IFRS 15 – Revenue from

contracts with customers

Revenue: The Basics

Agenda

1) 5-Step model
2) Deep dive: performance obligations, including material rights

PwC and ICPAU 2

The 5-step model

Core principle
Revenue recognised to depict transfer of goods or services

Step 1 - Identify the contract with the customer

Step 2 - Identify the performance obligations in the contract

Step 3 - Determine the transaction price

Step 4 - Allocate the transaction price

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

PwC and ICPAU 3

Revenue recognition model

A simple example….
• Contract: Entity A sells products X, Y and Z to Customer B
• Transaction price: CU18m, 50% upfront, 50% when all
three delivered
• Stand alone price: Each sold separately for CU8m each
• Nature of products:
- Product X: Good, control transferred at a point in time
- Product Y: Good, control transferred at a point in time
- Service Z: Service transferred over one year

PwC and ICPAU 4

Revenue recognition model – a simple example
Step 1 -–Identify
Signed contract
the contract
exists
with the customer

Step 2 - Identify the performance obligations in the contract

Step 3 - Determine the transaction price

Contract
An agreement between two or more parties that creates
enforceable rights and obligations (not necessarily written)

Step 4 - Allocate the transaction price

• Approved • Commercial substance
• Rights of each party identified • Collectibility
• Payment terms identified

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

PwC and ICPAU 5

Revenue recognition model – a simple example
Step 12 –
– Signed contract
Customer B canexists
benefit from X, Y and Z separately as they are sold
separately – three separate performance obligations

Step 2 - Identify the performance obligations in the contract

Performance obligation:
Step 3 - Determine the transaction price
A promise in a contract with a customer to
transfer a good or service to the customer

AND Distinct
Step 4 - Allocate the transaction price

Implicit Explicit Written Verbal

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

PwC and ICPAU 6

Revenue recognition model – a simple example
Step
Step 13 –
– Signed contract exists
The transaction price is fixed at CU18m.

Step 2 – Customer
Transaction priceB=can benefit from
Amount X, Y and
to which Z separately
entity expectsastothey are sold
be entitled
separately –inthree separate
exchange forperformance
transferringobligations
goods or services

Step 3 - Determine the transaction price • Highly probable?

• Subject to significant
reversal?

Step 4 - Allocate the transaction price

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

PwC and ICPAU 7

Revenue recognition model – a simple example
Step 41 –
Step –25% discount
Signed is allocated
contract exists evenly Total stand alone price = CU24m
across X, Y, Z Total transaction price = CU18m
Total discount = 25%
Step 2 – Customer B can benefit from Discount
X, Y and*Zstand-alone
separately=as they are
CU6msold
separately - three separate performance obligations

• Observable
Step 3 – The transaction price of good at
is fixed or CU18m.
service that is sold separately
1

• Estimate selling prices if not observable

Relative
• Adjusted
Step 4 - Allocate market assessment
the transaction price approach or expected cost plus margin
2 approach stand-alone
selling price

• Residual approach…
• Only when selling price is highly variable or uncertain (different to
Step35 - Recognise
current residual
revenue method)
when (or as) a performance obligation is satisfied

PwC and ICPAU 8

Revenue recognition model – a simple example
Step
Step 51––CU6m
Signed contract
each existswhen control of X / Y transfers
= recognise
CU6m = recognise over the period that Z is provided
Step 2 – Customer B can benefit from X, Y and Z separately as they are sold
separately
Yes- threeCustomer
separatereceives
performance
benefits obligations
as performed/another
entity would not need to re-perform
e.g. cleaning service, shipping
Step 3 – The transaction price is fixed at CU18m.
No

Point in time
Over time

Step 4 –Yes
25% discount is allocatedan asset
Create/enhance Total stand controls
customer alone price = CU24m
evenly across X, Y, Z e.g. house on customer’s land
Total transaction price = CU18m
Total discount = 25%
No
Discount * stand-alone = CU6m
Does not create asset w/alternative use
Yes AND No
Right to payment for work to date
Step 5 - Recognise revenue when (or as) a performance obligation is satisfied
e.g. ‘manufacturing service’
PwC and ICPAU 9
Revenue recognition model – a simple example

If not over time, then point in time….

Recognise revenue when control transfers

Indicators that customer has obtained control of a good or service:

Customer has significant Customer has accepted

risk and rewards the asset

Legal title to asset

Physical possession of
Right to payment for asset
asset

PwC and ICPAU 10

Revenue recognition model – a simple example

PwC and ICPAU 11

Exercise - Temperature test

Answer multiple choice questions in each scenario.

PwC and ICPAU 12

Exercise – Scenario 1
• Entity C sells land to Customer D. Customer D uses the land to construct a housing
development.
• Customer D makes a non-refundable upfront payment of CU10,000 when legal title is
transferred and CU990,000 in five years, which is when Customer D expects to have
completed the development.
• Entity C has no history with this customer and the land is in an area currently not
zoned for housing development. Thus, Entity C is not able to conclude that Customer
D will pay more than the upfront payment.
• If Customer D fails to pay in five years, Entity C re-takes legal title to the land and any
assets on the land.
Question
How much revenue is recognised when Entity C transfers legal title of the land?
A. Recognise revenue CU1,000,000 as the control of the land has been transferred. There
is a long-term receivable of CU990,000.
B. Recognise revenue of CU10,000 as this is a non-refundable payment and control of the
land has transferred to the customer.
C. Recognise no revenue as there is no contract with the customer due to the significant
doubt about the customer’s ability and intention to pay.
PwC and ICPAU 13
Temperature test: Exercise Debrief
Step 1: Identify the contract
Scenario 1

Entity C

• Initial payment: CU10,000

• Deferred payment: CU990,000

How much revenue is recognised when Entity C transfers legal title of the
land?
A. CU1,000,000, full contract amount
B. CU10,000, non-refundable amount
C. Nil, there is no contract with the customer
PwC and ICPAU 14
 Step 1
Temperature test: Exercise Debrief Collectibility criterion to
determine if contract
Step 1: Identify the contract exists

What is the
appropriate
treatment then?
• Record deposit liabilities initially and
continue to re-assess whether a
contract with a customer is Contract
established subsequently
• Recognise revenue only if the
• Approved • Commercial substance
consideration received is non-
• Rights of each
refundable andparty
when:identified • Collectibility
• Payment terms
o either identified
there is no remaining
obligations to transfer goods or
services to the customer;
o or the contract has been
terminated

PwC and ICPAU 15

Exercise – Scenario 2
• Entity E enters into a contract with Customer F to construct a brand new high-end
power station. Control of the power station is expected to transfer at the end of five
years.
• It is the first power station of this particular design and Entity E agreed to provide
support to Customer F in connection with the general maintenance of the plant for the
first year of operation free of charge.
• Entity E also provides similar maintenance services to other power stations.

Question
How many performance obligations exist in this agreement?
A. One. The maintenance service is not a distinct performance obligation. It is a
marketing expense and costs should be expensed as incurred.
B. Two. The construction of the plant and maintenance represent two distinct
performance obligations. They can be sold separately to the customer.
C. Many. Each component of the power station that can be sold separately (for example,
the generator) is a distinct performance obligation.

PwC and ICPAU 16

Temperature test: Exercise Debrief
Step 2: Identify the performance obligations
Scenario 2

Entity E Customer F

How many performance obligations exist in this agreement?

A. One
B. Two
C. Many
PwC and ICPAU 17
 Step 2
Distinct considered
Temperature test: Exercise Debrief from the perspective of
Step 2: Identify the performance obligations the customer

Can the customer benefit

from the goods or services
transferred on their own?

Distinct Performance
Obligations

Is the promise separately

identifiable from other
promises?

PwC and ICPAU 18

Exercise – Scenario 3
• Assume the same facts as Scenario 2.
• The contract price is CU1,000,000 plus a 5% bonus if the plant meets specific
operating thresholds in the first two years. Entity E projects a 50% chance that it will
receive the bonus (50% that it will not receive a bonus).
• The plant is a new design and Entity E has limited historical evidence on the plant’s
operations.
• Customer F finances the project by making a CU1,000,000 prepayment before
construction begins. The lending rate between the customer and the entity is 10%.
Question
What is the transaction price?
A. CU1,000,000, the fixed contract sum
B. CU1,025,000, the fixed contract sum plus estimated bonus of CU25,000 (5% * 50%
likelihood)
C. CU1,610,510, the fixed contract sum considering time value of money
D. CU1,635,500, the fixed contract sum plus estimated bonus of CU25,000 (5% * 50%
likelihood) plus effect of time value of money (TVM on the contingent payment assumed
immaterial)
PwC and ICPAU 19
Temperature test: Exercise Debrief
Step 3: Calculate the transaction price
Scenario 3

What is the transaction price?

A. CU1,000,000
Contract
B. CU1,025,000
Expected construction
C. CU1,610,510
period................. 5 years
Full payment…… CU1 million D. CU1,635,500
……

5% bonus based on operating

target

PwC and ICPAU 20

 Step 3
Temperature test: Exercise Debrief New model for variable
consideration and
Step 3: Calculate the transaction price financing

• Measured reliably?
Variable
IAS 11 / 18 • Sufficiently advanced that performance
consideration is probable to meet [IAS 11]?

• Highly probable?
IFRS 15
• Not subject to significant reversal?

• Prepayment is non-financial liability

Financing IAS 11 / 18 • Time value of money only considered
for deferred payments

• Need to determine if significant

IFRS 15 financing component exists

PwC and ICPAU 21

Exercise – Scenario 4
• Entity G sells mobile phones, tablets and airtime plans to its customers.
• Entity G offers a new promotion package where customers can purchase a phone, subscribe for
a 12-month airtime plan and receive a ‘free’ tablet for a total price of CU800.
• This reflects a 20% discount from the standalone selling prices of the items which are as
follows:
Phone: CU300
Airtime: CU300
Tablet: CU400
Total: CU1,000
• The entity regularly offers bundled packages for the phone and a 12-month airtime plan for
CU400.
Question
How should the transaction price of CU800 be allocated to the phone, airtime and tablet?
A. Phone: CU240, Airtime: CU240, Tablet: CU320, based on 20% discount applied proportionally
to all three performance obligations
B. Phone: CU200, Airtime: CU200, Tablet: CU400, based on the entire discount being allocated to
the phone and airtime because there is objective evidence that the discount relates to those two
performance obligations
PwC and ICPAU 22
Temperature test: Debrief
Step 4: Allocate the transaction price
Scenario 4

CU1,000
Phone
CU300
20% CU800
Tablet Discount
CU400
Airtime
CU300

How should the transaction price of CU800 be allocated?

A. Phone: CU240, Airtime: CU240, Tablet: CU320
B. Phone: CU200, Airtime: CU200, Tablet: CU400

PwC and ICPAU 23

 Step 4
Temperature test: Exercise Debrief Based on relative stand-
alone selling price but
Step 4: Allocate the transaction price more guidance provided

CU1,000
Phone
CU300
20% CU800
Tablet Discount
CU400
Airtime
CU300
Phone/airtime  CU400
Tablet  CU400
Phone and airtime regularly sold
together for CU400

PwC and ICPAU 24

Exercise – Scenario 5
• Entity H agrees to produce 10,000 car frames for Customer I for a transaction price of
CU10,000,000.
• Entity H has the right to payment for work performed including a reasonable margin if
Customer I cancels while production is partially completed.
• There is no alternative use for the frames as they reflect a particular car model
designed by the customer.

Question
Entity H has completed 50% of the production and delivered 2,000 car frames to
Customer I. How much revenue should Entity H recognise for the work performed to
date?
A. CU2,000,000
B. CU5,000,000

PwC and ICPAU 25

Temperature test: Exercise Debrief
Step 5: Recognise revenue
Scenario 5

Entity H Customer I

CU10
million

How much revenue should Entity H recognise for the work performed to
date?
A. CU2,000,000
B. CU5,000,000

PwC and ICPAU 26

 Step 5
Single model for all
Temperature test: Exercise Debrief performance obligations
Step 5: Recognise revenue criteria to determine over
time

Point in time
IFRS
IAS 18
15 Exclusive

Over time

PwC and ICPAU 27

Temperature test: Exercise Debrief
Step 5: Recognise revenue
Good or service transfers over time if one of the following criteria met:

Does not create asset

Customer receive benefits
as performed/another
would not need to re-
perform
w/alternative use
Create/enhance an asset
AND
customer controls
right to payment for work
to date

If criteria not met, transfers at a point in time based on following indicators

Right to payment Customer has

Legal title to asset
for asset accepted the asset

Customer has
Physical possession
significant risk and
of asset
rewards
PwC and ICPAU 28
Deep dive: performance obligations
Recap: definition

Performance obligation if:

• Distinct good or service:
o customer benefits from good/service on its own or with other resources;
and
o separable from other promises
• Series of goods/services, if consistent pattern of transfer to customer over
time

PwC 29
Deep dive: performance obligations
In practice

Individual Sold separately • Consumer goods

distinct or • Simple installation
good or service can be used separately • Mobile and service

Group of Dependent on
• Construction contracts
or interrelated with
inseparable other items in the
• Complex installations
goods or service • Customised software
contract

Series of • Daily cleaning service

Consistent pattern of
homogeneous transfer over time
• Ferry service
‘services’ • Call centre processing

PwC and ICPAU 30

Deep dive: material rights
Customer options for additional goods or services

What are potential customer options?

• Customer loyalty programme
• Extended warranty options
• Renewal options, etc.

Estimate the
standalone selling
price of the option
Material If YES, then and allocate a
right? portion of the sale
price to it

PwC 31
Deep dive: performance obligations - Exercise

Answer multiple choice and any follow-up questions in each scenario.

PwC and ICPAU 32

Exercise – Scenario 1
Entity T, a telecommunications company, offers the following 12-month bundled package:
• Broadband: broadband up to 25MB including a free router and free activation
• Mobile phone: a selected mobile phone plus 500 minutes per month
• TV: 10 designated entertainment channels with a free TV box
The functionalities of each product are as follows:
• Customers can use their own router. However, this would not result in any discount.
• Customers can use the handset with different service providers.
• The TV box can only be used to watch the designated channels offered by Entity T.
An engineer activates the broadband by enabling a live connection to the customer’s house.
Question
How many performance obligations are included in the bundled package offered by Entity
T?
A. Five
B. Six
C. Seven

PwC and ICPAU 33

Deep dive: performance obligations – Debrief
Bundled package
Scenario 1
5

4
1

How
To bemany
DISTINCT
performance
– Criterion
obligations
a) whether customers
are included
can benefit
in the bundled
from particular
package
goods or
services upon
offered by Entity
transfer
T?
A. Five
KeySix
B. judgment areas:
• Can
C. Seven
the customer benefit from the product on its own?
• Activation – required special arrangements and potential integration?

PwC and ICPAU 34

Exercise – Scenario 2
Government G engaged with Entity J to build a high-security prison. Entity J is
responsible for the overall management of the project, including prison design, site
clearance, construction of foundations and structure, installation of CCTV and
establishment of fences. There are competitors that offer similar services or sell similar
goods.
Question
How many performance obligations does Entity J have in the contract with
Government G?
A. One
B. Five

PwC and ICPAU 35

Deep dive: performance obligations – Debrief
Prison design & constructions
Scenario 2

How
To
How beabout
many
DISTINCT
when
performance
Entity
– Criterion
J only
obligations
acts
b) whether
as a project
does
the promises
coordinator
Entity are
J have
and
separately
individual
in theidentifiable
contract
subcontractors
with
to each
others
are
Government
directly responsible
G? to Government G? What is the potential implication?
A. One
• Principal v. agent
B. Five

PwC and ICPAU 36

Deep dive: performance obligations – Debrief
Distinct in the context of the contract

Factors that indicate good or service is separately identifiable include:

• entity does not provide a significant service of integrating the good or service with
other goods or services into a bundle that represent the combined output

• good or service does not significantly modify or customise another good or service
promised in the contract

• good or service is not highly dependent on, or highly interrelated with, other goods or
services promised in the contract

Judgment
required

PwC and ICPAU 37

Exercise – Scenario 3

• Entity K operates flights for passengers travelling between different cities in Country
X. Other airlines offer similar routes.
• Entity K operates a customer loyalty programme whereby the customer can
accumulate mileage for each trip using Entity K’s services.
• Customers can redeem one short trip for no further consideration after 10 short haul
flights. The fair value of the points received per flight is not material.
Question
How should Entity K determine the accounting for this customer loyalty programme?
A. Entity K shall disregard the loyalty points earned by customers each time given it is not
material individually.
B. Entity K shall separately account for the loyalty points and recognise related revenue
only when a customer redeems the points and takes the free flight.

PwC and ICPAU 38

Deep dive: material rights – Debrief
Customer loyalty programme
Scenario 3

Loyalty 10 times =
points

How should Entity K determine the accounting for this customer loyalty
programme?
A. Entity K shall disregard the loyalty points earned by customer each time given it is not
material individually.
B. Entity K shall separately account for the loyalty points and recognise related revenue
only when a customer redeems the points and takes the free flight.

PwC and ICPAU 39

Deep dive: material rights – Debrief
Customer loyalty programme

• Material rights existed – consideration of whole arrangement

• Accounting implication
Dr. Trade receivables <B/S> xx
Cr. Revenue <P/L> (xx)
Cr. Deferred revenue <B/S> (xx)

• Other complexities?

PwC and ICPAU 40

Recap

What do What benefits do

customers buy? customers obtain from
goods / services
transferred?

Separable from
other goods /
services?

Similar in nature Material rights?

and recognition
pattern?

PwC 41
More challenges are coming…

Uh oh….this is
not going to be
easy…

PwC 42
Questions?

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