Revenue

Question 1

Definition of Revenue

Answer 1

Increase in economic benefits during the accounting period in the form of inflows or enhancements or assets or deceases of liabilities that result in increase in equity, other than those relating to contributions from equity participants.

Question 2

However IFRS 15 Does not include all revenues….

Answer 2

Does not recognise interest income, dividend income, gains from revaluation and profit on sale of NCA

Question 3

What are the 5 recognition steps of IFRS 15 Revenue?

Answer 3

COPAR:

1.Identify the contract(s) with a customer

2.Identify the performance obligation in the contract.

3.Determine the transaction price

4.Allocate the transaction price to the performance obligation in the contract

5.Recognise revenue when the entity satisfies a performance obligation

Question 4

Identification of contract

Combining contracts, what is it?

Answer 4

If there are multiple contracts entered into with a customer at or near the same time - then IFRS 15 requires these to be treated as a single contract in substance

Question 5

Identification of contract

Modifications of contracts, what is it about?

Answer 5

If at a later date there is a change to the original contract agreed upon, this may sometimes be treated as a separate contract.

If changes relate to distinct items/services

-> Separate contract

If changes relate to indistinct items/servives

-> modification to the same contract

Question 6

Identify performance obligation

If goods and services are not distinct how do we treat them?

Answer 6

We can bundle them together as one performance obligation

Question 7

Determine the transaction price

Non cash considerations, how do we determine the price?

Answer 7

We measure the non-cash consideration at fair value (IFRS 13), and include in transaction price (TP)

Question 8

Determine the transaction price

Bad debts, how do we treat them in IFRS 15

Answer 8

Bad debt is treated as an expense rather than decrease in revenue. So the TP is not adjusted for likelihood of bad debts

Question 9

Determine the transaction price

Significant timing component, what is it about?

Answer 9

TP should be adjusted to reflect the time value of money if the timing component is > 1 year.

Reduce revenue and recognise interest income overtime.

Question 10

Determining transaction price

Variable consideration, when should TP be reduced

Answer 10

TP will need to be reduced to take account of the likelihood of:

Customer discounts

Customer refunds

penalties applied (e.g. clauses in the contract that means a reduced revenue if goods arrive late)

Question 11

Determining transaction price

Variable consideration continued… When should TP be increased?

Answer 11

TP would need to be increased to take account of the likelihood of the entity receiving:

Bonuses/incentives such as usage royalties

Question 12

what is the verbal probability threshold for IFRS 15 recognising revenue?

Answer 12

recognise revenue to the extent that it is highly probable that it will not be significantly reversed

Question 13

Determining TP

Expected Values

Answer 13

Use probability weighted values, this is appropriate where we have a population - such as large number of contracts with similar characteristics.

e.g. a retailer considering the reduction needed for returns might apply probability based on their past experience of the rate of customer returns.

Question 14

Determining TP

Most Likely amount

Answer 14

This is best used for contracts with different consideration outcomes.

e.g. entity will receive 40k if goods are delivered in 2 months, and 30k if goods delivered in 3 months.

Question 15

Recognise revenue when the entity satisfies a performance obligation

When is revenue recognised?

Answer 15

Revenue is recognized in the IS when the entity transfers the promised good or service to the customer (by fulfilling the performance obligation). This is when control of the good/service is transferred to the customer

Question 16

Recognise revenue when the entity satisfies a performance obligation

What are the 2 acocounting treatment scenarios?

Answer 16

1.the performance obligation is satisfied at a point in time ( in one go)

2.the performance obligation is satisfied over time (e.g. cleaning service for 3 months)

Question 17

How to determine if the performance obligation is likely satisfied?

Answer 17

1. Customer has physical possession of the goods, accepted delivery, legal ownership, customer has the majority of risk and rewards of ownership
2. The seller has a right to payment for the asset

Question 18

How to account for when the entity receives consideration, but the performance obligation is not/partially satisfied?

Answer 18

We need to set up contract liability to reflect that the revenue cannot be fully recognised:

Dr Cash

Cr Contract Liability

The contract liability can be discharged as the performance obligation is satisfied

Question 19

Further IFRS 15 Revenue scenarios:

Warranties, how do we treat an Assurance warranty?

Answer 19

This warranty is related to the quality of the product sold therefore not treated as a separate performance obligation.

However, provision for expected warranty cost should be set up (IAS 37 provisions).

Question 20

Further IFRS 15 Revenue scenarios:

Service Warranty, how to account for it?

Answer 20

It is perceived as an additional service, and/or can be purchased separately from the good.

IFRS 15 treats this as a separate performance obligation.

Question 21

Further IFRS 15 Revenue scenarios:

Sales of goods with a right of return how to

account for it?

Answer 21

IFRS 15 treats the transaction as having variable consideration (Step 3 TP)

Expected values used to calculate the TP.

TP should be reduced by the expected return value and a refund liability recognised.

Question 22

Further IFRS 15 Revenue scenarios:

Sales of goods with a right of return, how does it affect cost of sales and inventory?

Answer 22

Adjustments should be made accordingly (via a ‘right to recover’ asset).

Question 23

Further IFRS 15 Revenue scenarios:

Loyalty Schemes, how to account for them?

Answer 23

IFRS 15 states these as a separate performance obligation.

It is treated as if the customer has also ‘paid’ for future goods/services they acquire through redeeming reward points.

This scenario also needs to consider for likely level of points that will expire/unused.

Question 24

Further IFRS 15 Revenue scenarios:

What is a principal revenue

Answer 24

If the contract is for the entity to provide a good/service themselves, then the performance obligation is considered principal

Question 25

Further IFRS 15 Revenue scenarios:

What is an agent revenue

Answer 25

If the contract is for the entity to arrange for goods/services to be provided by another party

–> then the performance obligation is considered an agent.