Revenue – ifrs 15 handbook

Document Outline

• IFRS 15 handbook
• Contents
• Facing new challenges
• Overview
  • Organisation of the text
• 1 Step 1 – Identify the contract with a customer
  • 1.1 Criteria to determine whether a contract exists
    • Assessment focuses on enforceability, not form of the contract
    • Collectability is only a gating question
    • Collectability is assessed based on the amount that the entity expects to receive in exchange for goods or services
    • Judgement is required to differentiate between a collectability issue and a price concession
    • Collectability threshold may be assessed using information derived at the portfolio level
    • Collectability is reassessed only when there is a significant deterioration in the customer’s credit-worthiness
    • Collectability assessment required for contracts with a significant financing component
    • Fiscal funding clauses may affect the assessment of whether a contract exists
    • Enforceable rights and obligations for an expired contract when the entity continues to provide services
    • Free trial period offers
    • Success-based fee arrangements
    • Contracting practices may need to be evaluated by customer class
    • Two definitions of a contract exist in IFRS
    • Minimum purchase requirements
    • Additional steps may be required to create legally enforceable rights and obligations
    • Purchase orders under the same framework agreement may be inter-related
  • 1.2 Contract term
    • Contract term affects many parts of the standard
    • Consideration payable on termination can affect assessment of contract term
    • Compensation is broader than only termination payments
    • Ability of either party to cancel the contract at discrete points in time may limit the contract term
    • Evergreen contracts
    • Only the customer has a right to terminate the contract
  • 1.3 Consideration received before a contract exists
    • Revenue recognition may be deferred for a significant period
    • A receivable is generally not recognised when the collectability threshold is not met
  • 1.4 Combination of contracts
    • Evaluating ‘at or near the same time’ when determining whether contracts should be combined
    • Definition of related parties acquires new significance 
    • No exception for contracts entered into with different divisions of the same entity
    • Additional complexities for sales through distribution channels
• 2 Step 2 – Identify the performance obligations in the contract
  • 2.1 Distinct goods or services
    • Applying the indicators will require judgement
    • Applying Criterion 2 requires an entity to assess whether there is a transformative relationship between the two items being analysed
    • Separability of risks considered in determining whether goods or services are separately identifiable
    • Goods or services promised to a customer’s customer may be a performance obligation
    • Contractual restrictions may not be determinative
  • 2.2 Implied promises and administrative tasks
    • Only promises that transfer goods or services to the customer can be performance obligations
    • Set-up activities as administrative task
    • Providing end-user documentation is generally an administrative task
    • Distinguishing between an administrative task and a promised good or service 
  • 2.3 Series of distinct goods or services
    • No exemption from applying the series guidance
    • Accounting for a series is intended to provide a simplification of the model
    • Determining the nature of the entity’s promise to the customer is the first step in applying the series guidance
    • Identifying distinct goods or services as a series may affect the allocation of variable consideration
    • Not necessary for goods or services to be provided consecutively 
• 3 Step 3 – Determine the transaction price
  • Transaction price may include amounts not paid by the customer
    • Transaction price may include fair value of derivative on settlement date
  • 3.1 Variable consideration (and the constraint)
    • Consideration can be deemed to be variable even if the price stated in the contract is fixed
    • A fixed rate per unit of output may be variable consideration
    • Quantity subject to confirmation after delivery is variable consideration
    • Provisional pricing based on market price of commodity
    • Variable consideration or optional purchases
    • Volume discounts or rebates may be variable consideration or may convey a material right
    • A transaction price denominated in a foreign currency does not constitute variable consideration
    • Liquidated damages may represent variable consideration or a product warranty
    • All facts and circumstances are considered when selecting estimation method
    • Expected value method – No need to quantify less probable outcomes
    • Expected value method – Estimated amount does not need to be a possible outcome for an individual contract
    • Historical experience may be a source of evidence
    • A combination of methods may be appropriate
    • Constraint assessment made against cumulative revenue
    • Specified level of confidence included in constraint requirements
    • Constraint introduces an element of prudence
  • 3.2 Significant financing component
    • Assessment is undertaken at the individual contract level
    • No significant financing component if the timing of transfer of goods or services is at the customer’s discretion
    • Contracts with a payment scheduled for part-way through the performance period may contain a significant financing component
    • Contracts with material right may contain a significant financing component
    • Limited examples in the standard of when payments have a primary purpose other than financing
    • Accounting for long-term and multiple-element arrangements with a significant financing component may be complex
    • Using an interest rate that is explicitly specified in the contract may not be appropriate
    • Interest income recognised from a significant financing component may be presented as ‘revenue’ but not ‘revenue from contracts with customers’
    • Advance payments may affect EBITDA
    • Application of the practical expedient to a contract with multiple performance obligations
    • A contract with an implied interest rate of zero may contain a financing component
    • Interest accrued on a contract liability is a borrowing cost eligible for capitalisation
  • 3.3 Non-cash consideration
    • Constraint does not apply when variation is due to the form of non-cash consideration
    • Transfers of assets from customers
    • Barter transactions involving advertising services
  • 3.4 Consideration payable to a customer
    • Payments to distributors and retailers may be for distinct goods or services
    • Slotting fees
    • Nomination fees
    • Scope of consideration payable to a customer is wider than payments made under the contract
    • Consideration payable may include payments made outside a direct distribution chain
    • Amounts payable to a customer may be either variable consideration or consideration payable to a customer
  • 3.5 Sales taxes
• 4 Step 4 – Allocate the transaction price to the performance obligations in the contract
  • 4.1 Determine stand-alone selling prices
    • The standard does not contain a reliability threshold
    • Judgement is often required to estimate stand-alone selling price
    • Single good or service may have more than one stand-alone selling price
    • If there is a range of observable prices, then a stated contract price within the range may be an acceptable stand-alone selling price
    • Using a range to estimate stand-alone selling prices
    • The residual approach is an estimation technique, not an allocation method
    • In contracts for intellectual property or other intangible products, a residual approach may be appropriate for determining a stand-alone selling price
    • The assessment of whether it is appropriate to use a residual approach should be made separately for each good or service
    • Consideration allocated is unlikely to be zero or close to zero
  • 4.2 Allocate the transaction price
    • Allocating the transaction price may be simple if stated contract prices are acceptable estimates of stand-alone selling price
    • Additional calculations are necessary if the stand-alone selling price of one or more performance obligations differs from its stated contract price
    • Analysis is required when a large number of goods or services are bundled in various ways
    • Determination of ‘regularly sells’ is a key judgement
    • Guidance on allocating a discount typically applies to contracts with at least three performance obligations
    • Variable consideration allocation guidance is applied before the guidance on allocating discounts
    • Evaluating whether the allocation objective is met when allocating variable consideration to a distinct service period in a series
  • 4.3 Changes in the transaction price
• 5 Step 5 – Recognise revenue when or as the entity satisfies a performance obligation
  • 5.1 Transfer of control
    • Use of control concept to recognise revenue aligns with the accounting for assets
  • 5.2 Performance obligations satisfied over time
    • Differences in assumptions used when applying Criteria 1 and 3
    • Determining whether a commodity transfers over time may depend on Criterion 1
    • Application to service concession arrangements
    • Many factors to consider when evaluating alternative use
    • Evaluating whether costs of rework are significant
    • A right to payment may be established by relevant laws and regulations
    • Use of legal opinion when assessing enforceability of right to payment
    • Agreements for the construction of real estate may have different patterns of transfer of control
    • Enforceable right to payment for standard materials used as inputs
    • Termination of an over-time contract
  • 5.3 Measuring progress towards complete satisfaction of a performance obligation
    • Determining which measure of progress to apply is not a free choice
    • Single method of measuring progress is used for a performance obligation
    • Certain sales agent arrangements may be over-time
    • Measure of progress for stand-ready obligations is not always straight‑line
    • Milestone method may not depict pattern of performance
    • A performance obligation may be partially satisfied before the contract is identified 
    • Borrowing costs when revenue is recognised over time
    • Design and production services – A units-of-delivery method or a units-of-production method may not be appropriate 
    • No guidance on the timing and pattern of the recognition of margin on uninstalled materials
    • No detailed guidance on identifying inefficiencies and wasted materials
    • Consideration does not need to be a fixed amount per unit to recognise revenue at the amount that the entity has a right to invoice
    • Arrangements that include a contractual minimum
    • Practical expedient may not be available when a contract includes a significant up-front fee 
    • Rebates, credits and refunds generally preclude application of the practical expedient
  • 5.4 Performance obligations satisfied at a point in time
    • Judgement may be required to determine the point in time at which control transfers
    • Potential challenges may exist in determining the accounting for some delivery arrangements 
    • Indirect channels and sell-in vs sell-through
  • 5.5 Repurchase agreements
    • An approach that focuses on the repurchase price
    • Requirements for repurchase agreements not applicable to arrangements with a guaranteed resale amount
    • Conditional forwards or call options
    • Right of first refusal 
  • 5.6 Consignment arrangements
  • 5.7 Bill-and-hold arrangements
  • 5.8 Customer acceptance
• 6 Scope
  • 6.1 In scope
    • Determining whether an activity is ‘ordinary’ may require judgement
    • Sales of by-products may be in the scope of the standard
  • 6.2 Out of scope
    • Product and service warranties – Revenue vs provisions standard
    • Contributions in non-exchange transactions are outside the scope of the standard
    • Settlement of imbalances in non-monetary exchanges
  • 6.3 Partially in scope
    • In some cases, there will be little or no residual amount remaining to allocate
    • A counterparty may be both a collaborator and a customer
    • Rate-regulated entities applying specific requirements do not apply the standard to movements in regulatory deferral account balances
    • Parts of the standard apply to sales of non-financial assets
    • Financial services fees – Revenue vs financial instruments standard
    • Determining the contract term when a contract contains lease and non-lease components
  • 6.4 Portfolio approach
    • Entities need to consider costs vs benefits of portfolio approach
    • No specific guidance on assessing whether portfolio approach can be used
• 7 Contract costs
  • 7.1 Costs of obtaining a contract
    • Practical expedient applies if the amortisation period is less than one year
    • Capitalising commission when associated liability is accrued
    • Judgement required for multiple-tier commissions
  • 7.2 Costs of fulfilling a contract
    • Applicability of the cost capitalisation guidance in the revenue standard
    • Judgement needed in determining whether cost capitalisation criteria are met
    • Judgement needed in determining whether to capitalise learning curve costs
    • Costs in excess of constrained transaction price
    • Transportation services and costs
    • Back-end-loaded costs
  • 7.3 Amortisation
    • Amortisation period may need to include anticipated contracts
    • Anticipated contracts included when determining whether practical expedient applies
    • Judgement is required when contracts include recurring commissions
    • Systematic amortisation for contract assets related to multiple performance obligations
    • No correlation with the accounting for non-refundable up-front fees
    • Presentation of amortisation costs may often depend on the nature of the entity and its industry
  • 7.4 Impairment
    • Impairment model specifically for capitalised contract costs
    • Specific anticipated contracts are considered in impairment test
    • Discounting may be relevant for long-term contracts
• 8 Contract modifications
  • 8.1 Identifying a contract modification
    • Assessment focuses on enforceability
    • Criteria to determine when a modification is approved
    • Contract claims are evaluated using the guidance on contract modifications
    • Partial contract terminations are accounted for as contract modifications
  • 8.2 Accounting for a contract modification
    • Different approaches for common types of contract modifications
    • Distinct goods or services in a series that are treated as a single performance obligation are considered separately
    • Interaction of new contracts with pre-existing contracts needs to be considered
    • Accounting for contract asset on termination of an existing contract and creation of a new one
• 9 Licensing
  • 9.1 Licences of intellectual property
    • Different accounting for a licence and sale of IP
    • No definition of intellectual property
    • IP that forms part of tangible asset
    • Distinguishing between a licence and service
  • 9.2 Determining whether a licence is distinct
    • Assessing whether a licence is distinct may require significant judgement
    • Customer’s option to purchase additional licences
  • 9.3 Determining the nature of a distinct licence
    • Franchise licences generally provide a right to access IP
    • Only consider licensor’s activities that do not transfer a good or service to the customer
    • Effect of different attributes of a licence on determining the nature of the entity’s promise
    • Entity’s activities that significantly affect the IP
    • Cost and effort to undertake activities are not the focus of the analysis
  • 9.4 Timing and pattern of revenue recognition
    • Application of the general guidance on performance obligations satisfied at a point in time
  • 9.5 Contractual restrictions and attributes of licences
    • No explicit guidance on distinguishing attributes of a licence from additional licences
    • Distinguishing attributes of a single licence from additional promises to transfer licences
    • Substantial break between periods during which a customer is able to use (or access) IP
  • 9.6 Sales- or usage-based royalties
    • Exception for sales- or usage-based royalties aligns the accounting for different licence types
    • Judgement is required to assess when a licence of IP is ‘predominant’
    • Application of royalties exception to milestone payments
    • Guaranteed minimum payment – Right-to-use licence
    • Guaranteed minimum payment – Right-to-access licence
    • Variable royalty rates – Right-to-use licence
    • Variable royalty rates – Right-to-access licence
    • Allocating sales- or usage-based royalties to multiple performance obligations
• 10 Other application issues
  • 10.1 Sale with a right of return
    • Partial refunds are measured based on the portion expected to be refunded
    • Restocking fees and costs
    • Conditional right of return
    • Historical experience may be a source of evidence for estimating returns
  • 10.2 Warranties
    • A refund for defective services may be variable consideration rather than a warranty
    • Defective product returns in exchange for compensation 
    • Liquidated damages and similar types of contractual terms
    • Some warranty arrangements may be in the scope of the insurance standard
    • ‘Reasonably account’ threshold is undefined
    • Length of the warranty period is an indicator of the type of warranty, but is not always determinative
    • Repairs outside the warranty period as a customary practice
    • An ‘extended warranty’ may be a service-type warranty or an assurance-type warranty
  • 10.3 Principal vs agent considerations
    • Unit of account is the specific good or service
    • The specified good or service may be a right
    • Principal-agent indicators support application of the general control principle, but cannot override it
    • Certain conditions may help with control determination
    • No individual indicator is generally determinative
    • Providing a specific integration service is determinative
    • Entity obtains only flash title before transfer to the customer
    • Entity may still be principal for tangible asset even if it does not take physical possession
    • No specific guidance on allocating a discount when an entity is a principal for part of the arrangement and an agent for the other part
    • Estimating gross revenue as a principal
  • 10.4 Customer options for additional goods or services
    • Determining whether a material right exists requires an evaluation of both quantitative and qualitative factors
    • Customers’ options that provide accumulating rights are assessed in aggregate
    • Exercise of a material right
    • Estimate of the likelihood of exercise of an option is not revised
    • Estimating the stand-alone selling price of ‘free’ gift cards and coupons
    • Coupons issued at the point of sale
    • Volume discounts and rebates
    • Evaluating optional purchases at a discount compared with the original contract
    • A cancellable contract may contain a material right
    • Alternative approach not limited to renewal options
    • More than one acceptable approach to determine the expected goods or services to be provided
    • No significant financing component in most customer loyalty programmes 
    • Cancellable customer loyalty programmes may be implicit performance obligations
    • Treatment of customer credit card arrangements
    • Residual approach generally not appropriate for determining stand-alone selling price of loyalty points
    • Amounts payable to third party loyalty programme operators 
  • 10.5 Customers’ unexercised rights (breakage)
    • Constraint applies even though consideration amount is known
    • Breakage does not constitute variable consideration
    • Prepaid stored-value products may be financial liabilities
    • Portfolio of data can be used for estimating expected breakage
  • 10.6 Non-refundable up-front fees
    • Quantitative and qualitative indicators are considered when assessing up-front fees
    • Determining whether a non-refundable up-front fee relates to the transfer of a promised good or service 
    • Up-front fee may need to be allocated
    • Deferral period for non-refundable up-front fee depends on whether the fee provides a material right
    • Consideration of whether a non-refundable up-front fee gives rise to a significant financing component
    • Up-front fees in the funds and insurance industries
  • 10.7 Sales outside ordinary activities
    • Judgement required to identify ordinary activities
    • Accounting for a non-current non-financial asset held for sale may result in a gain or loss on transfer of control because consideration may differ from fair value
    • Applying transaction price guidance on measuring consideration received or receivable
    • Little difference in accounting for sales of real estate to customers and non-customers
    • Transfers to inventory are still possible if specific criteria are met
• 11 Presentation
  • 11.1 Statement of financial position
    • Contract asset and contract liability – Based on past performance
    • Single contract asset or contract liability for contracts with multiple performance obligations
    • Contract assets and contract liabilities for multiple contracts are not netted
    • Impairment assessment of contract assets for contracts with multiple performance obligations
    • Impairment assessment of contract assets when the consideration is variable
    • Classification as current vs non-current
    • Presentation of costs to obtain and costs to fulfil a contract in the statement of financial position
    • Receivable vs contract asset – Distinction based on unconditional right to consideration
    • Receivable vs contract asset – Refund obligations do not impact the analysis
    • Milestone payments under over-time contracts
    • Recognising a receivable when the consideration is variable
  • 11.2 Statements of profit or loss and cash flows
    • Presenting ‘revenue from contracts with customers’ separately on the face of the statement of profit or loss is not required
    • Interest income recognised from a significant financing component may be presented as ‘revenue’ but not ‘revenue from contracts with customers’
    • Presentation of amortisation costs in the statement of profit or loss
    • Classification of cash flows related to contract costs depends on the nature of the activity
• 12 Disclosure
  • 12.1 Annual disclosure
    • Revenue is a gross number
    • No minimum number of categories required
    • Disaggregation of revenue may be at a different level from segment disclosures
    • Changes in the transaction price may need to be disclosed
    • Remaining performance obligation disclosures may differ from backlog disclosures
    • Contract renewals are included only if they provide a material right
    • Certain contracts can be excluded from remaining performance obligation disclosures
    • Constrained transaction price is used in the remaining performance obligation disclosures
    • Greater specificity in the revenue standard
  • 12.2 Interim disclosures
    • Extent of interim revenue disclosures requires judgement 
• 13 Effective date and transition
  • 13.1 Transition
  • 13.2 Retrospective method
    • All contracts (open and closed) under previous requirements require consideration
    • Cost and income tax line items may also require adjustment
    • Regulatory requirements need to be considered
    • Relief provided by practical expedient 1
    • Limited hindsight allowed
    • Use of the practical expedient may bring forward revenue recognition
    • Exemption from restating for contract modifications that occur before the start of the earliest period presented
    • Disclosure relief only
  • 13.3 Cumulative effect method
    • Dual reporting still required
    • Cumulative effect method reduces comparability
    • Choosing to apply the cumulative effect method to all contracts may improve comparability 
    • Contract modification practical expedient simplifies implementation but reduces comparability
  • 13.4 Consequential amendments to other IFRS requirements
  • 13.5 First-time adoption
• Guidance referenced
• Detailed contents
• Index of examples
• Index of KPMG insights
• About this publication 
  • Content 
• Keeping in touch
• Acknowledgments