For example, if an advance payment is required for business purposes to obtain a longer-term contract, then the entity may conclude that a significant financing obligation does not exist. Changes, which include replacing the concept of transfer of ‘risks and rewards’ with ‘control’ and the introduction of ‘performance obligations’ alongside extensive disclosures, are likely to put more pressure on accountants and auditors to closely evaluate client contracts and challenge directors' judgements. ACCA P2 IFRS 15 Revenue from Contracts with Customers (2) Free lectures for the ACCA P2 If it is not appropriate to include all of the variable consideration in the transaction price, the entity should assess whether it should include part of the variable consideration. As a consequence of the above, the timing of revenue recognition may change for some point-in-time transactions when the new standard is adopted. Contract – An agreement between two or more parties that creates enforceable rights and obligations. Factors that may indicate the passing of control include the present right to payment for the asset or the customer has legal title to the asset or the entity has transferred physical possession of the asset. A good or service which has been delivered may not be distinct if it cannot be used without another good or service that has not yet been delivered. A modification may be accounted for as a separate contract or a modification of the original contract, depending upon the circumstances of the case. Experience in forming professional judgement on the practical application of IFRS; In-depth training on the new revenue and leasing standards (IFRS 15 and IFRS 16) with industry-specific illustrations; An overview of the differences between IFRS and Ind AS *On successful completion of the examination conducted by the ACCA independently. ACCA CIMA CAT DipIFR Search. The entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced. IFRS 15, Revenue from Contracts with Customers, is a new standard that outlines a single comprehensive framework for entities to use in accounting for revenue arising from contracts with customers. What is the meaning of IFRS 15? 4. You are currently involved in the completion stage of two engagements relating to different clients. The link leads to the article and there’s a link in the article leads to illustrative example, which is … The allocation is based on the relative standalone selling prices of the goods or services promised and is made at inception of the contract. Please visit our global website instead, Can't find your location listed? From January 2018, IAS 18 will be replaced by IFRS 15. When a contract contains more than one distinct performance obligation, an entity allocates the transaction price to each distinct performance obligation on the basis of the standalone selling price. Recognise revenue when each performance obligation is satisfied. Please visit our global website instead, Can't find your location listed? The new standard for revenue recognition, IFRS 15, Revenue from Contracts with Customers, came into effect for accounting periods beginning January 2018. Free sign up Sign In. IAS 16 Property, Plant and Equipment. 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. Each party’s rights in relation to the goods or services have to be capable of identification. ... ACCA Approved Learning Partner. The transaction price might include variable or contingent consideration. Here, we summarise the following five steps of revenue recognition and illustrative practical application for the most common scenarios: New contracts may arise when terms of existing contracts are modified. New contract arises as a result of modifications if: a new performance obligation is added to a contract. Free sign up Sign In. An entity can only include variable consideration in the transaction price to the extent that it is highly probable that a subsequent change in the estimated variable consideration will not result in a significant revenue reversal. The core principle of IFRS 15 is for companies to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the companies expect to be entitled in exchange for those goods or services. In some cases, it will be clear that a significant financing component exists due to the terms of the arrangement. CONTENTS 1. Where the transaction price includes a variable amount and discounts, consideration needs to be given as to whether these amounts relate to all or only some of the performance obligations in the contract. the vendor’s performance creates or enhances an asset (for example, work in progress) that is controlled by the customer as the work progresses. Step five requires revenue to be recognised as each performance obligation is satisfied. Step three requires the entity to determine the transaction price, which is the amount of consideration that an entity expects to be entitled to in exchange for the promised goods or services. Identification of contract. If an entity anticipates that it may ultimately accept an amount lower than that initially promised in the contract due to, for example, past experience of discounts given, then revenue would be estimated at the lower amount with the collectability of that lower amount being assessed. The definition of control includes the ability to prevent others from directing the use of and obtaining the benefits from the asset. ACCA CIMA CAT DipIFR Search. Step two requires the identification of the separate performance obligations in the contract. ACCA IFRS 15 Revenue from contracts with customers - YouTube To find out more look at the illustrative practical applications for the most common scenarios. FR F7 Blog Textbook Tests Test Centre Exams Exam Centre. An entity satisfies a performance obligation by transferring control of a promised good or service to the customer, which could occur over time or at a point in time. Dear students as you know that remembering all IAS and IFRS is a very difficult task. Variable consideration should be estimated as either the expected value or the most likely amount. ACCA BT F1 MA F2 FA F3 LW F4 Eng PM F5 TX F6 UK FR F7 AA F8 FM F9 SBL SBR INT SBR UK AFM P4 APM P5 ATX P6 UK AAA P7 INT AAA P7 UK. IFRS 15, Revenue from Contracts with Customers 3 IFRS 15, Revenue from Contracts with Customers Table of Contents Title of Paper Page(s) Accounting for Airline’s Brand and Customer Lists 4-5 Accounting for Contract Costs - Commissions and Selling Costs 6-7 Accounting for Passenger Taxes & Related Fees 8 Ancillary Services 9-13 Change Fees 14-17 The key difference between IFRS 15 and IAS 18 is that while IFRS 15 provides a standardised five-step model to recognize all types of revenue earned from customer contracts, IAS 18 considers different recognition criteria for a different type of incomes received. As entities and groups using the international accounting framework leave the old regime behind, let’s look at the more prescriptive new standard. "Contracts... must be enforceable, have commercial substance and be approved by the parties to the contract.". IFRS 15 Revenue from Contracts with Customers is published by the International Accounting Standards Board (IASB). This standard requires revenue to be accounted for by means of the application of the "five-step revenue recognition model". ACCA BT F1 MA F2 FA F3 LW F4 Eng PM F5 TX F6 UK FR F7 AA F8 FM F9 SBL SBR INT SBR UK AFM P4 APM P5 ATX P6 UK AAA P7 INT AAA P7 UK. If an entity does not satisfy its performance obligation over time, it satisfies it at a point in time and revenue will be recognised when control is passed at that point in time. Please visit our global website instead. Recognise revenue when each performance obligation is satisfied. Identify the contract(s) with a customer. An entity must determine the amount of consideration to which it expects to be entitled in order to recognise revenue. In this case servicing and warranties are performance obligations that are distinct and revenue relating to them needs to be recognised separately from the goods or services promised on the contract to which they relate. IFRS 15 Revenue from Contracts with Customers — Your Questions Answered. ACCA CIMA CAT DipIFR Search. Whether an entity recognises revenue over the period during which it manufactures a product or on delivery to the customer will depend on the specific terms of the contract. IAS 8, Accounting policies, changes in accounting estimates and errors. Management should use the approach that it expects will best predict the amount of consideration and it should be applied consistently throughout the contract. It defines transactions based on performance obligations satisfied over time versus point in time. Revenue Recognition - IFRS 15 - introduction with a quick quiz in ACCA FR (F7). This will be a major practical issue as it may require a separate calculation and allocation exercise to be performed for each contract. Several accounting pronouncements, including IAS 18 Revenue, have been superseded by the new IFRS 15 Revenue from Contracts with Customers. Subsequently, if revenue already recognised is not collectable, impairment losses should be taken to profit or loss. IFRS 15 – Revenue from Contracts with Customers Presented by Richard Martin Head, Corporate Reporting Association of Chartered Certified Accountants This material has been reproduced in the language and form as it was provided. It supersedes current revenue recognition guidance including IAS 18, Revenue and IAS 11, Construction Contracts and related Interpretations. This allows management to apply judgment to determine the separate performance obligations that best reflect the economic substance of a transaction. A mobile telephone contract typically bundles together the handset and network connection. Continuation of an existing contract arises when: no distinct goods or services are provided as part of the modification, performance obligation can be satisfied at modification date – for example, a customer negotiates a discount in relation to units already delivered, for example due to unsatisfactory quality or service relating to the delivered units only, A performance obligation is a distinct promise to transfer specific goods or services, distinct from other goods or services. Revenue Recognition - IFRS 15 - introduction as documented in theACCA FR (F7) textbook. This can be established using two methods: output method - direct measurement of the value of goods or services transferred to date for example per surveys of completion to date, appraisals of results achieved, milestones reached, units produced/delivered; or, input method - based on measures such as resources consumed, costs incurred (but see below re contract set up costs), number of hours per time sheets or machine hours, which are directly related to the vendor's performance, Contract set up activities and preparatory tasks necessary to fulfil a contract do not form part of revenue, and may meet capital recognition asset requirements (see below). Acowtancy. If that is not available, an estimate is made by using an approach that maximises the use of observable inputs - for example, expected cost plus an appropriate margin or the assessment of market prices for similar goods or services adjusted for entity-specific costs and margins or in limited circumstances a residual approach. Step four requires the allocation of the transaction price to the separate performance obligations. "Variable consideration is wider than simply contingent consideration as it includes any amount that is variable under a contract, such as performance bonuses or penalties.". The five-step model applies to revenue earned from a contract with a customer with limited exceptions, regardless of the type of revenue transaction or the industry. We'd suggest that you use this as a guide when allocating yourself CPD units. The contract must be approved by all involved. Recognise revenue when each performance obligation is satisfied, Identify separate performance obligations, Allocate transaction price to performance obligations. Performance obligation is distinct when its fulfilment: provides specific benefits associated with it, in its own right or together with other fulfilled obligations, is separable from other obligations in the contract – goods or services offered are not integrated or dependent on other goods or services provided already under the contract; the obligation provides goods or services rather than only modifies goods or services already provided, activities relating to internal administrative contract set-up, it is negotiated as a package with a single commercial objective, consideration for one contract depends on the price or performance of the other contract, Transaction price is the most likely value the entity expects to be entitled to in exchange for the promised goods or services supplied under a contract, May include significant financing components and incentives and non-cash amounts offered, which affect how revenue is recognised (see below), may arise as a result of discounts, rebates, refunds, credits, concessions, incentives, performance bonuses, penalties, and contingent payments, variable consideration is only recognised when it is highly probable that there will not be a significant reversal in the cumulative amount of revenue recognised to date, no revenue is recognised if the vendor expects goods to be returned, instead a provision matching the asset is recognised at the same time as the asset, with an adjustment to cost of sales, the restriction results in a later recognition of revenue and profit (once there is certainly the goods will not be returned) in comparison with current accounting, variable consideration is measured by reference to two methods, expected value for the contract portfolio (for a large number of contracts), or, single most likely outcome amount (if there are only two potential outcomes), if a financing component is significant, IFRS 15 requires an adjustment to be made for the effect of implicit financing, cash received in advance from buyer – vendor to recognise finance cost and increase in deferred revenue, cash received in arrears from buyer – vendor to recognise finance income and reduction in revenue, no adjustment for a financing component is needed if payment is settled within one year of goods or services transferred. The views expressed are those of the author and do not necessarily reflect the views of UNCTAD. To the extent that each of the performance obligations has been satisfied. Revenue Recognition - IFRS 15 - introduction 29 / 41 Question 5a i - June 2017 Sample You are a manager at Thyme & Co, a firm of Chartered Certified Accountants. Identify separate performance obligations, 4. The vendor’s performance creates an asset, when: Capitalisation of costs associated with a sale contract (for example bidding costs, sales commission). IFRS 15 provides indicators rather than criteria to determine when a good or service is distinct within the context of the contract. FREE Courses Blog. the following do not give rise to a financing component (and hence no adjustment is needed): customer has discretion over the timing of the transfer of control of the goods or services, consideration is variable and the amount or timing depends on factors outside of parties’ control, the difference between the consideration and cash selling price arises for other non-financing reasons (ie performance protection), Allocation is based on the standalone selling price of goods or services forming that performance obligation, on a proportionate basis to all performance obligations based on the stand-alone selling price of each performance obligation (observable or estimated), or, to specific performance obligations only, if, observable evidence exists evidencing that the discount relates to those specific obligations only; and, goods / services stipulated in the performance obligation are regularly sold as stand-alone and at a discount; and, discount is substantially the same as the discount usually given when goods / services are sold on a stand-alone basis, terms relating to varying the consideration relate to satisfying that specific performance obligation, amount of variable consideration allocated is what the entity expects to receive for satisfying the performance obligation, The point of revenue recognition is the point when performance obligation is satisfied, per each distinctive obligation, May result in revenue recognition at a point in time or over time, the customer simultaneously receives and consumes the asset/service as the vendor performs the service, or. IFRS 15 Revenue from Contracts with Customers Presented by Dwayne Riley ACCA, IFRS 15 became mandatory for accounting periods beginning on or after 1 January 2018. ACCA BT F1 MA F2 FA F3 LW F4 Eng PM F5 TX F6 UK FR F7 AA F8 FM F9 SBL SBR INT SBR UK AFM P4 APM P5 ATX P6 UK AAA P7 INT AAA P7 UK. Identifying Performance Obligations Studying this technical article and answering the related questions can count towards your verifiable CPD if you are following the unit route to CPD and the content is relevant to your learning and development needs. IFR by ACCA (Certificate in International Financial reporting) ... IFRS 15, Revenue from contracts with customers. IFRS 15 also states that costs relating to obtaining or fulfilling a contract are to be capitalised as assets and amortised as the revenue is recognised. Discounts and variable consideration will typically be allocated proportionately to all of the performance obligations in the contract. It’s ACCA IFRS 15 technical resource, an illustrative example. IFRS 15 standard does not distinguish between sales of goods, services or construction contracts. After that IAS 17 will no longer be applicable. Disclaimer: the IASB, the IFRS Foundation, the authors and the publishers do not accept responsibility for any loss caused by acting or refraining from acting in reliance on the material in this publication, whether such loss is caused by negligence or otherwise. ACCA CIMA CPD FIA (ACCA) AAT. The most likely amount represents the most likely amount in a range of possible amounts. It is not adjusted to reflect subsequent changes in the standalone selling prices of those goods or services. Only incremental costs of obtaining a contract (which would not have been incurred if the contract had not been obtained) to be considered, for example: direct sales commissions payable if contract is awarded - include, costs of running a legal department proving an across-business legal support function - exclude, Capitalise – if expected to be recovered (contract will generate profits), Amortise on a basis that is consistent with the transfer of the goods or services specified in the contract. In other cases, it could be difficult to determine whether a significant financing component exists. The five revenue recognition steps of IFRS 15 – and how to apply them. How should a promised good or service be identified? Contact information for your local office, Virtual classroom support for learning partners. Acowtancy. A performance obligation is satisfied at a point in time unless it meets one of the following criteria, in which case, it is deemed to be satisfied over time: Revenue is recognised in line with the pattern of transfer. This is a price at which the product would be sold on the market, rather than a significantly different price, for example heavily discounted despite the product being the same and of the same quality (for example to entice more future business from that customer). However, this latter amount still has to pass the ‘revenue reversal’ test. From 1 January 2018 all companies applying IFRS must adopt IFRS 15. IFRS 16 Leases . However, if certain conditions are met, they can be allocated to one or more separate performance obligations. Step one in the five-step model requires the identification of the contract with the customer. IFRS 15 became mandatory for accounting periods beginning on or after 1 January 2018. 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