IFRS 15, Revenue from contract with customers
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IFRS 15 REVENUE FROM CONTRACTS WITH CUSTOMERS
IFRS 15 sets out rules for the recognition of revenue based on transfer of control to the customer from the entity supplying the goods or services.
Recognition and measurement
Generally revenue is recognized when the entity has transferred promised goods or services to the customer. IFRS 15 Revenue from contracts with customer sets out five steps for the recognition and measurement process.
The five-step model
Under IFRS 15 revenue from contracts with customers is recognized and measured using a five step model.
Step 1 Identify the contract with the customer.
Step 2 Identify the separate performance obligations.
The key point is distinct goods or services. 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 is distinct if it is sold separately or if it could be sold separately because it has a distinct function and a distinct profit margin.
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. The transaction price
would reflect the company's probability-weighted estimate of variable consideration(including reasonable estimates of contingent amounts) in addition to the effects of the
customer's credit risk and the time value of money (if material).
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 standalone selling price.
Step 5 Recognize revenue 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 to the customer, or over time. An obligation satisfied over time will meet one of the following criteria:
- 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. - 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.
Performance obligations satisfied over time
A performance obligation satisfied over time meets the criteria in Step 5 above and, if it entered into more than one accounting period, would previously have been described as a long-term contract.
In this type of contract an entity often has an enforceable right to payment for performance completed to date. The standard describes this as an amount that approximates the selling price of the goods or services transferred to date (for example recovery of the costs incurred by the entity in satisfying the performance plus a reasonable profit margin).
Methods of measuring the amount of performance completed to date encompass output methods and input methods.
Output methods recognise revenue on the basis of the value to the customer of the goods or services transferred. They include surveys of performance completed, appraisal of units produced or delivered etc.
Input methods recognise revenue on the basis of the entity's inputs, such as labour hours, resources consumed, costs incurred. If using a cost-based method, the costs incurred must contribute to the entity's progress in satisfying the performance obligation.
Common types of transaction
Warranties
If a customer has the option to purchase a warranty separately from the product to which it relates, it constitutes a distinct service and is accounted for as a separate performance obligation. This would apply to a warranty which provides the customer with a service in addition to the assurance that the product complies with agreed-upon specifications.
Principal versus agent
An entity must establish in any transaction whether it is acting as principal or agent.
It is a principal if it controls the promised good or service before it is transferred to the customer. When the performance obligation is satisfied, the entity recognises revenue in the gross amount of the consideration to which it expects to be entitled for those goods or services.
It is acting as an agent if its performance obligation is to arrange for the provision of goods or services by another party. Satisfaction of this performance obligation will give rise to the recognition of revenue in the amount of any fee or commission to which it expects to be entitled in exchange for arranging for the other party to provide its goods or services.
Repurchase agreements
Under a repurchase agreement an entity sells an asset and promises, or has the option, to repurchase it. Repurchase agreements generally come in three forms.
(a) An entity has an obligation to repurchase the asset (a forward contract).
(b) An entity has the right to repurchase the asset (a call option).
(c) An entity must repurchase the asset if requested to do so by the customer (a put option).
In the case of a forward or a call option the customer does not obtain control of the asset, even if it has physical possession. The entity will account for the contract as:
(a) A lease in accordance with IAS 17, if the repurchase price is below the original selling price; or
(b) A financing arrangement if the repurchase price is equal to or greater than the original selling price. In this case the entity will recognise both the asset and a corresponding liability.
Consignment arrangements
When a product is delivered to a customer under a consignment arrangement, the customer (dealer) does not obtain control of the product at that point in time, so no revenue is recognised upon delivery.
Indicators of a consignment arrangement include:
(a) The product is controlled by the entity until a specified event occurs, such as the product is sold on, or a specified period expires.
(b) The entity can require the return of the product, or transfer it to another party.
(c) The customer (dealer/distributor) does not have an unconditional obligation to pay for the product.
Required accounting
The following apply where it is concluded that control of the inventory has been transferred to the dealer.
(a) The inventory should be recognised as such in the dealer's statement of financial position, together with a corresponding liability to the manufacturer.
(b) Any deposit should be deducted from the liability and the excess classified as a trade payable.
Where it is concluded that control of the inventory has not been transferred to the dealer, the following apply.
(a) The inventory should not be included in the dealer's statement of financial position until the transfer of control has taken place.
(b) Any deposit should be included under 'other receivables'.
Bill-and-hold arrangements
Under a bill-and-hold arrangement goods are sold but remain in the possession of the seller for a specified period, perhaps because the customer lacks storage facilities.
For a customer to have obtained control of a product in a bill and hold arrangement, the following criteria must all be met:
(a) The reason for the bill-and-hold must be substantive (for example, requested by the customer).
(b) The product must be separately identified as belonging to the customer.
(c) The product must be ready for physical transfer to the customer.
(d) The entity cannot have the ability to use the product or to transfer it to another customer.
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