IFRS 15 Flashcards
what is the core principle behind IFRS 15?
that the company should only recognise revenue in an amount that it expects to receive from customer from exchange of goods/services.
-purpose is to increase transparency
-to ensure accuracy
what are the five steps of the revenue recognition process according to IFRS 15?
1- identify contract with customer
2-identify the performance obligations
3- determine transaction price
4- allocate transaction price to performance obligations
5- book revenue
define contract and what all items should be included in it?
a contract is an agreement between two or more parties that results in legal obligation.
requirements for a contract for IFRS 15 are:
-Probable chances of economic benefit
-Payment terms can be identified
-Approved by both parties (verbal or written)
-Rights of both parties can be identified
-if criteria is met, it is not reassessed unless big change in facts and circumstances
-if not met, contract should continue to be reassessed to check if it is met later.
what is a performance obligation?
a promise to transfer to customer a good or service.
U need to identify if the contract is single P.O or Separate P.O
Single PO: non distinct: Construction of bungalow- a builder gets hired to make a building, he is responsible for finding land, making building, piping, wiring, finishing. , teaching one paper.
Separate PO: means distinct, customer gets benefit separately eg. Teaching + books, mobile + sim, generator + maintenance
what are examples of distinct and non distinct promises?
NON DISTINCT- a builder gets hired to make a building, he is responsible for finding land, making building, piping, wiring, finishing.
DISTINCT: computer guy sells software and provides installation services, updates, technical support.
these are all distinct because customer can benefit each service on its own.
builder cant provide a wiring service until there is no land and building. its dependent on each other.
what factors must be considered when deciding transaction price?
-time value of money (not required if payment terms is less than a year)
-fair value if non cash payment
-estimate of variable consideration like discount or warranty
-consideration payable to customer (should be reduced from transaction price unless u bought something from customer)
how is the transaction price allocated to separate performance obligations?
in proportion to the stand alone selling prices, i.e how much they would be sold for separately.
allocation is made at beginning of contract and is not adjusted if standalone prices are changed later.
how is standalone price determined?
-observable price
-competitor’s price
-market price adjusted
-expected cost +margin
when is revenue recognised?
revenue is recognised when or as performance obligation is being satisfied, and asset is transferred or being transferred.
-customer gains control of asset
-the performance obligation will be satisfied at a point in time or over time.
what does it mean that a performance is being satisfied over time?
performance is being satisfied over time if one of the following criteria is met:
-consumer simultaneously receives benefit as the obligation is performed. (like cleaning service on monthly payroll)
-performance creates or enhances an asset that the consumer has control over
-supplier has no other use for it and consumer is obliged to pay for amount of work performed TO DATE.
how is revenue of performance satisfied over time recognised?
it is based on how much the work is completed.
using either input or output method.
it can only be recognised if:
progress can be reasonably estimated
there is no reaonable estimate of progress but costs are expected to be recoverable, to the extent of costs incurred.
how is revenue recognised when performance is satisfied at a point in time?
revenue is recognised at the point when customer obtains control of asset.
signs of this are:
-customer is obliged to pay now
-legal title
-physical possession transferred
-customer has the risk and reward of ownership
-customer has accepted the asset.
Tanner is building a multi-unit residential complex. It enters into a contract with a customer for a specific unit that is under construction. The contract has the following terms:
The customer agrees to make progress payments during construction.
If the customer fails to make the progress payments, Tanner has the right to the consideration for the entire contract if it completes the unit.
The terms of the contract prevent the entity from directing the unit to another customer.
is this point or over time?
satisfaction over time
-cuz no alternative use
-right to payment for performance to date
Tanner now enters into another contract with a customer for a specific unit that is under construction. The contract has the following terms:
The customer pays a deposit upon entering the contract that is refundable if the entity fails to complete the unit in accordance with the contract.
The remainder of the purchase price is due upon completion of the unit.
If the customer defaults on the contract before completion, Tanner only has the right to retain the deposit.
is this satisfaction at point or over time?
This performance obligation is satisfied at a point in time because it is not a service contract, the customer does not control the unit as it is created and the entity does not have an enforceable right to payment for performance completed to date (i.e. the entity only has a right to the deposit until the unit is completed).
define contract asset and contract liability?
-contract asset AKA accrued income.
it is the payment that the customer has to pay to us for goods transferred (we have performed the work, recognised it as revenue BUT haven’t invoiced it or gotten paid yet)
.
-contract liability AKA DEFERRED INCOME is the performance obligation , the promise to transfer the goods/services- in exchange for consideration that is paid or is due. (customer has been sent an invoice or maybe has already paid and the payment is advance. the work has not been performed)
