IFRS 15 Flashcards
(18 cards)
What is Revenue
Income arising from the entity’s core business activities/ordinary activities means activities that are the main focus of the company’s operations
Recognition of revenue
revenue is recognised when the goods or services are transferred.
goods and services are transferred when the customer has obtained the control of those goods and services.
what does it mean by the customer has obtained the control
means that customer can direct the use and is obtanining substantially the benefits from the asset/services.
Some other Indicators:
Customer has accepted delivery
Customer has physical possession
Customer has legal rights
Services are complete.
Five step model
under ifrs 15, revenue is recognised under the five steps model :
⦁Identify the contract with the customer
⦁Identify the separate performamce obligations
⦁Determine the transaction price
⦁Allocation of the transaction price
⦁Recognition of revenue based on the satisfaction of performace obligations.
transaction price
The transaction price is the amount of consideration in a contract to which an entity expects to be entitled
in exchange for transferring promised goods or services to a customer.
time value of money
if consideration is to be received after one year or more than one year, then we would incorporate the concept of time value of money and therefore recognise revenue based on the present value , andd the diff between the pv and future value would always be interest
and the pv would increase each year with the amount of interest as the interest income getting credit and receivable getting debit.
Stand Alone Price
means a price at which an entity would sell a promised good or service separately to a
customer
satisfaction of performance obligations
⦁A performance obligation may be satisfied at a point in time (typically for transfer of goods)
⦁ A performance obligation may be satisfied over a period of time (typically for transfer of services).
when a performance obligation is satisfied over time
then revenue is also recognised over time,
by measuring progress towards the complete satisfaction of that performance obligation.
ways of measuring progress towards complete satisfaction
Output method : this method recognise revenue on the basis of goods transferred to date relative to the total goods to be transferred.
⦁Surveys of Performance completed to date;
⦁Units produced as a percentage of total units to be produced; or
⦁Units delivered as a percentage of total units to be delivered
⦁Contract milestone reached
ways of measuring progress towards complete satisfaction
Input method : reveneu is recognised based on entity’s inputs to the satisfaction of performance obligation relative to the total expected inputs.
⦁Resources consumed as a percentage of total resources to be used;
⦁Labour hours used as a percentage of total labour hours to be used;
⦁Machine hours used as a percentage of total machine hours to be used;
⦁Cost incurred as a percentage of total cost to be incurred
To determine the transaction price, some factors must be considerd :
Variable consideration
consideration payble to the customer
non cash consideration
Variable consideration
consideration to be received can vary because of like discounts, penalty etc
for example,
If the oil rig is not completed on time there will be a Rs. 20 millions penalty.
There are two methids we deal with variable consideration:
⦁Expected value method : we take weighted average of alll possible outcomes (multiplying probability by the outcome), used when multiple (more than two) scenarios/outcomes are possible
⦁most likely method : we select only the highest probable outcome ,
used when only two scenarios/outcomes are possible.
Allocation of the transaction price
would be allocated only and only based on the standallone sellling prices.
if standalone selling prices are not given, then we would calculate them :
market assessment approach]
residuall approach
expected cost plus approach
Contract asset
the case is about the delivery of products by the supplier and payment is not yet due by the customer. when the supplier has satisfied its performance obligation, it willl recognise revenue, but it willl not recognise receivable because the payment is not yet due, so today , the supplier would rather then recognising receivable would recognize contract asset because in the contract the payment to be made by supplier is not yet due and the supplier does not has unconditional right on the consideration. so on the date, payment becomes due, supplier would derecognise the contract asset and would recognise the receivable.
Contract liability
the case is about the payment in advance by the customer. means that customer has paid consideration but the supplier has not yet earned it, means unearned income
sale on approval or return basis
revenue is not recognised when the goods are delivered , revenue is only recognised :
when the goods are further sold to the 3rd customer
or
when the customer has approved the products
or when the time period for return has lapsed
whichever iss earlier.
bill and hold arrangement
supplier has billed the customer and is ready to send goods to the customer and now the customer is the owner of the goods and has the control of the goods but customer has asked the supplier to hold the goods for some time on his behalf. this is deemed as custodial services. in such case, the supplier would allocate the transaction price over the custodial service as the custodial service would be treated as a performance obligation.
