IFRS 15- Revenue from Contracts with Customers

Question 1

Steps to Recognise Revenue

Answer 1

To recognize revenue under IFRS 15, entities follow a structured approach comprising five steps:

1. Identify Contracts: Determine the existence of a contract with a customer.
2. Identify Performance Obligations: Identify promises in the contract to transfer distinct goods or services to the customer.
3. Determine Transaction Price: Ascertain the consideration expected in exchange for transferring promised goods or services, including estimation if the consideration is variable.
4. Allocate Transaction Price: Allocate the transaction price to each performance obligation based on their relative standalone selling prices.
5. Recognize Revenue: Recognize revenue when a performance obligation is satisfied by transferring a promised good or service to the customer, either at a point in time or over time. For obligations satisfied over time, select an appropriate measure of progress to determine the amount of revenue recognized as the obligation is fulfilled.

Question 2

Objective of standard:

Answer 2

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.

Question 3

Scope of Standard

Answer 3

• All contracts with customers w. 4 exceptions.
• If a contract partially within other standards follow their separation/measurement requirements first.
• Exclude amount initially measured by other standards from transaction price.
• Allocate remaining transaction price to performance obligations within this standard or other contract parts.

Question 4

Contracts outside of scope

Answer 4

• Lease contracts under IFRS 16
• Contracts under IFRS 17 unless primary purpose is services for fixed fee
• Financial instruments and other contractual rights under various standards
• Non-monetary exchanges facilitating sales between entities in same line of business

Question 5

What consitutes a contract?

Answer 5

• approval by both parties,
• identification of rights and
• payment terms established,
• commercial substance (risk, timing or entity’s fcf expected to change.)
• and probability of collecting consideration. Assesed by customer’s ability and intention to pay when due.
• Neither party should be capable of unilateral termination.

Oral, written or implied by business customes

Question 6

When can income from contract with unmet criteria be recognised?

Answer 6

• when all obligations are fulfilled,
• or the contract is terminated with non-refundable consideration.

Otherwise consideration recieved is recognised as a liability until specific perfromance occurs or refund measured at the amount received.

Question 7

When can/should two or more contracts be combined?

Answer 7

• If near or at same time can be accounted for as a single contract.
• If:
• Negotiation of contracts as package deal wi/ single commercial objective.
• Dependence of consideration in one contract on the price or performance of the other contract.
• The goods or services promised in the contracts (or some goods or services promised in each of the contracts) constitute a single performance obligation according to specific paragraphs.

Question 8

What is a contract modification ?

Answer 8

change in the scope or price of a contract approved by the parties involved.

Even where dispute or uncertainty around price or scope, if approved by both parties then qualifies.

Orally, written etc, customary business practice

Question 9

How is a contract modification accounted for?

Answer 9

• If increase in scope with distinct goods or services added and the price increaases accordingly based on stand alone selling prices it is accounted for as a separate contract.

Question 10

What happens if remaining G&S distinct from those already transferred?

Answer 10

The modification is treated as contract termination and creation of a new contract.

If not distinct, then form part of single performance obligation partially satisfied at the modification date, the modification is accounted for as part of the existing contract. Adjustments to revenue made on a cumulative catch-up basis.

If a mix- then acccount or in a consistent manner.

Question 11

What is a performance obligation?

Answer 11

Distinct goods or services individually or as a series with the same pattern of transfer:
* Each meets criteria for performance obligation satisfied over time.
* Same method measures progress for each.

Question 12

When is a good or service distinct?

Answer 12

• Customer can economically benefit from it’s on its own i.e consumed or sold above scrap value.
• Entity’s promise to transfer it is separately indentifiable from other promises in the contract.
• Is the promise to transfer each good or service individually or as part of a combined item.

Question 13

What are factors indicating the transfer are not separately identifiable

Answer 13

• Providing significant service integrating goods/services into bundle representing combined output specified by the customer.
• Significant modification or customization of goods/services by each other.
• High interdepedence or interrelaton or interellation between g&s.

Question 14

When is revenue recognised ?

Answer 14

Once performance obligations are satisfied. Either at a point in time or over time.

Over time- revenue recognised as entity progresses in fulfilling its obligations.

Question 15

How is progress measured?

Answer 15

Methods for measuring progress towards satisfying performance obligations include output methods and input methods, applied consistently and adjusted as circumstances change.

Question 16

What happens if progress cannot be reasonably measured?

Answer 16

Revenue recognition may be limited to costs incurred until reliable measurement becomes feasible.

Question 17

How is the transaction price i.e the revenue determined?

Answer 17

Contract & customs of industry.
Factors affecting estimation:
* Variable consideration,
* significant financing components,
* non-cash consideration, and
* consideration payable to the customer.

Question 18

What can be considered variable consideration and how is it estimated?

Answer 18

• Discounts, performance bonuses. Estimated using expected value method or most likely amount method.
• Must be constrained to prevent significant reversal.

Question 19

How are significant financing components accounted for?

Answer 19

By adjusting for time value of money, with interest revenue or expense recognised separately.

Question 20

Non- cash consideration treatment?

Answer 20

Measured at fair value, and consideration payable to the the customer is accounted for as a reduction of the transaction price unless it’s for a distinct good or service.

Recognised when entity recognises revenue or when the customer pays or promises to pay consideration.

Question 21

What to do with incremental costs of obtaining contract?

Answer 21

An entity should recognize as an asset the incremental costs incurred to obtain a contract with a customer, provided it expects to recover those costs.

As a practical expedient, if the amortization period of the asset is one year or less, entities may expense incremental costs when incurred.

Question 22

What is the criteria to prepay costs incurred to fulfill a contract?

Answer 22

• Directly relate to contract that can be identified.
• Generate or enhance resources for satisfying future performance obligations.
• Expected to be recoverable.

Question 23

What contract costs should be expensed when incurred?

Answer 23

• General administrative costs
• Costs of wasted resources,
• Costs related to satisfied performance obligations
• Costs not distinguishable between satisfied & unsatisfied obligations.

Question 24

How should assets for incrmenetal costs be amortised?

Answer 24

• Consistently with the transfer of related goods or services.
• Should be updated for significant changes in expected timing of transfer, change in accting estimate.
• Impairment assesment consider principles of transaction price and reflect the effects of customer credit risk.
• If carrying amount exceed expected consideration less directly related costs i.e profit. Recognise impairment loss.
• Before recognising impairment loss, any impairment loss on related assets should be recognised.
• Reversal on impairment losses should be recognised in profit or loss, limited to the carrying amt that would have been determined if no impairment loss was recognised previously.

Question 25

Presentation of contracts in SOFP

Answer 25

• Unconditional right to consideration =**recievable. **
• Entity’s obligation to transfer goods or services for which consideration been recieved or is due=Contract liability
• Entity’s right to consideration for g&s already transferred to the customer= contract asset

Question 26

What is the objective of disclosures?

Answer 26

• Provides users of financial statement with sufficient info to understand nature, amount, timing and uncertainty of revenue and cash flows from contracts.
• Includes qualitative and quantitative info about contracts, significant judgement, changes in judgments and assets recognised from contract costs.

Question 27

What are the disclosure requirements for contracts?

Answer 27

• Disclose revenue from contracts separately from other revenue sources.
• Disclose impairment losses on receivables or contract assets separately from impairment losses on other contracts.

Question 28

How should revenue be disaggregated?

Answer 28

• Revenue from contracts should be disaggregated into categories reflecting how economic factors affect the nature, amount, timing, and uncertainty of revenue and cash flows.
• Information should also clarify the relationship between disaggregated revenue and revenue disclosed for each reportable segment, if applicable.

Question 29

How are contract balances disclosed?

Answer 29

• Disclose opening and closing balances of receivables, contract assets, and contract liabilities.
• Explain revenue recognized during the reporting period related to the beginning balance of contract liabilities.
• Disclose revenue recognized in the reporting period from performance obligations satisfied in previous periods.
• Explain how the timing of performance obligation satisfaction relates to payment timing and its effect on contract asset and liability balances.
• Provide an explanation of significant changes in contract asset and liability balances during the reporting period.

Question 30

What about performance obligations should be disclosed?

Answer 30

Disclose information about when performance obligations are typically satisfied, significant payment terms, nature of goods or services promised, obligations for returns and refunds, and types of warranties.

Question 31

Transaction price allocated to remaining performance obligation

Answer 31

• Disclose the aggregate amount of transaction price allocated to unsatisfied performance obligations.
• Explain when the entity expects to recognize revenue from these remaining obligations, either quantitatively or qualitatively.

Question 32

Practical expedients

Answer 32

• Entities may omit disclosing information about performance obligations if the contract’s expected duration is one year or less or if revenue is recognized in a straightforward manner.
• Disclose qualitatively whether the practical expedient is applied and if any consideration from contracts is excluded from the transaction price disclosed.