IFRS 15

Revenue from
contracts with
customers
.
 Overview
 SCOPE
 OBJECTIVE

 DEFINITIONS

 RECOGNITION and MEASUREMENT

 The 5 Steps

 Warranties

 Contracts
 Scope

An entity shall apply this Standard to all contracts

with customers, except the following:

(a) Lease contracts within the scope of IFRS 16 Leases;

(b) Insurance contracts within the scope of IFRS 4 Insurance
Contracts;
(c) Financial instruments and other contractual rights or obligations
within the scope of IFRS 9 Financial Instruments, IFRS 10
Consolidated Financial Statements, IFRS 11 Joint Arrangements, IAS
27 Separate Financial Statements and IAS 28 Investments in
Associates and Joint Ventures; and
(d) Non-monetary exchanges between entities in the same line of
business to facilitate sales to customers or potential customers.
Objective

The objective of this Standard is

to establish the principles that an
entity shall apply to report useful
information to users of financial
statements about the nature,
amount, timing and uncertainty
of revenue and cash flows arising
from a contract with a customer.
 Definitions
Income arising in the course of an entity's
Revenue ordinary activities

.
Contract An agreement between two or more parties that
creates enforceable rights and obligations

An entity's right to consideration in exchange

Contract for goods or services that is conditioned on
. asset something other than the passage of time (for
example the entity's future performance).

An entity's right to consideration that is

Receivabl unconditional – ie only the passage of time is
e required before payment is due
 Continued
• An entity's obligation to transfer goods or services
Contract
liability to a customer for which the entity has received
consideration (or the amount is due) from the
customer

Performanc • A promise in a contract with a customer to transfer

e to the customer goods or services that are distinct
obligation

Stand- • The price at which an entity would sell a promised

. alone good or service separately to a customer
selling
price

The amount of consideration to which an entity expects to

Transactio be entitled in exchange for transferring promised goods or
n price services to a customer, excluding amounts collected on
.. behalf of third parties
 Recognition and
measurement

St
. e
p
• Identify the contract(s) with a customer

1
St
e • Identify the performance obligation(s) in the contract
p
2
St
e • Determine the transaction price
p
3
St • Allocate the transaction price to the performance
e obligations in the contract
p
4
St • Recognize revenue when (or as) the entity satisfies a
e performance obligation
p
5
 Step 1: Identify the contract
with the customer

A contract with a customer is within the scope of IFRS 15 only when:

.
. .
. . .
(d) The (e) It is
(a) The (b) Each (c) The probable
parties party's payment contract
has that the
have rights can terms can entity will
approved be be commercial
substance. collect the
the identified. identified. considerati
contract on to which
it will be
entitled.
 Combination of contracts

• An entity shall combine two or more contracts entered into at or

near the same time with the same customer (or related parties of
the customer) and account for the contracts as a single contract if
one or more of the following criteria are met:

. (a) The contracts are negotiated as a package

with a single commercial objective;

(b) The amount of consideration to be paid in

. one contract depends on the price or
performance of the other contract; or
(c) The goods or services promised in the
. contracts (or some goods or services promised
in each of the contracts) are a single
performance obligation
 Contract modifications

-A contract modification is a (a) The scope of the contract

change in the scope or price (or increases because of the addition
both) of a contract that is of promised goods or services that
approved by the parties. A are distinct; and
contract modification exists when
the parties to a contract approve
a modification that either creates
new or changes existing
enforceable rights and
obligations. (b) The price of the contract
increases by an amount of
consideration that reflects the
-An entity shall account for a
entity’s stand-alone selling prices
contract modification as a
of the additional promised goods or
separate contract if both of the
services and any appropriate
following conditions are present:
adjustments to that price to reflect
the circumstances of the particular
contract.
 Step 2: Identify the separate
performance obligations
– A contract includes promises to provide goods or services to a customer. Those
promises are called performance obligations
– A company would account for a performance obligation separately only if the
promised good or service is distinct.

a good or service that is promised to a customer is distinct if

both of the following criteria are met:

(a) The customer can benefit from the good or

. service on its own or together with other
resources that are readily available
(b) The entity's promise to transfer the good
. or service to the customer is separately
identifiable from other promises in the
contract
 Step 3: Determine the
transaction price
• The transaction price is the amount of consideration a company expects to be
entitled to from the customer in exchange for transferring goods or services.
• Variable Consideration –

 discounts

 rebates,

 Refunds

 price concessions

 credits and penalties

 Step 4: Allocate the transaction
price to the performance
obligations
.

Where a contract contains more than one

distinct performance obligation a company
allocates the transaction price to all separate
performance obligations in proportion to the
stand-alone selling price of the good or
service underlying each performance
obligation. If the good or service is not sold
separately, the company would have to
estimate its stand-alone selling price.
.
when (or as) a performance obligation
is
satisfied
The entity satisfies a performance obligation by transferring control
of a promised good or service to the customer.

A performance obligation can be satisfied at a point in time, such

as when goods are delivered the customer, or over time.

Over time
The customer simultaneously receives and
. consumes the benefits as the performance
takes place.

The entity's performance creates or enhances

. an asset that the customer controls as the
asset is created or enhanced.

Two Methods- Input and Output.

 IFRS 15 Step 5 – recognition
of revenue (point in time)
 If not over time, then point in time….
 recognise revenue when control transfers
 indicators of the transfer of control of a good or
service include:

The
The entity customer The
The entity The
has has the customer
has a customer
transferred significant has
present right has legal
physical risks and accepted the
to payment title
possession rewards of asset
ownership
 Common types of
transaction

• Warranties

• principal versus agent

• Consignment arrangements
 IFRS 15-Continued

Examples, application
guidance and details on the
five step models
 IFRS 15 Step 1 – identify the
contract
combination of contracts
Contracts entered into at or near the same time with the
same customer – is one or more of the following criteria
met?

Negotiated as a package with a single commercial objective

Linked consideration

Goods or services promised form a single performance obligation

 IFRS 15 Step 1 – identify the
contract
contract modifications
 Definition→ a change in the scope or price (or both)
of a contract that is approved by the parties to the
contract
Continue to apply IFRS 15
Is contract
to existing contract until
modification
approved? No contract modification is
approved
Yes

Does it add distinct Are remaining goods or

goods or services No
services distinct from those
at stand-alone already transferred?
selling prices?
Yes Yes No
Account for as Account for as
termination of part of original
Account as a separate existing contract –
contract contract and cumulative
creation of new catch-up
contract adjustment
 price
transaction price is the amount of consideration
to which entity expects to be entitled in
exchange for goods or services

Variable
Existence of Non-cash
significant considerati
consideration financing
component on
Amount of consideration can Adjust
vary because of discounts, consideration if Measure at fair
rebates, refunds, credits, price timing provides value
concessions, incentives, customer or entity
performance bonuses etc with significant
benefit of financing

Estimate using If fair value cannot

Expected Value or Most Practical expedient be estimated,
Likely Amount but – no adjustment if measure
‘Constrained’ (next the period between consideration
slide) consideration and indirectly by
transfer of good reference to stand-
and service is one
year or less alone selling price
Exception for licences of the goods or
of intellectual property services transferred
 IFRS 15 Step 3 – determining the transaction
price
Constraining estimates of variable
consideration

Include estimate of variable consideration in the transaction price only to

extent it is highly probable a significant reversal of revenue will not occur
when uncertainty is resolved

• Entities shall use their expectations and the likelihood of

revenue reversal using indicators, eg
• Factors outside entity’s influence (market, 3rd-party
actions etc)
• Length of time before uncertainty resolved
• Entity’s level of experience with similar types of contracts
 Step 3: Determine the transaction
price- Examples
Entity A supplies laptop computers to large businesses. On 1 July 20X5,
Entity A entered into a contract with Entity Z, under which Entity Z was to
purchase laptops at 500 per unit. The contract states that if Entity Z
purchases more than 500 laptops in a year, the price per unit is reduced
retrospectively to 450 per unit. Entity A's year end is 30 June.
(a) As at 30 September 20X5, Entity Z had bought 70 laptops from Entity A. Entity A therefore
estimated that Entity Z's purchases would not exceed 500 in the year to 30 June 20X6, and Entity
Z would therefore not be entitled to the volume discount.
(b) During the quarter ended 31 December 20X5, Entity Z expanded rapidly as a result of a
substantial acquisition, and purchased an additional 250 laptops from Entity A. Entity A then
estimated that Entity Z's purchases would exceed the threshold for the volume discount in the
year to 30 June 20X6.
 Required -Calculate the revenue Entity A would recognize in:
 (a) Quarter ended 30 September 20X5
 (b) Quarter ended 31 December 20X5
 IFRS 15 Step 3 – determining the
transaction price
no financing component
There is no significant financing component if
any of the following factors exist:
The customer paid for the goods or services in advance and
the timing of the transfer of those goods or services is at the
discretion of the customer.

The amount or timing of that consideration varies on the basis of the

occurrence or non-occurrence of a future event that is not
substantially within the control of the customer or the entity, for
example, if the consideration is a sales-based royalty.

The difference between the promised consideration and the cash

selling price of the good or service….arises for reasons other than the
provision of finance to either the customer or the entity, and the
difference between those amounts is proportional to the reason for the
difference.
 IFRS 15 Step 5 – recognition of
revenue (over time)

Recognise
revenue over
time

The entity’s
The customer The entity’s performance does not
simultaneously performance create an asset with
receives and creates or an alternative use to
consumes the enhances an asset the entity, and the
benefits provided by or that the customer or entity has an
controls as the enforceable right to
the entity’s payment for
performance as the asset is created or performance
entity performs enhanced completed to date
 IFRS 15 Step 5 – recognition of revenue over
time
methods of measuring progress
Objective: to depict performance in transferring control of goods or
services to the customer.
Method Description Examples Advantage Disadvantage

Output • Based on the • Surveys of • Probably • May not be

value of the performance to most directly
goods delivered date faithful observable
relative to those • Appraisals of depiction of • Information
undelivered results achieved entity’s may be
• Milestones reached performanc expensive to
• Units produced or e obtain
delivered

Input • Based on the • Resources • Can • May not be a

entity’s efforts consumed recognise direct
or inputs • Costs incurred revenue on relationship
towards • Labour hours straight-line between
satisfying the • Machine hours basis if inputs and
performance inputs transfer of
obligation expended control
relative to the evenly
total expected
inputs
 IFRS 15 Step 5 – Recognition of
revenue over time
measuring progress - miscellaneous

Must apply a single method for each performance

obligation. Must apply the method consistently.

Changes in measurement of progress → an IAS 8

change in accounting estimate.

If cannot measure outcome of performance obligation

but expect to at least cover costs → limit revenue to
cost incurred.
Sale of goods (and services)
when the performance
obligation is satisfied at a
point in time
 IFRS identifying the contract
consideration is not the stated
price—implicit price concession

 An entity sells 1,000 units of a prescription drug to a customer → promised

consideration = 1 million.

 First sale to a customer in a new region, which is experiencing significant economic

difficulty.
 the seller expects that it will not be able to collect the full amount of the promised

consideration.

 The seller expects the region’s economy to recover over the next two to three years.

 A relationship with the customer could help it to forge relationships with other

potential customers in the region.

 The entity expects to provide a price concession (accept a lower amount): estimate of

variable consideration = 400,000.

 Continued
Is probable that the entity will collect the
consideration?

1) Yes, it is probable that the entity will collect

the variable consideration of 400,000;
 modifications
modification of a contract for
goods

 An entity promises to sell 120 products to a customer for

12,000 (100 per product) → transferred to the customer over
a six-month period.
 The entity transfers control of each product at a point in time.
 After the entity has transferred control of 60 products to the
customer, the contract is modified to require the delivery of
an additional 30 products (that were not included in the initial
contract).
 See following slides for Case A and Case B
 Continued-Case A
 Case A: the price of the contract modification for
the additional 30 products is an additional 2,850
or 95 per product → reflects the stand-alone
selling price.

Is the substance of the contract modification

A new and separate contract for 30 future products that does not affect
the accounting for the existing contract. Consequently, the entity
recognises revenue of 100 per product for the 120 products in the
original contract and $95 per product for the 30 products in the new
contract;
 Continued-Case B

 Case B: in negotiating the purchase of an additional 30 products, the

parties initially agree on a price of 80 per product. However, the
customer discovers that the initial 60 products transferred contained
minor defects. The entity promises a partial credit of 15 per product
to compensate the customer for the poor quality and incorporates
the credit of 900 (15 credit × 60 products) into the price that the
entity charges for the additional 30 products. The contract
modification specifies that the price of the additional 30 products is
1,500 or 50 per product. That price comprises the agreed-upon price
for the additional 30 products of 2,400, or 80 per product, less the
credit of 900.
 Continued
Is the substance of the contract modification?

1) The renegotiation of the original contract (ie neither 50

nor 80 per product reflect the stand-alone selling price
of the additional products). Consequently, the entity
applies the requirements in paragraph 21(a) of IFRS 15
and accounts for the modification as a termination of
the original contract and the creation of a new contract.
In accordance with the substance of the new contract,
the entity recognises revenue for each of the remaining
products at a blended price of 93.33 {[(100 × 60
products not yet transferred under the original contract)
+ (80 × 30 products to be transferred under the
contract modification)] ÷ 90 remaining products}.; or
 IFRS 15 Example contract modification
change in the transaction price after a
contract modification

 1 July 2010: an entity promises to transfer two distinct products

to a customer.
 Product X transfers to the customer at contract inception; and
 Product Y transfers on 31 March 2011.
 Consideration = fixed consideration 1,000 + variable
consideration 200.
 estimate of variable consideration included in the transaction price →
highly probable that a significant reversal in cumulative revenue
recognised will not occur when the uncertainty is resolved.
 transaction price of $1,200 → allocated equally to X and Y.
 30 November 2010: the scope of the contract is modified
 include the promise to transfer Product Z (in addition to the
undelivered Product Y) to the customer on 30 June 2011.
 the price of the contract is increased by $300 (fixed consideration),
which does not represent the stand-alone selling price of Product Z.
 The stand-alone selling price of Product Z is the same as the stand-
alone selling prices of Products X and Y.
 Continued
Is the substance of the contract modification ?
1) The renegotiation of the original contract (ie 300
does not reflect the stand-alone selling price of
Product Z). Consequently, the entity accounts
for the modification as a termination of the
original contract and the creation of a new
contract for the sale of Products Y and Z (ie 450
each); or
 IFRS 15 Step 3 Example constraining
estimates of variable consideration
volume discount incentive

 1 January 2018 : sell Product A for 100 per unit.

 If the customer purchases more than 1,000 units in a
calendar year → price per unit is retrospectively
reduced to 90 per unit (variable consideration).
 First quarter ended 31 March 2018: sells 75 units
 estimate: purchases will not exceed 1,000-unit threshold
required for volume discount.
 May 2018: the customer acquires another company
 Second quarter ended 30 June 2018: sells an additional 500
units of Product A to the customer.
 Estimate: purchases will exceed 1,000-unit threshold for the
calendar year and entity will be required to retrospectively
reduce the price per unit to $90.
 IFRS 15 Step 3 Example significant
financing component

An entity sells a new product for 121 payable 24 months

after delivery → customer obtains control at inception.

 Because the product is new, the entity has no relevant

historical evidence of product returns or other
available market evidence.

 Cash selling price = 100, which represents the amount

that the customer would pay upon delivery for the same
product sold under otherwise identical terms and
conditions as at contract inception.

 Cost of the product to the entity = 80.

 Continued
Is there a financing Component in the contract?
The contract includes a significant financing component. This
is evident from the difference between the amount of
promised consideration of 121 and the cash selling price of
100 at the date that the goods are transferred to the
customer.

The contract includes an implicit interest rate of 10 per cent

(ie the interest rate that over 24 months discounts the
promised consideration of 121 to the cash selling price of
100). The entity evaluates the rate and concludes that it is
commensurate with the rate that would be reflected in a
separate financing transaction between the entity and its
customer at contract inception. The following journal entries
illustrate how the entity accounts for this contract
 IFRS 15 Application guidance
consignment arrangements
Delivers Dealer
Sells End
Enti product or
custo
ty distrib
mer
utor

Held in consignment
→ entity does not
Control No
passed?
recognise
revenue
Indicators of a consignment arrangement include:
 the product is controlled by the entity until a specified event occurs
 the entity is able to require the return of the product to a third
party, for example, another dealer
 the dealer does not have an unconditional obligation to pay for the
product
 IFRS 15 Application guidance
customer acceptance

Customer acceptance

When evaluating when a customer obtains

control of a good or service, consider clauses
that allow a customer to cancel a contract or
require an entity to take remedial action if a
good or service does not meet agreed-upon
specifications

If entity can objectively

If entity cannot objectively
determine that control of a
determine that good or
good or service transferred
service provided is in
in accordance with agreed-
accordance with agreed-
upon specifications →
upon specifications →
customer acceptance is a
cannot conclude customer
formality and does not
obtained control until
affect determination of
receive customer’s
when customer obtained
acceptance
control
 Example-Consignment
arrangements

Entity A owns a number of car dealerships throughout a geographical area.

The terms of the arrangement between the dealerships and the
manufacturer are:
(a) Legal title passes when the cars are either used by Daley Co for demonstration purposes
or sold to a third party.
(b) The dealer has the right to return vehicles to the manufacturer without penalty. (Daley Co
has rarely exercised this right in the past.)
(c) The transfer price is based on the manufacturer's list price at the date of delivery.
(d) Daley Co pays a substantial interest-free deposit to the manufacturer based on the
number of cars held.

Required

Should the asset and liability be recognised by Daley Co at the date of

delivery?
 IFRS 15 Step 5 Example no enforceable right to
payment for performance completed to date .:
performance obligation satisfied at a point in
time (akin to ‘traditional’ sale of goods)

An entity enters into a contract to build an item of

equipment.
 Payment schedule:
 10% of contract price as advance payment at contract inception.
 Regular payments throughout the construction period: 50% of the contract
price.
 Final payment of 40% of the contract price after construction is completed
and the equipment has passed the prescribed performance tests.
 Payments are non-refundable unless the entity fails to
perform as promised.
 If the customer terminates the contract, the entity is entitled
only to retain any progress payments received from the
customer.
 The entity has no further rights to compensation from the
customer.
 Continued
At contract inception, the entity assesses whether its
performance obligation to build the equipment is a performance
obligation satisfied over time

As part of that assessment, the entity considers whether it has an

enforceable right to payment for performance completed to
date , it can be seen from the question that the entity does not
have a right to payment for performance completed to date.

Because the entity does not have a right to payment for

performance completed to date, the entity’s performance
obligation is not satisfied over time ,Accordingly, the entity does
not need to assess whether the equipment would have an
alternative use to the entity. Thus, the entity accounts for the
construction of the equipment as a performance obligation
satisfied at a point in time in
 Rendering services,
construction
contracts (and sale
of goods) when
performance is
satisfied over time
(see paragraphs 35
to 37 and 39 to 45 of
IFRS 15)
 Example-IFRS 15 Step 5 customer
simultaneously receives and consumes
the benefits
 An entity enters into a contract to provide
monthly payroll processing services to a
customer for one year → a single performance
obligation
 The performance obligation is satisfied over time
 customer simultaneously receives and consumes the
benefits of the entity’s performance in processing each
payroll transaction as and when each transaction is
processed → another entity would not need to re-
perform payroll processing services for the service that
the entity has provided to date
 The entity recognises revenue over time by measuring
its progress towards complete satisfaction of that
performance obligation.
 Example-IFRS 15 Step 3 variable
consideration
estimating variable consideration

 A contract with a customer to build a customised asset.

 Promise to transfer the asset → performance obligation satisfied over
time.

 Promised consideration = 2.5 million → reduced or

increased depending on the timing of completion:

 for each day after 31 March 2017 that the asset is incomplete:
reduced by 10,000.
 for each day before 31 March 2017 that the asset is complete:
increased by 10,000.
 upon completion of the asset, a third party will inspect the asset and
assign a rating based on metrics that are defined in the contract.
 if receives a specified rating → entitled to 150,000 incentive bonus.
 Step 4: Allocate the transaction price
to the performance
obligations- Example

A mobile phone company gives customers a free handset when they

sign a two-year contract for provision of network services. The
handset has a stand-alone price of $100 and the contract is for $20
per month.

Required- Allocate the transaction price

 Continued
 In determining the transaction price, the entity prepares a separate
estimate for each element of variable consideration to which the entity will
be entitled

 The entity may decide to use the expected value method to estimate the
variable consideration associated with the daily penalty or incentive (ie 2.5
million, plus or minus 10,000 per day). This is because it is the method that
the entity expects to better predict the amount of consideration to which it
will be entitled.

 The entity may decide to use the most likely amount to estimate the
variable consideration associated with the incentive bonus. This is because
there are only two possible outcomes (150,000 or 0) and it is the method
that the entity expects to better predict the amount of consideration to
which it will be entitled.

 The entity considers the requirements on constraining estimates of

variable consideration to determine whether the entity should include some
or all of its estimate of variable consideration in the transaction price.
 IFRS 15 Application guidance
licensing

Licence → gives
the customer
rights to the
intellectual
property of an
entity. May
include:

Motion
pictures, music
Patents,
Software and and other
Franchises trademarks
technology forms of media
and copyrights
and
entertainment
 IFRS 15 Application guidance
licensing (continued)

Licence not distinct from other promised goods or services

• Licence together with other promised goods or services accounted for as a
single performance obligation
• Example: a licence that the customer can benefit from only in conjunction with a
related service

Licence is distinct from other goods or services

• Accounted for as a single performance obligation either:
• Over time – if right to access intellectual property throughout licence period.
Right to access intellectual property if:
• Licensor will undertake activities that significantly affect the intellectual
property;
• Licence exposes licensee to effects of activities; and
• Activities are not a good or service to licensee.
• OR
• At a point in time – if right to use intellectual property as it exists when
the licence is granted.
 IFRS 15 Application guidance
licensing (continued)
Recognise revenue for a sales-based or usage-based
royalty promised in exchange for a licence of
intellectual property only when (or as) the later of
the following events occurs:

r fo rm an c e o bligation
The pe o r all of the
h s o m e
ale to whic
The subsequent s sales-b a s e d o r
e
u s age-based
n allocated
or usage occurs lt y h a s b e
roya t isfie d (or
bee n s a
has
ed)
partially satisfi
 IFRS 15 Example licensing
licence of intellectual property
 Contract: licence for three years intellectual
property = design and production processes for a
good.
 The customer will obtain any updates to the
intellectual property for new designs or production
processes that may be developed by the entity.
 The updates are essential to the customer’s ability
to use the licence → the customer operates in an
industry in which technologies change rapidly.
 The entity does not sell the updates separately and
the customer does not have the option to purchase
the licence without the updates.
 Continued
 The entity may assesse the services promised to determine which goods and
services are distinct. The entity may determines that although the entity can
conclude that the customer can obtain benefit from the licence on its own
without the that benefit would be limited because the updates are critical to
the customer’s ability to continue to make use of the licence in the rapidly
changing technological environment in which the customer operates.
 The entity observes that the customer does not have the option to purchase
the licence without the updates and the customer obtains limited benefit from
the licence without the updates. Therefore, the entity may conclude that the
licence and the updates are highly interrelated and the promise to grant the
licence is not distinct within the context of the contract, because the licence is
not separately identifiable from the promise to provide the updates.
 The entity may conclude that because the customer simultaneously receives
and consumes the benefits of the entity’s performance as it occurs, the
performance obligation is satisfied over time in.
Warranties
 IFRS 15 Application guidance
warranties

Does the customer have the option Service-

to purchase the warranty type
separately? warranty
Yes A distinct
No service →
Does the promised warranty or a account for
part of the promised warranty promised
provide the customer with a service warranty as
in addition to the assurance that a
Yes
the product complies with agreed- performance
upon specifications? obligation
No and allocate
a portion of
Assurance-type warranty the
transaction
price to the
Accounted for in accordance with performance
IAS 37 obligation
 IFRS 15 Application guidance
warranties – assessing whether a
warranty provides a service

 In
assessing whether a warranty provides a
customer with a service in addition to the
assurance that the product complies with agreed-
upon specifications, an entity shall consider:
 Whether required by law
 If required by law → indicates that the warranty is not a
performance obligation
 Length of coverage period
 the longer the coverage period → more likely it is a
performance obligation
 Nature of the tasks that the entity promises to perform
 If necessary for an entity to perform specified tasks to
ensure product conforms with specification → likely do not
give rise to a performance obligation
 Example - warranties

 A manufacturer provides a warranty with a product

 The warranty provides the customer with:

 assurance that the product complies with agreed-upon

specifications and will operate as promised for one year

from the date of purchase; and

 the right to receive up to 20 hours of training services on

how to operate the product at no additional cost.

 Continued
Is the warranty a separate performance obligation?

 The product and the training services are distinct. The training services are
not significantly modified or customised by the product. The training services
are not highly dependent on, or highly interrelated with, the product.

 The entity may conclude, that the warranty does not provide the customer
with a good or service in addition to that assurance and, therefore, the entity
does not account for it as a performance obligation. The entity accounts for
the assurance-type warranty in accordance with the requirements in IAS 37.

 As a result, the entity allocates the transaction price to the two performance
obligations (the product and the training services) and recognises revenue
when (or as) those performance obligations are satisfied.
Contract costs
 IFRS 15 Contract costs
• Recognised as an asset if:
• - Incremental
Increment • For example: Sales commissions
al costs of • - Expected to be recovered
obtaining • Cost incurred regardless of whether contract was obtained → expense
a contract when incurred
• Practical expedient: if amortisation period is one year or less → may
expense

• If not within the scope of another standard, recognised as an asset if:

• - Relate directly to a contract or an anticipated contract
• - Relate to future performance
Costs to
• - Expected to be recovered
fulfil a
contract • For example: Pre-contract or setup costs

• Asset recognised → amortised on a systematic

basis
• Asset impaired if, for relevant goods or services,
remaining consideration less than costs not
already expensed = impairment loss in profit or
 IFRS 15 Costs to fulfil a
contract
Fulfilment costs eligible for capitalisation
must relate directly to a contract (or a
specific anticipated contract) and include:
• Direct labour - salaries and wages of employees who provide
the promised services directly to the customer
• Direct materials - supplies used in providing the promised
services
Fulfilment costs that are expensed when
incurred include:

• General and administrative costs

• Costs of wasted materials, labour or other resources to fulfil the
contract that were not reflected in the price of the contract
 IFRS 15 Example :contract costs
incremental costs of obtaining a
contract
 An entity wins a competitive bid to provide
consulting services to a new customer. Costs
incurred to obtain the contract:
$
External legal fees for due diligence 15,000
Travel costs to deliver proposal 25,000
Commissions to sales employees 10,000
Total costs incurred 50,000

 The entity expects to recover commissions to sales employees

through future fees for the consulting services.
 The entity also pays discretionary annual bonuses to sales
supervisors based on annual sales targets, overall profitability of
the entity and individual performance evaluations.
 The external legal fees and travel costs would have been incurred
regardless of whether the contract was obtained.
Principal versus
agent
 IFRS 15 Application guidance
principal versus agent
considerations

If another party is involved in providing

goods or services to a customer →
determine if entity’s promise is a
performance obligation:
Entity is principal →
recognise revenue in the
to provide the specified
gross amount of
goods or services itself
consideration to which it
expects to be entitled
Entity is agent →
to arrange for the other recognise revenue in the
party to provide those amount of fee or
goods or services commission to which it
expects to be entitled
IFRS 15 Application guidance
principal versus agent
considerations (continued)
The entity
does not
have
Another inventory The entity
party is risk does not
primarily have
responsibl discretion
Indicators
e for that an in
fulfilling entity is an establishin
the agent
g prices
include: The
contract
entity’s
The entity considerati
is not on is in the
exposed to form of a
credit risk commissio
n
Non-refundable
upfront fees
IFRS 15 Application guidance
non-refundable upfront fees

Customer charged non-refundable upfront fee at or near

contract inception → Examples: joining fees in health club
membership contracts, activation fees in
telecommunication contracts

If the fee does not result in the transfer of a promised good

or service → account for as an advance payment for future
goods or services

If the non-refundable upfront fee relates to a good or

service → evaluate whether to account for the good or
service as a separate performance obligation
 IFRS 15 Example non-
refundable upfront fees
 An entity enters into a contract with a customer under standard
terms for one year of transaction processing services.

 The customer is required to pay the entity a nominal and non-

refundable upfront fee to set up the customer on the entity’s
systems and processes.

 The customer can renew the contract each year without paying an
additional fee.

 The entity’s setup activities do not transfer a good or service to

the customer.
 Continued
 Is there a separate performance obligation following
the upfront fees?
 The entity’s setup activities do not transfer a good
or service to the customer and, therefore, do not
give rise to a performance obligation.
 The entity may conclude that the renewal option
does not provide a material right to the customer
that it would not receive without entering into that
contract. The upfront fee is, in effect, an advance
payment for the future transaction processing
services. Consequently, the entity may determine
the transaction price, which includes the non-
refundable upfront fee, and recognises revenue for
the transaction processing services.
 Summary of accounting treatment

Statement of profit or loss

(a) Revenue and costs

Sales revenue and associated costs should be recorded in profit or loss as the

contract activity progresses.

b) Profit recognised in the contract

must reflect the proportion of work carried out, which will be equivalent

to the amount of performance obligation satisfied.

 Summary of accounting treatmen

Statement of financial position

(a) Contract asset (presented separately under current assets)

b) Receivables

(c) Contract liability

Thank You
Questions and Discussion