IFRS 15 Revenue from contracts with customers

IFRS 15
Revenue from contracts with
customers
1
May 12, 2017
Prepared By:
Mr. Yasir Riaz, FCA
Mr. Nadir Malik, ACA

Presenter Profile
2Workshop : IFRS 15 Revenue from Contracts with Customers
YASIR RIAZ
FCA, CICA
Yasir Riaz is a Fellow Chartered Accountant (FCA) from Institute of Chartered Accountants of Pakistan, an expert
finance professional and facilitator specialized in IFRS, US GAAP and several finance courses.
Yasir has in-depth knowledge and practical experience of IFRS and US GAAP. He is well known IFRS professional in
Pakistan. He has over 15 years of experience in teaching, training, consulting, and implementation of IFRS. His
trained IFRS professional are serving big 4 accountancy firms, private and public entities at national and
international level. He assisted many finance organization with technical issues related to financail instruments,
hedge accounting, deferred taxation, business consolidation and recently issued IFRS.
He is founding partner of Entrepreneurs Finance Consultants, providing premium quality training, accounting and
management consulting services in Pakistan and outside Pakistan.
He is founding partner of I.Y chartered accountants, providing assurance, business advisory, tax, risk
management, corporate finance and book keeping services to wide range of private and public entities. He served
wide range of industries including financial sector, energy, media, manufacturing, and services sector.
He is former principle of SKAN college, one of leading Accountancy college in Pakistan. SKANS has over 24 years of
delivering expert tuition and professional training in Pakistan for ACCA(UK), CIMA(UK), ICAEW (UK), MSc in
Professional Accountancy (UK), CFA(USA), CISA (USA), CMA (USA), and CA (PK).
yasir@iyk.com.pk
yasir@efinancec.com
Yasir riaz fca cica

3
4.45 – 5.00 pm Registration
5.00 – 5.05 pm Recitation of Holy Quran
5.06 – 5.55 pm Presentation
5.56 – 6.05 pm Prayer and tea break
6.06 – 6.50 pm Presentation
6.56 – 7.10 pm Prayer and tea break
7.11 – 8.30 pm Presentation & Exercises
8.31 – 8.35 pm Presentation of memento & Group
Photograph
This session will be followed by Dinner
Work Shop timelines
Start
Complete
Workshop : IFRS 15 Revenue from Contracts with Customers

Presentation Agenda
4
1. Overview of new Standard
i. Back ground of revenue recognition standard
ii. 5 step Model
iii. Contract Cost
iv. Specific guidance
v. Transition
vi. Presentation and Disclosure
2. Impacts, challenges and issues
3. Q&A discussion

Overview of new IFRS Standard

Backround
Scope: All contracts with customers except
• Lease contracts, IAS 17
• Insurance contracts, IFRS 4
• Financial instruments, IFRS 9
• Non-monetary exchanges between entities in same line of business to facilitate sales to customers
or potential customers
Timing
Scope
Released on 28, May 2014 – as IFRS 15.
Effective Date: 1, January 2018
• (early adaption permitted under IFRS, not with US GAAP)
Approach: full retrospective or modified retrospective
Complex contract
Mortgage Assistance services
Mortgage at fair value under IFRS 9
Remaining amount to assistance services under IFRS 15
Timing & Scope
6 Workshop : IFRS 15 Revenue from Contracts with Customers

Backround
Timing & Scope
replaces the following standards:
IFRIC 13
Customer Loyality
Programmes
IAS 18
Revenue
IFRIC 18
Transfers of
Assets from
Customers
SIC 31
Barter Trrans-
Actions involving
Advert.Services
IFRIC 15
Agreements
for the
construction
of real Estate
IAS 11
Construction
Contracts
IFRS 15
IAS 18
-Interest
-Dividends
IFRS 9

Backround
Core Principle
Opposed to the “risks and rewards approach (IAS 18)” revenue is now
recognised when the customer obtains control of that good or service
= “control principle”
Control!
HOW?
risk and reward?
5-step model

Presentation Agenda
9
ii. 5 step Model
iii. Contract Cost
v. Transition
3. Q&A discussion

Determine
the
transaction
Price (TP)
Allocate the
transaction
Price (TP) to the
separate
performance
obligations
(PO)
Recognize
revenue
when (or as)
an entity
satisfies a PO
Identify the
separate
performance
obligations
(PO)
Identify the
contract with
the customer
STEP 1 STEP 2 STEP 3 STEP 4 STEP 5
Oral / written?
Contract
modification?
Promises
Are they
distinct?
Fixed?
Variable?
Stand-alone selling
prices
Over time?
At the point of
time?
5-Step Model
10
Workshop : IFRS 15 Revenue from
Contracts with Customers

IFRS 15 Revenue from Contracts with Customers
Example #1: telecom co. / bundle offersExample #1: telecom co. / bundle offers
Network services =
80 CU/month
without handset
Free handset
+ 12-month network
services
Free handset
+ 12-month network
services
12 x CU 10012 x CU 100
Handset = 300 CU
ABC Johnny
11

No revenue for handset (given for free)
12-m. monthly plan at 100 CU/month
+ Free handset
IAS 18
Revenue for network services: CU 100 per month => CU 1 200 total
IFRS 15 => Transaction price = 1 200 (100*12)
Performance
obligations
Stand-alone
selling price
Allocated
transaction price
Revenue Billing
Handset 300 285.70
(300/1260*1200)
285.70
when handset is delivered
0
Network services 960 (12 * 80) 914.30
(960/1260*1200)
76.20/Month
(914.30/12)
100/month
TOTAL 1 260 1 200 1 200 1 200
IFRS 15 Revenue from Contracts with Customers
Example #1: telecom co. / bundle offersExample #1: telecom co. / bundle offers
12

Contract
= agreement between 2 or more parties creating
enforceable rights + obligations
 Written
1000 units
Attributes
 Parties have approved the contract and are committed to perform
 Each party’s rights to goods/services can be identified
 The payment terms for goods/services can be identified
 The contract has commercial substance
 It is probable that an entity will collect the consideration
(evaluate customer’s ability and intention to pay).
CU 1 000 000
CU 400 000
Client
 Oral
Determine the
Transaction Price (TP)
Allocate the
transaction Price (TP) to the
separate performance
obligations (PO)
Recognize revenue
when (or as)
an entity satisfies a PO
Identify the separate
performance obligations
(PO)
Identify the contract with the
customer
5-Step Model
`
Identify the contract with the customer
13

Combination of contracts
 The contracts are negotiated as a package with a single commercial objective; OR
When 1 or more is met:
 The amount of consideration paid in one contract depends on the price or
performance of the other contract; OR
 The goods or services in the contracts (or some of them in each contract) are
a single performance obligation.
Determine the
Allocate the
obligations (PO)
(PO)
customer
5-Step Model
`
Recognize revenue
when (or as)
14

= change in the scope, or price, or both => must be approved by the parties!
Contract modifications
Prior approval => Based on enforceability!
Constructor Customer Contract
Access to land within 30 days
Compensation for delays
Access provided after 90 days => Constructor
Made a CLAIM
= contract modification even if not approved
(enforceable)
`
Determine the
Allocate the
obligations (PO)
(PO)
customer
5-Step Model
Recognize revenue
when (or as)
15

Contract modifications
Are additional goods/services
in CM distinct?
Does consideration for added
goods/services reflect their
stand-alone prices?
I. CM = SEPARATE
CONTRACT
II. CM = PART OF EXISTING
CONTRACT
(“catch-up adjustment”)
III. CM ≠ SEPARATE CONTRACT;
(termination of old contract +
creation of new contract)
IV.
Combination of
II. and III.
YES
YES
NO
NO
Consideration allocated to the remaining PO:
= consideration from old contract not yet recognized
+ consideration in the contract modification
Determine the
Allocate the
obligations (PO)
(PO)
customer
5-Step Model
`
Recognize revenue
when (or as)
16

Performance obligations
= promise in a contract with a customer to transfer to the customer either:
Good / service (or
bundle) that is distinct
Series of distinct goods/services that are substantially
the same and have the same pattern of transfer
= single performance obligation
(not small individual PO)
PO can be both explicit (in the contract) and implicit (based on practices or policies)
If no transfer to customer => No PO! (e.g. admin or setup)
Determine the
Allocate the
obligations (PO)
(PO)
customer
Identify the separate performance obligations (PO)
Recognize revenue
when (or as)
5-Step Model
17

Examples:
 Sale of goods produced by entity
 Resale of goods purchased by entity
 Resale of rights purchased by an entity
 Performing contractually agreed-upon tasks
 Granting licenses
 Constructing, manufacturing, developing an asset on behalf of a customer
=> What is “DISTINCT”?
Determine the
Allocate the
obligations (PO)
customer
Recognize revenue
when (or as)
5-Step Model
18
(PO)

2. Criteria
I. Good/service is capable of being distinct
=> What is “DISTINCT”?
=> Customer can benefit from good/service
On its own
In conjunction with other readily
available resources
II. Separately identifiable from other goods/services in the contract
=> Entity is NOT using good/service as an input to produce or deliver combined output
=> The good/ service does NOT significantly modify or customize another good/service
=> The good/ service is not highly dependent with other goods/services in the contract
Determine the
Allocate the
obligations (PO)
(PO)
customer
Recognize revenue
when (or as)
5-Step Model
19

Scenario I
Customer Software developerContract
Software license
Installation
Software updates
Technical support
- Software remains functional during installation - Installation will customize software substantially
- Installation performed by other entities, too - Installation performed by other entities, too
- Other services sold also separately - Other services sold also separately
PO 1 = License PO 3 = Updates
PO 2 = Installation PO 4 = Support
PO 1 =
License +
Installation
PO 2 = Updates
PO 3 = Support
Determine the
Allocate the
obligations (PO)
(PO)
customer
Recognize revenue
when (or as)
5-Step Model
20

Goods/services that are NOT distinct:
=> Other considerations
=> Combine until you get a bundle that is distinct
PC only sold
with IT services
IT services sold either
separately, or with PC as a
package
PC = Not distinct, must be combined
IT services = distinct
Determine the
Allocate the
obligations (PO)
(PO)
customer
Recognize revenue
when (or as)
5-Step Model
21

Principal vs. agent considerations: => What is a performance obligation?
=> Other considerations
To provide good/service itself To arrange for another party to provide good/service
PRINCIPAL AGENT
Revenue = gross amount Revenue = net amount (commission)
Indicators
- Primary responsibility for fulfilling the contract - Consideration = commission
- Inventory risk - Customer’s credit risk
- Establishing prices
Determine the
Allocate the
obligations (PO)
(PO)
customer
Recognize revenue
when (or as)
5-Step Model
22

Transaction price
 Variable consideration
= amount of consideration to which the entity expects to be entitled
in exchange for transferring promised goods/services to a customer
excluding the amounts collected on behalf of third parties.
How to determine transaction price?
 Constraining estimates in variable consideration
 Existence of significant financing component
 Non-cash consideration
 Consideration payable to a customer
likelihood + magnitude of reversal
(over 1 year)
At fair value
For distinct good/service =>as purchases
Not for distinct good/service =>reduction in TP
Determine the
Allocate the
obligations (PO)`
(PO)
customer
Determine the Transaction Price (TP)
Recognize revenue
when (or as)
5-Step Model
23

=to allocate the transaction price to each performance obligation in an amountAllocation
objective that depicts the amount of consideration for transferring promised goods/services.
How to allocate the transaction price?
=> Based on relative stand-alone selling prices Criteria to apply the exception:
except for:
Allocating discounts
Entity regularly sells each distinct good/service on a stand-alone basis
Bundles are also sold regularly on a stand-alone basis at a discount to
stand-alone selling prices of goods/services
Discount attributable to each bundle is substantially the same as
discount in the contract + analysis provides evidence
Product A
Product B
Product B
Product C
= CU 40
= CU 55
= CU 45
= CU 140 Product C
= CU 60
(discount
of CU 40)
+
CU 29 (40/140*100)
Product A
Product B
Product C
CU 39 (55/140*100)
CU 32 (45/140*100)
CU 100
CU 40
Product A
Product B
Product C
CU 33 (55/100*60)
CU 27 (45/100*60)
CU 100
(general) (exception)
Determine the
Allocate the
obligations (PO)
(PO)
customer
Allocate the transaction Price (TP) to the
separate performance obligations (PO)
Recognize revenue
when (or as)
5-Step Model
24

Allocation
objective that depicts the amount of consideration for transferring promised goods/services.
Allocating consideration with variable amounts
Terms of variable payment relate specifically to
entity’s efforts to satisfy the PO
Allocating variable amount entirely to the PO is
consistent with the allocation objective
=to allocate the transaction price to each performance obligation in an amount
How to allocate the transaction price?
=> Based on relative stand-alone selling prices Criteria to apply the exception:
except for:
Determine the
Allocate the
obligations (PO)
(PO)
customer
Recognize revenue
when (or as)
5-Step Model
25

Stand-alone selling price
Adjusted market assessment approach
= the price at which the entity would sell promised good
or service separately to the customer (at contract inception)
How to estimate the stand-alone selling price?
I. Take observable selling prices
II. If observable selling prices not available
 Consider all information available
 Consider all information available
=> make estimate
Expected cost plus margin approach
Residual approach
Combination
Determine the
Allocate the
obligations (PO)
(PO)
customer
Recognize revenue
when (or as)
5-Step Model
26

27
Jack & Partner want to produce and distribute clothing with the famous animated characters created by Mikel. Mikel enters into a
contract with Jack & Partner for 2 intellectual property licenses:
- License 1: to use trademark "Mikel" in a www domain owned by Jack & Partner in order to promote and sell clothing with Mikel's brand;
- License 2: to use animated Mikel's characters on clothing.
Both licenses will be transferred to Jack & Partner immediately after contract is signed by both parties.The consideration for License 1 is
fixed, set at CU 3 000. The consideration for License 2 is 10% of future sales of clothing with Mikel's animated characters. Based on
budgets, Mikel estimates total consideration for License 2 at CU 50 000.
How and when shall Mikel recognize revenue from the contract with Jack & Partner, if:
1) Mikel sold these licenses separately in the past to a similar customer for CU 3 000 (License 1) and CU 50 000 (License 2).
2) Mikel sold these licenses separately in the past to a similar customer for CU 10 000 (License 1) and CU 40 000 (License 2).
In the year 1, total revenues from the sales of Mikel-branded clothing generated by Jack&Partner amount to CU 100 000.
Example
1. Scenario 1: stand-alone prices are CU 3 000/License 1 and CU 50 000/License 2
1.1 Assessment of allocating variable consideration
Here, Mikel's estimate of the sales-based fees approximates stand-alone selling price of License 2; and similarly, consideration for License 1
approximates stand-alone selling price of License 1. As a result, variable consideration based on sales can be allocated fully to one
performance obligation - License 2.
1.2 Allocation of variable consideration
License 1: 3,000
License 2: 50,000
Total 53,000
1.3 Revenue - year 1:
Revenue for transfer of License 1 - after contract signature:
Debit Contract Asset
Credit Revenue from sale of license 1
600
-600
Allocating variable consideration + licenses STEP 4

28
Revenue for transfer of License 2 - after contract signature (fixed part)
2,400
-2,400
Revenue for transfer of License 1 - year 1 (variable part):
2,000
-2,000 (CU 10 000/CU 50 000 * sales of CU 100 000 * 10% royalty)
Revenue for transfer of License 2 - year 1 (variable part):
8,000
-8,000
(CU 40 000/CU 50 000 * sales of CU 100 000 * 10% royalty)
Note: Mikel can recognize revenue from sales-based royalty only when a subsequent sale occurs (para B63 of
IFRS 15). In this case, it relates to both licenses, as the part of variable consideration is allocated to License 1
too.
Also please note that in this particular example, amounts of total revenues in individual point of times are the
same. However, amounts of revenues per licenses is different from scenario 1 and the it would have a
significant impact when the licenses are not transferred at the same time.
ExampleAllocating variable consideration + licenses STEP 4

Performance obligation is satisfied when a promised good or service is transferred to a customer.
Control
How can a performance obligation be satisfied?
At the point of timeOver time
Determine the
Allocate the
obligations (PO)
(PO)
customer
Recognize revenue
when (or as)
Recognize revenue when (or as)
5-Step Model
29

Performance obligation is satisfied Over time if 1 of the following is met:
• Customer simultaneously receives and consumes as the entity performs
• Customer controls the asset enhanced or created by the entity
• Entity does not create an asset with an alternative use + enforceable right to payment
How to measure progress towards completion?
=> Select single revenue recognition method + apply consistently (no change is permitted)
Over time Over time
Determine the
Allocate the
obligations (PO)
(PO)
customer
Recognize revenue
when (or as)
5-Step Model
30

Performance obligation is satisfied At the point of time if control not transferred over time.
Indicators:
• The entity has a present right to payment for the asset.
• The customer has legal title to the asset.
• The entity has transferred physical possession to the asset.
• The customer has the significant risks and rewards of ownership of the asset.
• The customer has accepted the asset.
Determine the
Allocate the
obligations (PO)
(PO)
customer
Recognize revenue
when (or as)
5-Step Model
31

32
RE Construct, property developer, builds a residential complex consisting of 50 apartments. Apartments have a similar size and
proportions - however, they can be customized to clients’ needs.
RE Construct enters into 2 contracts with 2 different clients (A and B). Both clients want to buy almost identical apartments and agree
with total price of CU 100 000 per apartment. The payment schedule is as follows:
- Upon the signature of a contract, clients pay deposit of CU 10 000 each.
- Milestone: 1 year prior planned completion, RE Construct will deliver progress reports to clients and clients need to pay CU 50 000
each.
- Completion: Upon the completion of the construction, the legal ownership to apartments is transferred to clients and they pay the
remaining amount of CU 40 000 each.
Assumed period of construction is 2 years from the date of contract. RE Construct has the right to retain the payments from any client
in the situation when that client defaults on the contract before its completion.
The contracts with clients A and B are NOT identical. Further contractual terms specify that:
- No other specific terms in the contract with client A.
- The contract with client B specifies that RE Construct cannot transfer or direct the apartment to another client and in return, the
client B cannot terminate the contract. If the client B defaults on the contract before its completion, RE Construct has the right for all
contractual price if RE Construct decides to complete the contract.
Total assumed cost of construction is CU 80 000, thereof CU 35 000 in the first year of construction and CU 45 000 in the second year
of construction.
When and how shall RE Construct recognize revenue from contract A and contract B?
Revenue over time vs. at the point of time (real estate) ExampleSTEP 5
1. Contract A
1.1 Assessment
The third criterion for recognizing revenue over time is NOT met, for the following reasons:
1) An apartment can be easily sold / transferred to another client in the case of default.
2) RE Construct has NO enforceable right to payment for performance up to date (keeps only the progress payments - these might not
be sufficient)
RE construct must recognize revenue from the contract A at the point of time.

33
1.2 Revenue recognition
Year 1
No revenue is recognized.
Year 2 - at delivery of apartment to a client
RE Construct will recognize revenue of CU 100 000 (full amount) at the point of delivery.
1.3 Journal entries
Upon the signature of contract - deposit received from client A
Debit Cash
Credit Contract liability
Debit Cash
Debit Contract liability
Credit Revenue
Debit Cash
Milestone 1 - progress payment received from client A
Completion - final payment received from client A
Delivery of apartment to the client A
50,000
-50,000
40,000
-40,000
100,000
-100,000
10,000
-10,000
2. Contract B
2.1 Assessment
The third criterion for recognizing revenue over time IS met, due to following reasons:
1) RE Construct cannot direct the apartment for the alternative use (the contract with client B does not permit the transfer).
2) RE Construct has the enforceable right to payment for performance completed to date.
RE Construct recognizes revenue from the contract B over time.
ExampleSTEP 5

34
2.2 Revenue recognition
Year 1
Revenue is recognized with reference to the progress towards completion.
In this case, it is appropriate to measure progress towards completion by the input method.
Year Costs Progress Revenue
1 35,000 43.75% 43,750
2 45,000 56.25% 56,250
Total 80,000 100.00% 100,000
2.3 Journal entries
Upon the signature of contract - deposit received from client B
10,000
-10,000
Milestone 1 - progress payment received from client B
50,000
-50,000
Year 1 - revenue recognized from contract B
43,750
-43,750
Completion - final payment received from client B
40,000
-40,000
Delivery of apartment to the client B + revenue in the year 2
56,250
-56,250
Debit Cash
Debit Cash
Debit Cash
Credit Revenue
Credit Revenue from contract B
ExampleSTEP 5

Contract asset, receivable and contract liability
Did the entity receive
consideration in advance?
Did the entity transfer
goods/services in advance of
consideration
Is the consideration conditional
other than the passage of time?
Recognize contract asset
Does the entity has the right to
bill its customer?
Recognize revenue
Yes
No
No
No No No necessary
accounting
Yes
Contract liability
Yes
35

Presentation Agenda
36
ii. 5 step Model
iii. Contract Cost
v. Transition
3. Q & A discussion

IFRS 15: Contract Costs
Costs to obtain a contract Costs to fulfill a contract
If not within IAS 2/IAS 16/IAS 38
Capitalize if:
• Costs relate directly to contract
• Costs generate/enhance resources used in
satisfying performance obligations in the
future
• Costs are expected to be recovered
 
Direct labor
Direct materials
Allocated costs
Chargeable costs
General + admin costs
Wasted costs
Costs of past performance
Indistinguishable costs
Sales commissions Legal fees Bonuses to employees
Capitalize
+Amortize
37

38
ExampleContract Cost
BigBooks Corp. (see example 5) is a company providing centralized accounting services for corporations. It enters into a 3-year contract with client A
to provide all bookkeeping and data processing activities for the period of 3 years.
Before providing the services, BigBooks incurs the following expenses:
- commission to a sales representative for arranging the contract: CU 5 000
- fee to a lawyer for drafting and finalizing sales contract: CU 3 500
- investment into additional 10 computers dedicated to contract with client A: CU 4 000
- customization of existing accounting software to BigBook's needs, preparing new chart of accounts and data flows, testing: CU 13 000
- payroll expenses of 3 employees dedicated to contract A for 3 years: CU 30 000.
How should BigBooks recognize these expenses in its financial statements?
1. Costs to obtain the contract with client A
Commission to sales representative: 5,000
Legal fees (drafting & finalizing the contract) 3,500
Total 8,500
These costs need to be capitalized and amortized over period of 3 years as BigBooks expects to recover them through future fees for the services
provided.
Journal entries:
8,500
-8,500
Amortization:
Based on revenue recognized for the contract.
Revenue Percentage Amortization
Year 1: 272,000 32.73% 2,782
Year 2: 272,000 32.73% 2,782
Year 3: 287,000 34.54% 2,936
Total 831,000 100.00% 8,500
Debit Asset - costs for contract A
Credit Cash / Bank account
Contract costs

39
Year 1:
2,782
-2,782
2. Costs to fulfill the contract with client A
Investment into additional 10 computers: 4,000 => in line with IAS 16 (account as for PPE and depreciate on a systematic basis)
Customization of SW, data flow, testing 13,000 13,000
=> costs do relate directly to the contract A -13,000
=> costs do generate/enhance resources
=> costs are expected to be recovered
BigBooks need to capitalize these costs and amortize them similarly as costs above
Based on revenue recognized for the contract.
Revenue Percentage Amortization
Year 1: 272,000 32.73% 4,255
Year 2: 272,000 32.73% 4,255
Year 3: 287,000 34.54% 4,490
Total 831,000 100.00% 13,000
(from ex. 5)
Year 1:
4,255
-4,255
Payroll expenses 30,000
=> costs do relate directly to the contract A
=> however, these costs do NOT generate/enhance resources
These costs are expensed in P/L when incurred.
Debit Asset - costs for contract A
Credit Cash / bank account
Debit P/L - amortization of costs for contract A
Credit Asset - costs for contract A
Debit P/L - amortization of costs for contract A
Credit Asset - costs for contract A
ExampleContract Cost

Presentation Agenda
40
ii. 5 step Model
iii. Contract Cost
v. Transition
3. Q&A discussion

IFRS 15 Specific guidance ?
1. Right to return assets sold
2. Warranties
3. Forwards and call options
4. Put options
5. Contract asset, receivables and contract liability
6. Non-refundable up-front fee
7. Bills and hold sale
8. Onerous contract
9. Customer loyalty program
41

Right of return
Not expected to be returned
Recognize revenue.
The entries required
Contract asset
Revenue
Receivable
Contract asset
Expected to be returned
Revenue not recognized
The entries required
Right to recover asset
Refund liability
42

Warranties-Decision tree
Assess the nature of warranty
Does the customer have the option
to purchase warranty separately ?
Does the warranty provide a
service in addition to service
already provided?
Provisions
Under IAS 37
Separate performance
obligation
Separate performance
obligation
No
No
Yes
Yes
If the warranty is required by law the is not separate
performance obligation
More lengthy the warrant period more likely that
there is a separate performance obligation
The tasks required to provide assurance that the product
complies agreed specification is not separate performance
obligation
43

Forward, Written or purchased call options
Written or purchased call
options
Repurchase price less than original
selling price?
Account for contract as
financing arrangement
Account for contract as lease unless
sale and lease back then IFRS 9 as
financing arrangement
No
Yes
When comparing re-purchase price, consider time value of
money
If the contract is financing arrangement, the entity will
continue to recognize the asset and will also recognize
the financing liability.
If the option lapses un-exercised, an entity will derecognize
the liability and will recognize the revenue.
44

Put option
Obligation to repurchase at
customer’s request
Repurchase price lower than the
original selling price
Repurchase price more than the
selling price?
Recognize revenue under IFRS
15
The customer has economic
incentive to exercise re-
purchase option?
Account for the contract under
IFRS 9 as financing
arrangement
No
No
Yes
Yes
When comparing re-purchase price, consider time value of
money
If the option lapses un-exercised, an entity will derecognize
the liability and will recognize the revenue.
Yes
No
Lease under IFRS 16
Recognize revenue
under IFRS 15
45

Non- refundable up-front fee
With renewal option
Related to transfer of performance
obligation
Revenue is recognized on
satisfaction of performance
obligation
Revenue recognized
immediately
No
No
Yes
Extended time for revenue
recognition
Yes
46

Bill and hold sale
Control transferred
Consider all the following: -
• Substantive reason for holding
• Goods separately identified
• Goods ready for physical
delivery
• The entity cannot use or sell
Revenue is recognized
Yes
No
Revenue cannot be recognized
until the control is transferred
Yes
47

Licenses
Distinct?
On transfer!
Revenue is recognized over the
time
As it exists at the point of time
Yes
No
Revenue recognized with other
goods or services
As it exists through out its life Revenue is recognized at the
point of time
Onerous contracts are accounted fore under IAS 37
48

Customer loyalty programs
Change in incentive afterwards?
Points redeemed by issuer!
Revenue is recognized
immediately and amount
received for CLP is contract
liability
Solely by issuer
No
Yes
The change will be a new PO
Solely by others The points to be redeemed is a
separate PO and revenue will
be recognized on satisfaction of
PO
Yes
Yes
No
Yes
Points redeemed by issuer or
others, revenue relating to
CLP is deferred until the
points redeemed or expired
No
49

Presentation Agenda
50
ii. 5 step Model
iii. Contract Cost
v. Transition
3. Q&A discussion

How to Apply ? Two Methods
1 January 2018 = mandatory effective date
How to make a transition?
Full retrospective adoption Modified retrospective adoption
= retrospectively to each prior reporting period = retrospectively with cumulative effect at the
date of initial application
Expedients:
• No need to restate completed contracts
within the same annual period
• No need to estimate variable considerations in
the comparative periods
• Some relief from disclosures
• Comparatives presented under prior IFRS
• IFRS 15 applied to existing and new contracts
onwards
• Adjustment to opening retained earnings
51
Transition

Presentation Agenda
52
ii. 5 step Model
iii. Contract Cost
v. Transition
3. Q&A discussion

When either party to a contract has performed, an entity shall present the contract in the statement of financial
position as a contract asset or a contract liability, depending on the relationship between the entity’s
performance and the customer’s payment. An entity shall present any unconditional rights to consideration
separately as a receivable.
Presentation and Disclosure
Presentation
53
How should producer reflect transaction in balance sheet
Debit Receivable 5000
Credit Contact Liability 5000
Debit Cash 5000
Credit Receivable 5000
ii) March 01, Cash receipt by producer from customer
i) On Jan 31, recording of advance payment due
iii) March 31, Upon satisfaction of performance obligation
Debit Contact Liability 5000
Credit Revenue 5000
On 01 January, a producer enter into contract to deliver a product to customer on 31 March. This contract is
non cancellable and requires the customer to made advance payment to C 5000 on 31 January. The customer
does not pay the consideration until 01 march.
Question ?
C C

54
Presentation and Disclosure
Disclosures May Be Challenging to Implement

Presentation Agenda
55
ii. 5 step Model
iii. Contract Cost
v. Transition
3. Q&A discussion

Early Preparation is the key for
successful implementation
A well planned implementation
approach could bring the desired
results.
and
It may impact the entire
Organization, its strategy and
business model
and
Each industry has different
dynamics and will have different
implications of IFRS 15
and
First Time Adoption of IFRS
impact more than Company
(1) People (2) Process & (3)
Information system
and
Impacts, Challenges and Issues
56

Identifting stake Holders and their Business
Interest
Government Shareholders Employees
Bankers Investors
Analysts
(e.g. for
credit ratings)
Customers Suppliers Competitors
Who cares about financial numbers ?
stakeholders
57

Availability of
profits for
distribution
Changes to
KPIs and
other key
metrics
Potential non
compliance
with loan
covenants
Compensation
and bonus plan
meeting
targets
Perception and
understanding of
analysts and
broader markets
impacts
PotentialStakeholder
Lenders
Competitors
Shareholders
Employees
Board
“ Impacts may be broader than you think ”


Analysts *
Government
Customers
Suppliers
* (e.g. credit ratings)
Pricing
Strategy &
Payment
terms

 



 



Likely Impact


Potentially very challenging for accounting systems
• Need to identify all existing contracts if criteria of the standard is met
• Need to identify / maintain large number of up-to-date standalone
selling prices?
• Need to perform high volume of different allocation calculations?
59
Challenges

Other areas where current areas may have to change
Not just an accounting issue:
• Need to prepare market for impacts and educate analysts and other
stakeholders
• Changes to KPIs and other key metrics (also, Off-Balance Sheet KPIs)
• Reconsideration of the nature of future contracts
• Changes to profile of tax cash payments
• Availability of profits for distribution
• Compensation and bonus plans – affects ability to meet targets?
• Potential non-compliance with loan covenants
60

IFRS 15
Implementation
Methodology
61

Information System / Technology
Pla
n
Processes & Internal Controls
Financial planning, budgeting & Reporting
Accounting policy
People & Organization & KPI
Tax & Dividends
Strategy ( Pricing, Payment terms )
Impact Landscaping
Design
Implement
Test
review
Plan
Potential Implementation Implications
(1) Scope Landscaping , Review of old and new accounting policy, impact assessment and preparation of GAP analysis, review of entire
organisation and identification of functions affected, Review of financial statement, management reports, business processes,
governance structure, together with discussions with management to outline the affected areas,. Evaluation of first time adoption
exemptions and accounting policy choices, Ensure functions/departments effected have due involvement in the convergence
approach ( I.e. Accounting, Controlling, sales, Business development, contract, Project management, IT etc)
(2) Plan, resources required and detail plan to be outline, including key deliverable and timeline to be agreed with management,
(3) Design, New processes, GL, new KPIs and management and operational trainings plans to be designed and agreed with
management, Trainings will be delivered, designing internal and external financial reports.
(4) Test , In test phase technology to be tested., reports are generated ,reviewed and validated. Run system parallel for three month.
(5) Implement, Process and technology changes will be go live. IFRS compliance reports to be generated, revised KPIs will be
monitored. Presentation and disclosure modification and reviewed.
(6) Review , Post implementation review and validation.
IFRS 15 Implementation Methodology
Methodology should be design in such a
way to deliver desired results to the
organization. It should include key
activities, in-scope and out scope
functional areas, deliverables, review and
valuation and etc.
“ Don’t forget the
broader business
impacts ”

63
Technology
Telecommunications
Life Sciences and
Health Care
Financial Services
Power and Utilities
Real Estate
Travel & Hospitality
Media and Entertainment
Automotive Industry, retail
&Consumer entities
Software
Key Challenges for different Industries
The profile of revenue and profit recognition will change for some entities, In
particular, companies will need to consider :
 whether revenue should be recognized over time or at a point in time;
 How shipping term will impact the timing of recognition.
 the extent to which distinct goods or services are supplied, which should be
accounted for separately;
 whether particular costs relating to obtaining a contract must be
capitalized;
 whether revenue must be adjusted for the effects of the time value of
money;
 how to account for contract modifications; and
 the impact of new guidance where pricing mechanisms include variable
amounts.
 Whether accounting treatment will be changes for different types of
licenses and royalties.
 Accounting for warranty Covers given to customer
The new Standard requires significantly more disclosures relating to revenue
and entities will need to ensure that appropriate processes are in place to
gather all the information.

Presentation Agenda
64
ii. 5 step Model
iii. Contract Cost
v. Transition
3. Q&A discussion

Q & A Session
65

Thank You
66
Mr. Yasir and his team
from

67
Contact Us
for
In House Training
If interested to run one day IFRS 15 training course please contact us at below
details
Course Delivery
Entrepreneurs Training, Accounting and Advisory
( Pvt) Limited
Head office , Lahore
House No. 415 B
Faisal Town, Lahore
Email : info@efinancec.com
Call : +92 42 35218637-40
www.efinancec.com
Branch Office, Islamabad
Suit No. 2, 2nd Floor
Pacific Centre, F8 Markaz
Islamabad
Call : 051-2287347, 051-2287316

IFRS 15 Revenue from contracts with customers

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to IFRS 15 Revenue from contracts with customers

Similar to IFRS 15 Revenue from contracts with customers (20)

Recently uploaded

Recently uploaded (20)

IFRS 15 Revenue from contracts with customers