IFRS15

Question 1

When do you recognise revenue under IFRS 15?

Answer 1

When control of the goods or service has passed to the customer. Must use the five step model

Question 2

What is the five step model steps

Answer 2

1. ID the contract with the customer
2. Determine the PO’s
3. Determine the transaction price
4. Assign the transaction price to the performance obligations
5. Recognise revenue when the PO is satisfied

Question 3

What are the three things that an entity must consider when determining the transaction price?

Answer 3

1. Variable consideration
2. The existence of a finance component
3. Non-cash consideration

Question 4

How to deal with deferred consideration received?

Answer 4

Must discount this amount and recognise at the discounted value. There will be finance income accrued on this amount year on year so that on the payment date the TR equates to the non-discounted amount

Question 5

How to deal with variable consideration?

Answer 5

Variable consideration should be accounted for under:

• Expected value - ie sum of probable weighted amount in range of outcomes
• Most likely amount - most likely amount in a range of outcomes

Should also note that variable consideration should only be included in the transaction price if it is highly probable that the revenue will not be reversed when the revenue is actually received

Question 6

How to deal with consideration that is of a non-cash nature?

Answer 6

Should measure the non-cash item at fair value at the date of transfer of the goods or service.

Question 7

How to allocate the transaction price to the performance obligation when there is no directly observable selling price (i.e. bundle of goods supplied at a discount)?

Answer 7

The contract needs to be unbundled so that the performance obligations are split up. You then need to apply the transaction price to each PO in the proportion of the standalone selling price of the PO.

e.g. free good worth £2 given in sale of £10 good. The entity should therefore recognise 2/12 * 10 of revenue when control of the free good is passed (and hence PO satisfied)

Question 8

What is the criteria for revenue to be recognised over a period of time?

Answer 8

1) The entity simultaneoulsy receives and consumes the benefits as the entity performs
2) The entity performance creates or enhances an asset that the customer controls as the asset is created or enhanced
3) The entity 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

Question 9

When it is determined that revenue is recognsied over time, how do the entities recognise the revenue?

Answer 9

1) Output method - measure the value of the goods or service transferred to date. e.g. how much of the building is complete?
2) Input method - Measure the cost of the good or service which has been incurred to date

Question 10

When do you recognise a contract liability?

Answer 10

When a customer has paid an amount of consideration prior to the entity performing by transferring the PO.

IT IS DEFERRED INCOME

Question 11

When do you recognise a TR or a contractual asset?

Answer 11

When the obligation has been performed but the consideration has not been satisfied.

Contractual asset - when payment of consideration is dependable on something other than the passage of time (e.g. future performance)

TR - when the receipt of consideration is nothing other than the passage of item. (Always TR recog’d when invoice rec’d)