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GROUP:-2
1. Md Shofiqul Islam (053)
2. Md Ashikur Rahman (062)
3. Nigar Sultana Madhuri (023)
4. Lamia Islam Himel (041)
5. Suvrojit Samadder (163)
 Presentation of contract assets &
1 contract liability

Contract modification
2
Cost of contract
AGENDA 3
4 Licensing

5 Disclosure
 Presentation of contract
asset & liabilities
(net)contract asset (net)contract liability
Right & obligation
If obligations < rights If obligations > rights
When either party to a contract has performed, an entity is required to
present the contract in the statement of financial position as a contract
asset or a contract liability. It’s depending on-
❑The relationship between the entity’s performance
❑The customer’s payment

Any unconditional rights to consideration are presented separately as a

receivable.
 Contract asset arises-
If an entity performs by transferring goods or services to a customer
❑Before the consideration is paid or
❑Before payment is due

The balance excludes any amount presented as a receivable

A receivable is a right to consideration that is unconditional, i.e. only
the passage of time required before payment of that consideration is due
.
Example..
 Contract liability arises-
If a customer pays consideration, or if the entity has a right to
consideration that is unconditional , before the good or service
is transferred to the customer.

The liability should be recognized either when the payment is

made or when the payment Is due(which ever is earlier )
Example..
 Are contract asset and contract liabilities
current or non-current ?
Often contract assets & liabilities will be presented as current in the
statement of financial position . This is because they will be released or
settled in the entity’s normal operating cycle .
In other cases ,it may be determined that a contract with a customer
extends beyond the entity’s normal operating cycle. In such cases ,the
contract assets &contract liabilities should be analyzed between
current & non-current elements .
An entity’s normal operating cycle is assumed to be 12 months when
not clearly identifiable
• IFRS 15 uses the terms “contract asset” and “contact liability”
but does not prohibit an entity from using alternative descriptions
in the statement of financial position for those items. If an
alternative description is used for a contract asset, sufficient
information should be provided to enable a user of the financial
statement to distinguish between receivables and contract assets.
 Contract Modification
• It is the change in the scope or price or both scope & price in the contract

• It needs to be approved by both the parties involved

• Modification needs to be enforceable

• The modification of contract can result in either be prospective accounting or

cumulative catch up adjustment
 Termination of the existing contract
A separate new contract
& creation of a new contract

Accounting for Contract

Modification

Cumulative catch-up adjustment

Senario-1: A separate new contract
1. Additional goods or services are distinct in nature
2. Price of the additional goods or services in the contract commensurate with
the standalone selling price

Case Study-A
An entity promises to sell 120 products to a customer for 12000;100 per product.
After the entity has transferred 60 products to the customers, the contract is
modified to require the delivery of an additional 30 products.
Here, these additional 30 products have standalone selling price 95 per product
and they are distinct in nature. The entity recognizes revenue of 100 per product
for the 120 product in the original contract & 95 per product for the 30 product
in the new contract
Senario-2: Termination of the existing contract and creation of a new
contract

1. Additional goods or services are distinct in nature.

2. Price of the additional goods or services in the contract doesn’t
commensurate with the stand-alone selling price.
3. The performance obligation not satisfied in the original contract plus the
additional consideration to be recognized to depict the transfer of goods or
services.
Case study-B
• A enters into a contract with B to provide for 100 mobile phones. The price
of each 50.
• After 3 months, there are few changes made to the contract. A & B agree to
add 50 more mobile phone at a price of 40 each.
• In the first 3 month, A had transferred 40 phones to B.

Here, the additional products distinct in nature; but the price of this products
doesn’t commensurate with the standalone selling price.
The transection price would be (60*50) + (50*40)=5000 in total.
The transection price for each phone would be 5000/110=45.50 each
Senario-3:cumulative catch-up adjustment
1. Goods or services are not distinct in nature.
2. Either a reduction or an increase in revenue recognized due to modification
of contract.
Case study-C:
▪ A enters into a contract with B to build a software.
Transection price- 5,00,000 & expected cost- 4,00,000.
▪ In the first 3 months,
A has incurred cost :1,20,000 ,completed 30% of the software
& recognized revenue (5,00,000*30%)=1,50,000.
Continued..
▪ After the first 3 months A & B have agreed to make changes in the
software which would result in rework for A. The transaction price has
been increased 1,00,000 & the cost is estimated to increase by
1,00,000.
▪ After the contract modification the transaction price is 6,00,000 & the
estimated cost is 5,00,000
▪ As the cost incurred to date is 1,20,000 the entity needs to recognize
revenue for 1,20,000/5,00,000=24% i.e. 6,00,000*24%=1,44,000. This
would result in reversal of revenue of 6,000 because of the cumulative
catch-up adjustment.
 Contract Modification Flow Chart
No
Is contract modification approved?
Don’t account for contract
modification until approved

yes
Does it add distinct goods
No Are remaining goods or
or services that are priced
services distinct from those
commensurate with stand-
already transferred ?
alone selling prices?

yes
yes No
Account for as
separate contract Account for as termination Account for as part of
of existing contract & original contract
creation of new contract (cumulative catch-up)
(prospective)
Cost of obtaining a contract Cost of fulfilling a contract

Contract
cost

Amortization of assets Impairment of assets arising

arising to obtain or fulfil a from cost to obtain or fulfil a
contract contract
 Cost of obtaining a contract
No
Would cost be incurred regardless Of Are the incremental cost
weather the contract is obtained? expected to be recovered?

yes yes
yes
Do they meet the criteria to be
capitalized as fulfilment cost ?
Capitalized cost

No
No
Expense costs as they are incurred
 Criteria to be capitalized as
fulfilment cost
• They relate directly to an existing contract or specific anticipated
contract
• They generate or enhance resources of the entity that will be used to
satisfy performance obligations in the future ; and
• They are expected to be recovered
Example:
Consulting company E provides consulting service . Following a competitive tender process .E
wins a contract to provide consulting service to customer C. E incurres the following cost to
obtain the contract
External legal fees for due diligence 15

Travel cost to deliver proposal 25

Commissions to sales employee & related payroll taxes 10

Total costs incurred 50

❑ Commission to sales employee & related payroll will be recognized as asset

❑ Travel cost to deliver proposal & external legal fees for due diligence will be recognized as expense
 Cost of fulfilling a contract
yes
Are the costs incurred in fulfilling the
Apply that other guidance
contract in the scope of other guidance ?

No

yes
Do they meet the criteria to be
capitalized as fulfilment cost ?
Capitalized cost

No

Expense costs as they are incurred

 Amortization
An entity amortizes asset recognized for the cost to obtain and /or fulfil
a contract on a systematic basis, consistent with the pattern of transfer of
good or service to which the asset relates.
Example ...
 Impairment
An entity recognizes an impairment loss to the extent that the carrying
amount of the asset exceeds the recoverable amount

The ‘recoverable amount’ is defined as the:

• remaining expected amount of consideration to be received in
exchange for the goods or services to which the asset relates; less
• costs that relate directly to providing those goods or services and
that have not been recognized as expenses.
 Long term construction
contract
A & B inters into a contract to construct a building .

contract price 9000

contract cost 8000
In 2020 A realized that the contract will cost 8500

2019 2020 2021

cost to date 2000 6120 8500
estimated cost to complete 6000 2380 …..
progress billing during the year 1900 4000 3100
cash collected during the year 1700 4000 3300
 Percent of completion Cost recovery
method method
Income statement Income statement
2019 2020 2021 2019 2020 2021
revenue from long term revenue from long term
contract 2250 4230 2520 contract 2000 4120 2880

cost of construction 2000 4120 2380 cost of construction 2000 4120 2380

gross profit 250 110 140 gross profit 0 0 500

 Percent of completion Cost recovery
method method
journal entry journal entry
2019 2020 2021 2019 2020 2021
To record cost of construction To record cost of construction
construction in process 2000 4120 2500
construction in process 2000 4120 2500
materials, cash, payable etc. 2000 4120 2500
materials, cash, payable etc. 2000 4120 2500
To record process buildings
To record process buildings
accounts receivable 1900 4000 3100
accounts receivable 1900 4000 3100
billing on construction in
process 1900 4000 3100 billing on construction in
process 1900 4000 3100
To record collection
cash 1700 4000 3300 To record collection
account receivable 1700 4000 3300 cash 1700 4000 3300
account receivable 1700 4000 3300
To recognize revenue & gross profit To recognize revenue & gross profit
construction in process(gross profit) 250 110 140 construction in process(gross profit) 0 0 500
Construction expanse 2000 4120 2500 Construction expense 2000 4120 2500
revenue from long term contract 2250 4230 2640 revenue from long term contract 2000 4120 3000
To record completion of contract To record completion of contract
billing on construction in process 9000 billing on construction in process 9000
construction in process 9000 construction in process 9000
 Percent of completion Cost recovery
method method
Statement of financial position Statement of financial position
2019 2020 2019 2020
current asset current asset
inventory inventory

construction in process 2000 6480 construction in process 2000 6120

less: building 1900 5900 less: building 1900 5900

cost in excess of builling 100 580 cost in excess of builling 100 220

account receivable 200 200 account receivable 200 200

current liability current liability

billing billing

less : construction in process less : construction in process

billing in excess of cost billing in excess of cost

 Licensing
IFRS 15 provides application guidance for the recognition
of revenue attributable to a distinct license of intellectual
property(IP). A license is an official permit to do ,use or
own something.it can be granted by a party to another
party as an element of an agreement between those
parties.
 Licensing of intellectual property
An IP license is an agreement between the owner of a specific IP right
&another entity, in which the IP owner or licensor provides the other
entity or licensee with the right to use its IP rights for a certain time

Examples:
➢Franchises
➢Software & technology
➢Patent, trademarks & copyrights
➢Scientific compounds etc.
 Revenue recognition for franchises
A franchise business is a business in which the owners or franchisors
sale the rights to their business logo, name & model to third party retail
outlets , owned by independent, third party operators, called
franchisees .
Franchises represent a challenging area because a verity of
performance obligations may exist in a given franchise agreement. As a
result, companies must carefully analyze franchise agreements to
identify the separate performance obligations
❑Four types of franchising agreements have evolved
1. Manufacturer - retailer
2. Manufacturer - wholesaler
3. Service sponsor – retailer
4. Wholesaler – retailer

❑Franchise companies derive their revenue from one or

two sources:
1. From the sale of initial franchise & related assets or services
2. From counting fees based on the operations of franchises
Services provided by franchisor
▪ Assistance in site selection
▪ Evaluation of potential income
▪ Supervising of construction activity
▪ Assistance in the acquisition of signs, fixtures & equipment
▪ Book keeping & advisory services
▪ Employee & management training
▪ Quality control
▪ Advertising and promotion
 Example
KFC agrees to give franchising permission to FOOD CORNER on January 1st ,2019
along with the training for the employees, specialized decoration & materials for the
products. FOOD CORNER will get all this for the price of 28,000
This training service , equipment for decorations & food materials at the following
standalone price
• Training -1,000
• Equipment for decoration – 5,000
• Materials for products – 2,000
• Franchising fees – 20,000
KFC will get 2% of the annual sales commission from FOOD CORNER on
December 31st
 Journal entry
January 01,2019
cash 28000
franchise revenue 20,000
Sales revenue (equipment) 5,000
Sales revenue (materials) 2,000
Service revenue (training) 1,000

Cost of good sold 4,000

inventory 4,000

Note: equipment cost 4,000

December 31,2019
Cash 4,000

franchise revenue 4,000

Note: food center performed 2,00,000 sales revenue during the year
 Disclosures
• The objective of the disclosure is to provide sufficient information
related to the nature, timing& uncertainty of revenue & cash flows
arising from contracts with customers
• Qualitative & quantitative disclosures
• Entity needs to have right processes to capture to the data, review it
& report it in the financials
 Examples of disclosures
Performance
obligations

Contract Significant
balances judgments

Understand nature
,amount timing &
Disaggregation uncertainty of revenue Cost to obtain or
Of revenue & cash flows fulfil a contract
 Disaggregation of revenue
• Need to disaggregate revenue that depicts the nature ,amount, timing &
uncertainty of revenue & cash flows are affected by economic factors
• Factors to be considered to determine the category of disclosures:
1. Disclosures around revenue presented outside the financials like press release or investors
report
2. Information reviewed by the chief operating decision maker to evaluate performance of the
company
3. Any other information used by the management to evaluate the performance of the company
or taking any decision related to the operations
• No minimum disaggregation categories required by the standard
• Examples of disaggregation of revenue :
1. Based of geography
2. Types of goods or services
3. Timing of revenue recognition
4. Sales channel
5. Contract type
6. Based on customer category & market
 Contract balances
Information to be disclosed around contract balances
• The opening & closing balances of contract assets, contract liabilities &
receivables from contracts with customers
• The amount of revenue recognized in the current period that was included in
the opening contract liability balance
• The amount of revenue recognized in the current period from performance
obligation satisfied (or partially satisfied) in previous periods, Ex: changes in
transection price .
• An explanation of how the entity's contract & payment terms will affect its
contract asset & contract liability balances
 Performance obligation
Information needed to provide around performance obligation:
▪ When the entity typically satisfies its performance obligations
▪ Significant payment terms
▪ The consideration is variable & the variable consideration is constrained
▪ Types of warrantees & related obligation
▪ The aggregate amount of the transection price allocated to performance
obligation that are unsatisfied at the reporting date

An entity is not required to disclose the transection price allocated to

unsatisfied performance obligations if
▪ The contract has an original expected duration of one year or less
▪ The entity applies practical expedient to recognize revenue at the amount to
which it has a right to invoice, which corresponds directly to the value to the
customer of the entity’s performance completed to date
 Significant judgments
▪ Those judgments used to determine the timing of the satisfaction of
the performance obligations, the transection price & amounts allocated
to performance obligations
▪ Performance obligations that are satisfied over time
o Entity describe the method used to recognize revenue i.e. input and output
method
o Why the methods are a faithful depiction of the transfer of goods & services
▪ Performance obligations that are satisfied at a point of time
o Disclosure about the significant judgments made to evaluate when the
customer obtains control of the promised goods or services
 Cost to obtain & fulfil the contract
• Disclose the closing balance of the contract incremental & fulfilment
cost capitalized in the financial statement
• Amount of amortization & impairment of balances
• Disclose judgments made in determining the cost incurred to obtain or
fulfil a contract at the amortization period
THANK YOU