04. Reporting Financial Performance

Question 1

Which IFRS relates to contract revenues?

Answer 1

IFRS 15 - Revenue from Contracts with Customers.

Question 2

What are the 5 steps for recognizing revenue.

Answer 2

1. Identify the contract(s) with the customer.
2. Identify the separate performance obligations.
3. Determine the transaction price.
4. Allocate the transaction price to the performance obligations.
5. Recognise revenue when (or as) a performance obligation is satisfied.

Question 3

What criteria must be met in order to apply IFRS 15?

Answer 3

• the parties have approved the contract.
• each party’s rights can be identified.
• payment terms can be identified.
• the contract has commercial substance.
• it is probable that the entity will be paid/receive consideration entitled to.

Question 4

What is a performance obligation?

Answer 4

A promise in a contract to transfer to a customer:

1. A good/service (or bundle of g/s) that is distinct.
   Or
2. A series of goods/services that are substantially the same and are transferred in the same way.

Question 5

For a good/service to be distinct, what criteria must be met?

Answer 5

1. Customer can benefit from good/service in its own or when combined with the customer’s available resources.
2. The promise to transfer the good/service is separately identifiable from other goods/services in the contract. That is, it is not integrated with, does not significantly modify or customise or does not highly depend on or relate to other g/s in the contract.

Question 6

When must a contract modification be accounted for as a separate contract?

Answer 6

1. Additional promised goods/services are distinct.

And

2. Increase in consideration reflects the stand-alone prices of the additional goods/services and appropriate adjustments (e.g. discounts).

Question 7

When must a contract variation be accounted for as a termination and creation of a new contract?

Answer 7

The remaining goods/services are distinct from those transferred on or before the date of the modification.

Question 8

When must a change order be accounted for as part of the existing contract?

Answer 8

1. Additional promised goods/services are not distinct.
2. The effect on the transaction price and progress to completion is recognized as an adjustment to revenue at the date of the modification.

Question 9

What criteria must be met for variable consideration to be included in the transaction price?

Answer 9

An estimated amount is included in the transaction price only to the extent that it is highly probable that a significant reversal in the cumulative revenue recognised will not occur when the uncertainty is resolved.

Question 10

In determining the transaction price, how can an entity identify a significant financing component and how should this financing element be dealt with?

Answer 10

Indications of a significant financing component include:
- the difference between the amount of promised consideration and the cash selling price of the promised goods or services.

• the length of time between the transfer of the promised goods or services to the customer and the payment date.

If there is a financing component, the consideration receivable needs to be discounted to present value using the rate at which the customer borrows money.

Question 11

If there is non-cash consideration, how should this be included in the transaction price?

Answer 11

Any non-cash consideration is measured at fair value.

If the fair value cannot be estimated reliably then the transaction is measured using the stand-alone selling price of the goods or services promised to the customer.

Question 12

When should consideration payable to a customer (not) be factored into the transaction price.

Answer 12

If consideration is paid to a customer in exchange for a distinct good or service, then it should be accounted for as a purchase transaction.

If not, the entity should account for it as a reduction of the transaction price.

Question 13

How should the transaction price in a contract be allocated to the performance obligations?

Answer 13

The total transaction price should be allocated to each performance obligation in proportion to the stand-alone selling prices.

Best evidence of stand-alone selling price is the observable price…if this is not available, use an estimate and try to maximise use of observable inputs.

The allocation is made at start of contract and is not adjusted later on if stand-alone prices change.

Bundle discounts are also allocated in proportion to stand-alone selling prices except where observable evidence suggests otherwise.

Question 14

How is the transaction price/consideration allocated when there’s a contract modification that needs to be accounted for as a termination of the existing contract and the creation of a new contract?

Answer 14

The consideration to be allocated in the new contract is the sum of:

• the remained of the transaction price from the existing contract that has not been recognised as revenue and the consideration promised in the contract modification.

Question 15

An entity satisfied a performance obligation over time if one of 3 criteria is met. What are these 3 criteria?

Answer 15

1. The customer simultaneously receives and consumes the benefits of the goods/services while the obligation is performed.
2. The entity’s performance creates or enhances an asset (eg WIP) that the customer controls as the asset is created or enhanced.
3. 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.

Question 16

Revenue recognised over time is based on performance completed. What are the two methods used in measuring satisfaction of a performance obligation?

Answer 16

1. Input method e.g proportion of costs incurred to total expected costs.
2. Output method e.g. number of units produced, time elapsed or surveys of performance.

Question 17

When a performance obligation is satisfied at a point in time, revenue is recognised when control of the good or service passes to the customer. List 5 indicators of a transfer of control.

Answer 17

1. The entity has a present right to payment for the asset.
2. The customer has legal title to the asset.
3. The entity has transferred physical possession of the asset.
4. The customer has the significant risks and rewards of ownership of the asset.
5. The customer has accepted the asset.

Question 18

What are the two methods that may be used to estimate the amount of variable consideration in a contract? When is each method more suitable?

Answer 18

1. Expected value (ie weighted average). It’s more suited for a large number of contracts with similar characteristics.
2. Most likely amount (of consideration). It’s more suitable when there are few possible outcomes.

Note: estimated variable consideration should be updated at the end of each reporting period and any changes in estimate reflected in the current period FS (applied prospectively).

Question 19

What two contract costs should be recognised as an asset (ie capitalised) under IFRS 15?

Answer 19

1. Costs of obtaining a contract excluding costs that are non-incremental. Non-incremental costs can only be recognised as an asset if they can be recharged to the customer (regardless of if the contract is won).
2. Costs of fulfilling a contract if they are not in the scope of another standard (eg IAS 2 or IAS 16) and the entity expects them to be recovered. Should be incremental and generate or enhance resources that the entity will use to satisfy performance obligations in the future.

Question 20

If an entity transfers goods or services to a customer before receiving consideration, how should this be recognised in the SOFP?

Answer 20

Either as a receivable if the right to the consideration is unconditional (ie conditional only on the passage of time) or as a contract asset.

Question 21

If an entity receives consideration (or has unconditional right to receive consideration) before transferring goods or services, how should this be recognised in the SOFP?

Answer 21

A contract liability aka deferred income should be recognised.

Question 22

What are the required disclosures under IFRS 15?

Answer 22

1. Revenue recognised from contracts with customers.
2. Contract balances and assets recognised from costs incurred obtaining or fulfilling contracts.
3. Significant judgements used, and any changes in judgements.

Question 23

What is a principal vs agent under IFRS 15? How is revenue recognised for each?

Answer 23

1. A principal provides the specified goods or services itself. IE it controls the good/service before it is transferred to the buyer. The principal recognises revenue when goods are or services are transferred to the customer.
2. An agent arranges for another party to provide the goods or services. A genet recognises revenue when it has arranged for another party to provide the goods or services. Revenue is measured at the fee or commission the entity is entitled to.

Question 24

A sale and repurchase agreement is where an entity sells an asset but retains a right to repurchase the asset at some point in the future. Under IFRS 15, what are the three forms a repurchase agreement may come in?

Answer 24

1. A forward - entity is obligated to repurchase the asset.
2. A call option - entity has the right to repurchase the asset.
3. A put option - entity is obligated to repurchase the asset at the customer’s request.

Question 25

When an entity has an option or right to repurchase an asset sold to a customer, the customer does not obtain control of the asset. What are the two options for accounting for such a contract?

Answer 25

1. As a lease (using lessor accounting) if the entity can or must repurchase the asset for less than the original selling price. OR 2. A financing arrangement (loan) if it can or must repurchase the asset for an amount greater than or equal to the original selling price. If the repo is a financing arrangement, the entity: - continues to recognise the asset. - recognises a financial liability for any consideration received from the customer and - recognises the difference between the amount of consideration received and to be paid as interest expense/finance cost, which increases the financial liability.

Question 26

What is a bill-and-hold arrangement? When are the criteria for revenue to be recognised in this arrangement?

Answer 26

A bill-and-hold arrangement is a contract in which the entity bills a customer for a product that it has not yet delivered to the customer. Revenue cannot be recognised until the customer obtains control of the product. In this arrangement, control is only transferred to the customer when 5 criteria are met: 1. There must be a substantive reason for the bill-and-hold arrangement (e.g. customer has requested because it does not have space for the product). 2. The product has been separately identified as belonging to the customer. 3. The product is currently ready for transfer to the customer. AND 4. The entity cannot use the product or direct it to another customer.

Question 27

What is the accounting treatment for a warranty under IFRS 15?

Answer 27

If customer has the option to purchase a separate warranty, it is a distinct service and is accounted for as a separate performance obligation. A portion of the transaction price is allocated ti the warranty. If the warranty cannot be purchased separately, it is dealt with under IAS 37 unless it is a service-type warranty (wholly or in part). For a service-type warranty, the service is a performance obligation and a portion of the transaction price is allocated to the warranty.

Question 28

What is the accounting treatment for customer options for additional goods and services under IFRS 15?

Answer 28

A customer may be given a right to acquire additional goods/services after buying products from an entity due to loyalty points or discount vouchers. The option is a separate performance obligation if it provides the material right to the customer that would not be received without entering into the contract. The transaction price should be allocated between the current purchase and additional goods/services based on relative stand-alone price. If not directly observable, estimate it considering any discount the customer would receive without exercising the option and the likelihood the option will be exercised. Revenue relating to the additional goods/services should be recognised when the additional products are provided or the option expires.

Question 29

What is the accounting treatment for customers’ unexercised rights (breakage)?

Answer 29

A non-refundable prepayment gives the customer the right to receive a good/service in the future which customer may not exercise. If the right is not exercised, the breakage amount is recognised as revenue unless there is a requirement to remit it to another party e.g. govt. If entitlement to the breakage amount is expected, it is recognised as revenue in proportion to the pattern of rights recognised by the customer. If entitlement is not expected, the breakage amount is recognised as revenue when the likelihood that the exercise of the customers’ rights becomes remote.

Question 30

What is the accounting treatment for non-refundable upfront fees under IFRS 15?

Answer 30

A non-refundable upfront fee that relates to a transfer of a promised good/service should be evaluated to determine whether to account for the good/service as a separate performance obligation. If it is an advance payment for future goods/services, it should be recognised as revenue when the future goods/services are provided.

Question 31

What is the accounting treatment for licensing under IFRS 15?

Answer 31

If the promise to grant a license is distinct from any other goods/services promised in the contract, it is a separate performance obligation. Whether a separate performance obligation is satisfied at a point in time or over time depends on the right conferred. Right to access - provision of access to IP as it exists throughout the license period. (Over time) Right to use - transfer of a right to use IP as it exists at a point in time in which the license is granted. (Point in time) A license gives a customer right to access if it meets all the following criteria? - contract requires or customer expects that the licensor will undertake activities that will significantly affect the IP. - the customer is exposed to the positive or negative effects of these activities. - the activities do not result in the transfer of a good/service to the customer.

Question 32

How is revenue from a sales-based or usage-based royalty promised in exchange for a license recognised under IFRS 15?

Answer 32

Regardless of if license is right to use or right to access, Revenue is recognised at the later of the following: - sales or usage occurs. - the performance obligation to which the royalty has been allocated has been satisfied or partially satisfied.

Question 33

How should sales with a right of return be accounted for under IFRS 15?

Answer 33

A selling entity should recognise: 1. An asset for the amount received/receivable and corresponding entries to revenue: - to revenue (for items not expected to be returned). - a refund liability (for items expected to be returned. 2. An asset for its right to recover products from customers (ie returns) and a corresponding adjustment to cost of sales. This is initially measured at the former carrying amount of the product less any expected costs to recover the goods. The measurement of the refund liability should be updated at each period end and similar adjustment made to revenue; the measurement of the right to returns should also be updated with the corresponding adjustment to cost of sales.

Question 34

How are consignment arrangements accounted for under IFRS 15? What are some indicators of a consignment arrangement?

Answer 34

Consignment is where the entity transfers goods to dealer to sell but retains control of it. In this case revenue should not be recognised by the manufacturer. Indicators of a consignment include: - the product is controlled by the manufacturer until a specified event occurs. - entity/manufacturer can require return of the product or transfer it to another party. - the retailer outlet/dealer does not have an unconditional obligation to pay for the product.

Question 35

How is crowdfunding accounted for?

Answer 35

Equity based - as an issue of capital under IAS 32 Debt based - as a debt instrument under IFRS 9 Reward based - IFRS 15 Donation based - apply IFRS 15 if rewards are issued.