Applying IFRS: Presentation and disclosure requirements of IFRS 15

Applying IFRS: Presentation and disclosure requirements of IFRS 15

1. IFRS 15: Revenue from Contract with Customers Compiled by: Christi J

2. IFRS 15: Revenue from Contract with Customers ▶ The Five Step Model ▶ Step 1: Identify the Contract with Customers ▶ Step 2: Identify the Performance Obligation ▶ Step 3: Determine the Transaction Price ▶ Step 4: Allocate the Transaction Price to each Performance Obligation ▶ Step 5: Recognize Revenue as each Performance Obligation is satisfied IFRS 15: Revenue from Contract with Customers

3. ▶ IAS 18: Revenue ▶ IAS 11: Construction Contracts ▶ SIC 31: Revenue – Barter Transactions involving Advertisement Services ▶ IFRIC 13: Customer Loyalty Programs ▶ IFRIC 15: Agreements for the Construction of Real Estate ▶ IFRIC 18: Transfers of Assets from Customer IFRS 15: Revenue from Contract with Customers Effective date: 1 January 2018 When & How to recognize Revenue Before the change After the change IFRS 15: Revenue from Contract with Customers

4. ▶ Step 1: Identify the Contract with Customers Oral / Written  Enforceable ▶ Step 2: Identify the Performance Obligation Distinct goods and services in the contract ▶ Step 3: Determine the Transaction Price Consideration for goods and services ▶ Step 4: Allocate the Transaction Price to each Performance Obligation On the basis of standalone selling price of each performance obligation ▶ Step 5: Recognize Revenue as each Performance Obligation is satisfied At a point of time or over the period of time The Five Step Model IFRS 15: Revenue from Contract with Customers

5. ▶ Contract is an agreement between two or more parties that creates enforceable rights and obligations . ▶ Contracts can be written, oral or implied by an entity’s customary business practices. IFRS 15 requires contracts to have following attributes: ▶ Parties approved the contract and committed to perform their respective obligations. ▶ Each party’s rights to goods/services can be identified. ▶ Payment terms for goods/services can be identified. ▶ Contract has commercial substance. and ▶ It is probable that the consideration will be received (Evaluate customer’s ability and intention to pay). Step 1: Identify the Contract with Customers Contract Attributes IFRS 15: Revenue from Contract with Customers

6. If a contract does not meet any of the above condition , revenue is recorded only when either: ▶ the entity’s performance is complete and substantially all of the consideration (cash) has been collected and it is non-refundable; or ▶ the contract has been terminated and the consideration received is non-refundable. ▶ If each party to the contract has a unilateral enforceable right to terminate a wholly unperformed contract without compensating the other party (or parties), no contract exists under IFRS 15. Step 1: Identify the Contract with Customers If any attribute is missing No Contract IFRS 15: Revenue from Contract with Customers

7. Step 1: Identify the Contract with Customers Contract Modification A change in enforceable rights and obligations (i.e. scope and/or price) is only accounted for as a contract modification if ▶ it has been approved by the parties, and ▶ creates new or changes existing enforceable rights & obligations. IFRS 15: Revenue from Contract with Customers

8. Step 1: Identify the Contract with Customers Are additional goods / services in CM distinct? Yes Does consideration for added goods/services reflect stand- alone price of distinct goods/services Yes Treat as “SEPARATE CONTRACT” No Adjust the existing contract [Catch- up Adjustment] No Terminate old contract & create new contract Allocation of consideration : Consideration allocated to remaining PO = consideration from old contract not yet recognized + consideration in the contract modification Contract Modification IFRS 15: Revenue from Contract with Customers

9. Good/service (or bundle of good/service) that is d istinct Series of d istinct goods/services that are substantially same & have same pattern of transfer to customer. ▶ PO can be both explicit (in the contract) and implicit (based on practices or policies) ▶ If no transfer to customer  No PO (e.g. admin or internal approval) Step 2: Identify the Performance Obligation Performance Obligation ▶ Promise in a contract to transfer to the customer either: IFRS 15: Revenue from Contract with Customers

10. ▶ 2 criteria to met: On its own; or 1. Customer can benefit from good or service either AND together with other resources that are readily available to the customer Promise to transfer good or service is separable from other promises in the contract. Entity is not using good / service as an input to produce or deliver combined output The good / service does not significantly modify or customize another good / service The good / service is not highly dependent with other good / service in the contract [Assessment requires judgment & consideration of all relevant facts and circumstances] Step 2: Identify the Performance Obligation What is DISTINCT? IFRS 15: Revenue from Contract with Customers

11. ▶ 2 criteria to met: On its own; or 1. Customer can benefit from good or service either AND together with other resources that are readily available to the customer Promise to transfer good or service is separable from other promises in the contract. Entity is not using good / service as an input to produce or deliver combined output The good / service does not significantly modify or customize another good / service The good / service is not highly dependent with other good / service in the contract [Assessment requires judgment & consideration of all relevant facts and circumstances] Step 2: Identify the Performance Obligation What is DISTINCT? IFRS 15: Revenue from Contract with Customers

12. Step 3: Determine the Transaction Price Non- cash Consideration Consideration Payable to a Customer Significant Financing Component Variable Consideration Transaction Price ▶ Transaction price is the amount of consideration an entity expects to be entitled to in exchange for goods or services (not amounts collected on behalf of 3 rd parties, e.g. sales taxes etc.) ▶ Transaction price may be affected by nature, timing, and amount of consideration. Consider the following: IFRS 15: Revenue from Contract with Customers

13. Step 3: Determine the Transaction Price Non- cash Consideration ▶ Non-cash consideration is accounted for at its FV. ▶ If FV is not reliably determinable, it is measured at stand- alone selling price of goods/services. IFRS 15: Revenue from Contract with Customers

14. Consideration Payable to a Customer ▶ It includes cash paid / payable to customer as well as credits or other items such as coupons and vouchers. ▶ It is a/c for as a reduction in TP , unless payment is in exchange for a good or service received from customer. However, where: Consideration paid > FV of goods / services received from customer Difference is accounted for as reduction in TP FV of goods or services cannot be reliably determined Full amount is accounted for as reduction in TP Step 3: Determine the Transaction Price IFRS 15: Revenue from Contract with Customers

15. Step 3: Determine the Transaction Price Significant Financing Component ▶ If timing of payments specified in contract provides either customer or entity with significant benefit of financing the transfer of goods / services, TP is adjusted to reflect financing component of contract. ▶ Significant financing component can either be explicitly stated in the contract or implied by payment terms agreed between parties. ▶ Adjustment for effect of significant financing component is not required if period b/w transfer and payment is 12 months or less. IFRS 15: Revenue from Contract with Customers

16. ▶ Factors to consider in determining whether a contract contains a significant financing component are: Difference between promised consideration & cash selling price. Length of time between transfer of control of the goods or services and payment. ▶ A significant financing component does not exist when: Timing of transfer of control of goods/services is at customer’s discretion Consideration is variable and the amount or timing of consideration is based on factors outside of control of parties. Difference between consideration and cash selling price arises for other non-financing reasons (i.e. performance protection e.g. completion of post completion remedial work on a building). Step 3: Determine the Transaction Price Significant Financing Component IFRS 15: Revenue from Contract with Customers

17. Step 3: Determine the Transaction Price Variable Consideration ▶ Examples are discounts, rebates, refunds, concessions, incentives, performance bonuses, penalties & contingent payments. ▶ Variable consideration must be estimated using either: Expected value method: based on probability weighted amounts within a range (for large number of similar contracts) Single most likely amount: Amount within a range that is most likely to eventuate (where there are few amounts to consider) ▶ TP can include variable consideration only if it is highly probable that subsequent change in estimate would not result in reversal of revenue. IFRS 15: Revenue from Contract with Customers

18. ▶ Allocate TP to each PO based on stand- alone selling price of each PO. ▶ Stand- alone selling price should be determined at contract inception and represents the price at which an entity would sell a good or service separately to a customer. ▶ Ideally, this will be an observable price at which an entity sells similar goods or services under similar circumstances and to similar customers ▶ Estimate stand- alone selling price of each PO by considering all available information including market conditions, entity- specific factors and information about customer or class of customers. ▶ Use of observable inputs to be maximized to the extent possible. ▶ Approaches that might be used to estimate the standalone selling price are discussed in next slide. Step 4: Allocate Transaction Price to each Performance Obligation Whether stand- alone selling price of each performance obligation is directly observable or not? Yes No IFRS 15: Revenue from Contract with Customers

19. Step 4: Allocate Transaction Price to each Performance Obligation ▶ Evaluate the market in which goods or services are sold. ▶ Estimate the price that customers in that market would be willing to pay. ▶ Refer to prices from competitors for similar goods or services adjusted for entity- specific costs and margins. ▶ Estimate the expected costs of satisfying a PO adjusted for an appropriate markup / margin. ▶ Total transaction price less the sum of the observable stand- alone selling prices. ▶ This method may only be used when: Selling price is highly variable; or Selling price is uncertain (price has not been established yet or good/service has not been previously sold). 3) Residual Approach 2) Expected Cost Plus Markup / Margin How to estimate the stand- alone selling price? 1) Market Assessment Approach IFRS 15: Revenue from Contract with Customers

20. Step 4: Allocate Transaction Price to each Performance Obligation Allocation of Discounts ▶ A discount exists if the sum of stand-alone selling prices of each PO in the contract exceeds the total consideration for the contract. ▶ A discount is allocated on a proportionate basis to all PO in the contract, UNLESS there is observable evidence that the discount relate to only some performance obligations in a contract. IFRS 15: Revenue from Contract with Customers

21. Step 4: Allocate Transaction Price to each Performance Obligation Allocation of Variable Consideration ▶ Variable consideration should be allocated proportionately to all PO. ▶ However, variable consideration is allocated entirely to a single PO if : Terms of a VC relate specifically to satisfy that PO; and Allocation of VC to a single PO is consistent with the allocation objective. IFRS 15: Revenue from Contract with Customers

22. ▶ For e.g. Construction services Step 5: Recognize Revenue as each Performance Obligation is satisfied At a point time ▶ For e.g. the provision of a meal. ▶ Performance obligation is satisfied when control of the promised goods or services is transferred to the customer. Performance obligation is satisfied (Control is transferred), and hence revenue is recognized: Over time IFRS 15: Revenue from Contract with Customers

23. Step 5: Recognize Revenue as each Performance Obligation is satisfied IFRS 15: Revenue from Contract with Customers Performance Obligation is satisfied (Control is transferred) over time if any one of the following is met: Customer simultaneously receives and consumes all of the benefits as the entity performs OR Entity’s performance creates or enhances an asset controlled by the customer OR Entity’s performance does not create an asset with an alternative use to the entity AND Entity has an enforceable right to payment for performance completed to date

24. Performance obligation is satisfied (Control is transferred) Over time At a point time Recognize revenue in a way that depicts the entity’s performance in transferring control of goods or services to customers. Methods include: ▶ Output methods: For e.g. Surveys of performance completed to date, Appraisals of results achieved, Milestones reached, Units produced/delivered. ▶ Input methods: For e.g. Resources consumed, Labour / Machine hours, Costs incurred, Time lapsed. Consider following indicators in evaluating the point in time at which control of asset has transferred to customer: ▶ Entity has transferred title to the asset; ▶ Entity has transferred physical possession of asset; ▶ Entity has a present right to payment for asset; ▶ Customer has accepted the asset; and ▶ Customer has the significant risks and rewards of ownership of the asset. Step 5: Recognize Revenue as each Performance Obligation is satisfied IFRS 15: Revenue from Contract with Customers

25. ▶ Only incremental costs of obtaining a contract that are expected to be recovered can be recognized as asset. ▶ Incremental costs are costs incurred in obtaining a contract that would not have been incurred if the contract is not obtained. Such as sales commission that is only paid if a specified contract is obtained. ▶ Incremental costs of acquiring a contract can be expense out if amortization period is equal to or less than 1 year. ▶ If costs to fulfil a contract are within the scope of other IFRSs (e.g. IAS 2, IAS 16, IAS 38 etc.) apply those IFRSs. ▶ If not, a contract asset is recognized under IFRS 15 if, and only if: Costs relate directly to a contract (e.g. direct labour, materials, overhead allocations etc; Costs generate or enhance resources of entity that will be used to satisfy performance obligations in future; and iii. Costs are expected to be recovered. Contract cost to be amortized on a systematic basis that reflects the transfer of goods or services to the customer. Contract Cost Cost to obtain a Contract Cost to fulfill a Contract IFRS 15: Revenue from Contract with Customers

26. ▶ An entity’s obligation to transfer goods or services to a customer for which the entity has received consideration (or the amount is due) from the customer. ▶ A contract might require payment in advance or allow the supplier a right to consideration that is unconditional (i.e. a receivable), before it transfers a good or service to the customer. ▶ In these cases, the supplier presents the contract as a contract liability when the payment is made or the payment is due (whichever is earlier). Contract Liability IFRS 15: Revenue from Contract with Customers

27. Contract Asset & Receivable Contract Asset ▶ An entity’s right to consideration in exchange for goods or services that it has transferred to a customer when that right is conditioned on something other than the passage of time (for example the entity’s future performance). ▶ A contract asset is reclassified as a receivable when the supplier’s right to consideration becomes unconditional. Receivable ▶ An entity’s right to consideration that is unconditional –i.e. only the passage of time is required before payment is due. ▶ In practice, where revenue has been invoiced a receivable is recognized. Where revenue has been earned but not invoiced, it is recognized as a contract asset. IFRS 15: Revenue from Contract with Customers

28. ▶ When consideration takes the form of a sales- based or usage- based royalty for a license of intellectual property, the entity recognizes revenue only when (or as) the later of the following events occurs: Subsequent sale or usage occurs; and PO to which some or all of sales or usage- based royalty has been allocated has been satisfied (or partially satisfied). Additional Consideration: Sales- based or Usage- based Royalties IFRS 15: Revenue from Contract with Customers

29. ▶ When product are transferred with a right of return, revenue should not be recognized for goods that are expected to be returned. ▶ Calculate the level of returns using Expected value method(probability-weighted sum of amounts); or Single most likely amount. ▶ Refund liability (rather than revenue) is recognized for any consideration received to which vendor does not expect to be entitled (which relates to goods expected to be returned). Any refund liability is reassessed and updated at each reporting date. ▶ Asset is also recognized for vendor’s right to recover goods from customers on settling the liability. Such asset is measured at carrying amount of goods less any expected costs to recover such goods. ▶ Asset is presented separately from refund liability. ▶ If value is less than amount recorded in inventory, inventory is reduced with a corresponding adjustment to cost of goods sold. Additional Consideration: Sale with a Right of Return IFRS 15: Revenue from Contract with Customers

30. AGENT ▶ Entity is principal if it controls the promised good or service before it is transferred to the customer. ▶ When PO is satisfied, the entity recognizes revenue in the gross amount of the consideration for those goods or services. ▶ Entity is agent if its PO is to arrange for provision of goods or services by another party. ▶ When PO is satisfied, the entity recognizes revenue in the amount of any fee or commission to which it expects to be entitled in exchange for arranging to provide its goods or services for the other party . PRINCIPAL VERSUS AGENT IFRS 15: Revenue from Contract with Customers ▶ In any transaction, the entity must establish whether it is acting as principal or agent. PRINCIPAL

31. PRINCIPAL VERSUS AGENT IFRS 15: Revenue from Contract with Customers Indicators that an entity is agent rather than principal include: ▶ Another party is primarily responsible for fulfilling the contract. ▶ The entity does not have inventory risk before or after the goods have been ordered by a customer, during shipping or on return. ▶ The entity does not have discretion in establishing prices for the other party’s goods or services and, therefore, the benefit that the entity can receive from those goods or services is limited. ▶ The entity’s consideration is in the form of a commission. ▶ The entity is not exposed to credit risk for receivable from a customer in exchange for the other party’s goods or services.

32. WARRANTIES IFRS 15: Revenue from Contract with Customers Service type warranty ▶ That provides a customer with a services in addition to assurance that product will function as specified. ▶ For e.g: 2 years free repairs ▶ Customer can also purchase this warranty separately. ▶ Account for such warranty as separate performance obligation and allocate a portion of transaction price to it. Assurance type warranty ▶ That provides a customer with the assurance that product will function as specified. ▶ For e.g: 15 days money back guarantee ▶ Customer cannot purchase this warranty separately. ▶ Account for such warranty as per IAS 37.

33. WARRANTIES IFRS 15: Revenue from Contract with Customers Classification of warranty Whether warranty is required by law? ▶ If Yes -- > Generally Assurance type (For e.g. Quality control on food items/medicines, opening of parachute, ) ▶ If No -- > Generally Service type (For e.g. Warranty on electronic appliances) Length of the warranty period? ▶ Longer the period, additional services would be provided. Generally, Service type. For e.g: 1 year free repair and maintenance ▶ Shorter the period, additional services would not be provided Generally, Assurance type. For e.g: 3 days checking warranty in case of purchase of used mobile phone

34. Whether license is integral component to the functionality of tangible good? OR Whether customer can only benefit from the license in conjunction with a related service? License is NOT distinct from other goods / services License is distinct from other goods / services ▶ Such license and other goods or services are accounted for together as a single performance obligation. ▶ Such license is a/c for as separate performance obligation (PO). LICENCING A license establishes customer’s rights over the intellectual property of a entity such as software & technology, media & entertainment (e.g. motion pictures), franchises, patents, trademarks & copyrights. IFRS 15: Revenue from Contract with Customers

35. ▶ The promise to grant a licence is treated as a ▶ The promise to grant a license is treated as a LICENCING The customer has right to use the entity’s intellectual property as it exists at the point in time at which the license is granted. Right to use The customer has right to access the entity’s intellectual property as it exists throughout the license period Right to access License is distinct from other goods / services Whether The entity can make changes to the intellectual property throughout the license period; The customer is exposed to the effects of these changes; and The changes do not constitute transfer of good/service to customer PO satisfied at the point in time IFRS 15: Revenue from Contract with Customers