Workbook on IFRS15 Revenue

Introduction

IFRS 15 replaces the following standards and interpretations:

IAS 18 Revenue,
IAS 11 Construction Contracts
SIC 31 Revenue – Barter Transaction Involving Advertising Services
IFRIC 13 Customer Loyalty Programs
IFRS 15 Agreements for the Construction of Real Estate and
IFRIC 18 Transfer of Assets from Customers

Key features

Transfer of control

Revenue is recognised when a customer obtains control of a good, or service. A customer obtains control when it has the ability to direct the use of and obtain the benefits from the good, or service.

Transfer of control is not the same as transfer of risks and rewards, nor is it necessarily the same as the culmination of an earnings process.

Entities will also need to determine whether revenue should be recognised over time, or at a point in time.

Variable consideration

Entities might agree to provide goods, or services, for consideration that varies upon certain future events occurring, or not occurring. Examples include refund rights, performance bonuses and penalties.

These amounts have often not recognised as revenue until the contingency is resolved. Now, an estimate of variable consideration is included in the transaction price, if it is highly probable that the amount will not result in a significant revenue reversal, if estimates change.

Even if the entire amount of variable consideration fails to meet this threshold, management will need to consider whether a portion (a minimum amount) does meet the criterion. This amount is recognised as revenue when goods or services are transferred to the customer.

This could affect entities in multiple industries where variable consideration is currently not recorded until all contingencies are resolved. Management will need to reassess estimates each reporting period, and adjust revenue accordingly. .

There is a narrow exception for intellectual property (IP) licences where the variable consideration is a sales- or usage-based royalty.

Allocation of transaction price based on relative stand-alone selling price

Entities that sell multiple goods, or services, in a single arrangement must allocate the consideration to each of those goods, or services. This allocation is based on the price an entity would charge a customer on a stand-alone basis for each good, or service.

Management should first consider observable data to estimate the stand-alone selling price. An entity will need to estimate the stand-alone selling price, if such data does not exist. Some entities will need to determine the stand-alone selling price of goods, or services, that have not previously required this assessment, such as entities that report under US GAAP and issue customer loyalty points.

Licences

Entities that license their IP to customers will need to determine whether the licence transfers to the customer over time or at a point in time. A licence that is transferred over time allows a customer access to the entity’s IP as it exists during the licence period.

Licences that are transferred at a point in time allow the customer the right to use the entity’s IP as it exists when the licence is granted. The customer must be able to direct the use of, and obtain substantially all of, the remaining benefits from the licensed IP to recognise revenue when the licence is granted. IFRS 15 includes several examples.

Time value of money

Some contracts provide the customer or the entity with a significant financing benefit (explicitly or implicitly). This is because performance by an entity and payment by its customer might occur at significantly different times.

An entity should adjust the transaction price for the time value of money if the contract includes a significant financing component.

The standard provides certain exceptions to applying this guidance and a practical expedient which allows entities to ignore time value of money if the time between transfer of goods, or services, and payment is less than one year.

Contract costs

Entities sometimes incur costs (such as sales commissions, or mobilisation activities) to obtain or fulfil a contract.

Contract costs that meet certain criteria are capitalised as an asset and are amortised as revenue is recognised. More costs are expected to be capitalised in some situations.

Management will also need to consider how to account for contract costs incurred for contracts that are not completed upon the adoption of IFRS 15.

Disclosures

Extensive disclosures are required to provide greater insight into both revenue that has been recognised, and revenue that is expected to be recognised in the future from existing contracts.

Quantitative and qualitative information will be provided about the significant judgments, and changes in those judgments, that management made to determine revenue that is recorded.

Definitions

contract An agreement between two or more parties that creates

enforceable rights and obligations.

contract asset An undertaking’s right to consideration in exchange for goods or services that the undertaking has transferred to a customer when that right is conditioned on something other than the passage of time (for example, the undertaking’s future performance).

contract liability An undertaking’s obligation to transfer goods or services to a customer for which the undertaking has received consideration (or the amount is due) from the customer.

customer A party that has contracted with an undertaking to obtain goods or services that are an output of the undertaking’s ordinary activities in exchange for consideration.

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.

performance obligation

A promise in a contract with a customer to transfer to the customer either:

(i) a good or service (or a bundle of goods or services) that is distinct; or(ii) a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.

revenue Income arising in the course of an undertaking’s ordinary activities.

stand-alone selling price (of a good or service)

The price at which an undertaking would sell a promised good or service separately to a customer.

transaction price (for a contract with a customer)

The amount of consideration to which an undertaking expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties.

IFRS 15 Main Provisions

The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

To achieve that core principle, an entity should apply the following steps:

Step 1: Identify the contract(s) with a customer.

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

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

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

Step 1: Identify the Contract with a Customer

A contract is an agreement between two or more parties that creates enforceable rights and obligations. An entity should

apply the requirements to each contract that meets the following criteria:

Approval and commitment of the parties
Identification of the rights of the parties
Identification of the payment terms
The contract has commercial substance
It is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.

In some cases, an entity should combine contracts and account for them as one contract. In addition, there is guidance on the accounting for contract modifications.

Step 2: Identify the Performance Obligations in the Contract

A performance obligation is a promise in a contract with a customer to transfer a good, or service, to the customer. If an entity promises in a contract to transfer more than one good, or service, to the customer, the entity should account for

each promised good or service as a performance obligation only if it is:

(1) distinct

or (2) a series of distinct goods, or services, that are substantially the same and have the same pattern of transfer.

A good, or service, is distinct if both of the following criteria are met:

Capable of being distinct—The customer can benefit from the good, or service, either on its own, or together with other resources that are readily available to the customer.
Distinct within the context of the contract—The promise to transfer the good, or service, is separately identifiable from other promises in the contract.

A good, or service, that is not distinct should be combined with other promised goods, or services, until the entity identifies a bundle of goods, or services, that is distinct.

Step 3: Determine the Transaction Price

The transaction price is the amount of consideration (for example, payment) to which an entity expects to be entitled in exchange for transferring promised goods, or services, to a customer, excluding amounts collected on behalf of third

parties.

To determine the transaction price, an entity should consider the effects

of:

Variable consideration—If the amount of consideration in a contract is variable, an entity should determine the amount to include in the transaction price by estimating either the expected value (that is, probability-weighted amount) or the most likely amount, depending on which method the entity expects to better predict the amount of consideration to which the entity will be entitled.
Constraining estimates of variable consideration—An entity should include in the transaction price some, or all, of an estimate of variable consideration only to the extent it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. (It is highly probable that it will be paid.)
The existence of a significant financing component—An entity should adjust the promised amount of consideration for the effects of the time value of money, if the timing of the payments agreed upon by the parties to the contract (either explicitly or implicitly) provides the customer, or the entity, with a significant benefit of financing for the transfer of goods or services to the customer. In assessing whether a financing component exists and is significant to a contract, an entity should consider various factors.

As a practical expedient, an entity need not assess whether a contract has a significant financing component if the entity expects at contract inception that the period between payment by the customer and the transfer of the promised goods, or services, to the customer will be one year or less.

Noncash consideration—If a customer promises consideration in a form other than cash, an entity should measure the noncash consideration (or promise of noncash consideration) at fair value.

If an entity cannot reasonably estimate the fair value of the noncash consideration, it should measure the consideration indirectly by reference to the standalone selling price of the goods, or services, promised in exchange for the consideration.

Consideration payable to the customer—If an entity pays, or expects to pay, consideration to a customer (or to other parties that purchase the entity’s goods or services from the customer) in the form of cash or items (for example, credit, a coupon, or a voucher) that the customer can apply against amounts owed to the entity (or to other parties that purchase the entity’s goods or services from the customer), the entity should account for the payment (or expectation of payment) as a reduction of the transaction price, or as a payment for a distinct good, or service, (or both).

Step 4: Allocate the Transaction Price to the Performance Obligations in the Contract

To allocate an appropriate amount of consideration to each performance obligation, an entity must determine the standalone selling price, at contract inception, of the distinct goods, or services, underlying each performance obligation and would typically allocate the transaction price on a relative standalone selling price basis. If a standalone selling price is not observable, an entity must estimate it.

Sometimes, the transaction price includes a discount, or variable consideration, that relates entirely to one of the performance obligations in a contract. The requirements specify when an entity should allocate the discount, or variable consideration, to one (or some) performance obligation(s), rather than to all performance obligations in the contract.

An entity should allocate to the performance obligations any subsequent changes in the transaction price on the same basis as at contract inception. Amounts allocated to a satisfied performance obligation should be recognized as revenue, or as a reduction of revenue, in the period in which the transaction price changes.

Step 5: Recognize Revenue When (or As) the Entity Satisfies a Performance Obligation

An entity should recognize revenue when (or as) it satisfies a performance obligation by transferring a promised good or service to a customer. A good or service is transferred when (or as) the customer obtains control of that good or service.

For each performance obligation, an entity should determine whether the entity satisfies the performance obligation over time by transferring control of a good, or service, over time.

If an entity does not satisfy a performance obligation over time, the performance obligation is satisfied at a point in time.

An entity transfers control of a good, or service, over time and, therefore, satisfies a performance obligation and recognizes revenue over time, if one of the following criteria is met:

The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs.
The entity’s performance creates, or enhances, an asset (for example, work in process) 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.

If a performance obligation is not satisfied over time, an entity satisfies the performance obligation at a point in time. To determine the point in time at which 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, which 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.
The customer has accepted the asset.

For each performance obligation that an entity satisfies over time, an entity shall recognize revenue over time by consistently applying a method of measuring the progress toward complete satisfaction of that performance obligation.

Appropriate methods of measuring progress include output methods and input methods. As circumstances change over time, an entity should update its measure of progress to depict the entity’s performance completed to date.

Costs to Obtain, or Fulfil, a Contract with a Customer

The guidance also specifies the accounting for some costs to obtain or fulfil a contract with a customer.

Incremental costs of obtaining a contract—An entity should recognize, as an asset, the incremental costs of obtaining a contract that the entity expects to recover. Incremental costs are those costs that the entity would not have incurred, if the contract had not been obtained.

As a practical expedient, an entity may expense these costs when incurred if the amortization period is one year or less.

Costs to fulfil a contract—To account for the costs of fulfilling a contract with a customer, an entity should apply the requirements of other standards, if applicable.

Otherwise, an entity should recognize an asset from the costs to fulfil a contract if those costs meet all of the following criteria:

Relate directly to a contract (or a specific anticipated contract)
Generate, or enhance, resources of the entity that will be used in satisfying performance obligations in the future
Are expected to be recovered.

Disclosures

An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

Qualitative and quantitative information is required about:

Contracts with customers—including revenue and impairments recognized, disaggregation of revenue, and information about contract balances and performance obligations (including the transaction price allocated to the remaining performance obligations)

Significant judgments and changes in judgments—determining the timing of satisfaction of performance obligations (over time or at a point in time), and determining the transaction price and amounts allocated to performance obligations
Assets recognized from the costs to obtain or fulfill a contract.

Why change the requirements for recognising revenue?

(Source: IFRS 15 Revenue from Contracts with Customers - Project Summary and Feedback Statement (IASB) May 2014)

Inconsistencies and weaknesses in previous revenue Standards

In IFRS, significant diversity in revenue recognition practices had arisen because previous revenue

Standards contained limited guidance on many important topics, such as accounting for arrangements with multiple elements. Furthermore, the limited guidance that was provided was often difficult to apply to complex transactions, particularly because previous revenue Standards did not include any basis for conclusions.

Consequently, some companies supplemented the limited guidance in IFRS by selectively applying US GAAP.

In US GAAP, broad revenue recognition concepts were supplemented by numerous industry and transaction specific requirements, which often resulted in economically similar transactions being accounted for differently.

Furthermore, even with all of those specific requirements, revenue recognition questions continued to arise as new types of transactions emerged.

Disclosure requirements were inadequate. The disclosure requirements in previous IFRS and US GAAP often resulted in information that was inadequate for investors to understand a company’s revenue, and the judgements and estimates made by the company in recognising that revenue.

For instance, investors were concerned that the revenue information disclosed was often ‘boilerplate’ in nature or was presented in isolation and without explaining how the revenue recognised related to other information in the financial statements.

IFRS 15 addresses those deficiencies by specifying a comprehensive and robust framework for the recognition, measurement and disclosure of revenue. In particular, IFRS 15:

improves the comparability of revenue from contracts with customers;

reduces the need for interpretive guidance to be developed on a case-by-case basis to

address emerging revenue recognition issues; and

provides more useful information through improved disclosure requirements.

For many contracts, such as many straightforward retail transactions, IFRS 15 will have little, if any, effect on the amount and timing of revenue recognition.

For other contracts, such as long-term service contracts and multiple-element arrangements, IFRS 15 could result in some changes either to the amount or timing of the revenue recognized by a company.

Existing practice: Incidental obligations and sales incentives

Some companies may not separately recognise revenue for the transfer to the customer of goods or services that some consider to be sales incentives, or otherwise incidental, or ancillary to the other promised goods, or services, in the contract.

That practice results in a company recognising all of the transaction price as revenue even though it has remaining performance obligations to satisfy.

This sometimes occurs in the automotive industry when a manufacturer sells a car, with an incentive such as maintenance that will be provided at a later date.

Requirements in IFRS 15

A company will assess whether the promised goods or services arising from incidental obligations and sales incentives are goods or services that are distinct.

If the goods or services are distinct, the company will recognise revenue when (or as) each distinct good or service is transferred to the customer.

Existing practice: Contingent revenue cap

Some practices for allocating the transaction price limit the amount of consideration allocated to a satisfied performance obligation to the amount that is not contingent on the satisfaction of performance obligations in the future.

That practice is commonly used to account for telecommunications contracts that bundle the sale of a mobile phone with the provision of network services for a specified period (often for one or two years).

Requirements in IFRS 15

IFRS 15 does not permit the transaction price to be allocated to performance obligations on a basis that is consistent with the contingent revenue cap.

Instead, IFRS 15 requires a company to allocate the transaction price—which would be any amount that the customer pays on entering into the contract and the monthly payments for the network services—to the mobile phone and the network services on the basis of the relative stand-alone selling prices of each item requirements in IFRS 15

Existing practice: No observable selling price

For some contracts, revenue requirements preclude a company from recognising revenue on the transfer of a good, or service, to a customer if there is no observable evidence of the stand-alone selling prices of each of the goods, or services, promised in the contract.

This often results in the deferral of revenue recognition because revenue could not be recognised when the first of the promised goods or services transfers to the customer.

This regularly occurs in the software industry when observable prices are not available for upgrades and additional functionality for computer software.

Requirements in IFRS 15

If observable prices of the promised goods or services are not available, a company would allocate the transaction price on the basis of estimated stand-alone selling prices of those goods or services.

The company will recognize revenue as each distinct good, or service, is transferred to the customer.

Existing practice: Licences

The revenue recognition guidance on accounting for licences of intellectual property is broad. Different interpretations of that guidance has led to significant diversity in the accounting for licences.

Requirements in IFRS 15

IFRS 15 provides application guidance on how to apply the revenue framework to different types of licences of intellectual property.

Existing practice: Timing of revenue recognition

Because of a lack of clear and comprehensive guidance, there is some diversity in practice in determining whether a company should recognise revenue for some goods or services at a point in time, or over time.

For example, some companies selling residential real estate in multi-unit developments have difficulty determining whether the construction of such assets is a service that is provided over time (and, hence, revenue is recognized over time), or a good that is transferred to the customer when construction is complete (and, hence, revenue is recognised at that point in time).

Requirements in IFRS 15

A company will be able to recognise revenue over time only if the criteria specified in IFRS 15 are met. In all other cases, a company will recognise revenue at the point in time when the customer obtains control of the promised good, or service.

Existing practice: Estimates of variable consideration

Revenue requirements do not include detailed guidance for measuring the amount of revenue that should be recognised when the consideration is variable.

Requirements in IFRS 15

If the consideration promised by a customer is variable, a company will estimate it using either the expected value or the most likely amount, depending on which amount better predicts the amount of consideration to which the company will be entitled. Some or all of the estimated amount of variable consideration is included in the transaction price only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

Existing practice: Significant financing components

If a customer pays for goods or services in advance or in arrears, some companies may not consider the effects of any financing components in the contract when determining the amount of revenue to be recognised.

Requirements in IFRS 15

A company is required to consider the effects of any significant financing components in the determination of the transaction price (and thus the amount of revenue recognised).

This may affect long-term contracts in which payment by the customer and performance by the company occur at significantly different times.

Existing practice: Disclosure

Disclosure of information about revenue is inadequate and lacks cohesion with the disclosure of other items in the financial statements.

For example, many investors have said that some companies present revenue in isolation, which means that investors cannot relate revenue to the company’s financial position.

Requirements in IFRS 15

IFRS 15 includes a comprehensive set of disclosure requirements that require a company to disclose qualitative and quantitative information about its contracts with customers to help investors understand the nature, amount, timing and uncertainty of revenue.

Performance obligations

Performance obligations satisfied over time

An undertaking 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:

(i) the customer simultaneously receives and consumes the benefits

provided by the undertaking’s performance as the undertaking performs;

(ii) the undertaking’s performance creates or enhances an asset (for example, work

in progress) that the customer controls as the asset is created or enhanced; or

(iii) the undertaking’s performance does not create an asset with an alternative use

to the undertaking and the undertaking has an enforceable right to payment for performance completed to date.

An asset created by an undertaking’s performance does not have an alternative use to an undertaking if the undertaking is either restricted contractually from readily directing the asset for another use during the creation or enhancement of that asset or limited practically from readily directing the asset in its completed state for another use.

The assessment of whether an asset has an alternative use to the undertaking is made at contract inception.

After contract inception, an undertaking shall not update the assessment of the alternative use of an asset unless the parties to the contract approve a contract modification that substantively changes the performance obligation.

An undertaking shall consider the terms of the contract, as well as any laws that apply to the contract, when evaluating whether it has an enforceable right to payment for performance completed to date.

The right to payment for performance completed to date does not need to be for a fixed amount.

However, at all times throughout the duration of the contract, the undertaking must be entitled to an amount that at least compensates the undertaking for performance completed to date if the contract is terminated by the customer or another party for reasons other than the undertaking’s failure to perform as promised.

Performance obligations satisfied at a point in time

If a performance obligation is not satisfied over time, an undertaking satisfies the performance obligation at a point in time.

An undertaking shall consider indicators of the transfer of control, which include, but are not limited to, the following:

(i) The undertaking has a present right to payment for the asset—if a customer is presently obliged to pay for an asset, then that may indicate that the customer has obtained the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset in exchange.

(ii) The customer has legal title to the asset—legal title may indicate which

party to a contract has the ability to direct the use of, and obtain

substantially all of the remaining benefits from, an asset or to restrict

the access of other undertakings to those benefits.

Therefore, the transfer of legal title of an asset may indicate that the customer has obtained control of the asset. If an undertaking retains legal title solely as protection against the customer’s failure to pay, those rights of the undertaking would not preclude the customer from obtaining control of an asset.

(iii) The undertaking has transferred physical possession of the asset—the customer’s physical possession of an asset may indicate that the customer has the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset or to restrict the access of other undertakings to those benefits.

However, physical possession may not coincide with control of an asset.

For example, in some repurchase agreements and in some consignment arrangements, a customer or consignee may have physical possession of an asset that the undertaking controls.

Conversely, in some bill-and-hold arrangements, the undertaking may have physical possession of an asset that the customer controls.

(iv) The customer has the significant risks and rewards of ownership of the asset—the transfer of the significant risks and rewards of ownership of an asset to the customer may indicate that the customer has obtained the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset.

However, when evaluating the risks and rewards of ownership of a promised asset, an undertaking shall exclude any risks that give rise to a separate performance obligation in addition to the performance obligation to transfer the asset.

For example, an undertaking may have transferred control of an asset to a customer but not yet satisfied an additional performance obligation to provide maintenance services related to the transferred asset.

(v) The customer has accepted the asset—the customer’s acceptance of an asset may indicate that it has obtained the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset.

Measuring progress towards complete satisfaction of a performance obligation

For each performance obligation satisfied over time, an undertaking shall recognise revenue over time by measuring the progress towards complete satisfaction of that performance obligation.

The objective when measuring progress is to depict an undertaking’s performance in transferring control of goods or services promised to a customer (ie the satisfaction of an undertaking’s performance obligation).

An undertaking shall apply a single method of measuring progress for each performance obligation satisfied over time and the undertaking shall apply that method consistently to similar performance obligations and in similar circumstances.

At the end of each reporting period, an undertaking shall remeasure its progress towards complete satisfaction of a performance obligation satisfied over time.

Methods for measuring progress

Appropriate methods of measuring progress include output methods and input methods. In determining the appropriate method for measuring progress, an undertaking shall consider the nature of the good or service that the undertaking promised to transfer to the customer.

When applying a method for measuring progress, an undertaking shall exclude from the measure of progress any goods or services for which the undertaking does not transfer control to a customer.

Conversely, an undertaking shall include in the measure of progress any goods or services for which the undertaking does transfer control to a customer when satisfying that performance obligation.

As circumstances change over time, an undertaking shall update its measure of progress to reflect any changes in the outcome of the performance obligation. Such changes to an undertaking’s measure of progress shall be accounted for as a change in accounting estimate in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

Reasonable measures of progress

An undertaking shall recognise revenue for a performance obligation satisfied over time only if the undertaking can reasonably measure its progress towards complete satisfaction of the performance obligation.

An undertaking would not be able to reasonably measure its progress towards complete satisfaction of a performance obligation if it lacks reliable information that would be required to apply an appropriate method of measuring progress.

In some circumstances (for example, in the early stages of a contract), an undertaking may not be able to reasonably measure the outcome of a performance obligation, but the undertaking expects to recover the costs incurred in satisfying the performance obligation.

In those circumstances, the undertaking shall recognise revenue only to the extent of the costs incurred until such time that it can reasonably measure the outcome of the performance obligation.

Constraining estimates of variable consideration

An undertaking shall include in the transaction price some or all of an amount of variable consideration only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

In assessing whether it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur once the uncertainty related to the variable consideration is subsequently resolved, an undertaking shall consider both the likelihood and the magnitude of the revenue reversal.

Factors that could increase the likelihood or the magnitude of a revenue reversal include, but are not limited to, any of the following:

(i) the amount of consideration is highly susceptible to factors outside the undertaking’s influence. Those factors may include volatility in a market, the judgement or actions of third parties, weather conditions and a high risk of obsolescence of the promised good or service.

(ii) the uncertainty about the amount of consideration is not expected to be resolved for a long period of time.

(iii) the undertaking’s experience (or other evidence) with similar types of contracts is limited, or that experience (or other evidence) has limited predictive value.

(iv) the undertaking has a practice of either offering a broad range of price concessions or changing the payment terms and conditions of similar contracts in similar circumstances.

(v) the contract has a large number and broad range of possible consideration amounts.

Reassessment of variable consideration

At the end of each reporting period, an undertaking shall update the estimated transaction price (including updating its assessment of whether an estimate of variable consideration is constrained) to represent faithfully the circumstances present at the end of the reporting period and the changes in circumstances during the reporting period.

The existence of a significant financing component in the contract

In determining the transaction price, an undertaking shall adjust the promised amount of consideration for the effects of the time value of money if the timing of payments agreed to by the parties to the contract (either explicitly or implicitly) provides the customer, or the undertaking, with a significant benefit of financing the transfer of goods or services to the customer.

In those circumstances, the contract contains a significant financing component. A significant financing component may exist regardless of whether the promise of financing is explicitly stated in the contract or implied by the payment terms agreed to by the parties to the contract.

The objective when adjusting the promised amount of consideration for significant financing component is for an undertaking to recognise revenue at an amount that reflects the price that a customer would have paid for the promised goods or services if the customer had paid cash for those goods or services when (or as) they transfer to the customer (ie the cash selling price).

An undertaking shall consider all relevant facts and circumstances in assessing whether a contract contains a financing component and whether that financing component is significant to the contract, including both of the following:

(1) the difference, if any, between the amount of promised consideration and the cash selling price of the promised goods or services; and

(2) the combined effect of both of the following:

(i) the expected length of time between when the undertaking transfers the promised goods or services to the customer and when the customer pays for those goods or services; and

(ii) the prevailing interest rates in the relevant market.

Notwithstanding the assessment above, a contract with a customer would not have a significant financing component if any of the following factors exist:

(i) 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.

(ii) a substantial amount of the consideration promised by the customer is variable and 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 undertaking (for example, if the consideration is a sales-based royalty).

(iii) 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 undertaking, and the difference between those amounts is proportional to the reason for the difference.

For example, the payment terms might provide the undertaking or the customer with protection from the other party failing to adequately complete some or all of its obligations under the contract.

As a practical expedient, an undertaking need not adjust the promised amount of consideration for the effects of a significant financing component if the undertaking expects, at contract inception, that the period between when the undertaking transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.

To meet the objective when adjusting the promised amount of consideration for a significant financing component, an undertaking shall use the discount rate that would be reflected in a separate financing transaction between the undertaking and its customer at contract inception. That rate would reflect the credit characteristics of the party receiving financing in the contract, as well as any collateral or security provided by the customer or the undertaking, including assets transferred in the contract.

An undertaking may be able to determine that rate by identifying the rate that discounts the nominal amount of the promised consideration to the price that the customer would pay in cash for the goods or services when (or as) they transfer to the customer.

After contract inception, an undertaking shall not update the discount rate for changes in interest rates or other circumstances (such as a change in the assessment of the customer’s credit risk).

An undertaking shall present the effects of financing (interest revenue or interest

expense) separately from revenue from contracts with customers in the statement of comprehensive income.

Interest revenue or interest expense is recognised only to the extent that a contract asset (or receivable) or a contract liability is recognised in accounting for a contract with a customer.

Consideration payable to a customer

Consideration payable to a customer includes cash amounts that an undertaking pays, or expects to pay, to the customer (or to other parties that purchase the undertaking’s goods or services from the customer).

Consideration payable to a customer also includes credit or other items (for example, a coupon or voucher) that can be applied against amounts owed to the undertaking (or to other parties that purchase the undertaking’s goods or services from the customer).

An undertaking shall account for consideration payable to a customer as a reduction of the transaction price and, therefore, of revenue unless the payment to the customer is in exchange for a distinct good or service that the customer transfers to the undertaking.

If the consideration payable to a customer includes a variable amount, an undertaking shall estimate the transaction price (including assessing whether the estimate of variable consideration is constrained).

If consideration payable to a customer is a payment for a distinct good or service

from the customer, then an undertaking shall account for the purchase of the good or service in the same way that it accounts for other purchases from suppliers.

If the amount of consideration payable to the customer exceeds the fair value of the distinct good or service that the undertaking receives from the customer, then the undertaking shall account for such an excess as a reduction of the transaction price.

If the undertaking cannot reasonably estimate the fair value of the good or service received from the customer, it shall account for all of the consideration payable to the customer as a reduction of the transaction price.

If consideration payable to a customer is accounted for as a reduction of the transaction price, an undertaking shall recognise the reduction of revenue when (or as) the later of either of the following events occurs:

(i) the undertaking recognises revenue for the transfer of the related goods or services to the customer; and

(ii) the undertaking pays or promises to pay the consideration (even if the payment is conditional on a future event). That promise might be implied by the undertaking’s usual business practices.

Allocation of a discount

A customer receives a discount for purchasing a bundle of goods or services if the sum of the stand-alone selling prices of those promised goods or services in the contract exceeds the promised consideration in a contract.

Except when an undertaking has observable evidence that the entire discount relates to only one or more, but not all, performance obligations in a contract, the undertaking shall allocate a discount proportionately to all performance obligations in the contract.

The proportionate allocation of the discount in those circumstances is a consequence of the undertaking allocating the transaction price to each performance obligation on the basis of the relative stand-alone selling prices of the underlying distinct goods or services.

An undertaking shall allocate a discount entirely to one or more, but not all, performance obligations in the contract if all of the following criteria are met:

(i) the undertaking regularly sells each distinct good or service (or each bundle of distinct goods or services) in the contract on a stand-alone basis;

(ii) the undertaking also regularly sells on a stand-alone basis a bundle (or bundles) of some of those distinct goods or services at a discount to the stand-alone selling prices of the goods or services in each bundle; and

(iii) the discount attributable to each bundle of goods or services is substantially the same as the discount in the contract and an analysis of the goods or services in each bundle provides observable evidence of the performance obligation (or performance obligations) to which the entire discount in the contract belongs.

If a discount is allocated entirely to one or more performance obligations in the contract, an undertaking shall allocate the discount before using the residual approach to estimate the stand-alone selling price of a good or service.

Disclosure

The objective of the disclosure requirements is for an undertaking to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.

To achieve that objective, an undertaking shall disclose qualitative and quantitative information about all of the following:

(i) its contracts with customers;

(ii) the significant judgements, and changes in the judgements, made in applying IFRS 15 to those contracts; and

(iii) any assets recognised from the costs to obtain or fulfil a contract with a customer.

An undertaking shall consider the level of detail necessary to satisfy the disclosure objective and how much emphasis to place on each of the various requirements.

An undertaking shall aggregate or disaggregate disclosures so that useful information is not obscured by either the inclusion of a large amount of insignificant detail or the aggregation of items that have substantially different characteristics.

An undertaking need not disclose information in accordance with IFRS 15 if it has provided the information in accordance with another Standard.

Contracts with customers

An undertaking shall disclose all of the following amounts for the reporting period unless those amounts are presented separately in the statement of comprehensive income in accordance with other Standards:

(a) revenue recognised from contracts with customers, which the undertaking shall disclose separately from its other sources of revenue; and

(b) any impairment losses recognised (in accordance with IFRS 9) on any receivables or contract assets arising from an undertaking’s contracts with customers, which the undertaking shall disclose separately from impairment losses from other contracts.

Disaggregation of revenue

An undertaking shall disaggregate revenue recognised from contracts with customers into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

In addition, an undertaking shall disclose sufficient information to enable users of financial statements to understand the relationship between the disclosure of disaggregated revenue and revenue information that is disclosed for each reportable segment, if the undertaking applies IFRS 8 Operating Segments.

Contract balances

An undertaking shall disclose all of the following:

(i) the opening and closing balances of receivables, contract assets and contract liabilities from contracts with customers, if not otherwise separately presented or disclosed;

(ii) revenue recognised in the reporting period that was included in the contract liability balance at the beginning of the period; and

(iii) revenue recognised in the reporting period from performance obligations satisfied (or partially satisfied) in previous periods (for example, changes in transaction price).

An undertaking shall explain how the timing of satisfaction of its performance obligations relates to the typical timing of payment and the effect that those factors have on the contract asset and the contract liability balances. The explanation provided may use qualitative information.

An undertaking shall provide an explanation of the significant changes in the contract asset and the contract liability balances during the reporting period. The explanation shall include qualitative and quantitative information.

Examples of changes in the undertaking’s balances of contract assets and contract liabilities include any of the following:

(i) changes due to business combinations;

(ii) cumulative catch-up adjustments to revenue that affect the corresponding contract asset or contract liability, including adjustments arising from a change in the measure of progress, a change in an estimate of the transaction price (including any changes in the assessment of whether an estimate of variable consideration is constrained) or a contract modification;

(iii) impairment of a contract asset;

(iv) a change in the time frame for a right to consideration to become unconditional (ie for a contract asset to be reclassified to a receivable);

and

(v) a change in the time frame for a performance obligation to be satisfied (ie for the recognition of revenue arising from a contract liability).

Performance obligations

An undertaking shall disclose information about its performance obligations in contracts with customers, including a description of all of the following:

(i) when the undertaking typically satisfies its performance obligations (for example, upon shipment, upon delivery, as services are rendered or upon completion of service), including when performance obligations are satisfied in a bill-and-hold arrangement;

(ii) the significant payment terms (for example, when payment is typically due, whether the contract has a significant financing component, whether the consideration amount is variable and whether the estimate of variable consideration is typically constrained;

(iii) the nature of the goods or services that the undertaking has promised to transfer, highlighting any performance obligations to arrange for another party to transfer goods or services (ie if the undertaking is acting as an agent);

(iv) obligations for returns, refunds and other similar obligations; and

(v) types of warranties and related obligations.

Transaction price allocated to the remaining performance obligations

An undertaking shall disclose the following information about its remaining performance obligations:

(1) the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied (or partially unsatisfied) as of the end of the reporting period; and

(2) an explanation of when the undertaking expects to recognise as revenue the amount disclosed, which the undertaking shall disclose in either of the following ways:

(i) on a quantitative basis using the time bands that would be most appropriate for the duration of the remaining performance obligations; or

(ii) by using qualitative information.

As a practical expedient, an undertaking need not disclose the information in for a performance obligation if either of the following conditions is met:

(i) the performance obligation is part of a contract that has an original expected duration of one year or less; or

(ii) the undertaking recognises revenue from the satisfaction of the performance obligation.

An undertaking shall explain qualitatively whether it is applying the practical expedient and whether any consideration from contracts with customers is not included in the transaction price and, therefore, not included in the information disclosed.

For example, an estimate of the transaction price would not include any estimated amounts of variable consideration that are constrained.

Significant judgements in the application of IFRS 15

An undertaking shall disclose the judgements, and changes in the judgements, made in applying IFRS 15 that significantly affect the determination of the amount and timing of revenue from contracts with customers.

In particular, an undertaking shall explain the judgements, and changes in the judgements, used in determining both of the following:

(i) the timing of satisfaction of performance obligations; and

(ii) the transaction price and the amounts allocated to performance obligations.

Determining the timing of satisfaction of performance obligations

For performance obligations that an undertaking satisfies over time, an undertaking shall disclose both of the following:

(i) the methods used to recognise revenue (for example, a description of the output methods or input methods used and how those methods are applied); and

(ii) an explanation of why the methods used provide a faithful depiction of the transfer of goods or services.

For performance obligations satisfied at a point in time, an undertaking shall disclose the significant judgements made in evaluating when a customer obtains control of promised goods or services.

Determining the transaction price and the amounts allocated to performance obligations

An undertaking shall disclose information about the methods, inputs and assumptions used for all of the following:

(i) determining the transaction price, which includes, but is not limited to, estimating variable consideration, adjusting the consideration for the effects of the time value of money and measuring non-cash consideration;

(ii) assessing whether an estimate of variable consideration is constrained;

(iii) allocating the transaction price, including estimating stand-alone selling

prices of promised goods or services and allocating discounts and variable consideration to a specific part of the contract (if applicable);

and

(iv) measuring obligations for returns, refunds and other similar obligations.

Assets recognised from the costs to obtain or fulfil a contract with a customer

An undertaking shall describe both of the following:

(i) the judgements made in determining the amount of the costs incurred to obtain or fulfil a contract with a customer; and

(ii) the method it uses to determine the amortisation for each reporting period.

An undertaking shall disclose all of the following:

(i) the closing balances of assets recognised from the costs incurred to

obtain or fulfil a contract with a customer, by main category of asset (for example, costs to obtain contracts with customers, pre-contract costs and setup costs); and

(ii) the amount of amortisation and any impairment losses recognised in the

reporting period.

Practical expedients

If an undertaking elects to use the practical expedient in either the existence of a significant financing component about the incremental costs of obtaining a contract), the undertaking shall disclose that fact.

Methods for measuring progress towards complete satisfaction of a performance obligation

Methods that can be used to measure an undertaking’s progress towards complete satisfaction of a performance obligation satisfied over time include the following:

(i) output methods; and

(ii) input methods.

Output methods

Output methods recognise revenue on the basis of direct measurements of the value to the customer of the goods or services transferred to date relative to the remaining goods or services promised under the contract.

Output methods include methods such as surveys of performance completed to date, appraisals of results achieved, milestones reached, time elapsed and units produced or units delivered.

When an undertaking evaluates whether to apply an output method to measure its progress, the undertaking shall consider whether the output selected would faithfully depict the undertaking’s performance towards complete satisfaction of the performance obligation.

An output method would not provide a faithful depiction of the undertaking’s performance if the output selected would fail to measure some of the goods or services for which control has transferred to the customer.

For example, output methods based on units produced or units delivered would not faithfully depict an undertaking’s performance in satisfying a performance obligation if, at the end of the reporting period, the undertaking’s performance has produced work in progress or finished goods controlled by the customer that are not included in the measurement of the output.

As a practical expedient, if an undertaking has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the undertaking’s performance completed to date (for example, a service contract in which an undertaking bills a fixed amount for each hour of service provided), the undertaking may recognise revenue in the amount to which the undertaking has a right to invoice.

The disadvantages of output methods are that the outputs used to measure progress may not be directly observable and the information required to apply them may not be available to an undertaking without undue cost. Therefore, an input method may be necessary.

Input methods

Input methods recognise revenue on the basis of the undertaking’s efforts or inputs to the satisfaction of a performance obligation (for example, resources consumed, labour hours expended, costs incurred, time elapsed or machine hours used) relative to the total expected inputs to the satisfaction of that performance obligation.

If the undertaking’s efforts or inputs are expended evenly throughout the performance period, it may be appropriate for the undertaking to recognise revenue on a straight-line basis.

A shortcoming of input methods is that there may not be a direct relationship between an undertaking’s inputs and the transfer of control of goods or services to a customer.

Therefore, an undertaking shall exclude from an input method the effects of any inputs that, in accordance with the objective of measuring progress, do not depict the undertaking’s performance in transferring control of goods or services to the customer.

For instance, when using a cost-based input method, an adjustment to the measure of progress may be required in the following circumstances:

(i) When a cost incurred does not contribute to an undertaking’s progress in satisfying the performance obligation.

For example, an undertaking would not recognise revenue on the basis of costs incurred that are attributable to significant inefficiencies in the undertaking’s performance that were not reflected in the price of the contract (for example, the costs of unexpected amounts of wasted materials, labour or other resources that were incurred to satisfy the performance obligation).

(ii) When a cost incurred is not proportionate to the undertaking’s progress in satisfying the performance obligation. In those circumstances, the best depiction of the undertaking’s performance may be to adjust the input method to recognise revenue only to the extent of that cost incurred.

For example, a faithful depiction of an undertaking’s performance might be to recognise revenue at an amount equal to the cost of a good used to satisfy a performance obligation if the undertaking expects at contract inception that all of the following conditions would be met:

(i) the good is not distinct;

(ii) the customer is expected to obtain control of the good significantly before receiving services related to the good;

(iii) the cost of the transferred good is significant relative to the total expected costs to completely satisfy the performance obligation;

and

(iv) the undertaking procures the good from a third party and is not significantly involved in designing and manufacturing the good (but the undertaking is acting as a principal).

Principal versus agent considerations

When another party is involved in providing goods or services to a customer, the undertaking shall determine whether the nature of its promise is a performance obligation to provide the specified goods or services itself (ie the undertaking is a principal) or to arrange for the other party to provide those goods or services (ie the undertaking is an agent).

An undertaking is a principal if the undertaking controls a promised good or service before the undertaking transfers the good or service to a customer.

However, an undertaking is not necessarily acting as a principal if the undertaking obtains legal title of a product only momentarily before legal title is transferred to a customer.

An undertaking that is a principal in a contract may satisfy a performance obligation by itself or it may engage another party (for example, a subcontractor) to satisfy some or all of a performance obligation on its behalf.

When an undertaking that is a principal satisfies a performance obligation, the undertaking recognises revenue in the gross amount of consideration to which it expects to be entitled in exchange for those goods or services transferred.

An undertaking is an agent if the undertaking’s performance obligation is to arrange for the provision of goods or services by another party.

When an undertaking that is an agent satisfies a performance obligation, the undertaking recognises 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.

An undertaking’s fee or commission might be the net amount of consideration that the undertaking retains after paying the other party the consideration received in exchange for the goods or services to be provided by that party.

Indicators that an undertaking is an agent (and therefore does not control the good or service before it is provided to a customer) include the following:

(i) another party is primarily responsible for fulfilling the contract;

(ii) the undertaking does not have inventory risk before or after the goods have been ordered by a customer, during shipping or on return;

(iii) the undertaking does not have discretion in establishing prices for the other party’s goods or services and, therefore, the benefit that the undertaking can receive from those goods or services is limited;

(iv) the undertaking’s consideration is in the form of a commission; and

(v) the undertaking is not exposed to credit risk for the amount receivable from a customer in exchange for the other party’s goods or services.

If another undertaking assumes the undertaking’s performance obligations and contractual rights in the contract so that the undertaking is no longer obliged to satisfy the performance obligation to transfer the promised good or service to the customer (ie the undertaking is no longer acting as the principal), the undertaking shall not recognise revenue for that performance obligation. Instead, the undertaking shall evaluate whether to recognise revenue for satisfying a performance obligation to obtain a contract for the other party (ie whether the undertaking is acting as an agent).