputs to produce a combined output , that is a
functional & integrated software system specifically for the
customer
◦ Concludes that although the customised installation could be
provided by another entity,
● Not separately identifiable from the service stipulated in the
contract (customised installation service)

� Performance obligations therefore:

1. Customised installation services (that include the licence)
2. Technical support services
 Step 1 STEP 2 Step 3 Step 4 Step 5

What is Distinct? A summary

G&S are distinct if BOTH of the following criteria are met:
The customer can benefit from the good The entity’s promise to transfer the good
or service either or service to the customer
on its own or in conjunction is separately identifiable
&
with other readily available resources from other promises in the contract

Separately identifiable?
The entity does The goods or services The good or service is
not bundle the or does not significantly or not highly dependent
G&S that represents the modify or customize or interrelated with
combined output for which another good or service other goods or services
customer has contracted promised in the contract in the contract
Step 1 STEP 2 Step 3 Step 4 Step 5

PO: What if G/S not distinct?

If G/S is not distinct the entity combines the G/S
with other G/S in the contract until the bundle is
distinct
Step 1 STEP 2 Step 3 Step 4 Step 5

Customary business practice

�Consider not only those G&S defined in the
contract

�Also look at customary business practices

i.e. does the customer have a valid expectation
for the entity to provide a particular G/S?
Step 1 STEP 2 Step 3 Step 4 Step 5

Example: Customary business practice

� Entity sells a computer server to a distributer (i.e. the
customer) who will then on-sell it to an end customer
� Entity has historically always provided maintenance services
to the end user for no additional consideration
� The contract does not explicitly promise maintenance
services nor does it define the terms & conditions for this
service

Question
� Are the maintenance services a performance obligation?
Step 1 STEP 2 Step 3 Step 4 Step 5

Customary business practice

Answer

�Yes
◦ The entity’s past practice has created a valid
expectation in the minds of the end users that the
entity will always provide this service
Step 1 STEP 2 Step 3 Step 4 Step 5

Brain teaser
�You are buying a new Golf GTi
Purchase price includes the following:
◦ Vehicle
◦ Three-year service plan
◦ Manufacturer’s warranty for five years
◦ Metallic, custom paint job

Question
�How many separate performance obligations should
the retailer account for?
SESSION BREAK