Revenue Recognition IFRS 15
What are the 5 Steps of revenue recognition?
1) Identify the contract with the customer
2) Identify the separate performance obligations in the contract
3) Determine the transaction price
4) Allocate the transactin price to the separate performance obligations
5) Recognize revenue when each performance obligation is satsified
Recognition of income according to the CF
1) If the probability that an inflow of economic benefits will occur is not low; and
2) If faithful representation of the asset or the liability and any corresponding income, expenses or changes in equity is possible.
What is a contract?
An agreement between two or more parties that creates enforceable rights or obligations. Contracts can be written, oral or implied.
What are the main conditions of a contract?
a) Contract has been approved by both parties to the contract.
b) Each party's rights with respect to goods/services to be transferred can be identified.
c) Payment terms for the goods/services to be transferred can be identified.
d) The contract has commercial substance.
e) Collection of consideration is probable.
What is performance obligation?
A promise in a contract with a customer to transfer the customer either:
- A single good or service (or a bundle of goods and services) that is distinct.
- A series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.
When is a good or service distinct?
Customer can benefit from the good or service on its own, or
customer can use the good or service with other resources readily available to the customer.
+
Entity's promis to transfer the good or service to the customer is separately identifiable fom other promises in the contract.
= Separate performance obligation
What is the transaction price?
The amount of consideration to which an entity expects to be intitles in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties.
What should also be considered in the transaction price?
a) Variable consideration
b) Constraints to estimates of variable consideration
c) Significant financing component
d) Non-cash consideration
e) Consideration payable to customer
The general rule to allocate the transaction price to performance obligations is:
Allocation to performance obligations based on relative stand-alone selling prices.
When should revenue be recognized?
When (or as) it satisfies each performance obligation by transferring control.
When is a performace obligation recognized over time?
Yes to one of the following:
- Customer receives benefits as the entity performs.
- Entity creates/enhances an asset that the customer already controls.
- Asset does not have alternative use to the entity and enforceable right to receive payment already exists.
-> No to all = point in time
When do contracts have to be combined?
If an entity enters into multiple contracts with the same customer at, or near, the same time, if:
- contracts are a package with intent of meeting a singular business purpose, or
- consideration that customer has to pay in one contract is impacted by the price or performance of the other contract, or
- some or all of the good/services promised in the individual contracts form a single PO
When is a contract modification a separate contract?
- contract modification is approved by both parties
- the scope of the contract increases due to addition of promised goods or services that are distinct
- the price of the contract increases by an amount of consideration that is reflective of the stand-alone prices of the additional goods and services
When does no contract modification exist?
When contract modification is not approved by both parties
When is a contract modification part of existing contract and a single po?
modification approved by both? - yes
scope of contract icreases due to addition of promised goods/services that are distinct? - no or yes
Does the price of the contract increase by an amount of consideration that is reflective of the stand-alone selling prices of these additional goods and service? - no
are remaining goods/services distinct from goods/services transferred on or before date of modification? - no
When is the old contract terminated and a new contract created?
- contract modification not approved by both parties
- scope of contract does not increase due to addition of promised goods or services that are distinct
- the price of the contract does not increase by an amount of consideration that is reflective of the stand-alone selling prices of these additional goods and services
- remaining goods or services are distinct from goods or services transferred on or before the date of the contract modification
Warranty obligations provide ...
- assurance that product functions as intended (assurance type)
- additional service (service type)
How is an assurance-type warranty recognized?
recognize revenue when goods are delivered and simultaneous recognition of provision
How is a service-type warranty recognized?
It is a separate performance obligation -> allocate a portion of the transaction price to the po.
How should th right of return for other reasons than a defect be recognized?
Not a separate po!
Separate recognition of
1) expected revenues
2) refund liability
3) right to recover asset in case of refund
customer options for additional goods/services are considered a material right if?
Customer would not receive the option to acquire additional goods or services without entering into that contract
+
price for additional goods does not reflect the stand-alone selling price
-> material right to customer gives rise to a po
third party involved in providing goods/services, principal or agent?
principal: provide specified goods/services itself.
= controls goods or service before the transfer.
-> gross revenue recognition
agent: arrange for third party to provide.
indicators:
another party is primarily responsible
entity does ot have inventory risk
entity does not have price discretion
etc.
-> net revenue recognition
transaction price: 2 options to estimate variable consideration (eg discounts etc)?
1) most likely outcome
-> recommended in scenarios with only two possible outcomes
2) expected value
-> recommended in scenarios of multiple contracts with similar characteristics and a large number of possible outcomes
What is the constraint on estimation of variable consideration?
estimated variable consideration shall be included in the transaction price only to the extent that it is highly probable that a significant revenue reversal will not occur.
Significant financing component means:
entities adjust revenue for the time value of money if there is a significant benefit of financing either for the customer or the enitity
-> entity accounts for interest expense or interest revenue separately from the sale transaction.
No adjustment if financing period < 1 yr.
how should revenue be recognized in case of non-cash consideration?
Recognize revenue at fair value of what is received
How to recognize revenue in case of consideration payable to the customer (discounts, coupons etc.)?
These elements reduce the consideration received and the revenue to be recognized.
What is the stand-alone selling price?
The observable price at which an entity would sell a promised good or service separately to a customer.
Estimation of price can happen by:
adjusted market assessment approach
expected cost plus a margin approach
residual approach, under certain circumstances
When can the residual approach be used to estimate the stand-alone selling price?
one of the following criteria is met:
- entity sells the same food or service to different customers for a broad range of amounts (ie selling price is highly variable)
- entity has not yet established a price for that good or service and the good or service has not previously been sold on a stand-alone basis (ie uncertain selling price)
How should discounts be allocated to separate po's?
Generally allocated proportionally to all po's in contract.
Only if all of the following criteria are met, discount is allocated to a specific performance obligation or sub-bundle of po's:
- each distinct good/service is regularly sold on a stand-alone basis;
- a bundle of some of those distinct goods/services is regularly sold at a discount; and
- this discount is substantially the same as the discount in the contract
When should variable consideration be allocated to specific po's?
If the terms of a variable payment relate specifically to a po.
What is the output-bsed method, to depict performance in transferring control of goods/services?
Direct measurement based on the value
of the goods delivered relative to those
undelivered.
What is the input-based method, in to depict performance in transferring control of goods/services?
Indirect measurement based on the
entity’s efforts or inputs towards
satisfying the performance obligation
relative to the total expected inputs.
What is the cost-to-cost method?
Is used to determine the percentage of completion of a project that is satisfied over time.
-> Divide all costs recorded to date on a project or job by the total estimated amount of costs that will be incurred for that project or job.
-> Result is an overall percentage of completion that is then used, e.g., for revenue recognition.
When are adjustments (input-based method) to measure progress required?
a) cost incurred does not contribute to an entity's progress in satisfying the performance obligation.
b) cost incurred is not proportionate to the entity's progress in satisfying the performance obligation.