Rev Rec IFRS 15

Question 1

What are the five steps in the IFRS 15 approach
to revenue recognition?

Answer 1

1. Identify the contract(s) with a customer
2. Identify the performance obligation(s) in the
   contract
3. Determine the transaction price
4. Allocate the transaction price to the
   performance obligations in the contract
5. Recognize revenue when (or as) the entity
   satisfies a performance obligation.

Question 2

IFRS 15: Step 1

What are the criteria to determine whether IFRS
should be applied to a contract with a customer?

Answer 2

• The contract has been approved in writing, orally, or in accordance with other customary business practices and the parties are committed to perform their obligations in the contract
• Each party’s rights regarding the goods or services to be transferred can be identified
• The payment terms for the goods or services to be transferred can be identified
• The contract has commercial substance (i.e. the risk, timing or amount of the vendor’s future cash flows is expected to change as a result of the contract)
• It is probable that the consideration for the exchange of the goods or services that the vendor is entitled to will be collected. For the purposes of this criterion, only the customer’s ability and intention to pay amounts when they become due are
  considered.

Question 3

IFRS 15: Step 1

If a contract does not meet the criteria for application of IFRS 15, how is it accounted for?

Answer 3

Any consideration received would be recognized as
revenue only when:

• The vendor has no remaining contractual
  obligations to transfer goods or services and
  all, or substantially all, of the consideration has been received and is non-refundable OR
• The contract has been terminated and the
  consideration received is non-refundable

Question 4

IFRS 15: Step 1
When two or more contracts are entered into at (or near) the same time with the same customer, when should they be accounted for as a single contract
i.e. combined?

Answer 4

The contracts are accounted for as if they were a single contract i.e. combined if at least one of the following criteria is met:

• The contracts are negotiated as a package with
  a single commercial objective
• The amount of consideration in one contract
  depends on the price or performance of the
  other contract
• The goods or services that are promised in the
  contracts (or some of the goods or services)
  represent a single performance obligation.

Question 5

IFRS 15: Step 1
A contract modification relates to a change in the scope and/or price of a contract. When does the
change require an adjustment to revenue recognized and when is the modification treated as
separate contract?

Answer 5

• Adjustments to revenue are only made when there is a change in the contract rights or obligations as a
  result of the modification
• A contract modification is accounted for as a separate (and additional) contract only if both of the
  following criteria are met:
• The scope of the contract changes due to the
  addition of promised goods or services that
  are distinct
• The price of the contract increases by an
  amount of consideration that reflects the vendor’s
  stand-alone selling price of the additional promised
  goods or services

Question 6

IFRS 15: Step 1
A contract modification relates to a change in the scope and/or price of a contract. If the modification is NOT treated as a separate contract, how it is
accounted for?

Answer 6

• Treated as a termination of the existing contract and the creation of a new contract, if the remaining goods or services are distinct from the goods or services already provided
• The consideration to be allocated to the remaining performance obligations is the sum of:
• The consideration promised by the customer (including amounts already received) that was included in the estimate of the transaction price and that had not yet been recognized as revenue
• The consideration promised as part of the contract modification
• Treated as if it were a part of the existing contract, if the remaining goods or services are not distinct and, therefore, form part of a single performance obligation that is partially satisfied at the date of the contract modification.
• The effect that the contract modification has on the transaction price, and on the measure of progress towards completion is recognized as an adjustment to revenue (either as an increase in or a reduction of
  revenue) at the date of the contract modification (i.e. the adjustment to revenue is made on a cumulative catch-up basis).

Question 7

IFRS 15: Step 2
The second step is to identify one or more distinct performance obligations in the contract. What
is a performance obligation, and when are promises to deliver multiple goods or services considered distinct performance obligations?

Answer 7

• A performance obligation is a promise to transfer to the customer either:
• a good or service (or a bundle of goods or services) that is distinct; or
• a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer
• A good or service that is promised to a customer is distinct if both of the following criteria are met:
• The customer can benefit from the good or service (i.e. it can be used, consumed, or sold) either on its own or together with other resources that are readily available to the customer
• The entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract i.e. it is not highly interrelated or integrated with other goods and services in the contract

Question 8

IFRS 15: Step 3
The transaction price is often a fixed amount specified in the contract. What are situations that
could complicate the determination of the transaction price?

Answer 8

• Variable consideration including discounts,
  rebates, refunds, credits, price concessions,
  incentives, performance bonuses, penalties, etc.
• Existence of a significant financing
  component i.e. the consideration is received
  more than one year before or after the goods or
  services are provided
• Non-cash consideration (e.g. non-monetary
  transaction)
• Consideration payable to a customer including
  rebates, coupons, etc.

Question 9

IFRS 15: Step 3
In determining the transaction price, how is variable
compensation estimated?

Answer 9

• The amount is estimated using the method that provides the best prediction of the consideration. The possible methods are:
• Expected value method - The sum of probability
  weighted amounts in a range of possible outcomes. This may be an appropriate approach if the vendor has a large number of contracts which have similar characteristics.
• Most likely amount - The most likely outcome from the contract. This may be an appropriate approach if a contract has two possible outcomes, such as a
  performance bonus which will or will not be received.
• To avoid overly optimistic estimates of variable consideration there is an overall constraint that it cannot be highly probable that there will be a subsequent significant reversal of revenue
  once the uncertainty over the amount of variable consideration is resolved e.g. at the end of a return period.

Question 10

IFRS 15: Step 3
In determining the transaction price, how is a significant financing component treated?

Answer 10

• If the timing of payments provides the customer (where the payments received after goods and services are provided) or the vendor (where payment received before goods and services are provided) with a significant benefit of financing, the transaction
  price is adjusted to reflect this financing component
• If consideration is received more than one year after the goods or services are provided, the consideration should be discounted.

The present value should be recognized as revenue for the goods or services and the remainder recognized as interest revenue over the period between provision of the good or services and receipt of payment

• If payment is received more than one year before the goods or services are provided an interest expense should be recognized on the consideration being held, with an offsetting credit to deferred
  revenue. When the goods or services are provided the deferred revenue should be debited and revenue credited.

Question 11

IFRS 15: Step 3
In determining the transaction price, how is non-cash
consideration treated ?

Answer 11

• When determining the transaction price, the
  starting point is that the vendor should
  measure the non-cash consideration at
  its fair value.
• If it is not possible to measure the fair value
  of the non-cash consideration, then the
  vendor is required to estimate this by using
  the stand-alone selling prices of the goods or
  services subject to the contract (goods or
  services received).

Question 12

IFRS 15: Step 3
In determining the transaction price, how is consideration payable to a customer e.g. rebates
treated?

Answer 12

• Accounted for as a reduction of the
  transaction price (and hence, a reduction
  of revenue), unless the payment to the
  customer is in exchange for a distinct good
  or service that the customer transfers to the
  vendor.

Question 13

IFRS 15: Step 4
How is the transaction price allocated to the distinct
performance obligations (where there is more than one)?

Answer 13

• The starting point for the allocation is the relative
  standalone selling prices of each obligation
• If standalone selling prices are not available, they are estimated
• If there is a discount i.e. the total contract price is less than the sum of the standalone selling prices, it is allocated proportionately unless there is observable evidence that the discount relates only to certain component(s)
• Variable consideration is generally allocated to the specific performance obligations to which it relates, if it is related to a specific obligation and not to the contract as a whole

Question 14

IFRS 15: Step 5
It must be determined for each performance obligation whether it is satisfied over time, or at a
point in time. How is this determined?

Answer 14

• A performance obligation is satisfied over time if one of the following criteria is met:
• The customer simultaneously receives and
  consumes the economic benefits provided by the
  vendor’s performance (this is usually the case for
  services)
• The vendor creates or enhances an asset
  controlled by the customer
• The vendor’s performance does not create an asset for which the vendor has an alternative use, the vendor has an enforceable right to payment for
  performance completed to date.
• If none of the above criteria are met, the performance obligation is considered to be satisfied at a point in time

Question 15

IFRS 15: Step 5
How is revenue recognized on a performance obligation that is satisfied over time?

Answer 15

• When a performance obligation is satisfied over
  time, revenue is recognized by measuring the
  progress toward completion based on either:
• Input methods (e.g. expenses incurred, labour
  hours used, etc.)
• Output methods (e.g. milestones achieved,
  units delivered, etc.)

Question 16

IFRS 15: Step 5
When is revenue recognized on a performance obligation that is satisfied at a point in time?

Answer 16

• If a performance obligation is satisfied at a point in time revenue is recognized when control is transferred. In assessing transfer of control the following indicators are considered:
• The vendor has a present right to payment for the asset
• The customer has legal title to the asset
• The customer has physical possession of an asset
• Physical possession may not coincide with control of an asset e.g. consignment stock or bill and hold
  arrangements may result in physical possession but
  not control)
• Significant risks and rewards of ownership
• Acceptance of the asset

Question 17

How are upfront fees dealt with under IFRS 15?

Answer 17

• Apply the IFRS 5 step framework.
• The question is whether the fee relates to the
  transfer of a separate good or service, in
  applying Step 2 of the IFRS 15 framework
  (identifying the performance obligations).
• If the fee is not related to a separate
  performance obligation, it is accounted for as
  advance payment for future goods or services
  i.e. deferred. The fee would be recognized along
  with the other contract revenue in accordance
  with step 5.

Question 18

How does a right of return factor in to the five steps in IFRS 15?

Answer 18

• Under IFRS 15 revenue is only recorded to the
  extent that the vendor expects to be entitled to
  it (in other words revenue is recorded net of any
  expected returns)
• To determine the amount of revenue to be
  recorded the guidance on variable
  consideration should be applied in Step 3 of
  the IFRS 15 framework, considering case facts
  about the nature of the products to be returned
• A refund liability is recognized (credited) for the
  amount of the expected returns

Question 19

What are the indicators of a consignment sale and how are they treated under IFRS 15?

Answer 19

• Apply the five step framework.
• In applying Step 5 revenue is recognized when control is transferred. IFRS 15 states that a vendor does not recognize revenue on consignment sales because control has not transferred.
• IFRS 15 lists the following indicators of a consignment sale:
• The product is controlled by the entity until a specified event occurs, such as the sale of the product to a customer of the dealer or until a specified period expires
• The entity is able to require the return of the product or transfer the product to a third party (such as another dealer); and
• The dealer does not have an unconditional obligation to pay for the product (although it might be required to pay a deposit).

Question 20

How are customer acceptance provisions dealt with under IFRS 15?

Answer 20

• Apply the five step framework.
• In applying Step 5 revenue is recognized when control is transferred.
• IFRS 15 states that if it can be demonstrated that the asset meets the specifications, then customer acceptance is considered to be a formality that is not taken into account when determining whether control over the asset has passed to the
  customer.
• For example if there are size and weight specifications; the vendor would be able to confirm whether these had been met before formal acceptance by the customer.
• On the other hand, If the vendor is unable to determine that specifications have been met, then control over the asset does not transfer to the customer until the vendor has received the customer’s acceptance and revenue could be
  recognized until that time.

Question 21

What additional criteria must be met in order for revenue on bill and hold sales to be recognized
under IFRS 15?

Answer 21

• In applying Step 5 IFRS 15 provides the following additional criteria that must be met the case of a bill and hold sale in order for revenue to be recognized:
• The reason for the bill and hold arrangement must be substantive (for example, the arrangement might be requested by the customer because of a lack of physical space to store the goods)
• The product must be identified separately as belonging to the customer (that is, it cannot be used by the supplier to satisfy other orders)
• The product must currently be ready for physical
  transfer to the customer
• The vendor cannot have the ability to use the
  product, or to direct it to another customer.

Question 22

When is a warranty accounted for under IFRS 15 (as a separate performance obligation) vs. IAS
37 (as a provision)?

Answer 22

• If the customer has the option to purchase the warranty separately, it is accounted for under IFRS 15
• If a customer does not have the option to purchase the warranty separately, it is accounted for under IAS 37 unless it provides the customer with a service in addition to the assurance that the product complies with agreed-upon specifications. In making this
  assessment consider factors such as:
• Whether the warranty is required by law — supports that it is not a performance obligation
• The length of the warranty coverage period — the longer the coverage period, the more likely it is that the promised warranty is a performance obligation because it is more likely to provide a service in addition to the assurance that the product complies with agreed-upon specification
• The nature of the tasks that the entity promises to perform