5. IFRS 15: Revenue from Contracts with Customers Flashcards
Step 1: Identify (C)ontract with customers
Keyword: Substance, Consideration, Rights, Approve, Payment
- Contract has commercial (S)ubstance
- Probable that (C)onsideration entitled to in exchange for the G/S will be (C)ollected
- Each party’s (R)ights related to the G/S can be identified
- (A)ll parties have (A)pprove the contract and are committed to perform their obligation
- (P)ayment terms can be identified.
Combination of contracts (criteria)
Contracts entered should be combined and accounted for as a single contract if One or More of the following criteria are met:
- Contract are sold together as a (p)ackage
- Consideration to be paid (d)epends on the price or performance of other contract
- G/S promised in contract constitutes a (s)ingle PO.
Contract Modification (Part 1)
Keyword: Scope, distinct, price, SASP
Modification is accounted for a separate contract when both condition exists:
- Scope of contract increased due to extra G/S that are distinct (can be sold separately)
- Price of contract increases by the entity’s SASP of the additional G/S
Contract Modification (Part 2): Termination and replacement of existing contract
If the remaining G/S to be delivered under the existing contract are distinct but its price does not reflect SASP from those delivered prior to contract mod date
New modified price is allocated proportionately to the sum of:
- Remaining sum for G/S promised under existing contract and
- Additional consideration for G/S promised for the modified contract
Accounting is done prospectively
Contract Modification (Part 3): Modification of Existing Performance Obligation
Arises when the remaining G/S to be delivered under existing contracts are not distinct from the G/S delivered prior to the contract mod date.
In effect, the original contract will only be partially satisfied at the date of the modification.
- Modified considerations will be recognized as an adjustment to revenue at the date of the modification.
- Accounting for the mod will be done retrospectively with the adjustment to revenue being made on a cumulative catch-up basis.
Step 2: Identify (PO) in the contract
Keywords: Promises, distinct
Definition: performance obligation are promises in a contract to a customer G/S that are distinct.
Keywords: Benefit from G/S, Separately identifiable
G/S is distinct when:
- Customer can benefit from the G/S on its own or together with other resources
- The entity’s promise to transfer G/S to the customer is separately identifiable from other promises.
Step 3: Determine Transaction Price (TP)
TP definition:
- Amount of consideration an entity is entitled to receive in exchange for transferring promised G/S to a customer.
- Excluding amount collected on behalf of third parties which may include, fixed amounts, variable amounts or both.
Variable consideration is only recognized IF it is highly probable that the significant reversal of cumulative reversal recognized WILL NOT occur.
Variable Consideration Estimation Methods
- Expected value (large population)
- Most Likely Amount
Variation of other considerations
Keywords: SFC
Existence of a significant financing component (aka: price customer should pay if customer pay cash today):
Keywords: Rights to consideration, Contract obligation yet to be performed
- Contract asset: entity’s right to consideration in exchange for G/S that has already transferred to a customer
- Contract liability: Value of the contract obligation yet to be performed subsequent to receipt of payment from customer.
Non-cash considerations (form of payment other than cash)
- Measured at fair value
- If fair value not reasonably measured, entity required to measure the consideration by reference to the SASP of G/S promised
Consideration payable to customer (slotting/ rental fees to sell products)
- Reduction in TP unless payment is in exchange for distinct G/S.
Step 4: Allocate the TP to each distinct (PO)
Keywords: Proportionately, SASP, distinct G/S
TP allocated to each PO proportionately on the basis of the relative stand-alone selling price (SASP) of each distinct good or service.
If SASP is not directly observable:
- Adjusted market assessment approach (FV method)
- Expected cost plus margin approach
- Residual approach
Step 5: Recognition revenue when a PO is satisfied
Criteria for revenue recognition:
- Asset is transferred when the customer obtains control over the asset
Definition of Control
- The ability to direct the use of asset
- Obtain substantially all of the economic benefits from the asset
- Prevent other entities from doing so
Performance obligations satisfied over time
Keyword: Receives and consumes benefits, control, no alt use + right of payment
One or more of the following criteria must be satisfied for PO to be satisfied over time:
- Customer receives and consumes the benefits as PO is satisfied
- Customer controls as the asset is created or enhanced
- No alternative use from the asset which the entity created and grants them the right to payment for performance completed to date.
Measure of progress
Revenue of PO satisfied over time should only be recognized if the progress towards completion can be reliably measured.
Methods of measuring progress:
Output method: Value of work completed / Total contract price
Input method: Cost incurred to day/ Total contract price
Contract Cost
Incremental cost:
- Cost that are directly attributed to obtaining a contract and would not have been incurred by the entity if the contract had not been obtained.
- If entity expects to recover the cost = recognize as an asset
- If cost would have been incurred regardless on whether the contract has been obtained = expensed when incurred unless billed to customer
Cost to fulfill contract:
- Guidance of other standards relation to contract cost should be applied first
- Fulfillment cost not within the scope of other standards is recognized as an asset under IFRS 15 all criteria are met:
- Cost directly relate to the contract
- Cost must enhance a resource that will be used to satisfy PO
- Entity expects to recover the costs
