Revenue in terms of IRFS 15

Question 1

Definition: Revenue

Answer 1

Revenue is income arising in the course of an entity’s normal trading or operating activities.

Question 2

5 Steps to Recognize Revenue

Answer 2

IFRS 15 Revenue from Contracts with Customers (para IN7) says that an entity recognises revenue by applying the following five steps:

1. Identify the contract.
2. Identify the separate performance obligations within a contract.
3. Determine the transaction price.
4. Allocate the transaction price to the performance obligations in the contract.
5. Recognise revenue when (or as) a performance obligation is satisfied.

Question 3

Definition: Contract

Answer 3

IFRS 15 says that a contract is an agreement between two parties that creates rights and obligations. A contract does not need to be written.

Question 4

Criteria for Contracts

Answer 4

An entity can only account for revenue from a contract if it meets the following criteria:

1. The parties have approved the contract and each party’s rights can be identified.
2. Payment terms can be identified.
3. The contract has commercial substance.
4. It is probable that the entity will be paid.

Question 5

Definition: Performance Obligations

Answer 5

Performance obligations are promises to transfer distinct goods or services to a customer.

Question 6

What are Distinct Performance Obligations

Answer 6

A promised good or service is distinct if:

1. The customer can benefit from the good or service on its own or by using resources that are readily available, and
2. The promise to provide the good or service is separately identifiable from other contractual promises.

Question 7

Definition: Transaction Price

Answer 7

IFRS 15 defines the transaction price as the amount of consideration the entity expects in exchange for satisfying a performance obligation. Sales tax is excluded.

Question 8

Rules: Variable Consideration

Answer 8

If a contract includes variable consideration then an entity must estimate the amount it will be entitled to.

IFRS 15 says that this estimate ‘can only be included in the transaction price if it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur when the uncertainty is resolved’ (IFRS 15, para 56).

Question 9

Indications of Financing Component

Answer 9

IFRS 15 provides the following indications of a significant financing component:

1. The difference between the amount of promised consideration and the cash selling price of the promised goods or services.
2. The length of time between the transfer of the promised goods or services to the customer and the payment date.

Question 10

Rules: Non-Cash Consideration

Answer 10

Any non-cash consideration is measured at fair value.

If the fair value of non-cash consideration cannot be estimated reliably then the transaction is measured using the stand-alone selling price of the good or services promised to the customer.

Question 11

Rules: Consideration Payable to Customer

Answer 11

If consideration is paid to a customer in exchange for a distinct good or service, then it should be accounted for as a purchase transaction.

Assuming that the consideration paid to a customer is not in exchange for a distinct good or service, an entity should account for it as a reduction of the transaction price.

Question 12

Allocation of Transaction Price

Answer 12

The total transaction price should be allocated to each performance obligation in proportion to stand-alone selling prices.

If a stand-alone selling price is not directly observable then it must be estimated.

Question 13

Criteria for Satisfying Performance Obligations Over Time

Answer 13

IFRS 15 (para 35) states that an entity satisfies a performance obligation over time if one of the following criteria is met:

(a) The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs.
(b) 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, or
(c) The entity’s 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 14

Criteria for Satisfying Performance Obligations at a Point in Time

Answer 14

The entity must determine the point in time at which a customer obtains control of a promised asset.

An entity controls an asset if it can direct its use and obtain most of its remaining benefits. Control also includes the ability to prevent other entities from obtaining benefits from an asset.

IFRS 15 (para 38) provides the following indicators of the transfer of control:

1. The entity has a present right to payment for the asset.
2. The customer has legal title to the asset.
3. The entity has transferred physical possession of the asset.
4. The customer has the significant risks and rewards of ownership of the asset.
5. The customer has accepted the asset.

Question 15

Contract Costs

Answer 15

IFRS 15 says that the following costs must be recognised as an asset (i.e. capitalised):

1. The costs of obtaining a contract. This must exclude costs that would have been incurred regardless of whether the contract was obtained or not (such as some legal fees, or the costs of travelling to a tender).
2. The costs of fulfilling a contract if they do not fall within the scope of another standard (such as IAS 2 Inventories) and the entity expects them to be recovered.