IFRS 15—Revenue from Contracts with Customers: All-Inclusive

IFRS 15 promulgated by the International Accounting Standards Board (IASB) PROVIDES guidance on accounting for Revenue from Contracts with Customers.

It was adopted in 2014 and became EFFECTIVE in January 2018.

IFRS 15 Revenue from Contracts with Customers – Scope

´Revenue from Contracts With Customers´ applies to all contracts with the customers EXCEPT:

• Lease contracts;
• Financial instruments and other contractual rights or obligations;
• Non-monetary exchanges between entities in the same business to facilitate sales; AND
• Insurance contracts.

IFRS 15 Revenue Recognition

The Core Principle of IFRS 15 is that an entity will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

IFRS 15 5 Step Model

Revenue from Contracts with Customers is recognized based on the application of principle-based the Five Step Model.

Contract Costs

1. Amortization and Impairment of Contract Assets

• Contract Cost is to be amortized on a systematic basis that reflects the transfer of goods or services to the customer.
• Contract cost to be impaired if its carrying amount > remaining consideration receiveable LESS directly related costs to be incurred.

IFRS 15 Licensing

A License establishes a customer’s rights over the intellectual property of an entity such as software and technology, media & entertainment.

IFRS 15 specifies the accounting treatment that depends on whether or not the license is ‘distinct’ from other goods or services promised.

IFRS 15 Royalties – Sales Based or Usage Based

When consideration takes the form of sales-based or usage-based royalty for a license of intellectual property, the entity recognizes revenue only when (or as) the latter of the following event occurs:

• Subsequent sale or usage occurs; AND
• Performance obligation to which some or all of sales or usage-based royalty has been allocated been satisfied (or partially satisfied).

Upfront Fee [Non-Refundable]

IFRS 15 states that a vendor may charge a non-refundable upfront fee at (or near) contract inception (e.g. joining fees, activation fees, set-up fees, etc.)

Warranties as Per IFRS 15

In determining the CLASSIFICATION of a Warranty, an entity considers:

• Whether the warranty is required by law;
• Length of the warranty coverage period; AND
• Nature of the tasks that the vendor promises to perform.

IFRS 15 – Principal Vs Agent Considerations

In any transaction, IFRS 15 requires that the entity must establish whether it is acting as principal or agent.

INDICATORS that an entity is an 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 receivables from a customer in exchange for the other party’s goods or services.

Consignment Arrangement As Per IFRS 15

When a product is delivered to a customer under a consignment arrangement, the customer (dealer) does not obtain control of the product at that point in time so revenue is not recognized upon delivery.

INDICATORS of a consignment arrangement include:

• Product is controlled by the entity until a specified event occurs such as the product is sold or a specified period expires.
• Entity can require the return of the product or transfer it to another party.
• Customer (dealer) does not have an unconditional obligation to pay for the product.

IFRS 15 – Bill and Hold Arrangement

Under bill and hold arrangement, goods are sold but remain in the possession of the seller for a specified period, perhaps because the customer lacks storage facilities.

IFRS 15 depicts that the entity will need to determine at what point the customer obtains control of the product:

For a customer to have obtained control of a product in a bill and hold arrangement, the following CRITERIA must all be met:

• The reason for bill and hold contract must be substantive (e.g. requested by the customer).
• Product must be separately identified as belonging to the customer.
• The product must be ready for physical transfer to the customer.
• The entity should not have the ability to use the product or transfer it to another customer.

Sale With a Right of Return

When products 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:

Refund Liability (rather than revenue) is recognized for any consideration received to which the vendor doesn’t expect to be entitled. Any refund lability is reassessed and updated at each reporting period.

Asset is also recognized for Vendor’s Right to recover goods from customers on settling the liability. Such asset is measured at the carrying amount of goods less any expected costs to recover such goods.

An asset is Presented Separately from refund liability.

If the value is less than the amount recorded in inventory, inventory is reduced with a Corresponding Adjustment to the cost of goods sold.

IFRS 15 Material Right – Customer Options for Additional Goods/Services

IFRS 15 establishes the customer options to acquire additional goods or services (either free of charge or at discount) including sales incentives, customer award credits (or points), contract renewal options, or other discounts on future goods or services.

Whether the customer option provides a material right to the customer?

A MATERIAL RIGHT is some benefit provided to a customer that it would not receive without entering into the contract.

Repurchase Agreement (Repo)

A Repurchase Agreement, also known as a Repo, is a short-term loan where one party agrees to sell securities to another party and then buy them back at a later date for a slightly higher price.

The DIFFERENCE between the sale and purchase price represents the interest on the loan.

Under a repurchase agreement, an entity sells an asset and promises or has the option to repurchase it.

Forward Contract

In Forward Contract, the entity has an obligation to repurchase the asset. However, the customer doesn’t obtain control of the asset, even if it has physical possession.

Call Option

In Call Option entity has the right to repurchase the asset. However, the customer doesn’t obtain control of the asset, even if it has physical possession.

Put Option

In Put Option entity must repurchase the asset if requested to do so by the customer and consideration needs to be given to whether or not the customer is likely to exercise that option.

Synopsis

International Financial Reporting Standard IFRS 15 was adopted in 2014 and became EFFECTIVE in 2018 superseded previous International Accounting Standards (IAS), IFRIC & SIC’s and presented various ‘Revenue Recognition Concepts‘.

Jhanzayb

Chartered Accountant (Institute of Chartered Accountants of Pakistan)

Bachelor of Accounting Honours (Asia e University, Malaysia)