IFRS 15 - Revenue from Contracts with Customers Nadia De Santis – OIC Technical Manager

IFRS 15 Agenda Core principles Recognition and measurement (five-step model) Presentation and disclosure

Core principles

Objective, core principle and recognising revenue 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 Objective Recognise revenue to depict the transfer of promised goods and 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 Core principle Recognise revenue when the entity satisfies performance obligations by transferring goods or services to the customer When? The transaction price is allocated to the goods or services transferred to the customer, ie the performance obligations How?

Which contracts does IFRS 15 apply to? An entity shall apply IFRS 15 to a contract only if the counterparty to the contract is a customer A customer is 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 A contract is an agreement between two or more parties that creates enforceable rights and obligations IFRS 15 specifies the accounting for an individual contract → may apply the Standard to a portfolio of contracts if effect would not differ materially

Recognition and measurement

The five-step revenue recognition model Identify the contract(s) with a customer Step 2 Identify the performance obligation(s) in the contract Step 3 Determine the transaction price Step 4 Allocate the transaction price to the performance obligations in the contract Step 5 Recognise revenue when (or as) the entity satisfies a performance obligation

Step 1 – Identify the contract Contract criteria Par 9 IFRS 15 The contract is approved and the parties are committed to their obligations The entity can identify each party’s rights and payment terms The contract has commercial substance Collection of consideration is probable Contracts with customers must meet ALL of these criteria

A question for you Applying IFRS 15, considering: an entity that enters into a contract (approved) with a customer for a sale a building for a CU 1 million in which the customer intends to open a restaurant in the building; the customer pays the entity with a long-term financing agreement with the entity; The customer is a start-up; The entity’s cost of the building is CU 600.000 The all criteria of paragraph 9 are met. True False

Step 2 – Identify the performance obligations A performance obligation is a promise in a contract with a customer to transfer a distinct good or service (or bundle of goods or services), or a series of substantially similar distinct goods or services with the same pattern of transfer to the customer

Step 2 – Identify the performance obligations Distinct good or service 27a) Customer can benefit from good or service (ie capable of being distinct); And 27b) Promised good or service is separable from other promises (ie distinct in the context of the contract)

Example*: Identifying performance obligations Determining whether goods or services are distinct A software developer enters into a contract with a customer to transfer: a software licence, an installation service unspecified software updates and technical support (online and telephone) for a two-year period. The entity sells the licence, installation service and technical support separately. The installation service includes changing the web screen for each type of user (for example, marketing, inventory management and information technology). The installation service is routinely performed by other entities and does not significantly modify the software. The software remains functional without the updates and the technical support. * Refer to Example 11 of IFRS 15 Revenue from Contracts with Customers

A question for you Considering the example in slide 13 and applying IFRS 15, the entity identifies 4 performance obligation: (a) the software licence; (b) an installation service; (c) software updates; and (d) technical support. True False

Step 3 – Determine the transaction price Par 47 IFRS 15 Transaction price is the amount of consideration to which entity expects to be entitled in exchange for goods or services. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both.

Step 3 – Determine the transaction price Amount of consideration can vary because of discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses etc. Include estimate of variable consideration in the transaction price only to extent it is highly probable a significant reversal of revenue will not occur when uncertainty is resolved Variable consideration Adjust consideration if timing provides customer or entity with significant benefit of financing Existence of significant financing component Measure at fair value Non-cash consideration

A question for you An entity enters into a contract with a customer to build an asset for CU1 million. In addition, the terms of the contract include a penalty of CU100,000 if the construction is not completed within three months of a date specified in the contract. The entity concludes that the consideration promised in the contract includes a fixed amount of CU900,000 and a variable amount of CU100,000 (arising from the penalty)*. True False * Refer to Example 20 of IFRS 15 Revenue from Contracts with Customers

Step 4 – Allocating the transaction price to performance obligations Allocation based on stand-alone selling prices The objective when allocating the transaction price is for an entity to allocate the transaction price to each performance obligation in an amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for transferring the promised goods or services to the customer. Allocate transaction price to separate performance obligations based on relative stand- alone selling price. Where stand-alone selling price is not directly observable: estimate the amount using 3 approach: Adjusted market value: consider the price observable in the specific market Expected cost plus a margin: estimate the price as expected cost plus margin Residual approach: estimate the price as the difference between total transaction price and the sum of observable stand-alone selling price. An entity may use this approach only if (i) the entity sells the same good or service for a broad range of amounts or (ii) the 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 selling price.

Stand-alone selling price Example:* Allocating the transaction price to performance obligations Allocation methodology An entity enters into a contract with a customer to sell Products A, B and C in exchange for CU100. Performance obligations are satisfied at different points in time. The entity regularly sells the product A for CU 40. For product B the entity uses the price from competitors for similar product (adjusted market approach). For product C the entity uses the residual approach. Stand-alone selling price Method Allocated transaction price Product A 40 Directly observable Product B 30 Estimated using Adjusted Market Assessment approach Product C Residual approach Total 100

A question for you When estimating the stand-alone selling price, one of the factors that an entity could consider is its historical pricing for the sale of the good or service involved. True False

Step 5 – Recognition of revenue Revenue is recognised when (or as) an entity satisfies a performance obligation by transferring a promised good or service (ie an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset. Control → ability to direct the use of, and obtain substantially all of the remaining benefits from, the good or service. Indicators of the transfer of control of a good or service include: The entity has a present right to payment The customer has legal title The entity has transferred physical possession The customer has the significant risks and rewards of ownership The customer has accepted the asset

Step 5 – Recognition of revenue Recognise revenue over time The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs The entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced 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 or or If a performance obligation is not satisfied over time, an entity satisfies the performance obligation at a point in time and recognise revenue when control transfers.

Example:* Performance obligations satisfied over time Customer simultaneously receives and consumes the benefits An entity enters into a contract to provide monthly payroll processing services to a customer for one year → a single performance obligation. The performance obligation is satisfied over time customer simultaneously receives and consumes the benefits of the entity’s performance in processing each payroll transaction as and when each transaction is processed → another entity would not need to re-perform payroll processing services for the service that the entity has provided to date. * Refer to Example 13 of IFRS 15 Revenue from Contracts with Customers

Example:* Performance obligations satisfied over time Assessing whether a performance obligation is satisfied at a point in time or over time An entity is developing a multi-unit residential complex. A customer enters into a binding sales contract with the entity for a specified unit that is under construction. Each unit has a similar floor plan and is of a similar size, but other attributes of the units are different (eg the location of the unit within the complex). The customer pays a deposit upon entering into the contract and the deposit is refundable only if the entity fails to complete construction of the unit in accordance with the contract. The remainder of the contract price is payable on completion of the contract when the customer obtains physical possession of the unit. If the customer defaults on the contract before completion of the unit, the entity only has the right to retain the deposit. The performance obligation is satisfied at point in time The entity determines that it does not have an enforceable right to payment for performance completed to date because, until construction of the unit is complete, the entity only has a right to the deposit paid by the customer. * Refer to Example 17 of IFRS 15 Revenue from Contracts with Customers

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