Revenue from contracts with Customers IFRS...

The views expressed in this presentation are those of the presenter,

not necessarily those of the IASB or IFRS Foundation.

International Financial Reporting Standards

Revenue from contracts with Customers

IFRS 15

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Vienna, September 2015

Darrel Scott

IASB member

IFRS 15 at a glance

© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

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• A genuinely global Standard

– Joint Standard with FASB

– Replaces IAS 18, IAS 11 and

related Interpretations

• A framework for revenue recognition

• Effective date:

– currently 1 January 2017 (may

change to 1 January 2018)

– early application permitted

• Ongoing support with new joint

Revenue Transition Resource Group

Culmination of an extensive due process


3

2010 2014 2011

December 2008

Discussion Paper

Preliminary Views on

Revenue Recognition

in Contracts with

Customers

211 comment letters

June 2010

Exposure Draft

Revenue from

Contracts with

Customers

974 comment letters

Roundtables

May 2014

Final Standard (IFRS)

IFRS 15 Revenue from

Contracts with Customers

Effective date: 1 January

2017/8?

November 2011

Revised Exposure

Draft

Re-exposure of

Revenue from

Contracts with

Customers

358 comment letters

Roundtables

2008

All contracts with customers, except Lease contracts

Insurance contracts

Financial instruments

– Guidance in IFRS 9 on whether a fee is part of the

financial instrument or in scope of IFRS 15

Non-monetary exchanges in the same line of business

to facilitate sales to customers

IFRS 15 has a broad scope


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The 5-step revenue recognition model


5

Recognise revenue to depict transfer of goods or services in an amount of consideration to which expected to be entitled

Identify the contract(s) with a customer

Identify the performance obligations in the contract

Determine the transaction price

Allocate the transaction price to the performance obligations

Recognise revenue when (as) a performance obligation is satisfied

1

2

3

4

5

Existence of a contract

• Must meet specified criteria to apply the model

Combine contracts

• Negotiated as a package

• Linked consideration

• Goods or services form one performance obligation

Contract modifications

• Separate contract if add distinct goods/services at standalone selling price

• Prospective if remaining goods/services distinct

• Otherwise, cumulative catch-up

Step 1: Identify the contract


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Promise to transfer a distinct good or service

• On its own

• Together with other readily available goods or services (including those previously acquired from entity)

Customer can benefit from

good or service

• No significant service of integrating the good or service

• Good or service is not highly dependent on or interrelated with other goods or services

Promised good or service is

separable from other promises

Step 2: Identify performance obligations


7

Step 3: Determine transaction price


8

Amount of consideration to which entity expects to be entitled

in exchange for goods or services

Variable

consideration

Significant

financing

Payable to

customer

Non-cash

consideration

Adjust if timing

provides either

party with

significant

financing

benefit

Measure at fair

value unless

cannot be

reasonably

estimated

Reduction of the

TP unless in

exchange for a

distinct good or

service

Estimate using:

• Expected value

• Most likely

amount

But ‘constrained’

Step 3: Determine transaction price Constraining variable consideration


9

Include estimate of variable consideration in the

transaction price only if expect subsequent change to

estimate would not result in a significant reversal of

revenue

• Entity’s expectations of revenue reversal assessed using

indicators, eg

– Factors outside entity’s influence (market, 3rd-party

actions)

– Entity’s level of experience

– Length of time before uncertainty resolved

Step 4: Allocate the transaction price


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Allocate to each performance obligation the amount to

which entity expects to be entitled in exchange for

satisfying that performance obligation

• Relative standalone selling price basis

– estimate selling prices if not observable

– residual estimation techniques may be appropriate

• Discounts and contingent amounts allocated entirely to

specific performance obligation if specified criteria met

Step 5: Recognise revenue when (as) a performance obligation is satisfied


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Performance obligation is satisfied by transferring good or service

Performance obligations satisfied over time if specified criteria met

Revenue is recognised by

measuring progress towards

complete satisfaction of the

performance obligation

• Clarified units produced or delivered may be a reasonable proxy in some cases

• Clarified input methods may need to be adjusted (eg uninstalled materials)

All other performance obligations satisfied at

point in time

Revenue is recognised at the point

in time when the customer obtains

control of the promised asset.

Indicators of control include:

• Present right to payment

• Legal title

• Physical possession

• Risks and rewards of ownership

• Customer acceptance

A performance obligation is satisfied over time (ie revenue recognised over

time) if one of three criteria met:

• The customer receives and consumes the benefits of the entity’s

performance as the entity performs – assessed by considering (hypothetically) whether another entity would need

to substantially re-perform the work completed to date if that other entity

were to fulfil the remaining obligation

• The entity’s performance creates or enhances an asset (eg WIP) 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 and the entity has a right to payment for performance

completed to date, and it expects to fulfil the contract as promised

Step 5: Performance obligations Satisfied over time


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Disclosure requirements

13

Disaggregation of

revenue

13

Disclosure objective: To enable users of financial statements to

understand the nature, amount, timing and uncertainty of revenue

and cash flows arising from contracts with customers

Disaggregate revenue into categories that depict how

revenue and cash flows affected by economic factors

• When determining categories, consider: other

disclosures, information reviewed by chief operating

decision maker and other information used by entity

• Explain relationship with segment disclosures


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IASB Disaggregation of revenue required in annual and

interim financial statements; otherwise general

principles of interim financial reporting apply

FASB All quantitative disclosures in annual and interim

Remaining

performance

obligations

Interim

requirements

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Information about

contract balances

(formerly a

reconciliation)

A combination of qualitative and quantitative disclosures

• Opening and closing balances

• Amount of revenue recognised from contract liabilities

• Explanation of significant changes in contract balances

• Disclose aggregate amount of the transaction price

allocated to remaining performance obligations

• Quantitative or qualitative explanation of when

amounts will be recognised as revenue

Disclosure requirements continued


Contract costs


15

Costs of obtaining

a contract

Recognised as an

asset if:

• Incremental

• Expected to be

recovered

For example:

Selling

commissions

Costs of fulfilling

a contract

Recognised as an

asset if:

• Relates directly

• Relate to future

performance

• Expected to be

recovered

For example: Pre-

contract or setup

costs

Onerous contracts

Apply IAS 37

Transition and effective date


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• Effective date: annual reporting periods beginning on or after 1 January 2017

• Early application permitted

PY2

(2015)

PY1

(2016)

CY

(2017)

CY footnotes

Retrospective

(with optional practical

expedients)

Cum

ula

tive

ca

tch

-up

Contracts under new standard

Cumulative effect at date

of application Contracts not restated

Cum

ula

tive

ca

tch

-up

Existing* and

new contracts

under new

standard

Impact of IFRS 15

compared to IASs 11 & 18

*contracts for which entity has not transferred all goods or services identified under IASs 11 & 18

Contracts restated

• IFRS 15 does not apply to contracts within scope of IFRS 9

• Limits number of activities affected, but none-the-less can be

significant: – Contracts which include variable fees

– Performance bonuses, penalties or structuring fees

– When upfront fees can be recognised as revenue

– Recognition of fees on signing of contracts

– Accounting for loyalty schemes

– Splitting out distinct goods and services

– Relative stand alone basis

– Capitalisation of costs

– Commissions, success ‘bonuses’

Some key effects Financial institutions


17

Some key effects Other industries 18

Sector Accounting

Construction

/ Aerospace

& Defence

• Revenue may be recognised over time (eg percentage of

completion) but ‘PO over time’ criteria must be met

• More discipline in cost-to-cost measures of performance

• Costs capitalised if result in resources to be used in

fulfilling contract, not to normalise margin

Telcos • Revenue recognised for ‘free’ handset, as well as for

airtime contract

Products • Revenue recognition deferred for some sales incentives

and incidental obligations

• Revenue deferred for some implicit product warranties


Some key effects Other industries 19

Sector Accounting

Software • Elimination of VSOE, so revenue can be recognised

when license transferred

• Revenue recognition for software development only if

‘PO over time’ criteria met

Media/

pharma

• Revenue may be recognised on transfer of licence, but

will need to consider if licence is right to use or right to

access

• Sales-based royalties recognised as sales occur

Asset

management

• Contingent fees based on index recognised only if highly

probable will not be reversed


• New, limited life, joint group with FASB

• Supports transition to IFRS 15 – Advises boards about implementation issues

– Forum from which stakeholders can learn about IFRS 15

• Will not issue authoritative guidance

• Members include preparers, auditors, users plus observers

(including regulators)

Revenue Transition Resource Group


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• Stakeholders submit implementation questions – Submissions remain private

• IASB and FASB prioritise the questions for Group discussion

• Group discusses the questions in a public meeting – All meeting materials available on website

• IASB and FASB determine if/what action required in light of

input from the Group’s discussion

• Met in July & October 2014 and January & March 2015

• Further details available at http://go.ifrs.org/RTRG

How does the Group operate?


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http://go.ifrs.org/RTRG

Thank you


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