Revenue from Contracts with Customers IFRS 15 Revenue from Contracts with Customers Presented by: CPA Sporta Fred (PhD. Fellow) Thursday 25th November 2016 Credibility . Professionalism . Accountability

Content Objective Scope Definitions Disclosures Judgments

Superseded Standards IFRS 15 replaces the following standards and interpretations: IAS 11 Construction contracts IAS 18 Revenue IFRIC 13 Customer Loyalty Programmes IFRIC 15 Agreements for the Construction of Real Estate IFRIC 18 Transfers of Assets from Customers SIC-31 Revenue - Barter Transactions Involving Advertising Services

1.0 Objective [IFRS 15:1] The objective of IFRS 15 is 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. [IFRS 15:1] Application of the standard is mandatory for annual reporting periods starting from 1 January 2018 onwards. Earlier application is permitted. 

1.2: scope IFRS 15 (5) An entity shall apply this Standard to all contracts with customers, except the following: (a) Lease contracts within the scope of IAS 17 Leases; (b) Insurance contracts within the scope of IFRS 4 Insurance Contracts; (c) Financial instruments and other contractual rights or obligations within the scope of IFRS 9 Financial Instruments, IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IAS 27 Separate Financial Statements and IAS 28 Investments in Associates and Joint Ventures; and

1.2: scope IFRS 15 (5) (d) non-monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers. For example, this Standard would not apply to a contract between two oil companies that agree to an exchange of oil to fulfill demand from their customers in different specified locations on a timely basis.

1.3 Key definitions IFRS 15 (5) Appendix A] Contract; An agreement between two or more parties that creates enforceable rights and obligations. Customer; A party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration. Income; Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in an increase in equity, other than those relating to contributions from equity participants.

1.3 Key definitions IAS 15 (5) Appendix A] Performance obligation; A promise in a contract with a customer 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. Revenue; Income arising in the course of an entity’s ordinary activities. Transaction price The amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties.

Recognition IFRS 15(9) Identifying the contract An entity shall account for a contract with a customer that is within the scope of this Standard only when all of the following criteria are met: (a) the parties to the contract have approved the contract (in writing, orally or in accordance with other customary business practices) and are committed to perform their respective obligations; (b) the entity can identify each party’s rights regarding the goods or services to be transferred; (c) the entity can identify the payment terms for the goods or services to be transferred;

Recognition IFRS 15(9) (d) The contract has commercial substance; and (e) It is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. In evaluating whether collectability of an amount of consideration is probable, an entity shall consider only the customer’s ability and intention to pay that amount of consideration when it is due. The amount of consideration to which the entity will be entitled may be less than the price stated in the contract if the consideration is variable because the entity may offer the customer a price concession

Accounting requirements for revenue The five-step model framework The core principle of IFRS 15 is that an entity will recognise 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.  This core principle is delivered in a five-step model framework: [IFRS 15:IN7]

The framework five steps Identify the contract(s) with a customer Identify the performance obligations in the contract Determine the transaction price Allocate the transaction price to the performance obligations in the contract Recognise revenue when (or as) the entity satisfies a performance obligation. Application of this guidance will depend on the facts and circumstances present in a contract with a customer and will require the exercise of judgment.

Order of application Core principle Revenue recognised to depict transfer of goods or services Step 1 - Identify the contract with the customer; IFRS 15(9) Step 2-Identify the performance obligations in the contract;IFRS15(22) Step 3 - Determine the transaction price; IFRS 15 (42) Step 4 - Allocate the transaction price; IFRS 15 (74) Step 5 - Recognise revenue when (or as) a performance obligation is satisfied; IFRS 15 (32)

Step 1: Identify the contract with the customer A contract with a customer will be within the scope of IFRS 15 if all the following conditions are met: [IFRS 15:9] The contract has been approved by the parties to the contract; Each party’s rights in relation to 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; and It is probable that the consideration to which the entity is entitled to in exchange for the goods or services will be collected.

Step 2: Identify the performance obligations in the contract Performance obligations are promises to transfer goods or services to a customer that are: explicit, implicit, or arise from customary business practices Identifying performance obligations is critical to measurement and timing of recognition At the inception of the contract, the entity should assess the goods or services that have been promised to the customer, and identify as a performance obligation: [IFRS 15.22] A good or service 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.

Step 3: Determine the transaction price The transaction price is the amount to which an entity expects to be entitled in exchange for the transfer of goods and services. [IFRS 15:47] Where a contract contains elements of variable consideration, the entity will estimate the amount of variable consideration to which it will be entitled under the contract. [IFRS 15:50] Variable consideration is only included in the transaction price if, and to the extent that, it is highly probable that its inclusion will not result in a significant revenue reversal in the future when the uncertainty has been subsequently resolved. [IFRS 15:56]

Step 4: Allocate the transaction price to the performance obligations in the contracts Where a contract has multiple performance obligations, an entity will allocate the transaction price to the performance obligations in the contract by reference to their relative standalone selling prices(SSP). [IFRS 15:74] If a SSP is not directly observable, THEN estimate it. IFRS 15 suggests various methods that might be used, including: Adjusted market assessment approach Expected cost plus a margin approach Residual approach

Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation Revenue is recognised as control is passed, either over time or at a point in time. [IFRS 15:32] Control of an asset is defined as the ability to direct the use of and obtain substantially all of the remaining benefits from the asset. The benefits related to the asset are the potential cash flows that may be obtained directly or indirectly.

Presentation 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. .

Disclosure The objective of the disclosure requirements is for an entity to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. To achieve that objective, an entity shall disclose qualitative and quantitative information about all of the following:

Disclosure (a) Its contracts with customers (see paragraphs 113–122); (b) The significant judgements, and changes in the judgements, made in applying this Standard to those contracts (see paragraphs 123–126); and (c) Any assets recognised from the costs to obtain or fulfil a contract with a customer in accordance with paragraph 91 or 95 (see paragraphs 127–128).

Accounting policy disclosure Revenue recognition “Revenue from sales of goods is recognised when the goods are delivered and title has passed. Royalty revenue from licensing patents for use by others is recognised on a straight-line basis over the license period. Revenue is measured at the fair value of the consideration received or receivable, net of discounts and sales-related taxes collected on behalf of the government.”

Revenue by category Note X Revenue

Focus on risk and rewards Brief comparison IAS 18 /11 IFRS 15 Separate models for: Construction contracts Goods Services Single model for performance obligations: Satisfied over time Satisfied at a point in time Focus on risk and rewards Focus on control Limited guidance on: Multiple element arrangements Variable consideration Licences More guidance: Separating elements, allocating the transaction price, variable consideration, licences, options, repurchase arrangements and so on….

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