The setup of manufacturing line is not a distinct service and does not constitute a separate performance obligation as it does not result in a transfer of goods or services to the customer. A good or service is distinct if both of the following criteria are met (IFRS 15.27): A 2-step approach seems to work best. An entity that chooses to apply IFRS 15 earlier than 1 January 2018 should disclose this fact in its relevant financial statements. The entity estimates that the annual cost of servicing the product will be $2,400. Installation services seem capable of being distinct, too, because the question said that the customer could buy the installation from the software vendor. That is: The ship has no alternative use as it has been built to Customer As specific requirements, and; Construction Co also has an enforceable right to payment under the legal system it operates within. the costs relate directly to a contract (or a specific anticipated contract); the costs generate or enhance resources of the entity that will be used in satisfying performance obligations in the future; and, Performance obligations satisfied over time, Methods for measuring progress towards complete satisfaction of a performance obligation, Customer options for additional goods or services, the significant judgments, and changes in the judgments, made in applying the guidance to those contracts; and. Such revenue is recognised only when the underlying sales or usage occur. 28 . See Example 10 Case A, Example 11 Cases B/E and Example 55 and Example 56 Case B accompanying IFRS 15. The situation is further complicated when a package such as the one outlined above is supplied at a special price and the fair value of both components is known. To recognise revenue under IFRS 15, an entity applies the following five steps: In April 2001 the International Accounting Standards Board (Board) adopted IAS11Construction Contractsand IAS18Revenue, both of which had originally been issued by the International Accounting Standards Committee (IASC) in December 1993. For official information concerning IFRS Standards, visit IFRS.org. under licence during the term and subject to the conditions contained therein. (c) The proportion that costs incurred to date bear to the estimated total costs of the transaction. Interest, royalties and dividends [IFRS 15:60] A practical expedient is available where the interval between transfer of the promised goods or services and payment by the customer is expected to be less than 12 months. disregard potential contractual restrictions or practical limitations that otherwise would prevent the entity from transferring the remaining performance obligation to another entity; and. Discover more about the adoptionprocess for IFRS Accounting Standards, and whichjurisdictions haveadopted them and require their use. On 1 January 2013 the entity supplies a product for a total price of $13,310, payable on 1 January 2016. Performance obligation is satisfied over time if one of the criteria given in IFRS 15.35 is met: Questions or comments? retain prior period figures as reported under the previous standards, recognising the cumulative effect of applying IFRS 15 as an adjustment to the opening balance of equity as at the date of initial application (beginning of current reporting period). As already stated, revenue is a crucial number to users of financial statements in assessing an entitys financial performance and position. Answer Most of the examples are relatively self-explanatory. In addition, the guidance extends to cover and affect not only revenue recognition, but also profit recognition. Activities that do not transfer a good or service to a customer are not a performance obligation even though they may be necessary to fulfil a contract (IFRS 15.25). In summary, then, IAS 11 very much applies the principles set out in IAS 18 (for the recognition of revenue on the rendering of services) to the recognition of revenue from construction contracts. IFRS 15 suggests various methods that might be used, including: [IFRS 15:79], Any overall discount compared to the aggregate of standalone selling prices is allocated between performance obligations on a relative standalone selling price basis. IFRS 15 is effective for annual reporting periods beginning on or after 1 January 2018, with earlier application permitted. Subscribe to receive the latest BDO news and insights. Provision of services: Performance obligations are promises in a contract to transfer to a customer goods or services that are distinct. You can access full versions of IFRS Standards at shop.ifrs.org. [IFRS 15:5], A contract with a customer may be partially within the scope of IFRS 15 and partially within the scope of another standard. a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer. The standard provides detailed guidance on how to account for approved contract modifications. This is arrived at by discounting the future cash receivable by the seller. IFRS 15 specifies how and when an IFRS reporter will recognise revenue as well as requiring such entities to provide users of financial statements with more informative, relevant disclosures. [IFRS 15:C1], When first applying IFRS 15, entities should apply the standard in full for the current period, including retrospective application to all contracts that were not yet complete at the beginning of that period. Skanska AB (Swedish pronunciation: [sknska]) is a multinational construction and development company based in Sweden. Free smartphone is a distinct good and constitutes a separate performance obligation for the telecommunications company. With our money back guarantee, our customers have the right to request and get a refund at any stage of their order in case something goes wrong. [IFRS 15:111]. Another important type of a performance obligation is a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer (IFRS 15.22(b)). Under IFRS 15, revenue is recognised when (or as) a performance obligation is satisfied by transferring a promised good or service (i.e. Further details on accounting for contract modifications can be found in the Standard. Get all the latest India news, ipo, bse, business news, commodity only on Moneycontrol. Over the next five years the borrowing will grow as follows: The almost certain re-purchase on 1 January 2013 will eliminate the borrowing. Clients can buy the installation services from us. It simply does not integrate the software to the combined output and it is not highly interrelated, because also other entities can provide installation. 1. The standard provides a single, principles based five-step model to be applied to all contracts with customers. Therefore, an entity should disclose qualitative and quantitative information about all of the following: [IFRS 15:110], Entities will need to consider the level of detail necessary to satisfy the disclosure objective and how much emphasis to place on each of the requirements. Control is the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset, or to restrict the access of other entities to those benefits (IFRS 15.31-34). IFRS 15 specifies how and when an IFRS reporter will recognise revenue as well as requiring such entities to provide users of financial statements with more informative, relevant disclosures. In that scenario: [IFRS 15:7], The core principle of IFRS 15 is that an entity will recognise 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. [IFRS 15:99], Further useful implementation guidance in relation to applying IFRS 15. [IFRS 15:56], However, a different, more restrictive approach is applied in respect of sales or usage-based royalty revenue arising from licences of intellectual property. (c) Both the sellers costs to complete the contract and the stage of contract completion at the end of the reporting period can be measured reliably. hyphenated at the specified hyphenation points. Sometimes we provide additional services like customice packing. (a) Total contract revenue can be measured reliably. Should it be classified under marketing and distribution cost or should it be accounted for under cost of sales being cost to fulfil the contract under IFRS 15? Please check your inbox to confirm your subscription. the entity does provide a significant service of integrating the goods or services with other goods or services promised in the contract; the goods or services significantly modify or customise other goods or services promised in the contract; the goods or services are highly interrelated or highly interdependent. Measurement method should take into account all goods and services promised in the contract. No profit margin is recognised when the elevator is delivered but revenue is recognised to the extent of the costs of the elevator incurred as follows: Profit would be recognised on the delivery of the elevator at 31 December 2018, even though it had not been installed. Consequently, any inputs that do not relate directly to the vendors performance in transferring those goods and services are excluded when measuring progress to date. In making this assessment an entity should (IFRS 15.B4): IASB stated that this criterion for performance obligation satisfied over time is not intended to be applied when an asset (e.g. If you accept all cookies now you can always revisit your choice on ourprivacy policypage. Measurement of progress can be based on the output or the input. Where the entity has performed by transferring a good or service to the customer and the customer has not yet paid the related consideration, a contract asset or a receivable is presented in the statement of financial position, depending on the nature of the entitys right to consideration. The credit rating of the customer is such that a relevant imputed annual rate of interest is 10%. Even if the installation is obligatory per contract, the outcome would still be the same. If the answer is yes, entities move on to point b. and assess whether this good/service is distinct within the context of the contract (again, more discussion on this point below). You can find further information here. When the application of this criterion is not straightforward, it is crucial to focus on assessing whether another entity would need to substantially re-perform the work that the entity has completed to date if that other entity were to fulfil the remaining performance obligation. The cost of the elevator would be included in Building Cos calculation of percentage of completion using the input method. In other words, the entity is using the goods or services as inputs to produce or deliver the combined output or outputs specified by the customer. Paragraph IFRS 15.29 lists three most common circumstances in which two or more promises to transfer goods or services to a customer are not separately identifiable (a non-exhaustive list): Non-refundable upfront fees should be assessed against the criteria for identifying a performance obligation which will determine their accounting treatment. It is noted explicitly that when input methods are used, there may not be a direct relationship between the inputs being used, and the transfer of goods or services to a customer. Most construction contracts are fixed price contracts. IFRS 15 replaces the following standards and interpretations: The objective of IFRS 15 is to establish the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a contract with a customer. IAS 18 states that Revenue shall be measured at the fair value of the consideration received or receivable (12). For example if goods are sold for $110, inclusive of recoverable sales taxes of 10%, the revenue is $100, not $110. (a) Revenue from the sale of goods of $10,000 ($13,310/(1.10) (3). Whilst it might be accepted that profit is the most important single indicator of corporate financial performance revenue does not fall far behind. However, those incremental costs are limited to the costs that the entity would not have incurred if the contract had not been successfully obtained (e.g. IAS 18 states that where the outcome of a transaction involving the rendering of services can be estimated reliably, associated revenue should be recognised by reference to the stage of completion of the transaction at the end of the reporting period (3). report Top 7 IFRS Mistakes the entitys promise to transfer the good or service to the customer is separately idenitifable from other promises in the contract. However, where the consideration is deferred, IAS 18 explains that the arrangement effectively constitutes a financing transaction and the substance of the transaction is a supply of goods or services plus the provision of finance. A customer has the right to control the use of an identified asset if it has both (a) the right to obtain substantially all of the economic benefits When making this determination, an entity will consider past customary business practices. A performance obligation is a promise to transfer to the customer a good or service (or a bundle of goods or services) that is distinct (IFRS 15.22). Any impairment relating to contracts with customers should be measured, presented and disclosed in accordance with IFRS 9. Effective for an entity's first annual IFRS financial statements for periods beginning on or after 1 January 2018. . (a) It is probable that the economic benefits associated with the transaction will flow to the entity. Trade mark guidelines the entity has a contractual or legally enforceable right to receive reasonable compensation for performance completed to date if the contract were to be terminated before completion for reasons other than the entitys failure to perform as promised. IAS 18 does not adequately address the issue of revenue recognition on a construction contract. A number of the conditions ((a) and (b) particularly) are subject to a degree of interpretation and therefore there can be some uncertainty about whether or not revenue should be recognised. Whether the latter type of modification is accounted for prospectively or retrospectively depends on whether the remaining goods or services to be delivered after the modification are distinct from those delivered prior to the modification. Any difference between the initial recognition of a receivable and the corresponding amount of revenue recognised should also be presented as an expense, for example, an impairment loss. Identify the performance obligations in the contract, Allocate the transaction price to the performance obligations in the contract. Therefore, costs would be the most objective method of measuring completion. When the entity has transferred a legal title to a customer under a contract, it is an indicator that the control of the asset has been passed to a customer. Earlier application is permitted. Office. It would not provide meaningful results if the gym tried to assess the number of hours that the customer will use throughout the contract and recognise revenue based on actual/total ratio. In this edition, we start our examination of the final step in the five-step process recognising revenue when a performance obligation is satisfied. The detail There are different ways I can help you, visit the services page for details. In respect of prior periods, the transition guidance allows entities an option to either: [IFRS 15:C3]. Our Standards are developed by our two standard-setting boards, the International Accounting Standards Board (IASB) and International Sustainability Standards Board (ISSB). any assets recognised from the costs to obtain or fulfil a contract with a customer. Entity A is a company manufacturing car parts. At 30 June 2017, Construction Co had incurred 50% of costs and their senior project manager estimated they had completed 50% of the build. The entitys performance creates or enhances an asset that the customer controls as the asset is created or enhanced. the costs relate directly to a contract (or a specific anticipated contract); the costs generate or enhance resources of the entity that will be used in satisfying performance obligations in the future; and, Performance obligations satisfied over time, Methods for measuring progress towards complete satisfaction of a performance obligation, Customer options for additional goods or services, the significant judgments, and changes in the judgments, made in applying the guidance to those contracts; and. IAS 18 further states that the outcome of a transaction can be estimated reliably when all the following conditions are satisfied (3): A practical expedient is available, allowing the incremental costs of obtaining a contract to be expensed if the associated amortisation period would be 12 months or less. Viewpoint. (a) The amount of revenue can be measured reliably. (a) Remove inconsistencies and weaknesses in existing revenue requirements This is recognised over the three years as shown in the table below: On 1 January 2016, the cash is received and the receivable derecognised. The exact basis for the recognition of revenue from the use by others of the sellers assets depends on the type of transaction (12): About IFRS 15. International Financial Reporting Standard (IFRS) 15: Revenue from Contracts with Customers was introduced by the International Accounting Standards Board to provide one comprehensive revenue recognition model for all contracts with customers to improve comparability within industries, across industries, and across capital markets. The price includes two years free servicing of the product. [IFRS 15:18-21]. Has the entity transferred physical possession of the asset to the customer? IFRS 15 prescribers the 5-step model for the revenue recognition. It seems yes. Revenue is recognised when/as performance obligations are satisfied in the amount of transaction price allocated to satisfied performance obligations (IFRS 15.46). From an IFRS perspective, the new standard arising out of the project is likely to be more robust than the existing standards. If a promised good or service is not distinct, it should be combined with other promised goods or services until they become distinct together (a bundle). Where the outcome of a construction contract cannot be estimated reliably revenue shall be recognised only to the extent of contract costs incurred that it is probable will be recoverable. [IFRS 15:74] If a standalone selling price is not directly observable, the entity will need to estimate it. In such cases, goods or services that seem to be distinct are in fact only inputs to the combined item. Although IFRS 15 is primarily a standard on revenue recognition, it also includes requirements relating to contract costs. In this respect the prime question arising is how to account for such cost by consumer product companies? The following indicators should be considered to determine whether control of an asset or service has been transferred: If revenue is recognised over time, the overall principle is that revenue is recognised to the extent that each of the vendors performance obligations has been satisfied. If an entity disposes of property, plant and equipment at the end of its useful economic life the proceeds of disposal are not revenue for the entity. Step 1: Identify the contract with the customer, A contract with a customer will be within the scope of IFRS 15 if all the following conditions are met: [IFRS 15:9], If a contract with a customer does not yet meet all of the above criteria, the entity will continue to re-assess the contract going forward to determine whether it subsequently meets the above criteria. Both standards are principles based and short on detail (this is particularly true of IAS 18). using the asset to produce goods or provide services; using the asset to enhance the value of other assets; using the asset to settle liabilities or to reduce expenses; the customer simultaneously receives and consumes all of the benefits provided by the entity as the entity performs; the entitys performance creates or enhances an asset that the customer controls as the asset is created; or. the entitys performance does not create an asset with an alternative use to the entity due to legal and/or practical restrictions and. (c) Completion of a physical proportion of the contract work. An example of this is provided in IFRS 15 (IE 95-100) where a construction company delivers a lift to a clients premises (and control therefore passes to customer) before installing it. On 1 January 2013 the total revenue from the sale would be split into: In this case we can conclude that yes, the first criterion is met and the software, installation service and 1-year support are capable of being distinct. Performance Obligations and Timing of Revenue Recognition (IFRS 15) Last updated: 12 April 2022. The project is in its final stage of development and a new standard is likely to apply for accounting periods beginning on or after 1 January 2017. Does IFRS 15 change the pattern of revenue recognition? Each BDO member firm in Australia is a separate legal entity and has no liability for another entitys acts and omissions. One or more of the goods or services significantly modifies or customises, or are significantly modified or customised by, one or more of the other goods or services promised in the contract (e.g. Entity A contracts to transport a package from Madrid to Moscow. (b) It is probable that the economic benefits associated with the transaction will flow to the seller. Revenue is recognised when all the following conditions have been satisfied (2): (a) The seller has transferred the significant risks and rewards of ownership of the goods to the buyer. (d) The costs incurred to date for the transaction and the costs to complete the transaction can be measured reliably. Here you are assessing what is interrelationship of the goods and services in the contract. How should Construction Co account for this arrangement as at 30 June 2017? IFRS 15 was issued in May 2014 and applies to an annual reporting period beginning on or after 1 January 2018. Search. In such circumstances, the amount receivable is split into (13): a single method of measuring progress would be used to measure the entitys progress towards complete satisfaction of the performance obligation to transfer each distinct good or service in the series to the customer. If not, it will be accounted for by modifying the accounting for the current contract with the customer. It does not matter whether the production will be spread evenly over time or not. New effective date of IFRS 15 is 1 January 2018, International Financial Reporting Standards, Collection of IFRS 15 news and publications, Joint Transition Resource Group for Revenue Recognition, Clarifications to IFRS 15: Issues emerging from TRG discussions, ESMA publishes 26th enforcement decisions report, Call for papers Research on IASBs post-implementation reviews of IFRS Standards, IASB, FASB, and The Accounting Review call for academic research papers on the performance of standards in capital markets, IASB posts recording of recent webinar on academics and the post-implementation reviews of IFRS 15, Academics and the post-implementation reviews of IFRS 9, IFRS 15, and IFRS 16, Deloitte comment letter on tentative agenda decision on principal versus agent software reseller, Deloitte comment letter on tentative agenda decision on IFRS 15 Training costs to fulfil a contract, Deloitte comment letter on tentative agenda decision on IFRS 15 Compensation for delays or cancellations, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers, SIC-31 Revenue Barter Transactions Involving Advertising Services, Project on revenue added to the IASB's agenda, Effective for an entity's first annual IFRS financial statements for periods beginning on or after 1 January 2017, IASB defers effective date of IFRS 15 to 1 January 2018. if other standards specify how to separate and/or initially measure one or more parts of the contract, then those separation and measurement requirements are applied first. The standard provides a single, principles based five-step model to be applied to all contracts with customers. In the spirit of reconciliation BDO in Australiaacknowledges the Traditional Custodians of country throughout Australia and their connections to land, sea and community. Or, in other words, whether the nature of the promise in the contract is to transfer each of those goods or services individually or a combined item. The IFRS Foundation's logo and theIFRS for SMEslogo, the IASBlogo, the Hexagon Device, eIFRS, IAS, IASB, IFRIC, IFRS,IFRS for SMEs, IFRS Foundation, International Accounting Standards, International Financial Reporting Standards, NIIFand SICare registered trade marks of the IFRS Foundation, further details of which are available from the IFRS Foundation on request. A contract asset is recognised when the entitys right to consideration is conditional on something other than the passage of time, for example future performance of the entity. They can either be sold separately by the entity or by another entity, or the customer has already obtained them from the entity from other transactions or events. Under HKFRS 15, the amount and pattern of revenue recognition of construction contracts could differ from those that applied under HKAS 11. The amendments do not change the underlying principles of the standard, just clarify and offer some additional transition relief. The entitys 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. (b) Identify the separate performance obligations in the contract. A telecommunications company promises a free smartphone to each customer who subscribes for a premium telecommunications service. IFRS 15 lists a few situations when two or more goods or services are NOT separately identifiable and thus not distinct: As an example, you sell software, but before it is functional and customer can use it, you need to customize it to the customers environment. IFRS 15, paragraphs 120 through 122, and ASC 606-10-50-13 through 50-14 explain that an entity must disclose the sum of the amount of future revenue for all unsatisfied performance obligations unless the contract is less than a year or the entity elects the practical expedient (ASC 606-10-55-18 or IFRS 15 para. The Interpretation was developed by the Interpretations Committee to apply to the accounting for transfers of items of property, plant and equipment by entities that receive such transfers from their customers. IAS 18 outlines the recognition principles in three parts: Therefore IAS 11 basically requires that, where the outcome of a construction contract can be recognised reliably, revenue on such contracts should be recognised according to the stage of completion of the contract (7). The International Accounting Standards Board (IASB) has issued two International Financial Reporting Standards (IFRSs) that provide guidance in this area: IAS 18 is the IFRS that deals with revenue for the majority of entities, whilst IAS 11 very much applies the principles of IAS 18 to entities in the construction sector. Under IFRS 15, revenue for the year 20X1 is CU 710 000. These topics should be considered carefully when applying IFRS 15. Can the customer install the software himself? An exception to this rule applies when the entity can objectively determine that the agreed specifications are met, such as weight or size (IFRS 15.B83-B85). Contract assets and receivables shall be accounted for in accordance with IFRS 9. The same applies for 1-year support services. the entity does provide a significant service of integrating the goods or services with other goods or services promised in the contract; the goods or services significantly modify or customise other goods or services promised in the contract; the goods or services are highly interrelated or highly interdependent. In certain circumstances, it may be appropriate to allocate such a discount to some but not all of the performance obligations. Entity A should recognise revenue for the transportation completed to date (i.e. Entity As credit rating is such that it would have to pay interest at 8.447% per annum on borrowings. In September 2015 the Board issuedEffective Date of IFRS15which deferred the mandatory effective date of IFRS15 to 1January 2018. [IFRS 15:60] A practical expedient is available where the interval between transfer of the promised goods or services and payment by the customer is expected to be less than 12 months. All Rights Reserved. Instead the profit or loss on disposal is treated as a deduction from operating expenses (or as a separate line item in the statement of profit or loss, if it is sufficiently material). IAS 18 Revenue. Construction Co would have processed the following journal entry as they incurred the construction costs during the year ended 30 June 2017: The journal entries at 30 June 2017 in relation to the revenue recognised is as follows: There would be similar treatment under IAS 11, however, there are more specific requirements under IFRS 15. (d) If the seller is acting as agent, rather than as the principal, in a transaction, the revenue the seller should recognise is the amount of commission receivable rather than the gross amount collected from the customer. These amendments do not change the underlying principles of IFRS15 but clarify how those principles should be applied and provide additional transitional relief. That is: Construction Co should use the input method of calculating progress (costs incurred to date) because this is the most accurate method it has of estimating completion. [IFRS 15:56], However, a different, more restrictive approach is applied in respect of sales or usage-based royalty revenue arising from licences of intellectual property. In this article we will: IAS 18 defines revenue as the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants (1). (e) Simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer Transfer of physical possession is another indication of transfer of control, but there are notable exceptions: Requirements relating to repurchase agreements can be summarised as follows: Transfer of significant risks and rewards of ownership of the asset is an indication of transfer of control. [IFRS 15:32], Control of an asset is defined as the ability to direct the use of and obtain substantially all of the remaining benefits from the asset. Access our Standards, Interpretations and related materials here. 250 Royall Street Canton, MA 02021. All affected companies face a lot of challenges and work related to the proper implementation of the new standard. to a customer of a dealer) for 3 years after the purchase. Application of this guidance will depend on the facts and circumstances present in a contract with a customer and will require the exercise of judgment. The new standard (ASC 606) provides a comprehensive, industry-neutral revenue recognition model intended to increase financial statement comparability across companies and industries. Applying IFRS 15, an entity recognises revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. 2. Building Co therefore excludes from an input method the effects of any inputs that do not depict the entitys performance in transferring control of goods or services to the customer, i.e. If the consideration promised in a contract includes a variable amount, an entity must estimate the amount of consideration to which it expects to be entitled in exchange for transferring the promised goods or services to a customer. Output methods are based on direct measurement of the value to the customer of the goods or services transferred to date relative to the remaining goods or services promised under the contract. IFRS 15 contains specific, and more precise guidance to be applied in determining whether revenue is recognised over time (often referred to as percentage of completion under existing standards) or at a point in time. The ship has no alternative use as it has been built to Customer As specific requirements, and. Can we distinct revenue for EXW and other shipping related services ? (e) The costs incurred or to be incurred by the seller in respect of the transaction can be measured reliably. Construction Co should recognise its revenue over time because the third criterion in IFRS 15, paragraph 35(c) is met. Similarly, construction companies do not recognise revenue when they deliver building materials to the construction site if the customer contracted them to construct a building. how we can recognize the revenue at a real estate development company? What is distinct? It also helps us ensure that the website is functioning correctly and that it is available as widely as possible. Why have global accounting and sustainability standards? IAS 11 provides the following examples of methods that might be suitable (9): [IFRS 15:C1], When first applying IFRS 15, entities should apply the standard in full for the current period, including retrospective application to all contracts that were not yet complete at the beginning of that period. Supplier can still transfer the software and customer can use it without the subsequent services. Well, you will have to apply your judgment and make lots of considerations in some cases, I know its not always easy. the contract has been approved by the parties to the contract; each partys rights in relation to the goods or services to be transferred can be identified; the payment terms for the goods or services to be transferred can be identified; the contract has commercial substance; and. Using our website, IFRS Sustainability Disclosure Standards (in progress), Follow - IFRS 15 Revenue from Contracts with Customers, IFRS 15 Revenue from Contracts with Customers, Post-implementation Review of IFRS 15 Revenue from Contracts with Customers, Assessment of Promised Goods or Services (IFRS 15), Clarifications to IFRS 15 Revenue from Contracts with Customers, Compensation for Delays or Cancellations (IFRS 15 Revenue from Contracts with Customers), Over Time Transfer of Constructed Good (IAS 23), Principal versus Agent: Software Reseller (IFRS 15), Training Costs to Fulfil a Contract (IFRS 15), International Sustainability Standards Board, Integrated Reporting and Connectivity Council. If the answer is yes, the good/service is distinct. International Financial Reporting Standards, commonly called IFRS, are accounting standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB). I have written 2 articles about the new rules in the past, namely: IFRS 15 vs. IAS 18: Huge change is here! sale of software with significant customisation). Other cookies are optional. Whether the latter type of modification is accounted for prospectively or retrospectively depends on whether the remaining goods or services to be delivered after the modification are distinct from those delivered prior to the modification. The Interpretation was originally developed by the Standards Interpretations Committee of the IASC to determine the circumstances in which a seller of advertising services can reliably measure revenue at the fair value of advertising services provided in a barter transaction. Here we need to assess whether the goods or services are separately identifiable in the contract. Processes needed to identify the appropriate revenue recognition pattern using specific fact patterns for each transaction, Systems to calculate over time or point in time revenue recognition, Systems to isolate significant amounts of uninstalled materials such as elevators and other significant costs which are not proportionate to the entitys progress in satisfying its performance obligation. a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer. Therefore this has led to calls by some users for a more rigorous approach that removes some of the uncertainty that is caused by the existing IFRSs. Any comments or questions? The amount is payable on completion. Effective for an entity's first annual IFRS financial statements for periods beginning on or after 1 January 2018. (b) It is probable that the economic benefits associated with the contract will flow to the seller. In January 2009 the Board issuedIFRIC18Transfers of Assets from Customers. In order to achieve the disclosure objective stated above, the Standard introduces a number of new disclosure requirements. Indeed in many sectors, for example the retail food sector, revenue is a headline number that is often announced first when results are communicated externally. For a performance obligation satisfied over time, an entity would select an appropriate measure of progress to determine how much revenue should be recognised as the performance obligation is satisfied. Consequently, an entity would disregard any contractual limitations that might preclude the customer from obtaining readily available resources from a source other than the entity. Compliance Challenges in Billing and ASC 606 for Construction Companies. This is another criterion that, if met, makes a performance obligation satisfied over time. Property developers and construction companies are typical for their contracts with customers of a long-term nature. The standard should be applied in an entitys IFRS financial statements for annual reporting periods beginning on or after 1 January 2018. These topics should be considered carefully when applying IFRS 15. The goods are inventories that need to mature for five years before being ready for sale. Step 2: Identify the performance obligations in the contract, At the inception of the contract, the entity should assess the goods or services that have been promised to the customer, and identify as a performance obligation: [IFRS 15.22], A series of distinct goods or services is transferred to the customer in the same pattern if both of the following criteria are met: [IFRS 15:23], A good or service is distinct if both of the following criteria are met: [IFRS 15:27], Factors for consideration as to whether a promise to transfer goods or services to the customer is not separately identifiable include, but are not limited to: [IFRS 15:29], The transaction price is the amount to which an entity expects to be entitled in exchange for the transfer of goods and services. Recognition and Measurement(2010th) (2010) IAS 39 (2009th) Financial Instruments: Recognition and Measurement (2009th) (2009) IAS 40: IFRIC 15: Agreements for the construction of success fees paid to agents). But, despite these items are capable of being distinct, they are NOT distinct in the context of the contract, because the contractor promised to deliver a combined output a house. The latest Lifestyle | Daily Life news, tips, opinion and advice from The Sydney Morning Herald covering life and relationships, beauty, fashion, health & wellbeing by past business practices or published policies) that create a valid expectation of the customer that the entity will transfer a distinct good or service are also treated as separate performance obligations, even though they may not be enforceable by law (IFRS 15.24, BC87). If certain conditions are met, a contract modification will be accounted for as a separate contract with the customer. Only Entity X is able to install the equipment. A series of distinct goods or services is treated as one performance obligation when both of the following criteria are met (IFRS 15.23): See Examples 7, 13, 25 accompanying IFRS 15 and the examples below. The transaction price is then reduced by the amounts that are initially measured under other standards; if no other standard provides guidance on how to separate and/or initially measure one or more parts of the contract, then IFRS 15 will be applied. Yet it is absolutely crucial to get it right, because further steps in the revenue recognition process depend on the correct splitting of the contract into separate distinct performance obligations. IAS 11 replaced When the selling price of a product includes an identifiable amount for subsequent servicing that amount is deferred and recognised as revenue over the period during which the service is performed. On 12 April 2016, clarifying amendments were issued that have the same effective date as the standard itself. As stated above, there is a different approach taken to the recognition of revenue from the provision of services. 3. In other words, the revenue is recognised gradually, rather than all at one critical point, as is the case for revenue from the sale of goods. Questions or comments? A customer cannot benefit from the roof on its own, but if the house is ready just without the roof, then yes, customer can buy the roof elsewhere and benefit from it. Entity X produces a specialised equipment which is installed at customers premises. IFRS 15 takes the view that although it is appropriate to recognise revenue from the sale of the elevators at the point at which control is transferred to the customer, it is not appropriate to recognise profit. Although IFRSs have fewer requirements on revenue recognition, the two main revenue recognition standards, IAS 18, Revenue and IAS 11, Construction Contracts, can be difficult to understand and apply. These words serve as exceptions. (b) The amount of the revenue can be measured reliably. The standard should be applied in an entitys IFRS financial statements for annual reporting periods beginning on or after 1 January 2018. (c) The stage of completion of the transaction at the end of the reporting period can be measured reliably. How should Building Co account for this arrangement as at 31 December 2018? In May 2017, the Board issued IFRS17Insurance Contractswhich permits an entity to choose whether to apply IFRS17 or IFRS15 to specified fixed-fee service contracts that meet the definition of an insurance contract. You can also check out my IFRS Kit with detailed video tutorials about IFRS 15. The refurbishment work is completed by 31 December 2019. However, if any of the criteria in IFRS 15, paragraph 35 are met, revenue should be recognised over time. Outline the principles that underpin the recognition and measurement of revenue. In addition, IAS 18 provides limited guidance on important topics such as revenue recognition for multiple-element arrangements. [IFRS 15:B63], Step 4: Allocate the transaction price to the performance obligations in the contracts, Where a contract has multiple performance obligations, an entity will allocate the transaction price to the performance obligations in the contract by reference to their relative standalone selling prices. identify the performance obligations in the contract. Can we distinct other services ? Consumer products companies will often provide merchandising services to their customers (distributors and retailers) that are aimed at selling their products to the end customer. Does the installation significantly modify software? Revenue will therefore be recognised when control is passed at a certain point in time. the entitys promise to transfer the good or service to the customer is separately idenitifable from other promises in the contract. We would then have two components to the transaction with fair values totalling $24,000 ($18,000 for the product + $6,000 for the servicing). http://traffic.libsyn.com/ifrsqa/039_IFRS15Distinct.mp3, Irregular lease payments under IFRS 16 Leases, Can We Interrupt Depreciation due to Covid-19 Pandemics? We do this because the quality of implementation and application of the Standards affects the benefits that investors receive from having a single set of global standards. The fact pattern in this example indicates that at least two of the conditions required for the recognition of revenue on the sale of goods have not been satisfied: Therefore it is inappropriate for entity A to recognise revenue when the goods are sold on 1 January 2013. Therefore, an entity should disclose qualitative and quantitative information about all of the following: [IFRS 15:110], Entities will need to consider the level of detail necessary to satisfy the disclosure objective and how much emphasis to place on each of the requirements. (d) Provide more useful information to users of financial statements through improved disclosure requirements, and Viewpoint. Customer A engages Construction Co to build a ship for $2,000,000 (expected cost $1,500,000) on 1 January 2017. This publication highlights key differences and how they might change the current accounting practices for construction contracts. Such revenue is recognised only when the underlying sales or usage occur. See Example 11 Case D accompanying IFRS 15. Further detail about these specific requirements can be found at IFRS 15:113-129. Any difference between the initial recognition of a receivable and the corresponding amount of revenue recognised should also be presented as an expense, for example, an impairment loss. Example: Satisfaction of performance obligation in a transportation service. Construction contracts a single method of measuring progress would be used to measure the entitys progress towards complete satisfaction of the performance obligation to transfer each distinct good or service in the series to the customer. None of this information can be tracked to individual users. A good or service promised to the customer is not separately identifiable from other promises in the contract when, in substance, the customer contracted for a combined good or service. Each of these things meets the first criterion it is capable of being distinct, because the customer can benefit from it on its own or with other available resources. Learn More. The fact that the customer is obliged to pay for the work performed to date is a crucial indicator that the customer controls the asset and performance obligation is satisfied over time. The conditions are such that all are likely to be satisfied at a particular point in time and so there is a critical point at which all the revenue from the sale of goods would be recognised. Hi, Im working for a manufaturing company who do manufacture products for overseas wholesale brands. [IFRS 15:32], Control of an asset is defined as the ability to direct the use of and obtain substantially all of the remaining benefits from the asset. The project managers estimate would not be appropriate as it is merely an estimate while the costs are actually known. IFRS 15 replaces the following standards and interpretations: The objective of IFRS 15 is to establish the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a contract with a customer. In December 2001 the Board issuedSIC31RevenueBarter Transactions Involving Advertising Services. Background The imputed rate of interest is the prevailing borrowing rate of the buyer or, if more easily determinable, the rate that discounts the future cash receivable to the current cash price of the goods or services. In sectors where this is true, the remuneration packages of senior executives often include a performance related element with revenue growth as the key determinant of performance. A receivable is recognised when the entitys right to consideration is unconditional except for the passage of time. Other borrowing costs are recognised as an expense. Residual approach (only permissible in limited circumstances). The following decision tree is a useful tool to determine whether revenue should be recognised at a point in time or over time: If revenue is recognised at a point in time, the overall principle is that revenue should be recognised at the point in time at which it transfers control of the good or service to the customer. Can the customer use the software also without 1-year support? This may be a very useful practical expedient as it effectively allows entities to bypass the requirements for determining the transaction price and allocating it to performance obligations. If it is not possible to reliably measure the outcome of a transaction involving the provision of services (perhaps because the transaction is in its very early stages) then revenue should be recognised only to the extent of costs incurred by the seller, assuming these costs are recoverable from the buyer (5). (d) It is probable that the economic benefits associated with the transaction will flow to the seller The entitys year end is 31 December. In May 2014 the Board issued IFRS15Revenue from Contracts with Customers, together with the introduction of Topic 606 into the Financial Accounting Standards BoardsAccounting Standards Codification. [IFRS 15:106]. All rights reserved. This should assist in future convergence between IFRS and US GAAP. Will advance billing hurt your balance sheet? In certain circumstances, it may be appropriate to allocate such a discount to some but not all of the performance obligations. IAS 18 states that entities should recognise revenue from the use of their assets yielding interest, royalties and dividends when (11): On 12 April 2016, clarifying amendments were issued that have the same effective date as the standard itself. IFRS 15 does not have any specific provisions on onerous (loss-making) contracts, therefore these IAS 37 requirements apply. These include, but are not limited to: [IFRS 15:31-33], An entity recognises revenue over time if one of the following criteria is met: [IFRS 15:35], If an entity does not satisfy its performance obligation over time, it satisfies it at a point in time. The expected total cost to the entity of providing the free service is $4,800 (2 X $2,400). Use at your own risk. IFRS 15 specifies how and when an IFRS reporter will recognise revenue as well as requiring such entities to provide users of financial statements with more informative, relevant disclosures. retain prior period figures as reported under the previous standards, recognising the cumulative effect of applying IFRS 15 as an adjustment to the opening balance of equity as at the date of initial application (beginning of current reporting period). obtain substantially all of the remaining benefits from an asset. For example, Building Co incurs a significant amount of costs on the elevator up front, but these costs do not reflect transfer of control of the refurbishment works to the customer. A receivable is recognised when the entitys right to consideration is unconditional except for the passage of time. Well, to prevent misunderstanding: profit for the year is a part of retained earnings in the balance sheet. How do you account for crypto currencies. Notable Skanska projects include renovation of the United Nations Headquarters, the World Trade Center Transportation Hub Liability limited by a scheme approved under Professional Standards Legislation. a mobile phone that needs a provider of telecommunications services). Does the customer have significant risks and rewards of ownership of the asset? Input methods are covered in IFRS 15.B18-B19. However, IAS 11 applies the basic principles we have already identified to such contracts, which are defined in IAS 11 as follows (6): Contracts specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use. Where goods are sold under conditions that either require the seller to repurchase them in the future or contain options to repurchase that are likely to be exercised then the substance of the transaction of often that the sale is actually a provision of finance. Are these services capable of being distinct? [IFRS 15:105], A contract liability is presented in the statement of financial position where a customer has paid an amount of consideration prior to the entity performing by transferring the related good or service to the customer. [IFRS 15:63], Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation, Revenue is recognised as control is passed, either over time or at a point in time. Construction Co should recognise its revenue over time because the third criterion in IFRS 15, paragraph 35(c) is met. This includes the ability to prevent others from directing the use of and obtaining the benefits from the asset. The customer simultaneously receives and consumes the benefits provided by the entitys performance as the entity performs. IASB defers effective date of IFRS 15 to 1 January 2018, The UKs withdrawal from the European Union, International Financial Reporting Standards, Collection of IFRS 15 news and publications, Joint Transition Resource Group for Revenue Recognition, Clarifications to IFRS 15: Issues emerging from TRG discussions, FRC publishes findings on the quality of corporate reporting in 2021/2022, ESMA publishes 26th enforcement decisions report, FRC publishes findings on the quality of corporate reporting in 2020/2021, Call for papers Research on IASBs post-implementation reviews of IFRS Standards, IASB, FASB, and The Accounting Review call for academic research papers on the performance of standards in capital markets, Governance in brief FRC sets out key matters for 2022/23 reporting season, Deloitte comment letter on tentative agenda decision on principal versus agent software reseller, Governance in focus On the board agenda 2022, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers, SIC-31 Revenue Barter Transactions Involving Advertising Services, Project on revenue added to the IASB's agenda, Effective for an entity's first annual IFRS financial statements for periods beginning on or after 1 January 2017, New effective date for an entity's first annual IFRS financial statements for periods beginning on or after 1 January 2018. if other standards specify how to separate and/or initially measure one or more parts of the contract, then those separation and measurement requirements are applied first. Contract assets and receivables shall be accounted for in accordance with IFRS 9. A good or service is transferred to a customer when they obtain control of that asset. from Madrid to Berlin) as another entity would not need to substantially re-perform the work that Entity A has completed to date if that other entity were to fulfil the remaining performance obligation to the customer and transport the package from Berlin to Moscow (IFRS 15.B4). We use cookies on ifrs.org to ensure the best user experience possible. 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