C. REPORTING THE FINANCIAL PERFORMANCE OF A RANGE OF ENTITIES - REVENUE

Question 1

The core principle of IFRS 15 Revenue from Contracts with Customers

Answer 1

is that entity recognises revenue to depict the transfer of promised goods or services to customers at amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

Question 2

The criteria that must be met before an entity can apply the revenue recognition model.

Answer 2

IFRS 15 requires an entity to recognize revenue by applying the five step model. The model applies where a contract exists; and all of the following criteria are met:
 The parties have approved the contract (in writing, orally or implied by the entity’s customary business practices)
 The entity can identify each party’s rights
 The entity can identify payment terms
 The contract has commercial substance (risk, timing or amount of future cash flows expected to change as result of contract)
 It is probable that entity will collect the consideration (customer’s ability and intention to pay that amount of consideration when it is due)

Question 3

Five step model for revenue recognition

Answer 3

 Step 1: Identify the contract(s) with the customer
 Step 2: Identify the separate performance obligations
 Step 3: Determine the transaction price
 Step 4: Allocate the transaction price to the performance obligations
 Step 5: Recognise revenue when or as a supplier satisfies performance obligations.

Question 4

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

Answer 4

Contract is an agreement between two or more parties that creates enforceable rights and obligations. There is no contract if each party has an enforceable right to terminate a wholly unperformed contract without compensating the other party. It needs to meet all of the criteria for the model. Any consideration received in respect of a contract that does not meet the criteria is recognised as a liability.

Question 5

Step 2. Identify the separate performance obligations.

Answer 5

At the inception of a contract an entity shall assess the goods and services promised in a contract with customer and shall identify as a performance obligation each promise to transfer to the customer either:
 A good or service (or a bundle of goods and services) that is distinct (ie the customer can benefit from good or service on its own or together with other readily available resources and the entity’s promise is separately identifiable from other promises in the contract); or
 A series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.
If a promised good or service is not distinct, an entity shall combine that good or service with other promised goods or services until it identifies a bundle of goods or services that is distinct.

Question 6

Separately identifiable means:

Answer 6

 No significant integrating of the goods/service with others promised in the contract
 The goods/service doesn’t significantly modify another good or service promised in the contract.
 The goods/service is not highly related/dependent on other goods or services promised in the contract.

Question 7

Step 3. Determine the transaction price.

Answer 7

The transaction price is the amount of consideration an entity expects to be entitled to in exchange for the goods or services promised under a contract, excluding any amounts collected on behalf of third parties (for example, sales taxes). A entity must consider the terms of the contract and its customary practices in determining the transaction price. Includes variable consideration (eg. possible refunds, rebates, discounts, bonuses, contingent consideration) if highly probable that significant reversal of cumulative revenue will not occur.
Discounting is not required where consideration is due in less than one year (where discounting applied, present interest separately from revenue).

Question 8

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

Answer 8

The objective is to allocate the transaction price to each performance obligation in an amount to which the supplier expects to be entitled for transferring the promised goods or services to the customer. The transaction price is allocated to each performance obligation in proportion to the stand-alone selling prices of distinct goods and services promised in the contract determined at the inception of the contract.
A stand-alone selling price is the price at which an entity would sell a promised good or service separately to a customer.

Question 9

Step 5. Recognise revenue when or as a supplier satisfies performance obligations.

Answer 9

Revenue is recognised when (or as) a company satisfies a performance obligation by transferring a promised good or service (ie asset) to a customer. The amount of revenue recognised is the amount of the transaction price allocated to the performance obligation. An asset is considered transferred when (or as) the customer obtains control of that asset. Control of an asset refers to ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset.

Question 10

Recognition of contract costs as an asset

Answer 10

Costs might be incurred in obtaining a contract and in fulfilling that contract.
The incremental costs of obtaining a contract with a customer are recognised as an asset if the supplier expects to recover those costs. The incremental costs of obtaining a contract are those costs that would not have been incurred if the contract had not been obtained. Costs to obtain a contract that would have been incurred regardless of whether the contract was obtained are expensed as incurred (unless they can be recovered from the customer regardless of whether the contract is obtained).
Costs incurred in fulfilling a contract might be within the scope of another standard (for example, IAS 2: Inventories, IAS 16: Property, Plant and Equipment or IAS 38: Intangible Assets). If this is not the case, the costs are recognised as an asset only if they meet all of the following criteria:
 The costs relate directly to a contract or to an anticipated contract that the entity can specifically identify;
 The costs generate or enhance resources of the entity that will be used in satisfying (or in continuing to satisfy) performance obligations in the future; and
 The costs are expected to be recovered.

Question 11

Amortisation and impairment of contract costs.

Answer 11

The asset should be amortised (to profit or loss) on a systematic basis consistent with the pattern of transfer of the goods or services to which the asset relates. For the costs of obtaining a contract, if the amortisation period is estimated to be one year or less, the costs maybe recognised as an expense when incurred.
The impairment loss should be recognized in profit or loss to the extent that the carrying amount exceeds:
 The remaining amount of consideration that the entity expects to receive in exchange for the goods or services to which the asset relates; less
 The costs that relate directly to providing those goods or services that have not yet been recognised as expenses.

Question 12

Presentation contract costs

Answer 12

When either party to a contract has performed, an entity shall present the contract in the statement of financial position as a contract asset (eg if entity transfers goods or services before customer pays) or as a contract liability (eg if customer pays before entity transfers goods or services). A contract asset is reclassified as a receivable when the supplier’s right to consideration becomes unconditional

Question 13

Satisfaction of a performance obligation over time

Answer 13

. An entity transfers control of 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 (eg work in progress) that the customer controls as the asset is created or enhanced; or
 The entity’s performance does not create an asset with alternative use to the entity and the entity has an enforceable right to payment for performance completed to date.
For a performance obligation satisfied over time, revenue is recognised by measuring the progress towards complete satisfaction of that performance obligation.

Question 14

Satisfaction of a performance obligation at a point in time.

Answer 14

If a performance obligation is not satisfied over time then it is satisfied at a point in time. To determine the point in time when a customer obtains control of a promised asset and an entity satisfies performance obligation, the entity would consider indicators of the transfer of control that 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.

Question 15

Sale with a right to return.

Answer 15

Some contracts result in the transfer of control of a product to a customer but also grant the customer the right to return the product for various reasons (such as dissatisfaction with the product) and receive any combination of the following – full or partial refund, a credit or another product in exchange.
All of the following must be recognised when a product is sold with a right of return:
 Revenue for the transferred products in the amount of consideration to which the entity expects to be entitled (i.e. revenue would not be recognised for the products expected to be returned);
 A refund liability; and
 An asset (and corresponding adjustment to cost of sales) for its right to recover products from customers on settling the refund liability.

Question 16

Warranties.

Answer 16

A warranty might provide an assurance that a product complies with agreed upon specifications.
 A warranty that the customer has the option to purchase separately is a distinct service and is accounted for as a separate performance obligation under IFRS 15.
 If the customer does not have an option to purchase a warranty separately, account for warranty in accordance with IAS37
 If a warranty provides the customer with a service in addition to the assurance that the product complies with agreed-upon specifications the promised service is a performance obligation.

Question 17

Principal versus agent considerations.

Answer 17

A person or company might act for another company.
 An entity is a principal if it controls a specified goods or service before it is transferred to a customer. A principal must recognise the gross amount of revenue to which it is entitled for goods and services transferred.
 If the entity arranges for goods or services to be provided by the other party, it is an agent. An agent must recognise revenue as the amount of any fee or commission to which it is entitled in exchange for arranging for the principal to provide its goods or services.

Question 18

Non-refundable up-front fees

Answer 18

. A supplier might charge a customer a non-refundable up-front fee. If the fee relates to a good or service it is recognised in the usual way as the supplier satisfies the performance obligations under the contract. A fee might relate to an activity that the supplier needs to undertake at the start of the contract in order to fulfil the contract. In that case the activity does not result in the transfer of a promised good or service to the customer but is an advance payment for future goods or services. In that case the fee would be recognised as revenue as the future goods or services are provided.

Question 19

Variable consideration.

Answer 19

The amount of consideration for the sale of goods and services might be variable. This could be due to a number of factors including discounts, price concessions, penalties and similar items or it might be contingent on the occurrence or non- occurrence of a future event.
If consideration includes a variable amount an entity must estimate the amount of consideration to which it will be entitled in exchange for transferring the promised goods or services to a customer. Variable consideration is only included in the transaction price to the extent that it is highly probable that a significant reversal of the amount of cumulative revenue recognised will not occur when any uncertainty is subsequently resolved. In other words variable consideration should only be included if it can be estimated and it is highly probable that the entity will earn the amount after all uncertainties are resolved.