IFRS 15 Flashcards
What is a contract and what is its criteria?
A contract is an agreement between two or more parties that creates enforceable rights and obligations.
A contract does not exist if each party has a right to terminate wholly unperformed contract without compensating the other party.
Criteria:
- The parties of the contract has approved the contract and are committed to perform their respective obligations.
- The entity can identify each party’s rights regarding the goods or services to be delivered.
- The entity can identify the payment terms for the goods or services to be transferred.
-The contract has commercial substance ( the risk, timing or amount of the future cashflows of entity to be changed )
- It is probable that the entity will only collect the consideration when it is due by the other party.
Consideration Received in Advance:
When criteria of a contract does not match and the entity has received consideration in advance then it should only recognize the revenue when either of the following event has happened:
- The entity has no obligation remaining regarding the delivery of the goods or services or the amount received is non refundable.
-The contract has been terminated and the consideration received is non-refundable.
The entity shall recognize the amount received as a liability unless any of the above events are fulfilled.
When should entity combine contracts?
An entity can combine two or more contracts and should treat it as a one as a one contract only when one or more of the following conditions are met:
-The contract are negotiated as a a package with a single commercial objective.
- The amount of consideration in one contract is dependent on the price or performance of the other contract.
-The goods or services promised in the contract can be treated as a single obligation according to IFRS 15.
What are performance obligations?
Performance obligations are normally specified in the business contract but it may also includes practices which are implied due to entity’s customary practices, published policies or a statement which may cause the customer to expect.
Normally, promised goods or services may include but are not limited to:
- Goods produced by an entity for sale. (inventory)
- Resale of goods purchased by an entity. ( Retailer)
- Performing a contractually agreed-upon task for customer.
- Standing ready to provide goods or services.
- Granting rights to goods to a customer that he might sell in future.
- Constructing, developing or restructuring an asset on behalf of customer.
Types of goods or services?
There can be two types of goods or services promised to the customer:
- A good or service(or a bundle of goods or services) that are distinct.
- A series of goods or services that are substantially the same and have same pattern of transfer to customer.
What are distinct goods or services?
A good or service is distinct if it fulfills both of the following criteria:
= The customer can benefit from the goods or service on its own or together with other goods or services that are readily available to him.
- The entity’s promise to transfer the goods or services are seperately identifiable from other promises in the contract.
What is Transaction price?
The amount of consideration that an entity expects to receive in exchange for the goods or services offered to the customer, excluding any third party amount collected or transferred, (ie; sale taxes)
Factors of Transaction Price.
When considering transaction price, an entity must consider the effect of the following:
- Variable Consideration.
- Constraining elements of variable consideration.
- The existence of significant financing component in the contract.
- Non-cash consideration.
- consideration payable to a customer.
Factors that tell the product or service is not distinct?
The factors include:
-The entity promised to provide goods or services that are combined with other goods or services to represent the compound output.
- one or more of the goods or services significantly modifies one or more of the other goods or services.
- The goods or services are highly interdependent or highly interrelated.
Treatment of Variable Consideration?
Value the amount either on’
- Expected value method.
- Most likely Method.
