Revenue

Question 1

Objective of IFRS 15

Answer 1

to establish the principles that an 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 2

Scope of IFRS 15

Answer 2

EXCLUDES:
1. Lease contracts
2. Financial instruments and other contractual rights/obligations
3. consolidated financial statements
4. Joint Arrangements
5. Separate Financial Statements
6. Investments in Associates and Joint Ventures
7. insurance contracts
8. Non-monetary exchanges

Question 3

core principle

Answer 3

an entity will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

Question 4

Five-step framework

Answer 4

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

Question 5

Step 1: Identify the contract with the customer

Answer 5

1. the contract has been approved by the parties to the contract;
2. each party’s rights in relation to the goods or services to be transferred can be identified;
3. the payment terms for the goods or services to be transferred can be identified;
4. the contract has commercial substance; and
5. it is probable that the consideration to which the entity is entitled to in exchange for the goods or services will be collected.

Question 6

If a contract with a customer does not yet meet all of the above criteria

Answer 6

the entity will continue to re-assess the contract going forward to determine whether it subsequently meets the above criteria. From that point, the entity will apply IFRS 15 to the contract

Question 7

Step 2: Identify the performance obligations in the contract

Answer 7

1. a good or service (or bundle of goods or services) that is distinct; or
2. a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.

Question 8

distinct good or service criteria

Answer 8

1. the customer can benefit from the good or services on its own or in conjunction with other readily available resources; and
2. the entity’s promise to transfer the good or service to the customer is separately idenitifable from other promises in the contract.

Question 9

series of distinct goods or services is transferred criteria

Answer 9

1. each distinct good or service in the series that the entity promises to transfer consecutively to the customer would be a performance obligation that is satisfied over time (see below); and
2. a single method of measuring progress would be used to measure the entity’s progress towards complete satisfaction of the performance obligation to transfer each distinct good or service in the series to the customer.

Question 10

Factors for consideration for transferring goods or services

Answer 10

1. the entity does provide a significant service of integrating the goods or services with other goods or services promised in the contract;
2. the goods or services significantly modify or customise other goods or services promised in the contract;
3. the goods or services are highly interrelated or highly interdependent.

Question 11

Step 3: Determine the transaction price

Answer 11

1. The promised amount of consideration is variable
2. The contract has a significant financing component
3. Trade and settlement discounts

Question 12

transaction price

Answer 12

the amount to which an entity expects to be entitled in exchange for the transfer of goods and services.

Question 13

Variable consideration (Discount or right of return)

Answer 13

1. Estimating the amount of variable consideration the entity will be entitled to.
2. Constraining the estimated variable consideration
3. Refund Liability

Question 14

Estimating the amount of variable consideration the entity will be entitled to.

Answer 14

If the consideration promised in a contract includes a variable amount, an entity shall estimate the amount of consideration to which the entity will be entitled in exchange for transferring the promised goods or services to a customer.

Question 15

Constraining the estimated variable consideration

Answer 15

An entity shall include in the transaction price the variable consideration estimated, only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved

Question 16

Refund Liability

Answer 16

Measured at the amount of consideration received to which the entity does not expect to be entitled to.
Shall be updated at the end of each reporting period for changes in circumstances

Question 17

Examples of refund liability

Answer 17

1. A customers right to return goods and be refunded for the returned goods.
2. A customers right to a settlement discount for payment within a certain period.
3. A customers right to a volume discount for a certain volume of purchases within a particular period of time.
4. The customers obligation to pay additional consideration if the product achieves a certain level of effectiveness.

Question 18

SIGNIFICANT FINANCING COMPONENT

Answer 18

1. The difference, if any, between the amount of promised consideration and the cash selling price of the promised goods or
   services; and
2. The combined effect of (i) the expected length of time between when the entity transfers the promised goods or services to the
   customer and when the customer pays for those goods or services and (ii) the prevailing interest rates in the relevant market.

Question 19

Measuring and recognising the financial component

Answer 19

1. The significant financing component (will be recognized as interest over the period between performance and payment).
2. And the transaction price (will be used to recognize revenue from contract with customers as per the 5-step revenue recognition model)
3. For a deferred/arrear payment: Promised consideration – significant financing component = transaction price

Question 20

Exceptions for significant financial component

Answer 20

1. The customer paid in advance and the timing of the transfer is at the discretion of the customer
   A substantial amount of the consideration varies on the occurrence or non-occurrence of a future event that is not within the control of the customer or entity

Question 21

One-year practical expedient (SFC)

Answer 21

An entity does not have to account for the significant financing component if the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.

Question 22

Advance payment vs Arrear/Deferred Payment

Answer 22

1. When a customer pays in arrears, the entity is providing finance to the customer and will therefore recognize an interest income.
2. A significant financing component can also exist when the customer pays in advance and the performance (delivery of goods/services) takes place in the future.
3. In this case it is the customer who is providing finance to the entity. The entity will therefore recognize an interest expense.

Question 23

Step 4: Allocate the transaction price to the performance obligations in the contracts

Answer 23

an entity will allocate the transaction price to the performance obligations in the contract by reference to their relative standalone selling prices.

Question 24

How to allocate the transaction price

Answer 24

1. Estimation of standalone selling price when it is not directly observable
2. Discounts (if the discount relates to some, but not all performance obligations) NB FOR ACC3AB
3. Variable consideration (if the variable consideration relates to some but not all performance obligations.

Question 25

standalone selling prices

Answer 25

They are based on the observable price of the good or service when the entity sells that good or service separately in similar circumstances and to similar customers If it is not directly observable, the entity will need to estimate it.

Question 26

Allocating a discount

Answer 26

When the sum of the standalone selling prices of the promised goods or services in the contract exceeds the transaction price, Allocated on a proportional basis to all of the performance obligations in the contract, based on given or easily determinable standalone selling prices.

Question 27

Criteria for allocating discount

Answer 27

1. The entity sells each distinct good or service in the contract on a stand-alone basis 2. The entity regularly sells, on a stand-alone basis, a bundle of some of those distinct goods or services at a discount to the stand-alone selling price of the good or services in each bundle 3. the discount ascribed to each bundle is substantially the same as the discount in the contract 4. an analysis of the goods or services in each bundle provides observational evidence of the performance obligation to which the entire discount in the contract belongs

Question 28

Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation

Answer 28

When the customer is given control of the asset

Question 29

Control of the asset

Answer 29

1. the customer has the ability to direct the use of the asset 2. the customer has the ability to receive substantially all the remaining benefits from the asset

Question 30

Way to satisfy performance obligations

Answer 30

At a point in time Over a period of time

Question 31

Performance obligation satisfied over time

Answer 31

1. the customer simultaneously receives and consumes all of the benefits provided by the entity as the entity performs; 2. the entity’s performance creates or enhances an asset that the customer controls as the asset is created; or 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 32

recognises revenue over time

Answer 32

Based on the measure of progress which can either by i. the input method: based on goods/services PRODUCED; results of appraisals, milestones reached or units produced ii. the output method: based upon the entity's EFFORTS and INPUTS: resources consumed, labour hours expended, costs incurred or time lapsed

Question 33

Performance obligations satisfied at a point in time

Answer 33

When the customer obtains control of the assets in terms of the ability to i. DIRECT THE USE of the asset ii. RECEIVE THE BENEFIT from the asset

Question 34

recognise revenue at a point in time criteria

Answer 34

1. The customer has a PRESENT OBLIGATION to pay for the asset 2. The customer has ACCEPTED the asset 3. The customer has significant RISKS and REWARDS of ownership of the asset 4. The customer has PHYSICAL POSSESSION of the asset 5. The customer has LEGAL TITLE to the asset

Question 35

Contract costs

Answer 35

The incremental costs of obtaining a contract must be recognised as an asset if the entity expects to recover those costs.

Question 36

Incremental costs

Answer 36

costs that it would not have incurred if the contract had not been obtained. Capitalization is amortized on a systematic basis marketing costs, legal costs, sales commission paid, etc.

Question 37

Costs to fulfill a contract

Answer 37

1. the costs relate DIRECTLY to a contract (or a specific anticipated contract); 2. the costs GENERATE or ENHANCE resources of the entity that will be used in satisfying performance obligations in the future; and 3. the costs are expected to be RECOVERED

Question 38

Costs not recognised as an asset and are Expended in IFRS 15

Answer 38

1. General and administrative costs (unless these costs are explicitly chargeable to the customer under the contract) 2. cost of wasted material, labour or other resources 3. costs that relate to satisfied or partially satisfied performance obligations (i.e. costs that relate to past performance); and 4. costs for which the entity cannot distinguish whether the costs relate to unsatisfied performance obligations or satisfied performance obligations or partially satisfied performance obligations

Question 39

Amortization and impairment

Answer 39

Amortised on a SYSTEMATIC BASIS; accounted for as a change in estimate in accordance with IAS 8 after updating significant changes Tested for impairment in terms of IAS16

Question 40

Appendix B examples

Answer 40

Sale with a right of return warranties principle vs agent considerations repurchase arrangements consignment arrangements bill-and-hold arrangements

Question 41

Presentation

Answer 41

1. Trade receivables: an entity's unconditional right to consideration that arises when the entity transfers goods or services to a customer, but the customer's payment of the consideration is still outstanding 2 .Contract assets: an entity's right to consideration that arises when the entity transferred goods or services to a customer, but the customer's payment of the consideration is still outstanding 3. Contract liabilities: arises when a customer pays consideration to the entity before the entity has transferred the goods or services to the customer; income received in advance

Question 42

Disclosure

Answer 42

1. contracts with customers; 2. significant judgments, and changes in the judgments, made in applying the guidance to those contracts; and 3. any assets recognised from the costs to obtain or fulfill a contract with a customer.

Question 43

contracts with customers

Answer 43

1. revenue recognised from contracts with customers 2. any impairment losses recognised on any receivables or contract assets 3. disaggregation of revenue 4. contract balances 5. performance obligations 6. transaction prices allocated to remaining performance obligations

Question 44

significant judgments, and changes in the judgments

Answer 44

1. determining the timing of satisfying performance obligations 2. determining the transaction price and amounts allocated to performance obligations

Question 45

assets recognised from the costs to obtain or fulfill a contract

Answer 45

1. closing balance of such assets 2. determining the amortisation method 3. amount of amortisation and impairment 4. judgements used in determining those costs incurred