F2 - C4 - IFRS 15 Contracts with Customers Flashcards
Define IFRS 15 Revenue from contract with customers
Establish the principles that an entity shall apply to report useful info to users of financial statements about the nature, amount timing and uncertainty of revenue and cashflows arising from a contract with a customer
What are the exemptions of IFRS15?
Any lease contract (IFRS 16)
Any insurance contract (IFRS 17)
Any financial instrument or contractual rights or obligations covered by IFRS9 or 11 and IAS 27 or 28
Entities in the same line of business agree to exchange non-monetary items
What are the 5 steps to recognise a contract?
ID the contract
ID the performance obligations
Determine the transaction price
Allocate price to performance obligations
Recognise revenue when a performance obligation is satisfied
How do you identify a contract?
- All parties must approve and commit to their obligations
- Identify each parties rights regarding transfer of goods
- Payment terms must be identifiable
- Must have commercial substance
- Probable the entity will receive owed consideration
How do you identify performance obligations?
- What must the supplier provide?
- A promise to provide a good or service
- Contract may contain multiple performance obligations for distinct goods or services
What determines a performance obligation?
- Specific explanation of what must the supplier provide
- A promise to provide the good or service
- If multiple are present within a contract they must be separately identifiable and be beneficial in their own right
What determines the transaction price?
The amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer
How do you treat variable consideration?
Estimate additional amount
Only include if highly probable
What elements should be considered when assessing if a contract contains a financing component?
The difference between the promised consideration and the cash selling price
The length of time between the transfer of goods and the payment
Prevailing interest rates
What are the 2 considerations of non-cash payment?
Must be measured at fair value
If no fair value available the stand alone price is used
How would you allocate price to performance?
Stand alone price used for individual obligations as determined at the start of the contract
What 3 methods can be used if no stand alone price is attainable?
Adjusted market assessemnt (Market Value)
Expected cost plus a margin (Add % to cost)
Residual (Total cost of contract less remaining obligation)
How do you recognise revenue when the entity satisfies a performance obligation?
1) Satisfying performance obligations
2) Performance obligations satisfied at a point in time
3) Performance obligations satisfied over time
Recognising revenue when the entity satisfied a performance obligation : Satisfying a performance obligation
1) Centres around transferring of control over the goods/ service
2) Control over an asset means being able to direct the use of all substantial benefits
3) Satisfied at either a singular point in time, or over a specified period
Recognising revenue when the entity satisfied a performance obligation: Performance obligations satisfied at a point in time
This is determined by when control is transferred to a customer
1) Customer has current obligation to pay for the asset
2) Risk and reward of ownership transferred
3) Customer has accepted the asset
4) Physical possession is transferred
5) Customer has legal title that can determine its use and claims its benefits
Recognising revenue when the entity satisfied a performance obligation: Performance obligations satisfied over time
1) Customers simultaneously receive and consume the benefits that an entity provides as they are given (Internet usage, power, water)
2) Creates or improves an asset which is already under control of a customer (Building an extension)
3) No alternative use to the entity and the entity has an enforceable right to payment
Accounting for revenue over time: IFR15
The amount of revenue recognised depends on the progress towards completion of the performance obligation
Apply it to situations where an entity is earning revenue over a long period of time
Revenue over time can be broken down into 4 key steps
Is the contract profitable?
Measuring progress
Income Statement
Statement of financial position
Revenue over time: Profitable contract
Profit expected - Revenue, costs and profit recognised in the income statement based on the projects completion
Loss expected - Entire loss recognised as soon as loss becomes probable by creating a provision
Not measured reliably - No profit is recognised, costs recognised in period they occur and revenue only recognised to the extent that costs are considered to be recoverable
Revenue over time: Measuring progress
Simply means to measure how much of the project has been completed so far
Revenue over time: Income Statement
Sales revenue - The sales value of work completed is included in revenue if it can be measured with reasonable certainty
Cost of sales -
Deducting the periods profit from the periods sales value
Losses should be recognised immediately and added to cost of sales
Uncertain outcomes should record costs along with matching revenue
Contract profits - Sales less cost of sales times % completion, previously recognised profits should be deducted
Expected contract losses - Expected losses to the end of the contract must be shown in advance
Revenue over time: Statement of financial position
Contract assets - Actual amounts received from the customer may be less than the amount recognised in the income statement, the difference is recorded as a contract asset which is determined based on the passage of time
Contract liabilities - A contract liability will be recognised in the statement of financial position
What is consignment inventory?
Inventory owned by one party and held by another
The owner sends goods to the holder in order to sell
Inventory is recorded on the books of the owner not the seller
Revenue is only recognised when the sale is made to a third party
What is sales with Right of Return?
Customer has the right to return product for various reasons
The following is recognised in this case:
Revenue for the transferred product that the supplier expects to be entitled to
A refund liability
An asset
