IFRS 15 - Revenue From Contracts With Customers

Question 1

5 Step Model:

Answer 1

1. Identify the contract with a customer.
2. Identify the performance obligations in the contract.
3. Determine the transaction price.
4. Allocate the transactions price to the performance obligations.
5. Recognise revenue when or as the performance obligation is met.

Question 2

What is a contract according to IFRS 15:

Answer 2

An agreement between two or more parties that creates enforceable rights and obligations.

Question 3

When should an entity account for a contract (5 criteria):

Answer 3

• all parties have approved the contract
• each parties rights can be identified
• the payment terms can be identified
• the contract has commercial substance
• it is probable that consideration will be received by the selling entity

Question 4

Step 2: how to account for the performance obligations:

Answer 4

If there is a distinction between different services in the contract, then these should be accounted for separately.

For example, equipment and a 12- month support package are 2 separate services.

Question 5

Warranties: how to account for these?

Answer 5

• if purchased separately by the customer, they should be accounted for as a performance obligation.
• if not purchased separately, it should be accounted for as per IAS 37.

Question 6

What is the transaction price:

Answer 6

The amount the consideration that an entity expects to be entitled to from the customer in exchange for transferring goods or services.

This can include Fixed Amounts and Variable Amounts.

It Excludes amounts received on behalf of third parties. Like VAT.

Question 7

Examples of variable consideration:

Answer 7

• Discounts
• Rebates
• Refunds
• Bonuses
• Penalties
• Right of Return

Revenue should only be recognised, when it is highly probable that the entity will receive the revenue.

Question 8

What does Significant Financing Component refer to in IFRS 15:

Answer 8

This is when a customer pays for services or goods more than 12 months after receiving the items/services.

This means they are borrowing money from their supplier.

In that case, the supplier needs to recognise the Discounted amount, taking into account at what rate the Customer could be borrowing (their credit score).

Question 9

How to account for a Significant Financing Component:

Answer 9

• recognise the Discounted Receivable.
• unwind this every reporting period
• increase the receivable with the interest revenue.
  The interest revenue should be shown separately from Revenue from contracts with customers in the statement of profit and loss.

Question 10

How to calculate the Discounted amount of a future payment, that needs to be recognised now:

Answer 10

Interest is 10%
Over a 2yr period:

Future consideration x (1 / 1.10^2) = Discounted amount or Present Value

Question 11

How to account for the discounted amount that needs to be paid in the future:

Answer 11

In Jan for example or at start of contract:
Dr. Receivable. Discounted amount
Cr. Revenue. Discounted amount

Then at end of financial year:
Dr. Consideration Receivable
(Increase Receivable with the Interest amount = Interest x Discounted amount)

Cr. Interest Revenue (P&L)

If there is a second year, then interest percentage x (Discounted Amount+interest year 1) = Interest to account for in year 2.

Question 12

If a company receives a noncash item in return for goods or services, how to account for the value?

Answer 12

It’s the Fair Value of the noncash item on the start date of the contract or when goods are received, that should be used to recognise the Revenue.

Question 13

Are you allowed to net off consideration, if you enter into a contract to purchase goods or services from one of your own customers:

Answer 13

If the consideration is for 2 very district goods or services, you should NOT net off.

Instead the income is treated as revenue.
The expense is recognised separately as an expense.

Question 14

Step 4: Allocate the transaction price to the performance obligation:

Answer 14

The transaction price must be allocated in proportion to the stand-alone prices for the different obligations.
So this is the price for an obligation if the entity was to sell it separately.

Question 15

Step 4: how to recognise/treat a discount on a transaction price for a bundle of services or goods:

Answer 15

The discount should be allocated proportionally, unless there is evidence that the discount relates to a specific element.

Question 16

How to calculate the % discount on a transaction cost of a bundle, to allocate this to the separate obligations:

Answer 16

(Difference between full price and bundle price incl discount) / Full Price = percentage of discount on the Full Price

Then allocate this to the full price of each item to get to the discounted price for each obligation.

Question 17

Step 5: Recognise revenue when or as a performance obligation is met:

Answer 17

This has been achieved when control has been passed to the customer.

Question 18

Step 5: a performance obligation is one of the following: (3 criteria)

Answer 18

• The customer simultaneously receives and consumes the benefits from the entity’s performance.
• the entity’s performance creates or enhances an asset (for example work in progress) 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’s performance creates and the entity has the right to payment for the performance completed to date.

Question 19

Step 5: How will revenue be recognised for a performance obligation:

Answer 19

Over time by measuring progress toward completion of the performance obligation. Either on input methods or on output methods.

Question 20

What is a receivable:

Answer 20

When the performance obligation has been satisfied, but the entity has not yet received the revenue.

Question 21

What is deferred income?

Answer 21

When an entity has received consideration before a performance obligation has been met.

Question 22

Disclosure requirement relating to IFRS 15:

Answer 22

1) Revenue recognised from contracts with customers disclosed separately from other sources of revenue.

2) Impairment losses recognised in any receivables or contract assets arising from contracts with customers.

3) Contract balances, including opening and closing balances and receivables, contract assets, and liabilities.

4) Revenue recognised in the current period from performance in previous periods.