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Article:

Does IFRS 15 change the pattern of


revenue recognition?
10 April 2018
The answer to this question is potentially, yes. One of the key changes introduced by IFRS 15 Revenue from
Contracts with Customers is that revenue recognition is now based on the transfer of control over goods or
services to a customer, rather than just the transfer of risks and rewards. For many companies this is resulting
in changes to the pattern of revenue recognition from over time to a point in time, or vice versa (less common).
Where point in time recognition remains appropriate, changes to the timing of the “point in time” might arise.

All entities adopting IFRS 15 need to assess how the new requirements apply to them and update how their
revenue recognition policies are described in the financial statements.

Over time or at a point in time


Under IFRS 15, an entity must determine for each performance obligation whether control is transferred over
time or at a point in time. If control is not transferred over time, the default position is that the performance
obligation is satisfied at a point in time.

Revenue recognised over time


IFRS 15 provides three criteria, at least one of which must be met to qualify for revenue recognition over time.

Comments and additional


Criteria Examples
guidance

 Typically applies to
a. The customer
contracts for services
simultaneously
 The concept of control of
receives and
an asset applies because
consumes the  Cleaning services
services are viewed as an
economic benefits  Transportation services
asset (momentarily) when
provided by the  Some professional services
they are received and used
vendor’s
or consumed
performance
 Consider whether another
vendor would need to
substantially re-perform the
work completed to date

b. The vendor creates  Typically applies when an  A building constructed on land


or enhances an asset asset (tangible or owned by the customer
controlled by the intangible) is being  Customised software written
customer constructed on the into a customer’s existing IT
customer’s premises infrastructure

c. (1) The vendor’s


performance does  Construction and real estate
not create an asset (developers)
for which the vendor  Typically applies to
 Manufacturing/engineering
has an alternative construction/development
contracts for customised
use; and (2) The of assets to customer
products/assets
vendor has an specifications
 Some advertising and
enforceable right to  Consider the terms of the
professional services
payment for contract and any relevant
 Software development projects
performance laws or regulations
hosted on the vendor’s servers
completed to date while under development

In practice, it is not always straightforward to determine which of the ‘over time’ criteria, if any, are relevant
and whether they are satisfied. For example, in the case of a professional services engagement:

 Does the customer receive a service or goods? Payroll processing services could be services that the
customer receives and benefits from throughout the contract and may qualify for over time revenue
recognition under the criteria in (a).
 Is the objective of the engagement to produce a report? The customer is unlikely to benefit until the
report is delivered. In such cases, the entity needs to consider the criteria in (c) or revenue might need to
be recognised at a point in time when the report is completed.

Where (c) applies, a careful review of the contract terms, and the legal frameworks that govern the transaction,
is required. There is often considerable judgement involved in assessing:

 Whether the asset can be sold to another customer, and


 Whether there is a right to payment for both costs incurred to date and a reasonable profit margin at all
times throughout the contract.
Revenue recognised at a point in time
When recognising revenue at a point in time, entities need to consider when the customer obtains the ability to
direct the use of, and obtain substantially all of the remaining benefits from, the asset. IFRS 15 provides a list
of indicators that control has passed, including if the customer has:

 A present obligation to pay


 Physical possession of the asset(s)
 Legal title
 Risks and rewards of ownership
 Accepted the asset(s).

While risks and rewards continues to be an indicator, entities moving from IAS 18 to IFRS 15 should consider
whether a different indicator or indicators could more accurately depict the transfer of control for the asset in
question, which could change the point in time when revenue is recognised. For example, some consumer
product manufacturers and retailers ship goods on “Free On Board (FOB) shipping point” terms, but retain a
degree of risk during shipment and may conclude that control is transferred (based on legal title, right to
payment, the customer’s right to redirect the goods) earlier than risks and rewards and may recognise revenue
earlier under IFRS 15.

For help and advice on revenue recognition issues please get in touch with your usual BDO contact or Tony
Perkins.

Read more on revenue recognition:

Will advance billing hurt your balance sheet?

What are the implications for June 2018 interims?

Variable consideration & the sales-based or usage-based royalty exception

Variable consideration

Contract costs and IFRS 15

Contract modifications and IFRS 15

Significant financing components in contracts

To bundle or not to bundle, that is the question

Sale with a right of return

IFRS 15 in the spotlight: Accounting for vouchers


Business Edge index
Article:

IFRS 15 in the Spotlight: Variable


consideration & the sales-based or
usage-based royalty exception
12 January 2018
In our November IFRS 15 article we considered the impact of variable consideration on revenue recognition
and the requirement to estimate this consideration, subject to the variable consideration constraint. This article
explains an exception to variable consideration treatment for certain licences of intellectual property (IP).

Where the variable consideration in relation to the licence (but not sale) of IP is in the form of a sales-based or
usage-based royalty, ie the amount of consideration receivable is dependent upon the number of sales the
customer makes using the IP, then that variable consideration is subject to different constraints.

This restriction only applies where the sales-based or usage-based royalty relates solely or predominantly to
the IP licence such as may be the case with, for example, a licence for a movie for six weeks of screenings,
along with providing memorabilia at the start of the screening period. In instances where the royalty relates
solely or predominantly to the IP licence then the sales-based or usage-based royalty exception (the ‘royalty
exception’) must be applied to the royalty in its entirety.

In these instances, instead of the ‘general approach’ to estimating the variable consideration amount, IFRS 15
only permits the recognition of the revenue from these sales-based or usage-based royalties when, or as, the
later of the following occurs:

 The subsequent sale or usage occurs, or


 The performance obligation to which some or all of these royalties has been allocated has been satisfied
(or partially satisfied).

The subsequent sale or usage occurs


This may require an element of estimation of sales/usage-based royalties where there is a timing difference
between the sale or usage occurring, and when these reports by the customer are received by the licensing
entity.

Satisfaction of performance obligation


The purpose this test is to prevent the acceleration of revenue recognition before an entity has performed the
obligation. This is because the royalty exception applies to the restriction of variable consideration that can be
recognised, but doesn’t over-ride the underlying requirements of IFRS 15 that where revenue is recognised
over time, the measurement depicts an entity’s performance in transferring control of the goods or services.

Example – recognition restricted to satisfaction of


performance obligation
An entity licences IP to a customer for five years, and determines that revenue is to be recognised over time.
The royalty exception applies because the payment schedule sets out that the amount billed is at the following
royalty rates on the customers’ sales: Year 1: 10%, Year 2: 8%, Year 3: 6%, Year 4: 4% Year 5: 2%.

The entity estimates that:

 The customer sales on which the royalty is based will be approximately equal for each of the five years
under licence, and
 Any activities undertaken by the entity affecting its IP will be performed on an even and continuous
basis throughout the licence period.

Should the entity recognise the royalty revenue based upon contractual terms?

Following the legal form of the royalty might not appropriately depict progress in satisfying its performance
obligation for providing access to the entity’s IP as it may exist from time to time throughout the licence
period.

Although the royalty exception sets a limit on the maximum amount of revenue that might be recognised, this
does not mean that this maximum amount should always be recognised. The entity may therefore need to defer
some of this revenue to satisfy the second test within the royalty exception recognition criteria. In practice, in
the scenario above, this might be done by applying an average expected royalty rate to calculate the revenue
deferral.

When does this exception apply?


The term ‘royalty’ is not defined within the standards, and care must be taken when determining whether the
royalty exception applies in certain payment structures which may be ‘in-substance’ sales or usage-based
royalties (for example, milestone payments).

An example of this would be where a company licences IP with a payment structure as follows:

 £1.5m for the licence of IP for 2 years


 Additional £0.5m if customer makes sales of more than £100m in the 2 years
 Additional £1.0m if customer makes sale of more than £200m in the 2 years.
In the above example, the entity will recognise revenue of £1.5m when, or as, control of the licence passes, and
the additional £0.5m/£1.0m in the period(s) that the customers’ sales exceed the cumulative £100m / £200m
targets.

What if the contract includes a minimum royalty guarantee?


Often, licence of IP contracts can include a fixed element and a royalty based element, such as a sales-based
royalty payment plan with a minimum royalty guarantee of £2m.

The minimum royalty guarantee element would not be subject to the royalty exception, as it does not form part
of the variable consideration, and so would be recognised when, or as, control of the licence is passed to the
customer. Any additional sales-based or usage-based royalties in excess of this guaranteed minimum would be
subject to the royalty exception and recognised in the period that the sales/usage occurs.

Where the licence of the IP is recognised at a point in time, the guaranteed minimum amount is recognised at
that point in time, with any excess royalties recognised once the sales/usage that take the royalties above the
guaranteed minimum occur.

Where the licence of the IP is recognised over time, more judgement is required by management as they will
need to determine an appropriate measure of progress. Regardless of the measure of progress selected,
cumulative revenue at any point in time must not exceed the sum of minimum guaranteed royalties plus excess
royalties earned to date.

For help and advice on revenue recognition issues please get in touch with your usual BDO contact or Scott
Knight.

Read more on revenue recognition:

IFRS 15 in the Spotlight: Variable consideration

Contract costs and IFRS 15

Contract modifications and IFRS 15

Significant financing components in contracts

To bundle or not to bundle, that is the question

Sale with a right of return

IFRS 15 in the spotlight: Accounting for vouchers

Business Edge Index


Article:

IFRS 15 in the Spotlight: Variable


consideration
13 November 2017
Many businesses have contracts with their customers that set out the consideration receivable that is not just
for a fixed amount. The consideration receivable can often include amounts such as:

 Awards for early or timely delivery and penalties for late delivery (common in industries such as
construction – see example 1 below), or
 Volume based rebates or stepped-pricing (common in industries such as retail or manufacturing – see
example 2 below).

Under IFRS 15 these amounts are referred to as ‘variable consideration’. Variable consideration can also arise
in other situations such as sales with a right of return, or where there is a valid expectation (either based on
customary business practice, or the seller’s intention when entering into the contract) that a price concession
will be offered later.

It is important to consider the treatment of these elements of revenue when looking at the accounting required
under IFRS 15 as this can differ from the previous accounting treatment.

At the start of the contract a seller must estimate the amount of consideration to which it expects to be entitled
on the contract. This estimate is updated at each reporting date until no further consideration is receivable.
IFRS 15 requires that this estimate of variable consideration is determined using either:

 The expected value method – based on probability-weighted amounts, or


 The most likely outcome method – appropriate where there are few possible outcomes (for example, an
entity either achieves a performance bonus or not).

The most appropriate method should be selected for each contract, and then must be applied consistently
throughout the contract term.

Regardless of which method is used, the estimation of the variable consideration amount is constrained to the
extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will
not occur. This means that when estimating the variable consideration, IFRS 15 sets a higher hurdle than the
previous IFRS standards which may defer the recognition of some revenue.

An exception to the above approach is made in relation to consideration in the form of a sales-based or usage-
based royalty for the licence of intellectual property which we will consider in next month’s issue.
Example 1: variable consideration – over-time revenue recognition

A construction company enters into a contract to build a bridge for £10m with an expected completion date of
July 2019. The company determines that the over-time revenue recognition criteria of IFRS 15 have been met.
The contract contains award / penalty clauses depending on the date of completion as follows:

Date of Completion Award Penalty

£’000 £’000

June 2019 or earlier 200 -

July or August 2019 - -

September 2019 or later - (1,000)

Due to the presence of a £1m penalty clause, the fixed consideration is £9m with any additional revenue being
variable consideration.

At the start of the contract, the construction company determines with a high degree of certainty that the bridge
will be completed on time and therefore, using the most likely outcome method and applying the constraint, no
awards or penalty deductions are included when estimating contract consideration (£10m).

At their reporting date of 31 December 2018 they reassess their variable consideration estimate. At this point,
it is most likely that the bridge will be completed in August 2019 but there is a reasonable chance that it will
not be completed until September 2019 so they determine that the date by which completion is highly probably
is September 2019.

Variable consideration to be recognised is therefore estimated to be constrained to £nil due to the penalty.
Previously, the penalty deduction may only have been accounted for when incurred.

If at 31 December 2018 the most likely date of completion is June 2019, with the date by which completion is
highly probably being determined as July 2019, then the variable consideration to be recognised would be
estimated as £1m giving total consideration of £10m. Previously this may have been £10.2m, including receipt
of the award based on the most likely completion date.

Example 2: variable consideration – point in time recognition

A manufacturing company (the ‘supplier’) enters into a contract to sell the product ‘A Biscuit’ to a
supermarket chain. The pricing in this contract is such that each pack is sold for £10, with a rebate being
offered at the end of the year based upon the total number of packs sold in 12 months. Revenue is recognised
for each pack upon delivery of that pack to the supermarket.

Number of packs sold in 12m Price per pack


£

1 – 1,000 10

1,001 – 1,500 8

1,501 or more 7

Start of the contract

The variable consideration is the £3 per pack that reflects the difference between the £10 and £7 selling prices.

To determine how much of this variable consideration it can recognise on the sale of the packs to the
supermarket chain throughout the year, the supplier must estimate how many packs of A Biscuit it expects to
sell. At the start of the contract, based upon normal sale volumes to businesses similar to the supermarket chain
it estimates that it will sell 1,200 packs (so consideration of £8 per pack) and it is highly probable that they will
not sell more than 1,500 packs. The variable consideration of £3 is therefore constrained to £1 – giving a
transaction price per pack of £8.

During the year

Upon sale of each pack of A Biscuit to the supermarket chain during the year, the supplier recognises £8
revenue. The difference of £2 between the invoice amount and revenue recognised is recorded as a contract
liability.

At year end

At their reporting date of 31 December 2018 they reassess their variable consideration estimate. At this point,
based upon volumes sold to date and the remaining period of the contract, they estimate that they will now sell
2,000 packs to the supermarket chain in total. The variable consideration is now constrained to £nil – giving a
transaction price and revenue per pack of £7.

Stepped pricing

The above example shows a reduction in the price of each pack sold in the year. If the pricing were stepped
rather than cumulative (ie first 1,000 at £10, the next 500 at £8, and all the rest at £7) the process of estimating
variable consideration would still be the same:

 During the year: recognise revenue of £9.67 for each pack sold as they estimate sales of 1,200 packs and
it is highly probable that they will not sell more than 1,500 packs [(1,000 x £10 + 200 x £8)/1,200]
 At year end: recognise revenue of £8.75 for each pack sold as they estimate sales of 2,000 [(1,000 x £10
+ 500 x £8 + 500 x £7)/2,000]. This will result in a cumulative adjustment of (£0.92) reduction in
revenue for each pack sold to date.
For help and advice on revenue recognition issues please get in touch with your usual BDO contact or Scott
Knight.

Read more on revenue recognition:

Contract costs and IFRS 15

Contract modifications and IFRS 15

Significant financing components in contracts

To bundle or not to bundle, that is the question

Sale with a right of return

IFRS 15 in the spotlight: Accounting for vouchers

Business Edge Index


Article:

Contract Costs and IFRS 15


17 October 2017
Although IFRS 15 is primarily a standard on revenue recognition, it also includes requirements relating to
contract costs. As a result, companies may need to change their accounting for those costs on adoption of IFRS
15 for annual reporting periods beginning on or after 1 January 2018. This could affect their profit and
financial position - especially for entities involved in construction and long-term service contracts. Taken
together with changes in the pattern of revenue recognition under IFRS 15, this may result in increased
volatility in profit margins on a contract in different reporting periods.

For example, Capita, in its recent announcement notes that some of its contract costs will be expensed as
currently, while certain other costs (previously expensed) will now be capitalised as contract fulfilment assets
and released over the contract life. Taken with changes in revenue timing, this may lead to potentially lower
profits or losses in the early years of contracts – but with overall contract profitability unchanged.

What is changing?
As there is no specific IFRS addressing the accounting for costs, entities currently refer to a number of
different standards and principles in accounting for various types of costs incurred. Existing standards IAS 18
Revenue and IAS 11 Construction Contracts contain only limited guidance, mainly on applying the percentage
of completion method (under which contract revenue and costs are recognised with reference to the stage of
completion).

IFRS 15 introduces new guidance on accounting for all contract costs, distinguishing between:

 Incremental costs incurred in obtaining a contract, and


 Costs incurred to fulfil a contract.

Subject to certain criteria, these contract costs must be capitalised, amortised and assessed for impairment
under guidance in IFRS 15 (eg not IFRS 9 or IAS 36), while all other types of costs have to be expensed as
incurred. Assets recognised for contract costs are a new asset category and are presented separately from
contract assets and contract liabilities arising on the recognition of revenue. This could bring about a change in
practice for many entities.

Incremental costs of obtaining a contract


Incremental costs are costs that would not have been incurred had that individual contract not been obtained,
eg a sales commission. Currently, entities either expense the costs of obtaining a contract as incurred, include
them as part of contract costs under IAS 11 Construction Contracts, or capitalise them under IAS 38
Intangible Assets as ‘directly attributable’ costs.

However, under IFRS 15, these costs are recognised as an asset if they are expected to be recovered from the
customer. As a practical expedient, incremental costs of obtaining a contract can be expensed if the
amortisation period would be one year or less. Any other costs of obtaining a contract are expensed when
incurred, unless they are explicitly chargeable to the customer regardless of whether the contract is obtained.

Example
A company wins a competitive tender to provide consulting services to a new customer and incurs the
following costs to obtain the contract:

Costs £ IFRS 15 accounting treatment

Expensed as incurred as these would have been


External legal fees for due diligence 35,000
incurred whether or not the tender was won.

Expensed as incurred as these would have been


Travel costs to deliver proposal 5,000
incurred whether or not the tender was won.

Recognise as an asset as these are incremental costs of


Commissions to sales employees 10,000 obtaining the contract and the company expects to
recover them through future consultancy fees.

Total costs incurred 50,000

Costs to fulfil a contract


In accounting for costs to fulfil a contract, an entity must first assess whether the costs fall within the scope of
another IFRS (eg IAS 2 Inventories, IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets)
and, if so, account for them in accordance with that standard.

Any other costs to fulfil a contract are recognised as an asset under IFRS 15 only if they:

 Relate directly to a contract, or to an anticipated contract that can be specifically identified


 Generate or enhance resources to be used to satisfy performance obligations in future, and
 Are expected to be recovered.

There is no practical expedient to expense costs to fulfil a contract.


Costs that relate directly to a contract could include direct labour and materials or allocations of costs such as
depreciation or insurance, anything explicitly chargeable to the customer under the contract and subcontractor
costs. However, general and administrative costs that are not explicitly chargeable to the customer and the
costs of wasted materials, labour and other resources that were not reflected in the price of the contract do not
qualify.

Costs relating to satisfied or partially satisfied performance obligations (past performance) must be expensed.

Read more on revenue recognition:

Contract modifications and IFRS 15

Significant financing components in contracts

To bundle or not to bundle, that is the question

Sale with a right of return

IFRS 15 in the spotlight: Accounting for vouchers

Business Edge Index


Article:

IFRS15 in the spotlight - Significant


financing components in contracts
11 July 2017
From 1 January 2018, the new revenue recognition standard will apply specific rules where the timing of cash
payments specified in a contract is different from the timing of the transfer of control of the related goods or
services to the customer (ie different from the date the related revenue is recognised).

If the timing of payments agreed by the parties to the contract (either explicitly or implicitly) provides either
the customer or the vendor with a significant financing benefit (eg if £4m is paid in full up front but delivery
takes place 24 months later or vice versa), then IFRS 15 requires that the transaction price is adjusted to reflect
this ‘financing component’.

This is a significant departure from previous requirements as, under IAS 18, similar financing arrangements
will generally only have been considered where payment terms were deferred; typically payments in advance
would not have affected revenue. The objective of including such new adjustments for significant financing
components is for the vendor to recognise revenue at the cash selling price, even if the contract contains an
element of financing.

Example - A significant financing component arising from a payment in advance

A company enters into a contract with a customer to construct a new building. An analysis of the contract
has determined that the revenue for the building will be recognised at a point in time, rather than over time,
with control over the completed building passing to the customer in two years’ time. The contract contains
two payment options: Either the customer can pay £5 million in two years’ time when it obtains control of
the building, or the customer can pay £4 million on the signing of the contract. The customer decides on
the latter option.

The company concludes that, because of the significant period of time between the date of payment by the
customer and the transfer of the completed building to the customer and the effect of prevailing market
rates of interest, there is a significant financing component in the arrangement.

The interest rate implicit in the transaction is 11.8%. However, because the vendor is effectively borrowing
from its customer, the vendor is also required to consider its own incremental borrowing rate which it has
determined to be 6%. The accounting entries required to reflect the significant financing component are as
follows:

Contract inception:
Cash £4,000,000
Contract liability £4,000,000
Recognition of a contract liability for the payment in advance.

Over the two year construction period:

Interest expense £494,000


Contract liability £494,000
Accretion of the interest at 6% incremental borrowing rate.

At the date of transfer of the building to the customer:

Contract liability £4,494,000


Revenue £4,494,000

Ignoring costs of sales, over the two year duration of the project, cumulative profit before tax will not be
affected (the increase in revenue being offset by the increase in interest expense). However, other possible
KPIs may change (eg EBITDA will increase from £4,000 to £4,494 over that period).

As a practical expedient, IFRS 15 allows the effects of a significant financing component to be ignored if
the vendor expects, at contract inception, that the period between the transfer of a promised good or
service to the customer and the date of payment will be one year or less.

Practical issues
This may also lead to a change in current practice, particularly in environments where interest rates are high, as
a financing component may have been recognised under IAS 18 for periods less than one year.
IFRS 15 also identifies a number of situations where there may be a timing difference between the supply of
the goods or services and payment that is not regarded as giving rise to a significant financing component, for
example where:

 A customer has paid in advance and the timing of transfer of those goods or services is at the discretion
of the customer (such as prepaid phone cards and customer loyalty points)
 A substantial amount of consideration payable by the customer is variable and the amount or timing of
that consideration will be determined by future events that are not substantially within the control of
either the vendor or the customer (such as a sales-based royalty)
 The difference between the promised consideration and the cash selling price of the goods or services is
for a reason other than financing to either the customer or the vendor (such as to provide the customer
with protection that the vendor will fail to adequately complete its obligations – like the completion of
post construction remedial work on a building).

For help and advice on revenue recognition issues please get in touch with your usual BDO contact or Scott
Knight.

Read more on revenue recognition:

To bundle or not to bundle, that is the question

Sale with a right of return

IFRS 15 in the spotlight: Accounting for vouchers

Business Edge Index


Article:

Will advance billing hurt your balance


sheet?
09 March 2018
As IFRS 15 is about revenue recognition, you would expect it to have most impact on the P&L. However, as
the pattern of revenue recognition changes, it will also affect companies’ balance sheets because they will need
to reflect different performance obligations or contract assets. Companies that bill in advance for the delivery
of goods or services may see a marked impact on their first balance sheet after adopting IFRS 15.

Accounting for advance billing under IAS 18 often initially resulted in the recognition of a trade receivable and
deferred revenue. Under IFRS 15, this ‘grossing up’ of the balance sheet may not be appropriate – reducing
gross assets and gross liabilities.

Practical example
A company has sold software maintenance services in a stand-alone transaction (ie not bundled with other
goods or services) for a two-year ‘non-cancellable’ period. The company has decided to recognise the revenue
evenly - £1,000 per month over the 24-month period. Payment for the service can be structured in one of the
following ways:

1. Invoiced in full at the start (say 1 January 2018) and payable in full on 31 March 2018
2. Invoiced in full at the start but payable in 24 equal instalments at the end of each calendar month, or
3. Invoiced and payable in 24 equal instalments at the end of each calendar month.

Under IAS 18, for options 1 and 2, companies would often have recognised a trade receivable of £24,000 and
deferred revenue of £24,000 on 1 January 2018.

However, under IFRS 15, the contract liability and trade receivable should be shown net until the earlier of
either:

a. The date the payment becomes due (ie when the ‘receivable’ is recognised), or
b. The date the goods or services are delivered (ie when a ‘contract asset’ is recognised).

Under IFRS 15, the fact that the contract is ‘non-cancellable’ affects the date at which payment becomes due:
it is the date at which the cash payment should be received under the contract, not the invoice date of the trade
receivable.
Comparison of accounting entries
Receivables and contract assets must be presented separately either in the notes or on the face of the balance
sheet.

1 January 31 January 28 February

Option 1 Dr Receivable £24,000 Dr Deferred Revenue £1,000 Dr Deferred Revenue £1,000

IAS 18 Cr Deferred Revenue £24,000 Cr Revenue £1,000 Cr Revenue £1,000

Option 1 - Dr Contract asset £1,000 Dr Contract asset £1,000

IFRS 15 - Cr Revenue £1,000 Cr Revenue £1,000

Option 2 Dr Receivable £24,000 Dr Deferred Revenue £1,000 Dr Deferred Revenue £1,000


IAS 18 Cr Deferred Revenue £24,000 Cr Revenue £1,000 Cr Revenue £1,000

Option 2 - Dr Receivable £1,000 Dr Receivable £1,000


IFRS 15 - Cr Revenue £1,000 Cr Revenue £1,000

Option 3 Dr Receivable £1,000 Dr Receivable £1,000


IAS 18 Cr Revenue £1,000 Cr Revenue £1,000

Option 3 - Dr Receivable £1,000 Dr Receivable £1,000


IFRS 15 - Cr Revenue £1,000 Cr Revenue £1,000

The balance sheet effect


The new treatment under IFRS 15 will have no bearing on the pattern of revenue recognition or, of course, the
cash position of the company. However, it may have a significant effect on the appearance of the balance
sheet.

As can be seen in the example under IAS 18 both gross assets and gross liabilities are increased by £24,000 at
1 January. Under IFRS 15 this grossing up may occur at a later date (option 1) or not at all (option 2 and 3)

If the changes to your balance sheet are going to be significant/material, you will want to explain them to the
company’s stakeholders. This is done by making disclosures in your last annual report prior to implementing
IFRS 15 (as required under IAS 8.30 – disclosures for new standards not yet effective).
For help and advice on revenue recognition issues please get in touch with your usual BDO contact or Tony
Perkins.

Read more on revenue recognition:

IFRS 15 in the Spotlight: Variable consideration & the sales-based or usage-based royalty exception

IFRS 15 in the Spotlight: Variable consideration

Contract costs and IFRS 15

Contract modifications and IFRS 15

Significant financing components in contracts

To bundle or not to bundle, that is the question

Sale with a right of return

IFRS 15 in the spotlight: Accounting for vouchers

Business Edge Index


Article:

IFRS 15 in the Spotlight: Variable


consideration & the sales-based or
usage-based royalty exception
12 January 2018
In our November IFRS 15 article we considered the impact of variable consideration on revenue recognition
and the requirement to estimate this consideration, subject to the variable consideration constraint. This article
explains an exception to variable consideration treatment for certain licences of intellectual property (IP).

Where the variable consideration in relation to the licence (but not sale) of IP is in the form of a sales-based or
usage-based royalty, ie the amount of consideration receivable is dependent upon the number of sales the
customer makes using the IP, then that variable consideration is subject to different constraints.

This restriction only applies where the sales-based or usage-based royalty relates solely or predominantly to
the IP licence such as may be the case with, for example, a licence for a movie for six weeks of screenings,
along with providing memorabilia at the start of the screening period. In instances where the royalty relates
solely or predominantly to the IP licence then the sales-based or usage-based royalty exception (the ‘royalty
exception’) must be applied to the royalty in its entirety.

In these instances, instead of the ‘general approach’ to estimating the variable consideration amount, IFRS 15
only permits the recognition of the revenue from these sales-based or usage-based royalties when, or as, the
later of the following occurs:

 The subsequent sale or usage occurs, or


 The performance obligation to which some or all of these royalties has been allocated has been satisfied
(or partially satisfied).

The subsequent sale or usage occurs


This may require an element of estimation of sales/usage-based royalties where there is a timing difference
between the sale or usage occurring, and when these reports by the customer are received by the licensing
entity.

Satisfaction of performance obligation


The purpose this test is to prevent the acceleration of revenue recognition before an entity has performed the
obligation. This is because the royalty exception applies to the restriction of variable consideration that can be
recognised, but doesn’t over-ride the underlying requirements of IFRS 15 that where revenue is recognised
over time, the measurement depicts an entity’s performance in transferring control of the goods or services.

Example – recognition restricted to satisfaction of


performance obligation
An entity licences IP to a customer for five years, and determines that revenue is to be recognised over time.
The royalty exception applies because the payment schedule sets out that the amount billed is at the following
royalty rates on the customers’ sales: Year 1: 10%, Year 2: 8%, Year 3: 6%, Year 4: 4% Year 5: 2%.

The entity estimates that:

 The customer sales on which the royalty is based will be approximately equal for each of the five years
under licence, and
 Any activities undertaken by the entity affecting its IP will be performed on an even and continuous
basis throughout the licence period.

Should the entity recognise the royalty revenue based upon contractual terms?

Following the legal form of the royalty might not appropriately depict progress in satisfying its performance
obligation for providing access to the entity’s IP as it may exist from time to time throughout the licence
period.

Although the royalty exception sets a limit on the maximum amount of revenue that might be recognised, this
does not mean that this maximum amount should always be recognised. The entity may therefore need to defer
some of this revenue to satisfy the second test within the royalty exception recognition criteria. In practice, in
the scenario above, this might be done by applying an average expected royalty rate to calculate the revenue
deferral.

When does this exception apply?


The term ‘royalty’ is not defined within the standards, and care must be taken when determining whether the
royalty exception applies in certain payment structures which may be ‘in-substance’ sales or usage-based
royalties (for example, milestone payments).

An example of this would be where a company licences IP with a payment structure as follows:

 £1.5m for the licence of IP for 2 years


 Additional £0.5m if customer makes sales of more than £100m in the 2 years
 Additional £1.0m if customer makes sale of more than £200m in the 2 years.
In the above example, the entity will recognise revenue of £1.5m when, or as, control of the licence passes, and
the additional £0.5m/£1.0m in the period(s) that the customers’ sales exceed the cumulative £100m / £200m
targets.

What if the contract includes a minimum royalty guarantee?


Often, licence of IP contracts can include a fixed element and a royalty based element, such as a sales-based
royalty payment plan with a minimum royalty guarantee of £2m.

The minimum royalty guarantee element would not be subject to the royalty exception, as it does not form part
of the variable consideration, and so would be recognised when, or as, control of the licence is passed to the
customer. Any additional sales-based or usage-based royalties in excess of this guaranteed minimum would be
subject to the royalty exception and recognised in the period that the sales/usage occurs.

Where the licence of the IP is recognised at a point in time, the guaranteed minimum amount is recognised at
that point in time, with any excess royalties recognised once the sales/usage that take the royalties above the
guaranteed minimum occur.

Where the licence of the IP is recognised over time, more judgement is required by management as they will
need to determine an appropriate measure of progress. Regardless of the measure of progress selected,
cumulative revenue at any point in time must not exceed the sum of minimum guaranteed royalties plus excess
royalties earned to date.

For help and advice on revenue recognition issues please get in touch with your usual BDO contact or Scott
Knight.

Read more on revenue recognition:

IFRS 15 in the Spotlight: Variable consideration

Contract costs and IFRS 15

Contract modifications and IFRS 15

Significant financing components in contracts

To bundle or not to bundle, that is the question

Sale with a right of return

IFRS 15 in the spotlight: Accounting for vouchers

Business Edge Index


Article:

IFRS 15 in the Spotlight: Variable


consideration
13 November 2017
Many businesses have contracts with their customers that set out the consideration receivable that is not just
for a fixed amount. The consideration receivable can often include amounts such as:

 Awards for early or timely delivery and penalties for late delivery (common in industries such as
construction – see example 1 below), or
 Volume based rebates or stepped-pricing (common in industries such as retail or manufacturing – see
example 2 below).

Under IFRS 15 these amounts are referred to as ‘variable consideration’. Variable consideration can also arise
in other situations such as sales with a right of return, or where there is a valid expectation (either based on
customary business practice, or the seller’s intention when entering into the contract) that a price concession
will be offered later.

It is important to consider the treatment of these elements of revenue when looking at the accounting required
under IFRS 15 as this can differ from the previous accounting treatment.

At the start of the contract a seller must estimate the amount of consideration to which it expects to be entitled
on the contract. This estimate is updated at each reporting date until no further consideration is receivable.
IFRS 15 requires that this estimate of variable consideration is determined using either:

 The expected value method – based on probability-weighted amounts, or


 The most likely outcome method – appropriate where there are few possible outcomes (for example, an
entity either achieves a performance bonus or not).

The most appropriate method should be selected for each contract, and then must be applied consistently
throughout the contract term.

Regardless of which method is used, the estimation of the variable consideration amount is constrained to the
extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will
not occur. This means that when estimating the variable consideration, IFRS 15 sets a higher hurdle than the
previous IFRS standards which may defer the recognition of some revenue.

An exception to the above approach is made in relation to consideration in the form of a sales-based or usage-
based royalty for the licence of intellectual property which we will consider in next month’s issue.
Example 1: variable consideration – over-time revenue recognition

A construction company enters into a contract to build a bridge for £10m with an expected completion date of
July 2019. The company determines that the over-time revenue recognition criteria of IFRS 15 have been met.
The contract contains award / penalty clauses depending on the date of completion as follows:

Date of Completion Award Penalty

£’000 £’000

June 2019 or earlier 200 -

July or August 2019 - -

September 2019 or later - (1,000)

Due to the presence of a £1m penalty clause, the fixed consideration is £9m with any additional revenue being
variable consideration.

At the start of the contract, the construction company determines with a high degree of certainty that the bridge
will be completed on time and therefore, using the most likely outcome method and applying the constraint, no
awards or penalty deductions are included when estimating contract consideration (£10m).

At their reporting date of 31 December 2018 they reassess their variable consideration estimate. At this point,
it is most likely that the bridge will be completed in August 2019 but there is a reasonable chance that it will
not be completed until September 2019 so they determine that the date by which completion is highly probably
is September 2019.

Variable consideration to be recognised is therefore estimated to be constrained to £nil due to the penalty.
Previously, the penalty deduction may only have been accounted for when incurred.

If at 31 December 2018 the most likely date of completion is June 2019, with the date by which completion is
highly probably being determined as July 2019, then the variable consideration to be recognised would be
estimated as £1m giving total consideration of £10m. Previously this may have been £10.2m, including receipt
of the award based on the most likely completion date.

Example 2: variable consideration – point in time recognition

A manufacturing company (the ‘supplier’) enters into a contract to sell the product ‘A Biscuit’ to a
supermarket chain. The pricing in this contract is such that each pack is sold for £10, with a rebate being
offered at the end of the year based upon the total number of packs sold in 12 months. Revenue is recognised
for each pack upon delivery of that pack to the supermarket.

Number of packs sold in 12m Price per pack


£

1 – 1,000 10

1,001 – 1,500 8

1,501 or more 7

Start of the contract

The variable consideration is the £3 per pack that reflects the difference between the £10 and £7 selling prices.

To determine how much of this variable consideration it can recognise on the sale of the packs to the
supermarket chain throughout the year, the supplier must estimate how many packs of A Biscuit it expects to
sell. At the start of the contract, based upon normal sale volumes to businesses similar to the supermarket chain
it estimates that it will sell 1,200 packs (so consideration of £8 per pack) and it is highly probable that they will
not sell more than 1,500 packs. The variable consideration of £3 is therefore constrained to £1 – giving a
transaction price per pack of £8.

During the year

Upon sale of each pack of A Biscuit to the supermarket chain during the year, the supplier recognises £8
revenue. The difference of £2 between the invoice amount and revenue recognised is recorded as a contract
liability.

At year end

At their reporting date of 31 December 2018 they reassess their variable consideration estimate. At this point,
based upon volumes sold to date and the remaining period of the contract, they estimate that they will now sell
2,000 packs to the supermarket chain in total. The variable consideration is now constrained to £nil – giving a
transaction price and revenue per pack of £7.

Stepped pricing

The above example shows a reduction in the price of each pack sold in the year. If the pricing were stepped
rather than cumulative (ie first 1,000 at £10, the next 500 at £8, and all the rest at £7) the process of estimating
variable consideration would still be the same:

 During the year: recognise revenue of £9.67 for each pack sold as they estimate sales of 1,200 packs and
it is highly probable that they will not sell more than 1,500 packs [(1,000 x £10 + 200 x £8)/1,200]
 At year end: recognise revenue of £8.75 for each pack sold as they estimate sales of 2,000 [(1,000 x £10
+ 500 x £8 + 500 x £7)/2,000]. This will result in a cumulative adjustment of (£0.92) reduction in
revenue for each pack sold to date.
For help and advice on revenue recognition issues please get in touch with your usual BDO contact or Scott
Knight.

Read more on revenue recognition:

Contract costs and IFRS 15

Contract modifications and IFRS 15

Significant financing components in contracts

To bundle or not to bundle, that is the question

Sale with a right of return

IFRS 15 in the spotlight: Accounting for vouchers

Business Edge Index


Article:

Sale with a right of return


20 April 2017
Customers have a legal right to return goods that are faulty, not as described, or unfit for purpose. Even if
goods are not faulty many retailers have a goodwill policy allowing returns within a specified period. The level
of these returns can be high, especially where sales are made online.

IFRS 15 has prescriptive guidance on how to account for these return rights which requires the estimation not
only of the number of expected returns, but also the nature of these returns. These estimates could be difficult
to quantify and businesses may need to change their management reporting systems in order to ensure that they
have the information needed to implement this new standard.

IFRS 15 defines a right to return as a right that enables a customer to receive:

1. A full or partial refund of any consideration paid


2. A credit that can be applied against other amounts owed, or that will be owed, to the vendor by the
customer
3. A different product in exchange, or
4. Any combination of the above.

It is important to note that, the third point notwithstanding, an exchange by customers of one product for
another of the same type, quality, condition and price (for example, exchanging the product for one of a
different colour or size) is not considered a return for the purposes of applying IFRS 15. Where an exchange
occurs, revenue is recognised on the date of the original sale. This means that estimating expected returns
under IFRS 15 could be complex, given the different accounting treatments of exchanges for similar and
different items.

How do I account for this under IFRS 15?


Where a right to return exists, IFRS 15 requires sales revenue to be reduced to reflect the expected value of
returns using the rules relating to variable consideration. Instead of recognising revenue for these expected
returns, a refund liability is recognised. The inventory cost of items expected to be returned are also excluded
from cost of sales and instead remain within inventory, adjusted for any potential impairment or restocking
costs.

In subsequent periods, the vendor updates its expected levels of returns, adjusting the measurement of the
refund liability and the associated inventory asset.

How might this differ from previous practice?


This may be a major change from the approach taken previously, particularly if past practice was to record a
refund provision for only the margin earned on the original sale of the items expected to be returned. This is
especially the case where recognition of this provision was taken against cost of sales rather than reducing
revenue. This change will also represent a ‘grossing-up’ of the balance sheet as the refund liability and
inventory cost of expected returns are not off-set.

Example of the potential effect of the new requirements


A retailer sells 100 items for £10, with a cost per item of £8 resulting in a margin of £2 per item. It anticipates
that 12 of those items will be returned for a cash refund or exchanged for a different item.

Possible previous accounting IFRS 15 accounting

Revenue 1,000 (100 x £10) 880 (100-12) x £10

Cost of Sales 824 (100 x £8) + (12 x £2) 704 (100-12) x £8

Gross Profit 176 176

Inventories - 96 (12 x £8)

Refund liability 24 (12 x £2) 120 (12 x £10)

Although gross profit is unaffected, revenue, which is likely to be a key performance indicator, may be
significantly reduced. Therefore, it is clear that estimating expected levels of returns will be a critical estimate,
especially for businesses selling to the public.

For help and advice on accounting for returns please get in touch with Scott Knight.

See also IFRS 15 in the spotlight: Accounting for vouchers

Business Edge Index

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IFRS 15, Revenue from Contracts with Customers
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1 IFRS 15, Revenue from Contracts with Customers


The new revenue standardThese presentation materials are provided to you for your exclusive use and may not
be sold in part or their entirety to any third party. Further, these materials may not be shown, shared or
transferred to any other third party without the express written consent of SGV & Co. These materials should
not be used or duplicated – in whole or in part – for any other purpose.© 2015 SGV. All rights reserved. <img
src="http://slideplayer.com/7327210/24/images/1/IFRS+15%2C+Revenue+from+Contracts+with+Customers.j
pg" width="800" align="left" alt="IFRS 15, Revenue from Contracts with Customers" title="The new revenue
standard. These presentation materials are provided to you for your exclusive use and may not be sold in part
or their entirety to any third party. Further, these materials may not be shown, shared or transferred to any
other third party without the express written consent of SGV & Co. These materials should not be used or
duplicated – in whole or in part – for any other purpose. © 2015 SGV. All rights reserved.">

2 Agenda Overview and transitionThe modelOther aspects <img


src="http://slideplayer.com/7327210/24/images/2/Agenda+Overview+and+transition+The+model+Other+aspe
cts.jpg" width="800" align="left" alt="Agenda Overview and transition The model Other aspects"
title="Agenda Overview and transition The model Other aspects">

3 Overview and transition


The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB)
issued a new revenue recognition standard on 28 May 2014.This standard replaces the majority of existing
International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Principles
(GAAP) requirements on revenue recognition.Virtually every industry is affectedContains the accounting
principles for all revenue arising from contracts with customers.IASB and FASB set up joint transition
resource group.The impact to financial statements, business processes and internal controls will likely be
significant for some entities. <img
src="http://slideplayer.com/7327210/24/images/3/Overview+and+transition.jpg" width="800" align="left"
alt="Overview and transition" title="The International Accounting Standards Board (IASB) and the Financial
Accounting Standards Board (FASB) issued a new revenue recognition standard on 28 May 2014. This
standard replaces the majority of existing International Financial Reporting Standards (IFRS) and US
Generally Accepted Accounting Principles (GAAP) requirements on revenue recognition. Virtually every
industry is affected. Contains the accounting principles for all revenue arising from contracts with customers.
IASB and FASB set up joint transition resource group. The impact to financial statements, business processes
and internal controls will likely be significant for some entities.">

4 Overview and transition (cont.)


Effective for annual periods beginning on or after 1 January 2017*Early adoption allowed for IFRS
preparersEffective for US GAAP public entities for fiscal years beginning on or after 15 December 2016Early
adoption prohibited for US GAAP public companiesPrivate entities: 15 December 2017, but may elect to apply
the standard one year earlier, on the US public companies effective date*In May 2015, the IASB issued an
Exposure Draft proposing to defer mandatory effective date to 1 January Comment period ends on July 3,
2015. <img src="http://slideplayer.com/7327210/24/images/4/Overview+and+transition+%28cont.%29.jpg"
width="800" align="left" alt="Overview and transition (cont.)" title="Effective for annual periods beginning
on or after 1 January 2017* Early adoption allowed for IFRS preparers. Effective for US GAAP public entities
for fiscal years beginning on or after 15 December 2016. Early adoption prohibited for US GAAP public
companies. Private entities: 15 December 2017, but may elect to apply the standard one year earlier, on the US
public companies effective date. *In May 2015, the IASB issued an Exposure Draft proposing to defer
mandatory effective date to 1 January 2018. Comment period ends on July 3, 2015.">

5 Overview and transition: adoption methods available


PY2(2015)PY1(2016)CY (2017)CY footnoteFull retrospective(with optional practical expedients)Cumulative
catch-upIFRS 15 andIAS 8 disclosures applyContracts under new standardContracts restatedModified
retrospective(Cumulative effect at date of application)Contracts not restatedExisting* and new contracts under
new standardExisting and new contract compared using legacy IFRS*Contracts not completed in prior years as
determined under legacy revenue requirements (i.e., IAS 11, IAS 18 and related Interpretations) <img
src="http://slideplayer.com/7327210/24/images/5/Overview+and+transition%3A+adoption+methods+availabl
e.jpg" width="800" align="left" alt="Overview and transition: adoption methods available" title="PY2. (2015)
PY1. (2016) CY. (2017) CY footnote. Full retrospective. (with optional practical expedients) Cumulative
catch-up. IFRS 15 and. IAS 8 disclosures apply. Contracts under new standard. Contracts restated. Modified
retrospective. (Cumulative effect at date of application) Contracts not restated. Existing* and new contracts
under new standard. Existing and new contract compared using legacy IFRS. *Contracts not completed in
prior years as determined under legacy revenue requirements (i.e., IAS 11, IAS 18 and related
Interpretations)">

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6 Scope and scope exceptions


What is in scope or affected by the standardContracts with customersSale of some non-financial assets that are
not an output of the entity’s ordinary activities (e.g., property, plant and equipment, intangible assets)What is
not in scopeLeasing contractsInsurance contractsFinancial instruments and certain other contractsCertain non-
monetary exchangesCertain put options on sale and repurchase agreements <img
src="http://slideplayer.com/7327210/24/images/6/Scope+and+scope+exceptions.jpg" width="800" align="left"
alt="Scope and scope exceptions" title="What is in scope or affected by the standard. Contracts with
customers. Sale of some non-financial assets that are not an output of the entity’s ordinary activities (e.g.,
property, plant and equipment, intangible assets) What is not in scope. Leasing contracts. Insurance contracts.
Financial instruments and certain other contracts. Certain non-monetary exchanges. Certain put options on sale
and repurchase agreements.">

7 Summary of the model Core principle: Recognise revenue to depict the transfer of goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for
those goods or servicesStep 1 :Identify the contract(s) with the customerStep 2 :Identify the performance
obligationsStep 3 :Determine the transaction priceStep 4 :Allocate the transaction price to the performance
obligationsStep 5 :Recognise revenue when (or as) the entity satisfies a performance obligation <img
src="http://slideplayer.com/7327210/24/images/7/Summary+of+the+model.jpg" width="800" align="left"
alt="Summary of the model" title="Core principle: Recognise revenue to depict the transfer of goods or
services to customers in an amount that reflects the consideration to which the entity expects to be entitled in
exchange for those goods or services. Step 1 : Identify the contract(s) with the customer. Step 2 : Identify the
performance obligations. Step 3 : Determine the transaction price. Step 4 : Allocate the transaction price to the
performance obligations. Step 5 : Recognise revenue when (or as) the entity satisfies a performance
obligation.">

8 Step 1: Identify the contract(s) with the customer


Contract defined as an agreement between two or more parties that creates enforceable rights and
obligations.Could be written, oral or impliedDoes not exist if both parties can cancel without penaltyCriteria
must be met for arrangement to be within scope of new standard:Contract has commercial substance and the
parties are committed to performParties can identify the rights in the contractPayment terms can be identified
and collection is probableMultiple contracts entered into at the same time with the same customer should be
combined if certain conditions are met.The standard specifies the treatment for arrangements that do not meet
the specified criteria. <img
src="http://slideplayer.com/7327210/24/images/8/Step+1%3A+Identify+the+contract%28s%29+with+the+cus
tomer.jpg" width="800" align="left" alt="Step 1: Identify the contract(s) with the customer" title="Contract
defined as an agreement between two or more parties that creates enforceable rights and obligations. Could be
written, oral or implied. Does not exist if both parties can cancel without penalty. Criteria must be met for
arrangement to be within scope of new standard: Contract has commercial substance and the parties are
committed to perform. Parties can identify the rights in the contract. Payment terms can be identified and
collection is probable. Multiple contracts entered into at the same time with the same customer should be
combined if certain conditions are met. The standard specifies the treatment for arrangements that do not meet
the specified criteria.">

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9 Step 2: Identify the performance obligations


A performance obligation is defined as a promise in a contract with a customer to transfer a good or
service.Performance obligations are identified at contract inception and determined based on:Contractual
termsCustomary business practiceThere are no exceptions for incidental obligations or marketing incentives.A
series of goods or services that are substantially the same and have the same pattern of transfer is a single
performance obligation if criteria are met. <img
src="http://slideplayer.com/7327210/24/images/9/Step+2%3A+Identify+the+performance+obligations.jpg"
width="800" align="left" alt="Step 2: Identify the performance obligations" title="A performance obligation is
defined as a promise in a contract with a customer to transfer a good or service. Performance obligations are
identified at contract inception and determined based on: Contractual terms. Customary business practice.
There are no exceptions for incidental obligations or marketing incentives. A series of goods or services that
are substantially the same and have the same pattern of transfer is a single performance obligation if criteria
are met.">

10 Step 2: Identify the performance obligations (cont.)


The good or service is highly dependent on, is highly interrelated with, or significantly modifies or customises
other promised goods or services in the contractPart 1: Focus on whether the good or service is capable of
being distinctCustomer can benefit from the individual good or service on its ownCustomer can use good or
service with other readily available resourcesOr Part 2: Focus on whether the good or service is distinct in the
context of the contractTwo-step model to identify which goods or servicesare distinct <img
src="http://slideplayer.com/7327210/24/images/10/Step+2%3A+Identify+the+performance+obligations+%28c
ont.%29.jpg" width="800" align="left" alt="Step 2: Identify the performance obligations (cont.)" title="The
good or service is highly dependent on, is highly interrelated with, or significantly modifies or customises
other promised goods or services in the contract. Part 1: Focus on whether the good or service is capable of
being distinct. Customer can benefit from the individual good or service on its own. Customer can use good or
service with other readily available resources. Or. Part 2: Focus on whether the good or service is distinct in
the context of the contract. Two-step model to identify which goods or services. are distinct.">

11 Step 3: Determine the transaction price


Transaction price is the amount of consideration to which an entity expects to be entitled in exchange for
transferring promised goods or services separately to a customer.Transaction price would reflect the effects of
the following:Variable consideration (including application of the constraint)Consideration paid or payable to
a customerNon-cash considerationSignificant financing component (time-value of money) <img
src="http://slideplayer.com/7327210/24/images/11/Step+3%3A+Determine+the+transaction+price.jpg"
width="800" align="left" alt="Step 3: Determine the transaction price" title="Transaction price is the amount
of consideration to which an entity expects to be entitled in exchange for transferring promised goods or
services separately to a customer. Transaction price would reflect the effects of the following: Variable
consideration (including application of the constraint) Consideration paid or payable to a customer. Non-cash
consideration. Significant financing component (time-value of money)">

12 Step 3: Determine the transaction price: variable consideration


Transaction price may vary because of bonuses, discounts, rebates, refunds, credits, price concessions,
incentives or other similar items.Assuming entity has sufficiently reliable data on which to base an estimate,
the transaction price is estimated using the technique that better predicts the amount an entity will be entitled
to:Expected valueMost likely amountSum of the probability-weighted amounts in a range of possible
outcomesAn appropriate estimate if an entity has a large number of contracts with similar characteristicsThe
single most likely amount in a range of possible outcomesMost predictive when the transaction will produce
few outcomes <img
src="http://slideplayer.com/7327210/24/images/12/Step+3%3A+Determine+the+transaction+price%3A+varia
ble+consideration.jpg" width="800" align="left" alt="Step 3: Determine the transaction price: variable
consideration" title="Transaction price may vary because of bonuses, discounts, rebates, refunds, credits, price
concessions, incentives or other similar items. Assuming entity has sufficiently reliable data on which to base
an estimate, the transaction price is estimated using the technique that better predicts the amount an entity will
be entitled to: Expected value. Most likely amount. Sum of the probability-weighted amounts in a range of
possible outcomes. An appropriate estimate if an entity has a large number of contracts with similar
characteristics. The single most likely amount in a range of possible outcomes. Most predictive when the
transaction will produce few outcomes.">

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13 Step 3: Determine the transaction price: variable consideration (cont


Required to evaluate whether to ‘constrain’ amounts of variable consideration included in transaction
priceObjective: only include variable amounts when it is ‘highly probable’ doing so would not result in a
significant revenue reversalSpecific rule for licenced intellectual propertySales or usage-based royalties (i.e.,
variable consideration amounts) should not be recognised until the customer’s subsequent sale or usage
occurs13 <img
src="http://slideplayer.com/7327210/24/images/13/Step+3%3A+Determine+the+transaction+price%3A+varia
ble+consideration+%28cont.jpg" width="800" align="left" alt="Step 3: Determine the transaction price:
variable consideration (cont" title="Required to evaluate whether to ‘constrain’ amounts of variable
consideration included in transaction price. Objective: only include variable amounts when it is ‘highly
probable’ doing so would not result in a significant revenue reversal. Specific rule for licenced intellectual
property. Sales or usage-based royalties (i.e., variable consideration amounts) should not be recognised until
the customer’s subsequent sale or usage occurs. 13.">

14 Step 3: Determine the transaction price: Other aspects of transaction price


Consideration paid or payable to a customerDetermine whether such amounts are:A reduction of the
transaction price and revenueA payment for distinct goods and servicesNon-cash considerationMeasured at the
fair value of the consideration received or promisedSignificant financing component/time value of
moneyConsidered when significant and the primary purpose of the payment terms would be to provide
financing to/from counterpartyEvaluation not required if customer is expected to pay within a year or less of
when control of the goods or services are transferred14 <img
src="http://slideplayer.com/7327210/24/images/14/Step+3%3A+Determine+the+transaction+price%3A+Other
+aspects+of+transaction+price.jpg" width="800" align="left" alt="Step 3: Determine the transaction price:
Other aspects of transaction price" title="Consideration paid or payable to a customer. Determine whether such
amounts are: A reduction of the transaction price and revenue. A payment for distinct goods and services. Non-
cash consideration. Measured at the fair value of the consideration received or promised. Significant financing
component/time value of money. Considered when significant and the primary purpose of the payment terms
would be to provide financing to/from counterparty. Evaluation not required if customer is expected to pay
within a year or less of when control of the goods or services are transferred. 14.">

15 Step 4: Allocate the transaction price


Transaction price allocated to each separate performance obligation in proportion to stand-alone selling
pricesIf certain criteria are met, the model provides two potential exceptions, relating to:Variable
considerationDiscountsWhen the stand-alone selling price is not directly observable, an entity is required to
estimate the selling price by:Maximising the use of observable inputsApplying estimation methods
consistently for goods and services and customers with similar characteristicsUsing a residual technique only
when prices vary widely or are uncertain <img
src="http://slideplayer.com/7327210/24/images/15/Step+4%3A+Allocate+the+transaction+price.jpg"
width="800" align="left" alt="Step 4: Allocate the transaction price" title="Transaction price allocated to each
separate performance obligation in proportion to stand-alone selling prices. If certain criteria are met, the
model provides two potential exceptions, relating to: Variable consideration. Discounts. When the stand-alone
selling price is not directly observable, an entity is required to estimate the selling price by: Maximising the
use of observable inputs. Applying estimation methods consistently for goods and services and customers with
similar characteristics. Using a residual technique only when prices vary widely or are uncertain.">

16 Step 5: Recognise revenue when (or as) performance obligations are satisfied
Revenue is recognised upon satisfaction of a performance obligation by transferring a good or service to a
customer.A good or service is generally considered to be transferred when the customer obtains
control.Control can transfer ‘over time’ or at a ‘point in time.’First, the entity determines if control transfers
over time.If control does not transfer over time, the default is point in time. <img
src="http://slideplayer.com/7327210/24/images/16/Step+5%3A+Recognise+revenue+when+%28or+as%29+p
erformance+obligations+are+satisfied.jpg" width="800" align="left" alt="Step 5: Recognise revenue when (or
as) performance obligations are satisfied" title="Revenue is recognised upon satisfaction of a performance
obligation by transferring a good or service to a customer. A good or service is generally considered to be
transferred when the customer obtains control. Control can transfer ‘over time’ or at a ‘point in time.’ First, the
entity determines if control transfers over time. If control does not transfer over time, the default is point in
time.">

17 Step 5: Recognise revenue when (or as) performance obligations are satisfied over time
Control of goods and services are transferred over time if one of the following three criteria is met:(a) The
customeris simultaneously receiving and consuming the benefits ofthe entity’s performance asthe
entityperforms(b) The entity creates or enhances an asset that the customer controls as it is created or
enhanced(c) The entity’s performance does not create an asset with alternative use, andThe entity has
enforceable right to payment for performance completed to dateIf none of the criteria for transfer over time are
met, control transfers at a point in time. <img
src="http://slideplayer.com/7327210/24/images/17/Step+5%3A+Recognise+revenue+when+%28or+as%29+p
erformance+obligations+are+satisfied+over+time.jpg" width="800" align="left" alt="Step 5: Recognise
revenue when (or as) performance obligations are satisfied over time" title="Control of goods and services are
transferred over time if one of the following three criteria is met: (a) The customer. is simultaneously receiving
and consuming the benefits of. the entity’s performance as. the entity. performs. (b) The entity creates or
enhances an asset that the customer controls as it is created or enhanced (c) The entity’s performance does not
create an asset with alternative use, and. The entity has enforceable right to payment for performance
completed to date. If none of the criteria for transfer over time are met, control transfers at a point in time.">

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18 Step 5: Recognise revenue when (or as) performance obligations are satisfied over time (cont.)
Measuring progress toward completionThe objective is to depict the entity’s performanceSelect a single
method for a particular performance obligation:Output methodsInput methodsApply consistent method for all
similar arrangementsIf unable to reasonably estimate progress, revenue should not be recognised until progress
can be estimatedHowever, if an entity can determine no loss will be incurred, the entity can recognise revenue
up to the value of costs incurred <img
src="http://slideplayer.com/7327210/24/images/18/Step+5%3A+Recognise+revenue+when+%28or+as%29+p
erformance+obligations+are+satisfied+over+time+%28cont.%29.jpg" width="800" align="left" alt="Step 5:
Recognise revenue when (or as) performance obligations are satisfied over time (cont.)" title="Measuring
progress toward completion. The objective is to depict the entity’s performance. Select a single method for a
particular performance obligation: Output methods. Input methods. Apply consistent method for all similar
arrangements. If unable to reasonably estimate progress, revenue should not be recognised until progress can
be estimated. However, if an entity can determine no loss will be incurred, the entity can recognise revenue up
to the value of costs incurred.">

19 Step 5: Recognise revenue as performance obligations are satisfied at a point in time


If none of the criteria for transfer over time are met, control transfers at a point in time.The following are
indicators of when control is transferred:The entity has a present right to payment for the good or service.The
customer has legal title to the asset.The customer has physical possession.The customer has the significant risk
and rewards of ownership of the asset.The entity has evidence of the customer’s acceptance of the asset. <img
src="http://slideplayer.com/7327210/24/images/19/Step+5%3A+Recognise+revenue+as+performance+obligat
ions+are+satisfied+at+a+point+in+time.jpg" width="800" align="left" alt="Step 5: Recognise revenue as
performance obligations are satisfied at a point in time" title="If none of the criteria for transfer over time are
met, control transfers at a point in time. The following are indicators of when control is transferred: The entity
has a present right to payment for the good or service. The customer has legal title to the asset. The customer
has physical possession. The customer has the significant risk and rewards of ownership of the asset. The
entity has evidence of the customer’s acceptance of the asset.">

20 Other aspects: contract costs


Incremental costs of obtaining a contract are capitalised if they are expected to be recovered.Practical
expedient to allow immediate expense recognition if the contract is one year or less in duration.Costs of
fulfilling a contract (that are not addressed by another standard) are capitalised if they:Relate directly to a
contractGenerate or enhance resources that will be used to satisfy performance obligations in the futureAre
expected to be recoveredCapitalised costs are amortised over the period in which the related goods or services
are transferred and subject to impairment testing. <img
src="http://slideplayer.com/7327210/24/images/20/Other+aspects%3A+contract+costs.jpg" width="800"
align="left" alt="Other aspects: contract costs" title="Incremental costs of obtaining a contract are capitalised
if they are expected to be recovered. Practical expedient to allow immediate expense recognition if the contract
is one year or less in duration. Costs of fulfilling a contract (that are not addressed by another standard) are
capitalised if they: Relate directly to a contract. Generate or enhance resources that will be used to satisfy
performance obligations in the future. Are expected to be recovered. Capitalised costs are amortised over the
period in which the related goods or services are transferred and subject to impairment testing.">
21 Other aspects: licences
Must first determine whether the licence is a distinct performance obligation in the arrangementFor a distinct
licence, assess the nature of the promisePromise to provide access to the entity’s intellectual property (IP) as it
exists throughout the licence period (recognise over time)Explicit requirement or an implicit understanding
that the entity will undertake activities that significantly affect the IPThe licence directly exposes the customer
to any changes to the IP that arise as and when the entity undertakes those activitiesThose activities do not
transfer a good or service to the customer as they occurPromise to use the entity’s IP as it exists at the point in
time at which the licence is granted (recognise as at a point in time)For more information, refer to Section 8.4
of the Applying IFRS. <img
src="http://slideplayer.com/7327210/24/images/21/Other+aspects%3A+licences.jpg" width="800" align="left"
alt="Other aspects: licences" title="Must first determine whether the licence is a distinct performance
obligation in the arrangement. For a distinct licence, assess the nature of the promise. Promise to provide
access to the entity’s intellectual property (IP) as it exists throughout the licence period (recognise over time)
Explicit requirement or an implicit understanding that the entity will undertake activities that significantly
affect the IP. The licence directly exposes the customer to any changes to the IP that arise as and when the
entity undertakes those activities. Those activities do not transfer a good or service to the customer as they
occur. Promise to use the entity’s IP as it exists at the point in time at which the licence is granted (recognise
as at a point in time) For more information, refer to Section 8.4 of the Applying IFRS.">

22 Other aspects: disclosures


Key principle: To enable users of financial statements to understand the nature, amount, timing and uncertainty
of revenue and cash flows arising from contracts with customersPresent both qualitative and quantitative
information about:Contracts with customersSignificant judgements and changes in judgements made in
applying the standard to those contractsAssets recognised from costs to obtain or fulfil a contractFor more
information, refer to Section 9 of the Applying IFRS. <img
src="http://slideplayer.com/7327210/24/images/22/Other+aspects%3A+disclosures.jpg" width="800"
align="left" alt="Other aspects: disclosures" title="Key principle: To enable users of financial statements to
understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with
customers. Present both qualitative and quantitative information about: Contracts with customers. Significant
judgements and changes in judgements made in applying the standard to those contracts. Assets recognised
from costs to obtain or fulfil a contract. For more information, refer to Section 9 of the Applying IFRS.">

23 Impact of the new standard Not just accounting change


Impact on multiple business functions outside the finance and accounting functionResources will be required
to implement across functionsManagement informationEmployee benefitsTax planningControl
environmentBusiness operationsProject managementTraining and communicationProcesses and
systemsInvestor relationsSector issuesRevenuerecognition impacts <img
src="http://slideplayer.com/7327210/24/images/23/Impact+of+the+new+standard+Not+just+accounting+chan
ge.jpg" width="800" align="left" alt="Impact of the new standard Not just accounting change" title="Impact
on multiple business functions outside the finance and accounting function. Resources will be required to
implement across functions. Management information. Employee benefits. Tax planning. Control
environment. Business operations. Project management. Training and communication. Processes and systems.
Investor relations. Sector issues. Revenue. recognition impacts.">
24 Thank you <img src="http://slideplayer.com/7327210/24/images/24/Thank+you.jpg" width="800"
align="left" alt="Thank you" title="Thank you">

25 Disclaimer This material has been prepared for general informational purposes only and is not intended to be
relied upon as accounting or other professional advice. Please refer to your advisors for specific advice.This
material is not a substitute for reading the standards and interpretations themselves. Therefore, the participants
should refer to these standards and interpretations and evaluate their applicability and the impact of current and
future adoption. <img src="http://slideplayer.com/7327210/24/images/25/Disclaimer.jpg" width="800"
align="left" alt="Disclaimer" title="This material has been prepared for general informational purposes only
and is not intended to be relied upon as accounting or other professional advice. Please refer to your advisors
for specific advice. This material is not a substitute for reading the standards and interpretations themselves.
Therefore, the participants should refer to these standards and interpretations and evaluate their applicability
and the impact of current and future adoption.">

The new revenue recognition standard


Published byJodie Williams Modified over 2 years ago
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1 The new revenue recognition standard


17 July 2014 <img
src="http://slideplayer.com/6418217/22/images/1/The+new+revenue+recognition+standard.jpg" width="800"
align="left" alt="The new revenue recognition standard" title="17 July 2014.">

2 The new revenue recognition standard


AgendaOverview and transitionThe five-step modelOther aspectsNext steps3 July 2014The new revenue
recognition standard <img
src="http://slideplayer.com/6418217/22/images/2/The+new+revenue+recognition+standard.jpg" width="800"
align="left" alt="The new revenue recognition standard" title="Agenda. Overview and transition. The five-step
model. Other aspects. Next steps. 3 July 2014. The new revenue recognition standard.">

3 The new revenue recognition standard


OverviewFASB and IASB issued a new global revenue recognition standard on 28 May 2014Standard replaces
nearly all existing US GAAP and IFRS guidance on revenue recognitionVirtually every industry is
affectedStandard requires entities to make more estimates and use more judgment than under current
guidanceIts effect on financial statements, business processes and internal controls will likely be significant for
some entitiesFASB/IASB transition resource group and other implementation resource groups have been
created3 July 2014The new revenue recognition standard <img
src="http://slideplayer.com/6418217/22/images/3/The+new+revenue+recognition+standard.jpg" width="800"
align="left" alt="The new revenue recognition standard" title="Overview. FASB and IASB issued a new
global revenue recognition standard on 28 May 2014. Standard replaces nearly all existing US GAAP and
IFRS guidance on revenue recognition. Virtually every industry is affected. Standard requires entities to make
more estimates and use more judgment than under current guidance. Its effect on financial statements, business
processes and internal controls will likely be significant for some entities. FASB/IASB transition resource
group and other implementation resource groups have been created. 3 July 2014. The new revenue recognition
standard.">

4 Overview A converged standard?


The FASB and IASB each issued new standardsThe standards are substantially the same except for five
areas:The Boards use the term “probable” for the level of confidence needed when assessing collectibility,
which results in a lower threshold under IFRS (based on existing definitions of “probable”)The FASB requires
more interim disclosures than IASBThe IASB allows early adoptionThe FASB does not allow an entity to
reverse impairment losses on assets recognizedThe FASB provides relief for nonpublic entities relating to
specific disclosure requirements and the effective date3 July 2014The new revenue recognition standard <img
src="http://slideplayer.com/6418217/22/images/4/Overview+A+converged+standard.jpg" width="800"
align="left" alt="Overview A converged standard" title="The FASB and IASB each issued new standards. The
standards are substantially the same except for five areas: The Boards use the term probable for the level of
confidence needed when assessing collectibility, which results in a lower threshold under IFRS (based on
existing definitions of probable ) The FASB requires more interim disclosures than IASB. The IASB allows
early adoption. The FASB does not allow an entity to reverse impairment losses on assets recognized. The
FASB provides relief for nonpublic entities relating to specific disclosure requirements and the effective date.
3 July 2014. The new revenue recognition standard.">

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5 Overview and transition


Effective for annual periods beginning after 15 December (1 January 2017 for calendar year-end public entities
and IFRS preparers)Optional one-year deferral for nonpublic entities under US GAAPEarly adoption
prohibited for US GAAP public entities, but nonpublic entities are permitted to adopt up to the public entity
effective dateEarly adoption permitted for IFRS preparersStandard includes an expanded definition of a public
entityEntities can choose to adopt the standard using either a full retrospective approach or a modified
retrospective approach3 July 2014The new revenue recognition standard <img
src="http://slideplayer.com/6418217/22/images/5/Overview+and+transition.jpg" width="800" align="left"
alt="Overview and transition" title="Effective for annual periods beginning after 15 December 2016 (1
January 2017 for calendar year-end public entities and IFRS preparers) Optional one-year deferral for
nonpublic entities under US GAAP. Early adoption prohibited for US GAAP public entities, but nonpublic
entities are permitted to adopt up to the public entity effective date. Early adoption permitted for IFRS
preparers. Standard includes an expanded definition of a public entity. Entities can choose to adopt the
standard using either a full retrospective approach or a modified retrospective approach. 3 July 2014. The new
revenue recognition standard.">

6 Overview and transition Adoption methods available


Key ConsiderationsFull retrospective approach (excludes practical expedients)Modified retrospective
approachApply to which periods presented?All periods presentedOnly the most current period presentedApply
to which contracts?All contracts that would have existed during all periods presented if the new standard had
been applied from contract inceptionAny contracts existing as of effective date (as if new standard had been
applied since inception of contract), as well as any new contracts from that date forwardRecognition of the
effect of adoption in the financial statements?Follow requirements of ASC 250, cumulative effect of changes
to periods prior to periods presented is reflected in opening balance of retained earningsCumulative effect of
changes is reflected in the opening balance of retained earnings in the most current period presentedAdoption
disclosure requirements?Follow requirements of ASC 250, including disclosure of the reason for the change
and the method of applying the changeIn the year of adoption, disclose the amount each financial statement
line item was affected as a result of applying the new standard and an explanation of significant changes
(effectively requires two sets of books during the year of adoption)3 July 2014The new revenue recognition
standard <img
src="http://slideplayer.com/6418217/22/images/6/Overview+and+transition+Adoption+methods+available.jpg
" width="800" align="left" alt="Overview and transition Adoption methods available" title="Key
Considerations. Full retrospective approach (excludes practical expedients) Modified retrospective approach.
Apply to which periods presented All periods presented. Only the most current period presented. Apply to
which contracts All contracts that would have existed during all periods presented if the new standard had been
applied from contract inception. Any contracts existing as of effective date (as if new standard had been
applied since inception of contract), as well as any new contracts from that date forward. Recognition of the
effect of adoption in the financial statements Follow requirements of ASC 250, cumulative effect of changes to
periods prior to periods presented is reflected in opening balance of retained earnings. Cumulative effect of
changes is reflected in the opening balance of retained earnings in the most current period presented. Adoption
disclosure requirements Follow requirements of ASC 250, including disclosure of the reason for the change
and the method of applying the change. In the year of adoption, disclose the amount each financial statement
line item was affected as a result of applying the new standard and an explanation of significant changes
(effectively requires two sets of books during the year of adoption) 3 July 2014. The new revenue recognition
standard.">

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7 Scope and exceptions What is in scope What is not in scope


Contracts with customersSale of some nonfinancial assets that are not an output of the company’s ordinary
activities (e.g., property, plant and equipment, intangibles)What is not in scopeLeasing contractsInsurance
contractsFinancial instruments contractsCertain nonmonetary exchangesCertain put options on sale and
repurchase agreementsGuarantees within the scope of ASC 4603 July 2014The new revenue recognition
standard <img
src="http://slideplayer.com/6418217/22/images/7/Scope+and+exceptions+What+is+in+scope+What+is+not+i
n+scope.jpg" width="800" align="left" alt="Scope and exceptions What is in scope What is not in scope"
title="Contracts with customers. Sale of some nonfinancial assets that are not an output of the company’s
ordinary activities (e.g., property, plant and equipment, intangibles) What is not in scope. Leasing contracts.
Insurance contracts. Financial instruments contracts. Certain nonmonetary exchanges. Certain put options on
sale and repurchase agreements. Guarantees within the scope of ASC 460. 3 July 2014. The new revenue
recognition standard.">

8 The new revenue recognition standard


AgendaOverview and transitionThe five-step modelOther aspectsNext steps3 July 2014The new revenue
recognition standard <img
src="http://slideplayer.com/6418217/22/images/8/The+new+revenue+recognition+standard.jpg" width="800"
align="left" alt="The new revenue recognition standard" title="Agenda. Overview and transition. The five-step
model. Other aspects. Next steps. 3 July 2014. The new revenue recognition standard.">

9 Summary of the model Core principle: Recognize revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration to which the entity expects to be entitled in
exchange for those goods or servicesStep 1:Identify the contract(s) with a customerStep 2:Identify the
performance obligations in the contractStep 3:Determine the transaction priceStep 4:Allocate the transaction
price to the performance obligationsStep 5:Recognize revenue when (or as) each performance obligation is
satisfied3 July 2014The new revenue recognition standard <img
src="http://slideplayer.com/6418217/22/images/9/Summary+of+the+model.jpg" width="800" align="left"
alt="Summary of the model" title="Core principle: Recognize revenue to depict the transfer of promised goods
or services to customers in an amount that reflects the consideration to which the entity expects to be entitled
in exchange for those goods or services. Step 1: Identify the contract(s) with a customer. Step 2: Identify the
performance obligations in the contract. Step 3: Determine the transaction price. Step 4: Allocate the
transaction price to the performance obligations. Step 5: Recognize revenue when (or as) each performance
obligation is satisfied. 3 July 2014. The new revenue recognition standard.">

10 Step 1: Identify the contract(s) with a customer


Contract defined as an agreement between two or more parties that creates enforceable rights and
obligationsCan be written, oral or impliedDoes not exist if both parties have not performed and can cancel
without penaltyArrangement must meet these criteria to be within scope of standard:Parties have agreed to
terms and are committed to performEach parties’ rights and payment terms can be identifiedContract has
commercial substanceCollection is probableContracts entered into at the same time with the same customer
should be combined if certain criteria are metAccounting for contracts that are not within the scope of the
model3 July 2014The new revenue recognition standard <img
src="http://slideplayer.com/6418217/22/images/10/Step+1%3A+Identify+the+contract%28s%29+with+a+cust
omer.jpg" width="800" align="left" alt="Step 1: Identify the contract(s) with a customer" title="Contract
defined as an agreement between two or more parties that creates enforceable rights and obligations. Can be
written, oral or implied. Does not exist if both parties have not performed and can cancel without penalty.
Arrangement must meet these criteria to be within scope of standard: Parties have agreed to terms and are
committed to perform. Each parties’ rights and payment terms can be identified. Contract has commercial
substance. Collection is probable. Contracts entered into at the same time with the same customer should be
combined if certain criteria are met. Accounting for contracts that are not within the scope of the model. 3 July
2014. The new revenue recognition standard.">

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11 Step 2: Identify performance obligations


A performance obligation is a promise (explicit or implicit) to transfer a distinct good or service to a
customerPerformance obligations are identified at contract inception and determined based on:Contractual
termsCustomary business practiceIncidental obligations or marketing incentives may be performance
obligations (e.g., “free” maintenance provided by automotive manufacturers, loyalty points provided by a
hotel)Does not include activities to satisfy an obligation (e.g., set-up activities) unless a good or service is
transferred3 July 2014The new revenue recognition standard <img
src="http://slideplayer.com/6418217/22/images/11/Step+2%3A+Identify+performance+obligations.jpg"
width="800" align="left" alt="Step 2: Identify performance obligations" title="A performance obligation is a
promise (explicit or implicit) to transfer a distinct good or service to a customer. Performance obligations are
identified at contract inception and determined based on: Contractual terms. Customary business practice.
Incidental obligations or marketing incentives may be performance obligations (e.g., free maintenance
provided by automotive manufacturers, loyalty points provided by a hotel) Does not include activities to
satisfy an obligation (e.g., set-up activities) unless a good or service is transferred. 3 July 2014. The new
revenue recognition standard.">

12 Step 2: Identify performance obligations (cont.)


Two-step model to identify which goods or services are distinctStep 1 - Focus on whether the good or service
is capable of being distinctStep 2 - Focus on whether the good or service is distinct in the context of the
contractCustomer can benefit from the individual good or service on its ownThe good or service is not
integrated with, highly dependent on, highly interrelated with, or significantly modifying or customizing other
promised goods or services in the contractOR Customer can use good or service with other readily available
resources3 July 2014The new revenue recognition standard <img
src="http://slideplayer.com/6418217/22/images/12/Step+2%3A+Identify+performance+obligations+%28cont.
%29.jpg" width="800" align="left" alt="Step 2: Identify performance obligations (cont.)" title="Two-step
model to identify which goods or services are distinct. Step 1 - Focus on whether the good or service is capable
of being distinct. Step 2 - Focus on whether the good or service is distinct in the context of the contract.
Customer can benefit from the individual good or service on its own. The good or service is not integrated
with, highly dependent on, highly interrelated with, or significantly modifying or customizing other promised
goods or services in the contract. OR. Customer can use good or service with other readily available resources.
3 July 2014. The new revenue recognition standard.">

13 Example 1: Identify performance obligations


Entity enters into a contract to manufacture and install customized equipment and provide maintenance
services for a five-year periodInstallation services include the integration of multiple pieces of equipment at
the customer’s facility in order for the equipment to operate as a single unitEquipment cannot operate without
installationEntity sells equipment and installation services together, does not sell installation separatelyOther
vendors can provide the installation servicesThe maintenance services are sold separately3 July 2014The new
revenue recognition standard <img
src="http://slideplayer.com/6418217/22/images/13/Example+1%3A+Identify+performance+obligations.jpg"
width="800" align="left" alt="Example 1: Identify performance obligations" title="Entity enters into a
contract to manufacture and install customized equipment and provide maintenance services for a five-year
period. Installation services include the integration of multiple pieces of equipment at the customer’s facility in
order for the equipment to operate as a single unit. Equipment cannot operate without installation. Entity sells
equipment and installation services together, does not sell installation separately. Other vendors can provide
the installation services. The maintenance services are sold separately. 3 July 2014. The new revenue
recognition standard.">

14 Example 1: Identify performance obligations (cont.)


Step 1 – Capable of being distinct?Step 2 – Distinct in the context of the contract?Good cannot be used
without installation, but customer can obtain installation from another source. Good is distinct. Move to Step
2.Equipment and installation are highly interrelated. Significant customization is required during installation.
Good isn’t distinct on its own because it must be combined with installation.EquipmentInstallationInstallation
can be provided by multiple vendors, so service is distinct. Move to Step 2.See discussion above. Equipment
and installation are not distinct from one another.MaintenanceServices have a distinct function because they
are sold separately. Move to Step 2.Services are not highly interrelated. No integration, modification or
customization required. Services are distinct.In this example, there would be two performance obligations: (1)
the equipment and installation because they are not distinct; (2) maintenance services because they are distinct
services in the contract. <img
src="http://slideplayer.com/6418217/22/images/14/Example+1%3A+Identify+performance+obligations+%28c
ont.%29.jpg" width="800" align="left" alt="Example 1: Identify performance obligations (cont.)" title="Step 1
– Capable of being distinct Step 2 – Distinct in the context of the contract Good cannot be used without
installation, but customer can obtain installation from another source. Good is distinct. Move to Step 2.
Equipment and installation are highly interrelated. Significant customization is required during installation.
Good isn’t distinct on its own because it must be combined with installation. Equipment. Installation.
Installation can be provided by multiple vendors, so service is distinct. Move to Step 2. See discussion above.
Equipment and installation are not distinct from one another. Maintenance. Services have a distinct function
because they are sold separately. Move to Step 2. Services are not highly interrelated. No integration,
modification or customization required. Services are distinct. In this example, there would be two performance
obligations: (1) the equipment and installation because they are not distinct; (2) maintenance services because
they are distinct services in the contract.">

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15 The new revenue recognition standard


Step 2: Identify performance obligations Principal versus agent considerationsDetermining whether an entity
acts as a principal or an agent in a specific arrangement affects the amount of revenue recognized (gross versus
net recognition)Appropriately identifying the entity’s performance obligation is fundamental to the principal or
agent determinationAn entity is a principal if the entity controls a promised good or service before its transfers
to a customerAn entity may not be a principal if it obtains legal title only momentarily before is transferred to a
customerArranges for another party to provide goods or servicesProvides goods or services
itselfPrincipalAgent3 July 2014The new revenue recognition standard <img
src="http://slideplayer.com/6418217/22/images/15/The+new+revenue+recognition+standard.jpg" width="800"
align="left" alt="The new revenue recognition standard" title="Step 2: Identify performance obligations
Principal versus agent considerations. Determining whether an entity acts as a principal or an agent in a
specific arrangement affects the amount of revenue recognized (gross versus net recognition) Appropriately
identifying the entity’s performance obligation is fundamental to the principal or agent determination. An
entity is a principal if the entity controls a promised good or service before its transfers to a customer. An
entity may not be a principal if it obtains legal title only momentarily before is transferred to a customer.
Arranges for another party to provide goods or services. Provides goods or services itself. Principal. Agent. 3
July 2014. The new revenue recognition standard.">

16 The new revenue recognition standard


Step 2: Identify performance obligations Principal versus agent considerations (cont.)An entity is an agent if
the entity’s performance obligation is to arrange for the provision of goods or services by another
partyIndicators that an entity is an agent include:Net Indicators:Entity is not primarily responsible for fulfilling
contractEntity does not have discretion in establishing pricesEntity’s consideration is in the form of a
commissionEntity is not exposed to credit riskEntity does not have inventory risk3 July 2014The new revenue
recognition standard <img
src="http://slideplayer.com/6418217/22/images/16/The+new+revenue+recognition+standard.jpg" width="800"
align="left" alt="The new revenue recognition standard" title="Step 2: Identify performance obligations
Principal versus agent considerations (cont.) An entity is an agent if the entity’s performance obligation is to
arrange for the provision of goods or services by another party. Indicators that an entity is an agent include:
Net Indicators: Entity is not primarily responsible for fulfilling contract. Entity does not have discretion in
establishing prices. Entity’s consideration is in the form of a commission. Entity is not exposed to credit risk.
Entity does not have inventory risk. 3 July 2014. The new revenue recognition standard.">

17 Step 3: Determine the transaction price


Transaction price is defined as the amount of consideration to which an entity expects to be entitled in
exchange for transferring promised goods or services to a customerTransaction price includes the effects of the
following:Variable consideration (including application of the constraint)Significant financing
componentConsideration paid to a customerNoncash consideration3 July 2014The new revenue recognition
standard <img
src="http://slideplayer.com/6418217/22/images/17/Step+3%3A+Determine+the+transaction+price.jpg"
width="800" align="left" alt="Step 3: Determine the transaction price" title="Transaction price is defined as
the amount of consideration to which an entity expects to be entitled in exchange for transferring promised
goods or services to a customer. Transaction price includes the effects of the following: Variable consideration
(including application of the constraint) Significant financing component. Consideration paid to a customer.
Noncash consideration. 3 July 2014. The new revenue recognition standard.">

18 Step 3: Determine the transaction price Variable consideration


Transaction price may vary because of variable consideration (e.g., bonuses, discounts, rebates, refunds,
credits, price concessions, incentives)The transaction price is estimated using the approach that better predicts
the amount to which the entity is entitled based on its facts and circumstances (i.e., not a “free
choice”)Expected valueMost likely amountSum of the probability-weighted amounts in a range of possible
outcomesMost predictive when the transaction has a large number of possible outcomesCan be based on a
limited number of discrete outcomes and probabilitiesThe single most likely amount in a range of possible
outcomesMay be appropriate when the transaction will produce only two outcomes3 July 2014The new
revenue recognition standard <img
src="http://slideplayer.com/6418217/22/images/18/Step+3%3A+Determine+the+transaction+price+Variable+
consideration.jpg" width="800" align="left" alt="Step 3: Determine the transaction price Variable
consideration" title="Transaction price may vary because of variable consideration (e.g., bonuses, discounts,
rebates, refunds, credits, price concessions, incentives) The transaction price is estimated using the approach
that better predicts the amount to which the entity is entitled based on its facts and circumstances (i.e., not a
free choice ) Expected value. Most likely amount. Sum of the probability-weighted amounts in a range of
possible outcomes. Most predictive when the transaction has a large number of possible outcomes. Can be
based on a limited number of discrete outcomes and probabilities. The single most likely amount in a range of
possible outcomes. May be appropriate when the transaction will produce only two outcomes. 3 July 2014.
The new revenue recognition standard.">

19 Step 3: Determine the transaction price Price concessions


Entering into a contract expecting to collect less than the full transaction price may indicate a price
concessionPrice concessions (including implied price concessions) cause consideration to be variable and
should not be included in the estimated transaction priceIf an entity determines it is not probable of collecting
the estimated transaction price, a valid contract does not exist (as discussed in Step 1 of the model)When
assessing Step 1 (identify the contract), an entity also must consider Step 3 of the model (determine the
transaction price)Distinguishing between customer credit risk (i.e., bad debt) and implied price concessions
(i.e., reductions of revenue) will require significant judgment3 July 2014The new revenue recognition standard
<img
src="http://slideplayer.com/6418217/22/images/19/Step+3%3A+Determine+the+transaction+price+Price+con
cessions.jpg" width="800" align="left" alt="Step 3: Determine the transaction price Price concessions"
title="Entering into a contract expecting to collect less than the full transaction price may indicate a price
concession. Price concessions (including implied price concessions) cause consideration to be variable and
should not be included in the estimated transaction price. If an entity determines it is not probable of collecting
the estimated transaction price, a valid contract does not exist (as discussed in Step 1 of the model) When
assessing Step 1 (identify the contract), an entity also must consider Step 3 of the model (determine the
transaction price) Distinguishing between customer credit risk (i.e., bad debt) and implied price concessions
(i.e., reductions of revenue) will require significant judgment. 3 July 2014. The new revenue recognition
standard.">

20 Step 3: Determine the transaction price Constraint on variable consideration


Required to evaluate whether to “constrain” amounts of variable consideration included in the transaction
priceObjective of the constraint – include variable consideration in the transaction price only to the extent it is
“probable” that a significant revenue reversal will not occur when uncertainty is subsequently
resolved“Significant” is relative to cumulative revenue recognizedEstimates of the transaction price that
includes variable consideration should be updated at each reporting dateSpecific rule for licensed intellectual
propertySales- or usage-based royalties should not be included in the transaction price until the customer’s
subsequent sales/usage of a good or service occurs or the performance obligation is satisfied3 July 2014The
new revenue recognition standard <img
src="http://slideplayer.com/6418217/22/images/20/Step+3%3A+Determine+the+transaction+price+Constraint
+on+variable+consideration.jpg" width="800" align="left" alt="Step 3: Determine the transaction price
Constraint on variable consideration" title="Required to evaluate whether to constrain amounts of variable
consideration included in the transaction price. Objective of the constraint – include variable consideration in
the transaction price only to the extent it is probable that a significant revenue reversal will not occur when
uncertainty is subsequently resolved. Significant is relative to cumulative revenue recognized. Estimates of the
transaction price that includes variable consideration should be updated at each reporting date. Specific rule for
licensed intellectual property. Sales- or usage-based royalties should not be included in the transaction price
until the customer’s subsequent sales/usage of a good or service occurs or the performance obligation is
satisfied. 3 July 2014. The new revenue recognition standard.">

21 Example 2: Determine the transaction price Variable consideration


Entity enters into a contract and will receive $100,000 performance bonus if specified performance targets are
metEntity estimates 80% likelihood it will receive entire performance bonus and 20% likelihood it will receive
none of the bonusDue to the binary nature of the outcome, entity determines that the best predictor of the
ultimate consideration it will receive is the “most likely amount” approachTherefore, $100,000 is included in
the transaction priceConstraint likely has no effect because entity concluded it was probable that bonus will be
received3 July 2014The new revenue recognition standard <img
src="http://slideplayer.com/6418217/22/images/21/Example+2%3A+Determine+the+transaction+price+Varia
ble+consideration.jpg" width="800" align="left" alt="Example 2: Determine the transaction price Variable
consideration" title="Entity enters into a contract and will receive $100,000 performance bonus if specified
performance targets are met. Entity estimates 80% likelihood it will receive entire performance bonus and 20%
likelihood it will receive none of the bonus. Due to the binary nature of the outcome, entity determines that the
best predictor of the ultimate consideration it will receive is the most likely amount approach. Therefore,
$100,000 is included in the transaction price. Constraint likely has no effect because entity concluded it was
probable that bonus will be received. 3 July 2014. The new revenue recognition standard.">

22 Example 3: Determine the transaction price Variable consideration


Entity enters into a contract and will receive a performance bonus up to $100,000 if it meets specified
performance targets. It estimates the likelihood of achieving the targets as follows:Expected value approach is
determined to be the best method – entity calculates $59,000 using this methodHowever, entity must consider
whether any of the $59,000 should be constrainedPossible outcomesProbabilityCalculated
amount$100,00010%$10,000$80,00030%$24,000$60,00035%$21,000$40,000$4,000zero15%- 3 July
2014The new revenue recognition standard <img
src="http://slideplayer.com/6418217/22/images/22/Example+3%3A+Determine+the+transaction+price+Varia
ble+consideration.jpg" width="800" align="left" alt="Example 3: Determine the transaction price Variable
consideration" title="Entity enters into a contract and will receive a performance bonus up to $100,000 if it
meets specified performance targets. It estimates the likelihood of achieving the targets as follows: Expected
value approach is determined to be the best method – entity calculates $59,000 using this method. However,
entity must consider whether any of the $59,000 should be constrained. Possible outcomes. Probability.
Calculated amount. $100,000. 10% $10,000. $80,000. 30% $24,000. $60,000. 35% $21,000. $40,000. $4,000.
zero. 15% - 3 July 2014. The new revenue recognition standard.">

23 Step 3: Determine the transaction price


Significant financing componentThe time value of money is considered when significant, and the primary
purpose of the payment terms is to provide financing to counterpartyEvaluation not required if customer is
expected to pay within one year of when control of the goods or services is transferredNoncash
considerationMeasured at the fair value of the consideration received or promisedConsideration payable to a
customerDetermine whether such amounts are:A reduction of the transaction price and revenueA payment for
distinct goods and servicesA combination of the two3 July 2014The new revenue recognition standard <img
src="http://slideplayer.com/6418217/22/images/23/Step+3%3A+Determine+the+transaction+price.jpg"
width="800" align="left" alt="Step 3: Determine the transaction price" title="Significant financing component.
The time value of money is considered when significant, and the primary purpose of the payment terms is to
provide financing to counterparty. Evaluation not required if customer is expected to pay within one year of
when control of the goods or services is transferred. Noncash consideration. Measured at the fair value of the
consideration received or promised. Consideration payable to a customer. Determine whether such amounts
are: A reduction of the transaction price and revenue. A payment for distinct goods and services. A
combination of the two. 3 July 2014. The new revenue recognition standard.">
24 Step 4: Allocate the transaction price
Transaction price is generally allocated to each separate performance obligation on a relative standalone
selling price basisModel provides two possible exceptions relating to the allocation of variable consideration
and discounts, if certain criteria are metWhen a standalone selling price is not observable, an entity is required
to estimate itMaximize the use of observable inputsApply estimation methods consistently in similar
circumstancesStandard describes three estimation methods but others are permitted (and a combination of
estimation methods is allowed)Standalone selling prices used to perform the initial allocation should not be
updated after contract inception3 July 2014The new revenue recognition standard <img
src="http://slideplayer.com/6418217/22/images/24/Step+4%3A+Allocate+the+transaction+price.jpg"
width="800" align="left" alt="Step 4: Allocate the transaction price" title="Transaction price is generally
allocated to each separate performance obligation on a relative standalone selling price basis. Model provides
two possible exceptions relating to the allocation of variable consideration and discounts, if certain criteria are
met. When a standalone selling price is not observable, an entity is required to estimate it. Maximize the use of
observable inputs. Apply estimation methods consistently in similar circumstances. Standard describes three
estimation methods but others are permitted (and a combination of estimation methods is allowed) Standalone
selling prices used to perform the initial allocation should not be updated after contract inception. 3 July 2014.
The new revenue recognition standard.">

25 Step 5: Recognize revenue as performance obligations are satisfied


Revenue recognized upon satisfaction of a performance obligation by transferring a good or service to a
customerA good or service is considered to be transferred when (or as) the customer obtains
controlPerformance obligations are either satisfied over time or at a point in timeThe following are indicators
of when control is transferred:The entity has a present right to payment for the assetThe customer has legal
title to the assetThe customer has physical possession of the assetThe customer has the risk and rewards of
ownership of the assetThe entity has evidence of the customer’s acceptance of the asset3 July 2014The new
revenue recognition standard <img
src="http://slideplayer.com/6418217/22/images/25/Step+5%3A+Recognize+revenue+as+performance+obligat
ions+are+satisfied.jpg" width="800" align="left" alt="Step 5: Recognize revenue as performance obligations
are satisfied" title="Revenue recognized upon satisfaction of a performance obligation by transferring a good
or service to a customer. A good or service is considered to be transferred when (or as) the customer obtains
control. Performance obligations are either satisfied over time or at a point in time. The following are
indicators of when control is transferred: The entity has a present right to payment for the asset. The customer
has legal title to the asset. The customer has physical possession of the asset. The customer has the risk and
rewards of ownership of the asset. The entity has evidence of the customer’s acceptance of the asset. 3 July
2014. The new revenue recognition standard.">

26 Step 5: Recognize revenue as performance obligations are satisfied over time


Control of goods and services is transferred over time if one of the following three criteria is met:The entity
creates or enhances an asset that the customer controls as it is created or enhancedThe entity’s performance
does not create an asset with alternative use, and the entity has a right to payment for performance completed
to dateThe customer simultaneously receives and consumes the benefits of the entity’s performance as the
entity performs“Pure service” contracts(1) Disregard potential limitations that would prevent the transfer of a
remaining PO to another entity(2) Assume another entity fulfilling the remaining PO would not have the
benefit of any asset the entity controlsAnother entity would not have to re-perform work completed to dateIf
none of the criteria are met, control transfers at a point in time3 July 2014The new revenue recognition
standard <img
src="http://slideplayer.com/6418217/22/images/26/Step+5%3A+Recognize+revenue+as+performance+obligat
ions+are+satisfied+over+time.jpg" width="800" align="left" alt="Step 5: Recognize revenue as performance
obligations are satisfied over time" title="Control of goods and services is transferred over time if one of the
following three criteria is met: The entity creates or enhances an asset that the customer controls as it is created
or enhanced. The entity’s performance does not create an asset with alternative use, and the entity has a right to
payment for performance completed to date. The customer simultaneously receives and consumes the benefits
of the entity’s performance as the entity performs. Pure service contracts. (1) Disregard potential limitations
that would prevent the transfer of a remaining PO to another entity. (2) Assume another entity fulfilling the
remaining PO would not have the benefit of any asset the entity controls. Another entity would not have to re-
perform work completed to date. If none of the criteria are met, control transfers at a point in time. 3 July 2014.
The new revenue recognition standard.">

27 Step 5: Recognize revenue as performance obligations are satisfied over time (cont.)
Revenue is recognized over time by measuring progress toward completion of performance obligationsThe
objective is to most faithfully depict the entity’s performanceSelect a single method for each performance
obligation based on facts and circumstancesOutput methodsInput methodsApply method consistently for all
similar arrangementsIf unable to reasonably estimate progress, revenue should not be recognized until progress
can be estimatedHowever, if entity can determine that no loss will be incurred, it should recognize revenue up
to costs incurred3 July 2014The new revenue recognition standard <img
src="http://slideplayer.com/6418217/22/images/27/Step+5%3A+Recognize+revenue+as+performance+obligat
ions+are+satisfied+over+time+%28cont.%29.jpg" width="800" align="left" alt="Step 5: Recognize revenue as
performance obligations are satisfied over time (cont.)" title="Revenue is recognized over time by measuring
progress toward completion of performance obligations. The objective is to most faithfully depict the entity’s
performance. Select a single method for each performance obligation based on facts and circumstances. Output
methods. Input methods. Apply method consistently for all similar arrangements. If unable to reasonably
estimate progress, revenue should not be recognized until progress can be estimated. However, if entity can
determine that no loss will be incurred, it should recognize revenue up to costs incurred. 3 July 2014. The new
revenue recognition standard.">

28 The new revenue recognition standard


AgendaOverview and transitionThe five-step modelOther aspectsNext steps3 July 2014The new revenue
recognition standard <img
src="http://slideplayer.com/6418217/22/images/28/The+new+revenue+recognition+standard.jpg" width="800"
align="left" alt="The new revenue recognition standard" title="Agenda. Overview and transition. The five-step
model. Other aspects. Next steps. 3 July 2014. The new revenue recognition standard.">

29 Other aspects Warranties


Two types of warranties (i.e., assurance-type warranties and service-type warranties)If the customer has the
option to separately purchase the warranty, it represents a separate performance obligationIf the customer does
not have the option to separately purchase the warranty, it would accrue for the expected warranty costs unless
the services under the warranty are beyond “quality assurance” servicesFactors to consider when determining
whether a warranty promise provides more than “quality assurance” include:Is the warranty required by
lawLength of time covered by the warrantyThe nature of the tasks to be performed under the warranty
promiseGuidance is similar to current US GAAP3 July 2014The new revenue recognition standard <img
src="http://slideplayer.com/6418217/22/images/29/Other+aspects+Warranties.jpg" width="800" align="left"
alt="Other aspects Warranties" title="Two types of warranties (i.e., assurance-type warranties and service-type
warranties) If the customer has the option to separately purchase the warranty, it represents a separate
performance obligation. If the customer does not have the option to separately purchase the warranty, it would
accrue for the expected warranty costs unless the services under the warranty are beyond quality assurance
services. Factors to consider when determining whether a warranty promise provides more than quality
assurance include: Is the warranty required by law. Length of time covered by the warranty. The nature of the
tasks to be performed under the warranty promise. Guidance is similar to current US GAAP. 3 July 2014. The
new revenue recognition standard.">

30 Other aspects Contract costs


Incremental costs of obtaining a contract are capitalized if expected to be recoveredPractical expedient to allow
immediate expense recognition if the asset’s amortization period is one year or lessCosts of fulfilling a contract
that cannot be capitalized under another standard are capitalized if they:Relate directly to a contract or an
anticipated contractGenerate or enhance resources that will be used to satisfy performance obligations in the
futureAre expected to be recoveredOther applicable literature should be considered firstAssets are amortized
over the period the goods or services are transferred and are subject to impairment test3 July 2014The new
revenue recognition standard <img
src="http://slideplayer.com/6418217/22/images/30/Other+aspects+Contract+costs.jpg" width="800"
align="left" alt="Other aspects Contract costs" title="Incremental costs of obtaining a contract are capitalized
if expected to be recovered. Practical expedient to allow immediate expense recognition if the asset’s
amortization period is one year or less. Costs of fulfilling a contract that cannot be capitalized under another
standard are capitalized if they: Relate directly to a contract or an anticipated contract. Generate or enhance
resources that will be used to satisfy performance obligations in the future. Are expected to be recovered.
Other applicable literature should be considered first. Assets are amortized over the period the goods or
services are transferred and are subject to impairment test. 3 July 2014. The new revenue recognition
standard.">

31 Other aspects Loss contracts


Guidance on onerous contracts included in previous drafts of the standard was removedBoards elected to retain
current guidance on loss contracts, including:ASC 440 for firm purchase commitments for goods or
inventoryASC for separately priced extended warranty and product maintenance contractsASC for
construction-type and production-type contracts ASC 815 for certain derivative contractsASC 840 and ASC
420 for operating leases that are subleasedASC 944 for certain reinsurance contractsASC for certain software
arrangements3 July 2014The new revenue recognition standard <img
src="http://slideplayer.com/6418217/22/images/31/Other+aspects+Loss+contracts.jpg" width="800"
align="left" alt="Other aspects Loss contracts" title="Guidance on onerous contracts included in previous
drafts of the standard was removed. Boards elected to retain current guidance on loss contracts, including:
ASC 440 for firm purchase commitments for goods or inventory. ASC 605-20 for separately priced extended
warranty and product maintenance contracts. ASC 605-35 for construction-type and production-type contracts
ASC 815 for certain derivative contracts. ASC 840 and ASC 420 for operating leases that are subleased. ASC
944 for certain reinsurance contracts. ASC 985-605 for certain software arrangements. 3 July 2014. The new
revenue recognition standard.">

32 Other aspects Disclosure


Key principle – to help financial statement users understand the nature, amount, timing and uncertainty of
revenue and cash flows arising from contracts with customersEntity must present qualitative and quantitative
information about:Contracts with customersSignificant judgments and changes in judgments made when
applying the guidance to those contractsAssets recognized from costs to obtain or fulfill a contractFewer
disclosure requirements for nonpublic entitiesFor US GAAP entities, most disclosures are required for annual
and interim periods3 July 2014The new revenue recognition standard <img
src="http://slideplayer.com/6418217/22/images/32/Other+aspects+Disclosure.jpg" width="800" align="left"
alt="Other aspects Disclosure" title="Key principle – to help financial statement users understand the nature,
amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Entity must
present qualitative and quantitative information about: Contracts with customers. Significant judgments and
changes in judgments made when applying the guidance to those contracts. Assets recognized from costs to
obtain or fulfill a contract. Fewer disclosure requirements for nonpublic entities. For US GAAP entities, most
disclosures are required for annual and interim periods. 3 July 2014. The new revenue recognition standard.">

33 The new revenue recognition standard


AgendaOverview and transitionThe five-step modelOther aspectsNext steps3 July 2014The new revenue
recognition standard <img
src="http://slideplayer.com/6418217/22/images/33/The+new+revenue+recognition+standard.jpg" width="800"
align="left" alt="The new revenue recognition standard" title="Agenda. Overview and transition. The five-step
model. Other aspects. Next steps. 3 July 2014. The new revenue recognition standard.">

34 Next steps SAB Topic 11.M disclosures


Staff Accounting Bulletin (SAB) Topic 11.M requires disclosure of the effects of recently issued accounting
standardsIncludes disclosures of the required adoption date, the allowed and planned adoption method, effect
on the financial statements and other significant matters resulting from adoptionAn entity’s disclosures on the
new standard will likely evolve as more information about the effect is knownThe SEC staff has requested
disclosure of the transition method as soon as it is knownEntities are required to consider these disclosure
requirements in their next report filed with the SEC (e.g., quarterly filings)Required to provide disclosures
until the standard is adopted3 July 2014The new revenue recognition standard <img
src="http://slideplayer.com/6418217/22/images/34/Next+steps+SAB+Topic+11.M+disclosures.jpg"
width="800" align="left" alt="Next steps SAB Topic 11.M disclosures" title="Staff Accounting Bulletin
(SAB) Topic 11.M requires disclosure of the effects of recently issued accounting standards. Includes
disclosures of the required adoption date, the allowed and planned adoption method, effect on the financial
statements and other significant matters resulting from adoption. An entity’s disclosures on the new standard
will likely evolve as more information about the effect is known. The SEC staff has requested disclosure of the
transition method as soon as it is known. Entities are required to consider these disclosure requirements in their
next report filed with the SEC (e.g., quarterly filings) Required to provide disclosures until the standard is
adopted. 3 July 2014. The new revenue recognition standard.">

35 Next steps – business considerations What can you do now?


Understand the magnitude of the changes to your entity from both a financial statement and business
perspectiveEstablish a project management plan for adoption of the standardDetermine training requirements
for individuals responsible for key judgments and estimatesIdentify common transactions and potential
implementation issuesEstablish a process for gathering appropriate data to comply with the new
standardCommunicate your questions on the guidance through the planned implementation groups3 July
2014The new revenue recognition standard <img
src="http://slideplayer.com/6418217/22/images/35/Next+steps+%E2%80%93+business+considerations+What
+can+you+do+now.jpg" width="800" align="left" alt="Next steps – business considerations What can you do
now" title="Understand the magnitude of the changes to your entity from both a financial statement and
business perspective. Establish a project management plan for adoption of the standard. Determine training
requirements for individuals responsible for key judgments and estimates. Identify common transactions and
potential implementation issues. Establish a process for gathering appropriate data to comply with the new
standard. Communicate your questions on the guidance through the planned implementation groups. 3 July
2014. The new revenue recognition standard.">
IFRS 15: Revenue from Contracts with
Customers
Published byZackary Califf Modified over 3 years ago

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Presentation on theme: "IFRS 15: Revenue from Contracts with


Customers"— Presentation transcript:

1 IFRS 15: Revenue from Contracts with Customers


By:CA Kamal Garg[B. Com (H), FCA, DISA (ICAI)]Member, Ind AS (IFRS) Implementation Committee of
ICAI <img
src="http://slideplayer.com/4175353/13/images/1/IFRS+15%3A+Revenue+from+Contracts+with+Customers.j
pg" width="800" align="left" alt="IFRS 15: Revenue from Contracts with Customers" title="By: CA Kamal
Garg. [B. Com (H), FCA, DISA (ICAI)] Member, Ind AS (IFRS) Implementation Committee of ICAI.">

2 Introduction Released on May 28, 2014;


Replaced the two fundamental accounting Standards on revenue under prevailing IFRS, viz., IAS 18 - Revenue
and IAS 11 - Construction Contracts;The core principle of the new Standard is that companies need to
recognize revenue:to depict the transfer of goods and services to customers;in amounts that reflect the payment
consideration;to which the company expects to be entitled to;in exchange for those goods or servicesIFRS 15
requires a five-step process to be applied to revenue arrangements for revenue recognition in Income
Statement;IFRS 15 would be effective for the periods beginning on or after January 1, 2017 early adoption
permitted <img
src="http://slideplayer.com/4175353/13/images/2/Introduction+Released+on+May+28%2C+2014%3B.jpg"
width="800" align="left" alt="Introduction Released on May 28, 2014;" title="Replaced the two fundamental
accounting Standards on revenue under prevailing IFRS, viz., IAS 18 - Revenue and IAS 11 - Construction
Contracts; The core principle of the new Standard is that companies need to recognize revenue: to depict the
transfer of goods and services to customers; in amounts that reflect the payment consideration; to which the
company expects to be entitled to; in exchange for those goods or services. IFRS 15 requires a five-step
process to be applied to revenue arrangements for revenue recognition in Income Statement; IFRS 15 would be
effective for the periods beginning on or after January 1, 2017 early adoption permitted.">

3 IFRSs being replaced - A snapshot <img


src="http://slideplayer.com/4175353/13/images/3/IFRSs+being+replaced+-+A+snapshot.jpg" width="800"
align="left" alt="IFRSs being replaced - A snapshot" title="IFRSs being replaced - A snapshot">
4 Five step process to recognize revenue <img
src="http://slideplayer.com/4175353/13/images/4/Five+step+process+to+recognize+revenue.jpg" width="800"
align="left" alt="Five step process to recognize revenue" title="Five step process to recognize revenue">

5 Step 1 - Identify the contract(s) with the customer


A contract is an agreement between two or more parties that creates enforceable rights and obligations;An
entity is required to apply the requirements to each contract that meets the following criteria:approval and
commitment of the parties,identification of the rights of the parties,identification of the payment terms,the
contract has commercial substance, andit is probable that the entity will collect the consideration to which it
will be entitled to in exchange for the goods or services that will be transferred to the customers <img
src="http://slideplayer.com/4175353/13/images/5/Step+1+-
+Identify+the+contract%28s%29+with+the+customer.jpg" width="800" align="left" alt="Step 1 - Identify the
contract(s) with the customer" title="A contract is an agreement between two or more parties that creates
enforceable rights and obligations; An entity is required to apply the requirements to each contract that meets
the following criteria: approval and commitment of the parties, identification of the rights of the parties,
identification of the payment terms, the contract has commercial substance, and. it is probable that the entity
will collect the consideration to which it will be entitled to in exchange for the goods or services that will be
transferred to the customers.">

6 Step 2 – Identify the performance obligations in the contract


Performance obligations are promises in a customer's contract to transfer to the customer goods or services that
are distinct;In determining whether good's or services are distinct, a company considers if the customer can
benefit from the goods or services on its own or together with other resources that are readily available to the
customer.A company also needs to consider whether the company's promise to transfer the goods or services is
separately identifiable from other promises in the contract <img
src="http://slideplayer.com/4175353/13/images/6/Step+2+%E2%80%93+Identify+the+performance+obligatio
ns+in+the+contract.jpg" width="800" align="left" alt="Step 2 – Identify the performance obligations in the
contract" title="Performance obligations are promises in a customer s contract to transfer to the customer
goods or services that are distinct; In determining whether good s or services are distinct, a company considers
if the customer can benefit from the goods or services on its own or together with other resources that are
readily available to the customer. A company also needs to consider whether the company s promise to transfer
the goods or services is separately identifiable from other promises in the contract.">

7 Step 3 - Determine the transaction price


In order to determine the transaction price, an entity should consider the effects of the following:variable
consideration,constraining estimates of variable consideration,the existence of a significant financing
component,non-cash consideration, andconsideration payable to the customer <img
src="http://slideplayer.com/4175353/13/images/7/Step+3+-+Determine+the+transaction+price.jpg"
width="800" align="left" alt="Step 3 - Determine the transaction price" title="In order to determine the
transaction price, an entity should consider the effects of the following: variable consideration, constraining
estimates of variable consideration, the existence of a significant financing component, non-cash consideration,
and. consideration payable to the customer.">
8 Step 4 - Allocate the transaction price
An entity would typically allocate the transaction price to each performance obligation on the basis of the
relative stand-alone selling prices of each distinct good or service.If a stand-alone selling price is not
observable, the entity will be required to estimate the same.In certain situations the transaction price may
include a discount or a variable amount of consideration that relates entirely to a specific part of the contract.
<img src="http://slideplayer.com/4175353/13/images/8/Step+4+-+Allocate+the+transaction+price.jpg"
width="800" align="left" alt="Step 4 - Allocate the transaction price" title="An entity would typically allocate
the transaction price to each performance obligation on the basis of the relative stand-alone selling prices of
each distinct good or service. If a stand-alone selling price is not observable, the entity will be required to
estimate the same. In certain situations the transaction price may include a discount or a variable amount of
consideration that relates entirely to a specific part of the contract.">

9 Step 5 - Recognize revenue when a performance obligation is satisfied


IFRS 15 requires an entity to recognize revenue:when or as it satisfies a performance obligation by transferring
a promised goods or service to a customer;which is the point in time when the customer obtains control of that
goods or service;A performance obligation may be satisfied:at a point in time which is typically for promise to
transfer goods to a customer; orover time which is typically for promise to transfer services to a customer.For a
performance obligation in a customer's contract satisfied over time, an entity needs to select an appropriate
measure of progress in order to determine how much revenue should be recognized as the performance
obligation is satisfied <img src="http://slideplayer.com/4175353/13/images/9/Step+5+-
+Recognize+revenue+when+a+performance+obligation+is+satisfied.jpg" width="800" align="left" alt="Step
5 - Recognize revenue when a performance obligation is satisfied" title="IFRS 15 requires an entity to
recognize revenue: when or as it satisfies a performance obligation by transferring a promised goods or service
to a customer; which is the point in time when the customer obtains control of that goods or service; A
performance obligation may be satisfied: at a point in time which is typically for promise to transfer goods to a
customer; or. over time which is typically for promise to transfer services to a customer. For a performance
obligation in a customer s contract satisfied over time, an entity needs to select an appropriate measure of
progress in order to determine how much revenue should be recognized as the performance obligation is
satisfied.">

10 Step 5 - Recognize revenue when a performance obligation is satisfied


An entity transfers control of a goods or service over time and, therefore, satisfies a performance obligation
and recognizes revenue over time, if one of the following criteria is met:the customer simultaneously receives
and consumes the benefits provided by the entity's performance as the entity performs,the entity's performance
creates or enhances an asset (for example, work-in-process) that the customer controls as the asset is created or
enhanced, orthe entity's performance does not create an asset with an alternative use to the entity, andthe entity
has an enforceable right to payment for performance completed to date. <img
src="http://slideplayer.com/4175353/13/images/10/Step+5+-
+Recognize+revenue+when+a+performance+obligation+is+satisfied.jpg" width="800" align="left" alt="Step
5 - Recognize revenue when a performance obligation is satisfied" title="An entity transfers control of a goods
or service over time and, therefore, satisfies a performance obligation and recognizes revenue over time, if one
of the following criteria is met: the customer simultaneously receives and consumes the benefits provided by
the entity s performance as the entity performs, the entity s performance creates or enhances an asset (for
example, work-in-process) that the customer controls as the asset is created or enhanced, or. 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.">

11 Step 5 - Recognize revenue when a performance obligation is satisfied


If a performance obligation is not satisfied over time, an entity satisfies the performance obligation at a point in
time;To determine the point in time at which a customer obtains control of a promised asset and an entity
satisfies a performance obligation, the entity would consider indicators of the transfer of control, which
include, but are not limited to, the following:the entity has a present right to payment for the asset,the customer
has legal title to the asset,the entity has transferred physical possession of the asset,the customer has the
significant risks and rewards of ownership of the asset, andthe customer has accepted the asset <img
src="http://slideplayer.com/4175353/13/images/11/Step+5+-
+Recognize+revenue+when+a+performance+obligation+is+satisfied.jpg" width="800" align="left" alt="Step
5 - Recognize revenue when a performance obligation is satisfied" title="If a performance obligation is not
satisfied over time, an entity satisfies the performance obligation at a point in time; To determine the point in
time at which a customer obtains control of a promised asset and an entity satisfies a performance obligation,
the entity would consider indicators of the transfer of control, which include, but are not limited to, the
following: the entity has a present right to payment for the asset, the customer has legal title to the asset, the
entity has transferred physical possession of the asset, the customer has the significant risks and rewards of
ownership of the asset, and. the customer has accepted the asset.">

12 Other requirements of IFRS 15


Portfolio of contracts - Although IFRS 15 specifies the accounting required for an individual contract, yet in
some cases, a company may be able to apply the requirements of IFRS 15 to a portfolio of contracts instead of
applying the requirements separately to each contract with a customer.Contract Costs - IFRS 15 includes
requirements for accounting for some costs that are related to a contract with a customer. For costs to fulfil a
contract that are not within the scope of other IFRS standards, a company would recognize an asset for those
costs if the following criteria are met, viz.,the costs relate directly to a contract or a specific anticipated
contract,the costs generate or enhance resources of the company that will be used in satisfying performance
obligations in the future, andthe costs are expected to be recovered.Disclosure requirements of IFRS 15 - IFRS
15 aims to assist investors in better understanding the nature, amount, timing and uncertainty of revenues and
cash flows from contracts with customers. The standard requires a company to disclose quantitative and/or
qualitative information <img
src="http://slideplayer.com/4175353/13/images/12/Other+requirements+of+IFRS+15.jpg" width="800"
align="left" alt="Other requirements of IFRS 15" title="Portfolio of contracts - Although IFRS 15 specifies the
accounting required for an individual contract, yet in some cases, a company may be able to apply the
requirements of IFRS 15 to a portfolio of contracts instead of applying the requirements separately to each
contract with a customer. Contract Costs - IFRS 15 includes requirements for accounting for some costs that
are related to a contract with a customer. For costs to fulfil a contract that are not within the scope of other
IFRS standards, a company would recognize an asset for those costs if the following criteria are met, viz., the
costs relate directly to a contract or a specific anticipated contract, the costs generate or enhance resources of
the company that will be used in satisfying performance obligations in the future, and. the costs are expected to
be recovered. Disclosure requirements of IFRS 15 - IFRS 15 aims to assist investors in better understanding
the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. The
standard requires a company to disclose quantitative and/or qualitative information.">
Presentation on theme: "The views expressed in this presentation
are those of the presenter, not necessarily those of the IASB or IFRS
Foundation. International Financial Reporting."— Presentation
transcript:
1 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 Update
April 2011 <img src="http://images.slideplayer.com/25/7889490/slides/slide_1.jpg" width="800" align="left"
alt="The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or
IFRS Foundation." title="International Financial Reporting Standards Revenue from Contracts with Customers
Update April 2011.">

2 Agenda Summary of the exposure draft Feedback on the exposure draft Developments since the exposure
draft Project timeline 2 © 2011 IASC Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.iasb.org
<img src="http://images.slideplayer.com/25/7889490/slides/slide_2.jpg" width="800" align="left"
alt="Agenda Summary of the exposure draft Feedback on the exposure draft Developments since the exposure
draft Project timeline 2 © 2011 IASC Foundation." title="30 Cannon Street | London EC4M 6XH | UK.
www.iasb.org.">

3 The exposure draft Converged proposal with unanimous support of both the IASB and the FASB Improves
financial reporting: –Single model based on clear principles –Robust framework for addressing revenue issues
–Comparability across industries and markets –Enhanced disclosure requirements 7 <img
src="http://images.slideplayer.com/25/7889490/slides/slide_3.jpg" width="800" align="left" alt="The
exposure draft Converged proposal with unanimous support of both the IASB and the FASB Improves
financial reporting: –Single model based on clear principles –Robust framework for addressing revenue issues
–Comparability across industries and markets –Enhanced disclosure requirements 7" title="The exposure draft
Converged proposal with unanimous support of both the IASB and the FASB Improves financial reporting: –
Single model based on clear principles –Robust framework for addressing revenue issues –Comparability
across industries and markets –Enhanced disclosure requirements 7">

4 ED - Summary of the revenue proposals 1. Identify the contract(s) with the customer 2. Identify the separate
performance obligations 3. Determine the transaction price 5. Recognise revenue when a performance
obligation is satisfied 4. Allocate the transaction price Recognise revenue to depict the transfer of goods or
services in an amount that reflects the consideration expected to be received in exchange for those goods or
services Steps to apply the core principle: Core principle: © 2011 IFRS Foundation. 30 Cannon Street |
London EC4M 6XH | UK. www.ifrs.org 4 <img
src="http://images.slideplayer.com/25/7889490/slides/slide_4.jpg" width="800" align="left" alt="ED -
Summary of the revenue proposals 1. Identify the contract(s) with the customer 2." title="Identify the separate
performance obligations 3. Determine the transaction price 5. Recognise revenue when a performance
obligation is satisfied 4. Allocate the transaction price Recognise revenue to depict the transfer of goods or
services in an amount that reflects the consideration expected to be received in exchange for those goods or
services Steps to apply the core principle: Core principle: © 2011 IFRS Foundation. 30 Cannon Street |
London EC4M 6XH | UK. www.ifrs.org 4.">

5 Feedback on the exposure draft Comment letter period ended 22 October, 2010 Good level of responses
Overall support for project objective: to create a single, joint revenue standard for use across various industries
and capital markets 5 © 20101IASC Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.iasb.org
<img src="http://images.slideplayer.com/25/7889490/slides/slide_5.jpg" width="800" align="left"
alt="Feedback on the exposure draft Comment letter period ended 22 October, 2010 Good level of responses
Overall support for project objective: to create a single, joint revenue standard for use across various industries
and capital markets 5 © 20101IASC Foundation." title="30 Cannon Street | London EC4M 6XH | UK.
www.iasb.org.">

6 Re-deliberated proposals ProposalComments Recognise revenue when a good or service transfers to the
customer Transfer based on control works well for goods, but not services. Key question for service contracts -
when is transfer continuous? Identify separate performance obligations if goods and services distinct Clarify
‘distinct’. Concerns that a large number of separate of performance obligations will be identified. Contracts are
combined if independently priced; contract modifications are accounted for as new contracts if independently
priced Contracts will be combined too frequently. The cumulative catch-up in accounting for modifications
will apply too frequently. 6 <img src="http://images.slideplayer.com/25/7889490/slides/slide_6.jpg"
width="800" align="left" alt="Re-deliberated proposals ProposalComments Recognise revenue when a good
or service transfers to the customer Transfer based on control works well for goods, but not services."
title="Key question for service contracts - when is transfer continuous. Identify separate performance
obligations if goods and services distinct Clarify ‘distinct’. Concerns that a large number of separate of
performance obligations will be identified. Contracts are combined if independently priced; contract
modifications are accounted for as new contracts if independently priced Contracts will be combined too
frequently. The cumulative catch-up in accounting for modifications will apply too frequently. 6.">

7 Re-deliberated proposals ProposalComments Separate segments within a contract based on standalone selling
price Two step approach to segmentation is complicated and unnecessary Contract acquisition costs should be
recognised as an expense as incurred Acquisition costs should not always be expensed Distinguish two
warranties, both defer revenue based on a selling price ‘Statutory’ warranties should be cost accruals Account
for licences based on exclusivity ‘Exclusivity’ is not the right concept for distinguishing licences 7 <img
src="http://images.slideplayer.com/25/7889490/slides/slide_7.jpg" width="800" align="left" alt="Re-
deliberated proposals ProposalComments Separate segments within a contract based on standalone selling
price Two step approach to segmentation is complicated and unnecessary Contract acquisition costs should be
recognised as an expense as incurred Acquisition costs should not always be expensed Distinguish two
warranties, both defer revenue based on a selling price ‘Statutory’ warranties should be cost accruals Account
for licences based on exclusivity ‘Exclusivity’ is not the right concept for distinguishing licences 7" title="Re-
deliberated proposals ProposalComments Separate segments within a contract based on standalone selling
price Two step approach to segmentation is complicated and unnecessary Contract acquisition costs should be
recognised as an expense as incurred Acquisition costs should not always be expensed Distinguish two
warranties, both defer revenue based on a selling price ‘Statutory’ warranties should be cost accruals Account
for licences based on exclusivity ‘Exclusivity’ is not the right concept for distinguishing licences 7">
Advertisements

8 Re-deliberated proposals ProposalsComments Estimate uncertain consideration at probability weighted


amount Probability weighted is not useful or relevant except for portfolio-type transactions. Prefer ‘best
estimate’ for most transactions. The transaction price includes the effects of the time value of money and
collectibility Measurement is too complicated Allocate transaction price on stand alone selling price Many
agreed – other suggestions based on margin; residual method; allow for judgement The onerous test should be
performed at the level of each performance obligation Onerous test should be at contract level 8 <img
src="http://images.slideplayer.com/25/7889490/slides/slide_8.jpg" width="800" align="left" alt="Re-
deliberated proposals ProposalsComments Estimate uncertain consideration at probability weighted amount
Probability weighted is not useful or relevant except for portfolio-type transactions." title="Prefer ‘best
estimate’ for most transactions. The transaction price includes the effects of the time value of money and
collectibility Measurement is too complicated Allocate transaction price on stand alone selling price Many
agreed – other suggestions based on margin; residual method; allow for judgement The onerous test should be
performed at the level of each performance obligation Onerous test should be at contract level 8.">

9 Recognise revenue Key proposal ED: transfer based on control recognise revenue when a performance
obligation is satisfied by transferring a good or service to customer transferred when customer obtains control
ability to direct the use of and receive the benefit from revenue is recognised continuously only if service is
transferred continuously ie customer controls WIP 9 <img
src="http://images.slideplayer.com/25/7889490/slides/slide_9.jpg" width="800" align="left" alt="Recognise
revenue Key proposal ED: transfer based on control recognise revenue when a performance obligation is
satisfied by transferring a good or service to customer transferred when customer obtains control ability to
direct the use of and receive the benefit from revenue is recognised continuously only if service is transferred
continuously ie customer controls WIP 9" title="Recognise revenue Key proposal ED: transfer based on
control recognise revenue when a performance obligation is satisfied by transferring a good or service to
customer transferred when customer obtains control ability to direct the use of and receive the benefit from
revenue is recognised continuously only if service is transferred continuously ie customer controls WIP 9">

10 Recognise revenue Key proposal still transfer to customer Transfer of goods based on control carry forward
guidance in exposure draft about control add ‘risks and rewards’ as indicator eliminate ‘design or function’
indicator 10 <img src="http://images.slideplayer.com/25/7889490/slides/slide_10.jpg" width="800"
align="left" alt="Recognise revenue Key proposal still transfer to customer Transfer of goods based on control
carry forward guidance in exposure draft about control add ‘risks and rewards’ as indicator eliminate ‘design
or function’ indicator 10" title="Recognise revenue Key proposal still transfer to customer Transfer of goods
based on control carry forward guidance in exposure draft about control add ‘risks and rewards’ as indicator
eliminate ‘design or function’ indicator 10">

11 Recognise revenue Key proposal still transfer to customer Transfer of services is continuous if: entity’s
performance creates or enhances an asset customer controls or entity’s performance does not create an asset
with alternative use to the entity and one of: customer receives benefit as entity performs, or task would not
need to be re-performed (without the benefit of any inventory transfer), or entity has right to payment 11 <img
src="http://images.slideplayer.com/25/7889490/slides/slide_11.jpg" width="800" align="left" alt="Recognise
revenue Key proposal still transfer to customer Transfer of services is continuous if: entity’s performance
creates or enhances an asset customer controls or entity’s performance does not create an asset with alternative
use to the entity and one of: customer receives benefit as entity performs, or task would not need to be re-
performed (without the benefit of any inventory transfer), or entity has right to payment 11" title="Recognise
revenue Key proposal still transfer to customer Transfer of services is continuous if: entity’s performance
creates or enhances an asset customer controls or entity’s performance does not create an asset with alternative
use to the entity and one of: customer receives benefit as entity performs, or task would not need to be re-
performed (without the benefit of any inventory transfer), or entity has right to payment 11">

12 Separate performance obligations Key proposal ED: distinct goods or services performance obligation is a
promise to transfer a distinct good or service to the customer a good or service is distinct if it: –is sold
separately, or –has a distinct function and a distinct profit margin 12 <img
src="http://images.slideplayer.com/25/7889490/slides/slide_12.jpg" width="800" align="left" alt="Separate
performance obligations Key proposal ED: distinct goods or services performance obligation is a promise to
transfer a distinct good or service to the customer a good or service is distinct if it: –is sold separately, or –has
a distinct function and a distinct profit margin 12" title="Separate performance obligations Key proposal ED:
distinct goods or services performance obligation is a promise to transfer a distinct good or service to the
customer a good or service is distinct if it: –is sold separately, or –has a distinct function and a distinct profit
margin 12">

13 Separate performance obligations Key proposal still distinct goods or services One performance obligation if
a bundle of highly inter- related goods and services and the contract includes significant integration of those
goods & services into the item for which customer has contracted Otherwise separate performance obligations
if: –the good or service is distinct and –pattern of transfer of the good or service is different from that of other
goods or services in the contract 13 <img src="http://images.slideplayer.com/25/7889490/slides/slide_13.jpg"
width="800" align="left" alt="Separate performance obligations Key proposal still distinct goods or services
One performance obligation if a bundle of highly inter- related goods and services and the contract includes
significant integration of those goods & services into the item for which customer has contracted Otherwise
separate performance obligations if: –the good or service is distinct and –pattern of transfer of the good or
service is different from that of other goods or services in the contract 13" title="Separate performance
obligations Key proposal still distinct goods or services One performance obligation if a bundle of highly inter-
related goods and services and the contract includes significant integration of those goods & services into the
item for which customer has contracted Otherwise separate performance obligations if: –the good or service is
distinct and –pattern of transfer of the good or service is different from that of other goods or services in the
contract 13">

14 Combining and segmenting contracts Segmentation within contracts removed Combine two or more
contracts that are entered into at the same time with the same customer if one or more criteria met: –negotiated
as a package with a single commercial objective –amount of consideration in one contract depends on the other
–goods and services in the two contracts are interrelated in terms of design, technology or function 14 ©
2011IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org <img
src="http://images.slideplayer.com/25/7889490/slides/slide_14.jpg" width="800" align="left" alt="Combining
and segmenting contracts Segmentation within contracts removed Combine two or more contracts that are
entered into at the same time with the same customer if one or more criteria met: –negotiated as a package with
a single commercial objective –amount of consideration in one contract depends on the other –goods and
services in the two contracts are interrelated in terms of design, technology or function 14 © 2011IASC
Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org" title="Combining and segmenting
contracts Segmentation within contracts removed Combine two or more contracts that are entered into at the
same time with the same customer if one or more criteria met: –negotiated as a package with a single
commercial objective –amount of consideration in one contract depends on the other –goods and services in
the two contracts are interrelated in terms of design, technology or function 14 © 2011IASC Foundation | 30
Cannon Street | London EC4M 6XH | UK | www.iasb.org">

15 Contract modifications If a contract modification results only in the addition of a distinct good or service at a
price commensurate with the additional good or service, account for as a separate contract Otherwise, re-
evaluate the performance obligation and reallocate the transaction price to each separate performance
obligation 15 © 2011 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org <img
src="http://images.slideplayer.com/25/7889490/slides/slide_15.jpg" width="800" align="left" alt="Contract
modifications If a contract modification results only in the addition of a distinct good or service at a price
commensurate with the additional good or service, account for as a separate contract Otherwise, re-evaluate the
performance obligation and reallocate the transaction price to each separate performance obligation 15 © 2011
IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org" title="Contract modifications
If a contract modification results only in the addition of a distinct good or service at a price commensurate with
the additional good or service, account for as a separate contract Otherwise, re-evaluate the performance
obligation and reallocate the transaction price to each separate performance obligation 15 © 2011 IASC
Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org">

16 Acquisition costs ED proposed all acquisition costs recognised as an expense Tentative decision – recognise
an asset for the incremental costs of obtaining a contract (eg commissions) and recoverable in that contract
Incremental costs are those costs which are not incurred unless the contract is obtained Present the asset
separately Amortise the asset on a systematic basis consistent with performance of the contract 16 © 2011
IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org <img
src="http://images.slideplayer.com/25/7889490/slides/slide_16.jpg" width="800" align="left" alt="Acquisition
costs ED proposed all acquisition costs recognised as an expense Tentative decision – recognise an asset for
the incremental costs of obtaining a contract (eg commissions) and recoverable in that contract Incremental
costs are those costs which are not incurred unless the contract is obtained Present the asset separately
Amortise the asset on a systematic basis consistent with performance of the contract 16 © 2011 IASC
Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org" title="Acquisition costs ED
proposed all acquisition costs recognised as an expense Tentative decision – recognise an asset for the
incremental costs of obtaining a contract (eg commissions) and recoverable in that contract Incremental costs
are those costs which are not incurred unless the contract is obtained Present the asset separately Amortise the
asset on a systematic basis consistent with performance of the contract 16 © 2011 IASC Foundation | 30
Cannon Street | London EC4M 6XH | UK | www.iasb.org">

17 Warranties distinguished ED distinguished two types of warranty – latent defect and insurance. Both
‘deferred’ revenue. Tentative decisions: –account for warranty as a separate performance obligation if the
customer has the option to purchase the warranty separately –account for warranty as a cost accrual if the
customer has no option to purchase warranty separately and the assurance given to the customer is only that
past performance was as specified in contract 17 © 2011 IASC Foundation | 30 Cannon Street | London EC4M
6XH | UK | www.iasb.org <img src="http://images.slideplayer.com/25/7889490/slides/slide_17.jpg"
width="800" align="left" alt="Warranties distinguished ED distinguished two types of warranty – latent defect
and insurance." title="Both ‘deferred’ revenue. Tentative decisions: –account for warranty as a separate
performance obligation if the customer has the option to purchase the warranty separately –account for
warranty as a cost accrual if the customer has no option to purchase warranty separately and the assurance
given to the customer is only that past performance was as specified in contract 17 © 2011 IASC Foundation |
30 Cannon Street | London EC4M 6XH | UK | www.iasb.org.">

18 Licences The boards accept that exclusivity is not the basis for accounting for licences In granting a licence
an entity gives a promised right to the customer. That right gives rise to a performance obligation that is
satisfied at a point in time when the customer obtains control of the right 18 © 2011 IASC Foundation | 30
Cannon Street | London EC4M 6XH | UK | www.iasb.org <img
src="http://images.slideplayer.com/25/7889490/slides/slide_18.jpg" width="800" align="left" alt="Licences
The boards accept that exclusivity is not the basis for accounting for licences In granting a licence an entity
gives a promised right to the customer." title="That right gives rise to a performance obligation that is satisfied
at a point in time when the customer obtains control of the right 18 © 2011 IASC Foundation | 30 Cannon
Street | London EC4M 6XH | UK | www.iasb.org.">

19 Uncertain consideration The transaction price is the total amount of consideration that the entity estimates it
will be entitled to under the contract Estimate using the most predictive of two methods: probability-weighted
amount or most likely amount Do not recognise revenue if not reasonably assured to be entitled to that amount:
–customer can avoid payment –no experience –experience is not predictive 19 © 2011 IASC Foundation | 30
Cannon Street | London EC4M 6XH | UK | www.iasb.org <img
src="http://images.slideplayer.com/25/7889490/slides/slide_19.jpg" width="800" align="left" alt="Uncertain
consideration The transaction price is the total amount of consideration that the entity estimates it will be
entitled to under the contract Estimate using the most predictive of two methods: probability-weighted amount
or most likely amount Do not recognise revenue if not reasonably assured to be entitled to that amount: –
customer can avoid payment –no experience –experience is not predictive 19 © 2011 IASC Foundation | 30
Cannon Street | London EC4M 6XH | UK | www.iasb.org" title="Uncertain consideration The transaction price
is the total amount of consideration that the entity estimates it will be entitled to under the contract Estimate
using the most predictive of two methods: probability-weighted amount or most likely amount Do not
recognise revenue if not reasonably assured to be entitled to that amount: –customer can avoid payment –no
experience –experience is not predictive 19 © 2011 IASC Foundation | 30 Cannon Street | London EC4M 6XH
| UK | www.iasb.org">

20Time value of money Adjust transaction price for time value of money if the contract includes a financing
component that is significant to the contract Significant financing component if: –consideration would be
substantially different if paid cash at the time of transfer –significant timing difference between transfer of
goods and services and payment –contract contains an implicit or explicit interest rate 20 © 2011 IASC
Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org <img
src="http://images.slideplayer.com/25/7889490/slides/slide_20.jpg" width="800" align="left" alt="Time value
of money Adjust transaction price for time value of money if the contract includes a financing component that
is significant to the contract Significant financing component if: –consideration would be substantially
different if paid cash at the time of transfer –significant timing difference between transfer of goods and
services and payment –contract contains an implicit or explicit interest rate 20 © 2011 IASC Foundation | 30
Cannon Street | London EC4M 6XH | UK | www.iasb.org" title="Time value of money Adjust transaction
price for time value of money if the contract includes a financing component that is significant to the contract
Significant financing component if: –consideration would be substantially different if paid cash at the time of
transfer –significant timing difference between transfer of goods and services and payment –contract contains
an implicit or explicit interest rate 20 © 2011 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK
| www.iasb.org">

21 Collectibility An entity should not reflect customer’s credit risk in the measurement of transaction price or
revenue Recognise an allowance for any expected impairment in contracts with customers Corresponding
amount in profit and loss presented as a separate line item adjacent to revenue ie contra revenue 21 © 2011
IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org <img
src="http://images.slideplayer.com/25/7889490/slides/slide_21.jpg" width="800" align="left"
alt="Collectibility An entity should not reflect customer’s credit risk in the measurement of transaction price or
revenue Recognise an allowance for any expected impairment in contracts with customers Corresponding
amount in profit and loss presented as a separate line item adjacent to revenue ie contra revenue 21 © 2011
IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org" title="Collectibility An entity
should not reflect customer’s credit risk in the measurement of transaction price or revenue Recognise an
allowance for any expected impairment in contracts with customers Corresponding amount in profit and loss
presented as a separate line item adjacent to revenue ie contra revenue 21 © 2011 IASC Foundation | 30
Cannon Street | London EC4M 6XH | UK | www.iasb.org">

22 Allocation of transaction price Allocate to each separate performance obligation the amount the entity
expects to receive in exchange for satisfying that performance obligation Allocate transaction price based on a
relative standalone selling price If the standalone selling price is highly variable the best technique for
estimating standalone selling price may be a residual technique 22 © 2011 IASC Foundation | 30 Cannon
Street | London EC4M 6XH | UK | www.iasb.org <img
src="http://images.slideplayer.com/25/7889490/slides/slide_22.jpg" width="800" align="left" alt="Allocation
of transaction price Allocate to each separate performance obligation the amount the entity expects to receive
in exchange for satisfying that performance obligation Allocate transaction price based on a relative standalone
selling price If the standalone selling price is highly variable the best technique for estimating standalone
selling price may be a residual technique 22 © 2011 IASC Foundation | 30 Cannon Street | London EC4M
6XH | UK | www.iasb.org" title="Allocation of transaction price Allocate to each separate performance
obligation the amount the entity expects to receive in exchange for satisfying that performance obligation
Allocate transaction price based on a relative standalone selling price If the standalone selling price is highly
variable the best technique for estimating standalone selling price may be a residual technique 22 © 2011
IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org">
23 Onerous test ED proposed onerous test at level of individual performance obligation Tentative decision to
test at the level of the remaining performance obligations in the contract Costs confirmed as those relating
directly to satisfying the remaining performance obligations (as described in the exposure draft) 23 © 2011
IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org <img
src="http://images.slideplayer.com/25/7889490/slides/slide_23.jpg" width="800" align="left" alt="Onerous
test ED proposed onerous test at level of individual performance obligation Tentative decision to test at the
level of the remaining performance obligations in the contract Costs confirmed as those relating directly to
satisfying the remaining performance obligations (as described in the exposure draft) 23 © 2011 IASC
Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.iasb.org" title="Onerous test ED proposed
onerous test at level of individual performance obligation Tentative decision to test at the level of the
remaining performance obligations in the contract Costs confirmed as those relating directly to satisfying the
remaining performance obligations (as described in the exposure draft) 23 © 2011 IASC Foundation | 30
Cannon Street | London EC4M 6XH | UK | www.iasb.org">

24 Timeline 24 June 2010 ? Comment letters received Exposure Draft Effective date Targeted outreach Public
roundtables 22 Oct 2010 Boards’ re- deliberations Final standard 2011 24 Continued targeted outreach <img
src="http://images.slideplayer.com/25/7889490/slides/slide_24.jpg" width="800" align="left" alt="Timeline
24 June 2010 ." title="Comment letters received Exposure Draft Effective date Targeted outreach Public
roundtables 22 Oct 2010 Boards’ re- deliberations Final standard 2011 24 Continued targeted outreach.">

25 Where to get more information Expressions of individual views by members of the IASB and its staff are
encouraged. The views expressed in this presentation are those of the presenter. Official positions of the IASB
on accounting matters are determined only after extensive due process and deliberation. 25 Find out more at:
http://go.iasb.org/revenue+recognition http://go.iasb.org/revenue+recognition IASB staff: Henry Rees
hrees@ifrs.orghrees@ifrs.org Glenn Brady gbrady@ifrs.orggbrady@ifrs.org Allison McManus
amcmanus@ifrs.org April Pitman apitman@ifrs.orgapitman@ifrs.org FASB staff: Kenny Bement
kbbement@fasb.orgkbbement@fasb.org <img
src="http://images.slideplayer.com/25/7889490/slides/slide_25.jpg" width="800" align="left" alt="Where to
get more information Expressions of individual views by members of the IASB and its staff are encouraged."
title="The views expressed in this presentation are those of the presenter. Official positions of the IASB on
accounting matters are determined only after extensive due process and deliberation. 25 Find out more at:
http://go.iasb.org/revenue+recognition http://go.iasb.org/revenue+recognition IASB staff: Henry Rees
hrees@ifrs.orghrees@ifrs.org Glenn Brady gbrady@ifrs.orggbrady@ifrs.org Allison McManus
amcmanus@ifrs.org April Pitman apitman@ifrs.orgapitman@ifrs.org FASB staff: Kenny Bement
kbbement@fasb.orgkbbement@fasb.org.">