6 Revenue Flashcards
IFRS 15 applies to all contracts with customers except:
Leases within the scope of IAS 17 Insurance contracts within the scope of IAS 4 Financial instruments and other contractual rights and obligations within the scope of IFRS 9, IFRS 10, IFRS 11, IAS 27 or IAS 28 Non-monetary exchanges between entities in the same line of business
Define Income; Revenue; Contract; contract asset; Receivable
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. Revenue. Income arising in the course of an entity’s ordinary activities. Contract. An agreement between two or more parties that creates enforceable rights and obligations. Contract asset. An entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer when that right is conditioned on something other than the passage of time (for example the entity’s future performance). Receivable. An entity’s right to consideration that is unconditional – ie only the passage of time is required before payment is due.
Define Contract liability; Customer; Performance obligation; Stand-alone selling price.; Transaction price.
Contract liability. An entity’s obligation to transfer goods or services to a customer for which the entity has received consideration (or the amount is due) from the customer. Customer. A party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration. Performance obligation. A promise in a contract with a customer to transfer to the customer either: (a) a good or service (or a bundle of goods or services) that is distinct; or (b) a series of distinct goods or services that are substantially the same ad that have the same pattern of transfer to the customer. Stand-alone selling price. The price at which an entity would sell a promised good or service separately to a customer. Transaction price. The amount of consideration 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.
3.1 The five-step model Under IFRS 15 revenue is recognised and measured using a five step model. Step 1
A contract with a customer is within the scope of IFRS 15 only when: (a) The parties have approved the contract and are committed to carrying it out. (b) Each party’s rights regarding the goods and services to be transferred can be identified. (c) The payment terms for the goods and services can be identified. (d) The contract has commercial substance. (e) It is probable that the entity will collect the consideration to which it will be entitled. (f) The contract can be written, verbal or implied.
3.1 The five-step model Under IFRS 15 revenue is recognised and measured using a five step model. Step 2
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. Factors for consideration as to whether an entity’s promise to transfer the good or service to the customer is separately identifiable include, but are not limited to: (a) The entity does not provide a significant service of integrating the good or service with other goods or services promised in the contract.(b) The good or service does not significantly modify or customise another good or service promised in the contract. (c) The good or service is not highly dependent on or highly interrelated with other goods or services promised in the contract.
3.1 The five-step model Under IFRS 15 revenue is recognised and measured using a five step model. Step 3
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). Variable contingent amounts are only included where it is highly probable that there will not be a reversal of revenue when any uncertainty associated with the variable consideration is resolved. Examples of where a variable consideration can arise include: discounts, rebates, refunds, price concessions, credits and penalties.
3.1 The five-step model Under IFRS 15 revenue is recognised and measured using a five step model. Step 4
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. So, if any entity sells a bundle of goods and/or services which it also supplies unbundled, the separate performance obligations in the contract should be priced in the same proportion as the unbundled prices. This would apply to mobile phone contracts where the handset is supplied ‘free’. The entity must look at the stand-alone price of such a handset and some of the consideration for the contract should be allocated to the handset.
3.1 The five-step model Under IFRS 15 revenue is recognised and measured using a five step model. Step 5
Step 5 Recognise 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
The incremental costs of obtaining a contract (such as sales commission) are recognised as an asset if the entity expects to recover those costs. Costs that would have been incurred regardless of whether the contract was obtained are recognised as an expense as incurred. Costs incurred in fulfilling a contract, unless within the scope of another standard (such as IAS 2 Inventories, IAS 16 Property, plant and equipment or IAS 38 Intangible assets) are recognised as an asset if they meet the following criteria:
(a) The costs relate directly to an identifiable contract (costs such as labour, materials, management costs) (b) The costs generate or enhance resources of the entity that will be used in satisfying (or continuing to satisfy) performance obligations in the future; and (c) The costs are expected to be recovered
Costs recognised as assets are amortised on a systematic basis consistent with the transfer to the customer of the goods or services to which the asset relates.
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.
A performance obligation not satisfied over time will be satisfied at a point in time. This will be the point in time at which the customer obtains control of the promised asset and the entity satisfies a performance obligation. Some indicators of the transfer of control are:
(a) The entity has a present right to payment for the asset. (b) The customer has legal title to the asset. (c) The entity has transferred physical possession of the asset. (d) The significant risks and rewards of ownership have been transferred to the customer. (e) The customer has accepted the asset.
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. Indicators that an entity is an agent rather than a principal include the following:
(a) Another party is primarily responsible for fulfilling the contract. (b) The entity does not have inventory risk before or after the goods have been ordered by a customer, during shipping or on return. (c) The entity does not have discretion in establishing prices for the other party’s goods or services and, therefore, the benefit that the entity can receive from those goods or services is limited. (d) The entity’s consideration is in the form of a commission. (e) The entity is not exposed to credit risk for the amount receivable from a customer in exchange for the other party’s goods or services.
4.4 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.
4.7 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..
