Reporting financial performance

Reporting financial performance
Prepared by: Michael Wells Date: June 13-17, 2016 Addis Ababa

Aims Understand the concepts underlying the accounting for financial performance Understand the requirements and the judgements in applying the requirements in presenting financial performance in accordance with IFRS and the IFRS for SMEs determining functional currency revenue from contracts with customers (and other income) cost of goods sold (and other expenses) profit or loss and other comprehensive income earnings per share

The underlying concepts

International Financial Reporting Standards (IFRS)
International Financial Reporting Standards (IFRS)* the underlying concepts Focused on information needs of (primary users) existing and potential investors, lenders and other creditors who cannot require information from the entity information to enable primary users to make their own assessments of the reporting entity’s prospects for future net cash inflows as a basis for their decisions to buy, hold, sell equity and debt instruments or to provide a loan or to require settlement of a loan * source: Chapter 1 of IASB Conceptual Framework

Assessing prospects for future net cash inflows the underlying concepts
To assess an entity’s prospects for future net cash inflows, existing and potential investors, lenders and other creditors need information about: the resources of the entity; claims against the entity; and stewardship — how efficiently and effectively the entity’s management and governing board have discharged their responsibilities to use the entity’s resources for example, protecting the entity’s resources from unfavourable effects of economic factors such as price and technological changes

Elements of financial performance the underlying concepts
IASB (paragraph 4.25) Income “increases in economic benefits during the accounting period in the form of enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.” Expenses “decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.”

Reporting financial performance the underlying concepts
Information about an entity’s financial performance in a period, reflected by changes in economic resources and claims other than by obtaining resources from (distributing resources to) owners is useful in assessing the entity’s ability to generate net cash inflows (see paragraphs OB18 and OB19 of the IASB Conceptual Framework) The relevance of income and expenses are enhanced by separate presentation of: items that arise in the course of ordinary operations (for example, revenue from customers); and those that do not (for example, incidental disposals of assets) (see paragraphs 4.27 and 4.28 of the IASB Conceptual Framework) Do not offset expenses against income unless explicitly required

Other comprehensive income Is there a concept for OCI?
Paragraphs 81A to 105 of IAS 1 specify the statement of profit or loss and other comprehensive income (OCI). items of OCI that are reclassified subsequently to profit or loss (sometimes called recycling) are presented separately from those that are not. not recycled include: income/expenses presented in OCI from revaluing PPE, including bearer-plants, and some intangible assets) and financial assets FVOCI. recycled include: income/expenses presented in OCI from cash flow hedges. The IFRS for SMEs (paragraph 5.4(b)) specifies four types of OCI: (i) differences arising from the translation of a foreign operation; (ii) actuarial gains and losses on defined benefit post-employment benefit plans; (iii) cash flow hedging; and (iv) revaluation of PPE.

Reporting financial performance selected sub-classifications of income
Revenue (from contracts with customers) Changes in the fair value less costs to sell of biological assets in agricultural activity Changes in the fair value of investment property Income from government grants Dividends received Finance income (net) Profit on sale of property, plant and equipment (net) Income from associates and joint ventures accounted for using the equity method

Revenue or other income what do you think
Revenue or other income what do you think? (slide 1 of 2 slides for this company) For each source of income below choose 1 of: 1) revenue; or 2) other income (specify). A company has three segments: (i) motor vehicles; (ii) cattle; and (iii) construction services. The motor vehicle segment: retails new and second-hand vehicles; rents ‘new’ vehicles to others on short-term (up to three-month) rentals; and repairs motor vehicles. The cattle segment breeds beef cattle for slaughter. The construction segment constructs specialised machinery for use in agriculture sector.

Revenue or other income what do you think
Revenue or other income what do you think? (slide 2 of 2 slides for this company) For each source of income below choose 1 of: 1) revenue; or 2) other income (specify). The company also disposed of the following property in 2015: all farmland in Region X because its highest and best use is now residential housing the head-office building because the staff moved into a new building the rental fleet because it was replaced with a new fleet of vehicles a herd of cattle culled by order of the Agriculture Ministry because foot and mouth disease was found to be prevalent in the herd (nominal compensation was received from the Ministry)

Selected sub-classifications of expenses
Analysis of expenses by their function cost of sales selling and distribution expenses administrative expenses Analysis of expenses by their nature inventory derecognised when sold depreciation/amortisation staff costs Finance costs Income tax expense

Analysis of expenses by function what do you think?
For each expense below choose 1 of: 1) cost of sales expense; 2) administration expense; 3) selling and distribution expense; 4) finance expense; 5) income tax expense; or 6) other expense (specify). A car dealer derecognises motor vehicles sold to customers A sheep farmer derecognises ewes sold at auction A sheep farmer derecognises farmland sold An electricity provider recognises the $100,000 unwinding of the amortised cost of a bank loan for the year (cash inflow Y0 = $1,000,000; expected cash outflow Y2 = $1,210,000)

When does income arise from manufacturing? the underlying concepts
When does income mostly arise from manufacturing? Choose one of: as the raw materials are transformed into finished goods as the market value of the inventory changes; when substantially all the risks and rewards of ownership of the inventory pass from the company to its customer; when control of the inventory pass from the company to its customer; when the customer pays the company for the inventory sold; another time (specify).

Functional currency

Aims Understand the concept of a functional currency in general purpose financial information; Understand how to determine the functional currency; and Understand some of the main judgements made setting in determining the functional currency.

Relevant defined terms
Functional currency is the currency of the primary economic environment in which the entity operates (paragraph 8 of IAS 21 and paragraph 30.2 of the IFRS for SMEs) Foreign currency is a currency other than the functional currency of the entity (paragraph 8 of IAS 21) Presentation currency is the currency in which the financial statements are presented (paragraph 8 of IAS 21 and Glossary to the IFRS)

Application guidance Functional currency is determined (not chosen)
see paragraphs 9⎼14 of IAS 21 Functional currency is the entity’s measurement currency a foreign currency transaction is recorded, on initial recognition in the functional currency (paragraph 21 of IAS 21) at the end of each reporting period foreign currency (paragraph 23 of IAS 21): monetary items are translated using the closing rate non-monetary items measured at historical cost are translated at historic rates non-monetary items measured at fair value of translated at the rate on the date fair value was measured (usually the closing rate)

Revenue from contracts with customers

IFRS 15 Revenue from Contracts with Customers IFRS for SMEs (Section 23 Revenue is based on IAS 18 Revenue and IAS 11 Construction Contracts) IFRS 15 replaces 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 IFRS 15 is mandatory for annual periods beginning on or after 1 January 2018 early adoption is permitted a range of transitional provisions apply

Revenue: scope other Standards/Sections of the IFRS for SMEs
IFRS 15 and Section 23 does not apply to: lease contracts within the scope of IAS 17/Section 20; insurance contracts within the scope of IFRS 4; financial instruments and other contractual rights or obligations within the scope of IFRS 9/Sections 11 and 12, IFRS 10, IFRS 11/Section 15, IAS 27 and IAS 28/Section 14; and non-monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers.

Revenue: scope measurement exceptions
Although IFRS 15 does not specify exceptions from its scope for the following, it is difficult to envisage how IFRS 15 would in a meaningful way be applied to such items: biological assets in agricultural activity (see IAS 41 Agriculture) (excluded from the scope of Section 23 (see paragraph 23.2(e) and (f)) and IAS 18 and the illustrative examples that accompany IAS 41 appear not to have been updated to reflect application of IFRS 15) producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, to the extent that they are measured at net realisable value/fair value less costs to sell in accordance with well-established practices in those industries (see paragraph 3(a) of IAS 2 and paragraph13.3(a) of the IFRS for SMEs); and commodity broker-traders who measure their inventories at fair value less costs to sell (see paragraph 3(b) of IAS 2 and paragraph 13.3(b) of the IFRS for SMEs)

IFRS 15 Revenue from Contracts with Customers the main requirement: satisfying performance obligations Recognise revenue when (or as) the seller satisfies a performance obligation (point in time or over time) by transferring a promised good or service (ie an asset) to a customer (ie when the customer obtains control of the asset) However, recognise expected loss immediately (onerous contract) Measure revenue at customer consideration adjusted for the financial effects of significant financing components measure non-cash consideration at its fair value

IFRS 15’s 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

IFRS 15 Step 1 – identify the contract combination of contracts
Contracts entered into at or near the same time with the same customer – is one or more of the following criteria met? Negotiated as a package with a single commercial objective Linked consideration Goods or services promised form a single performance obligation Para 17: combination of contracts- An entity shall combine two or more contracts entered into at or near the same time with the same customer (or related parties of the customer) and account for the contracts as a single contract if one or more of the following criteria are met: (a) the contracts are negotiated as a package with a single commercial objective; (b) the amount of consideration to be paid in one contract depends on the price or performance of the other contract; or (c) the goods or services promised in the contracts (or some goods or services promised in each of the contracts) are a single performance obligation

IFRS 15 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 Some examples of promised goods or services: sale of goods produced by an entity (for example, inventory of a manufacturer) resale of goods purchased by an entity (for example, merchandise of a retailer) resale of rights to goods or services purchased by an entity (for example, a ticket resold by an entity acting as a principal) performing a contractually agreed-upon task for the customer (for example, cleaning services) providing a service of standing ready to provide goods or services (for example, unspecified updates to software that are provided on a when-and-if-available basis) arranging for another party to transfer goods or services to a customer (for example, acting as an agent of another party) constructing, managing or developing an asset on behalf of a customer granting a licence granting an option to purchase additional goods or services if it gives the customer a material right Appendix A: A performance obligation is a promise in a contract with a customer to transfer to the customer either: (a) a good or service (or a bundle of goods or services) that is distinct; or (b) a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer. Para 26: examples of promised goods or services The next slide provides some detailed criteria to determine whether or not the goods or services are distinct.

IFRS 15 Step 3 – determine the transaction price transaction price is the amount of consideration to which entity expects to be entitled in exchange for goods or services Amount of consideration can vary because of discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses etc Estimate using Expected Value or Most Likely Amount but ‘Constrained’ (next slide) Exception for licences of intellectual property Variable consideration Adjust consideration if timing provides customer or entity with significant benefit of financing Practical expedient – no adjustment if the period between consideration and transfer of good and service is one year or less Existence of significant financing component Measure at fair value If fair value cannot be estimated, measure consideration indirectly by reference to stand-alone selling price of the goods or services transferred Non-cash consideration Para 47: the transaction price is 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 (for example, some sales taxes). The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. Variable consideration: Para 50: If the consideration promised in a contract includes a variable amount, an entity shall estimate the amount of consideration to which the entity will be entitled in exchange for transferring the promised goods or services to a customer. Para 51: An amount of consideration can vary because of discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties or other similar items. The promised consideration can also vary if an entity’s entitlement to the consideration is contingent on the occurrence or non-occurrence of a future event. For example, an amount of consideration would be variable if either a product was sold with a right of return or a fixed amount is promised as a performance bonus on achievement of a specified milestone. Para 53: An entity shall estimate an amount of variable consideration by using either of the following methods, depending on which method the entity expects to better predict the amount of consideration to which it will be entitled: (a) The expected value—the expected value is the sum of probability-weighted amounts in a range of possible consideration amounts. An expected value may be an appropriate estimate of the amount of variable consideration if an entity has a large number of contracts with similar characteristics. (b) The most likely amount—the most likely amount is the single most likely amount in a range of possible consideration amounts (ie the single most likely outcome of the contract). The most likely amount may be an appropriate estimate of the amount of variable consideration if the contract has only two possible outcomes (for example, an entity either achieves a performance bonus or does not). Existence of significant financing component: Para 60: In determining the transaction price, an entity shall adjust the promised amount of consideration for the effects of the time value of money if the timing of payments agreed to by the parties to the contract (either explicitly or implicitly) provides the customer or the entity with a significant benefit of financing the transfer of goods or services to the customer. In those circumstances, the contract contains a significant financing component. A significant financing component may exist regardless of whether the promise of financing is explicitly stated in the contract or implied by the payment terms agreed to by the parties to the contract. Para 63: As a practical expedient, an entity need not adjust the promised amount of consideration for the effects of a significant financing component if the entity expects, at contract inception, that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less. Non-cash consideration: Para 66: To determine the transaction price for contracts in which a customer promises consideration in a form other than cash, an entity shall measure the non-cash consideration (or promise of non-cash consideration) at fair value. Para 67: If an entity cannot reasonably estimate the fair value of the non-cash consideration, the entity shall measure the consideration indirectly by reference to the stand-alone selling price of the goods or services promised to the customer (or class of customer) in exchange for the consideration.

IFRS 15 Step 3 – determining the transaction price Constraining estimates of variable consideration
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 Entity’s expectations of revenue reversal assessed using indicators, eg – Factors outside entity’s influence (market, 3rd-party actions etc) – Length of time before uncertainty resolved – Entity’s level of experience with similar types of contracts Exception for licences of intellectual property with a sales-based or usage-based royalty Refer to Application Guidance, effectively only recognise variable consideration as revenue when entitled to royalty Para 56 - An entity shall include in the transaction price some or all of an amount of variable consideration estimated in accordance with paragraph 53 only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Para 57 - In assessing whether it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur once the uncertainty related to the variable consideration is subsequently resolved, an entity shall consider both the likelihood and the magnitude of the revenue reversal. Factors that could increase the likelihood or the magnitude of a revenue reversal include, but are not limited to, any of the following: (a) the amount of consideration is highly susceptible to factors outside the entity’s influence. Those factors may include volatility in a market, the judgement or actions of third parties, weather conditions and a high risk of obsolescence of the promised good or service. (b) the uncertainty about the amount of consideration is not expected to be resolved for a long period of time. (c) the entity’s experience (or other evidence) with similar types of contracts is limited, or that experience (or other evidence) has limited predictive value. (d) the entity has a practice of either offering a broad range of price concessions or changing the payment terms and conditions of similar contracts in similar circumstances. (e) the contract has a large number and broad range of possible consideration amounts. Para 58: An entity shall apply paragraph B63 to account for consideration in the form of a sales-based or usage-based royalty that is promised in exchange for a licence of intellectual property.

IFRS 15 Step 3 – determining the transaction price discount rate in financing component
Use the discount rate that would be reflected in a separate financing transaction between the entity and its customer at contract inception. Reflects: credit characteristics of the customer any collateral or security Discount rate is not updated after contract inception, for example, for changes in interest rates or customer’s credit risk. Para 64 - To meet the objective in paragraph 61 when adjusting the promised amount of consideration for a significant financing component, an entity shall use the discount rate that would be reflected in a separate financing transaction between the entity and its customer at contract inception. That rate would reflect the credit characteristics of the party receiving financing in the contract, as well as any collateral or security provided by the customer or the entity, including assets transferred in the contract. An entity may be able to determine that rate by identifying the rate that discounts the nominal amount of the promised consideration to the price that the customer would pay in cash for the goods or services when (or as) they transfer to the customer. After contract inception, an entity shall not update the discount rate for changes in interest rates or other circumstances (such as a change in the assessment of the customer’s credit risk).

IFRS 15 Step 4 – allocating the transaction price to performance obligations: allocation based on stand-alone selling prices (multiple element sale) 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 one of the following approaches: Evaluate the market in which goods or services are sold and estimate the price that customers in the market would be willing to pay Adjusted market assessment approach Forecast the expected costs of satisfying a performance obligation and then add an appropriate margin for that good or service Expected cost plus a margin approach The total transaction price less the sum of the observable stand-alone selling prices of other goods or services promised in the contract Residual approach (limited applicability) Para 73: The objective when allocating the transaction price is for an entity to allocate the transaction price to each performance obligation (or distinct good or service) 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. Para 74 - To meet the allocation objective, an entity shall allocate the transaction price to each performance obligation identified in the contract on a relative stand-alone selling price basis. Para 79 - Suitable methods for estimating the stand-alone selling price of a good or service include, but are not limited to, the following: (a) Adjusted market assessment approach—an entity could evaluate the market in which it sells goods or services and estimate the price that a customer in that market would be willing to pay for those goods or services. (b) Expected cost plus a margin approach—an entity could forecast its expected costs of satisfying a performance obligation and then add an appropriate margin for that good or service. (c) Residual approach—an entity may estimate the stand-alone selling price by reference to the total transaction price less the sum of the observable stand-alone selling prices of other goods or services promised in the contract. However, an entity may use a residual approach to estimate, in accordance with paragraph 78, the stand-alone selling price of a good or service only if one of the following criteria is met: (i) the entity sells the same good or service to different customers (at or near the same time) for a broad range of amounts (ie the selling price is highly variable because a representative stand-alone selling price is not discernible from past transactions or other observable evidence); 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 basis (ie the selling price is uncertain).

IFRS 15 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 (ie point in time or over time) Control → ability to direct the use of, and obtain substantially all of the remaining benefits from, the good or service Benefits can be obtained directly or indirectly by: using the asset to produce goods or provide services using the asset to enhance the value of other assets using the asset to settle liabilities or reduce expenses selling or exchanging the asset pledging the asset to secure a loan holding the asset Para 31 - An entity shall recognise revenue when (or as) the 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. Para 33 - Goods and services are assets, even if only momentarily, when they are received and used (as in the case of many services). Control of an asset refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. Control includes the ability to prevent other entities from directing the use of, and obtaining the benefits from, an asset. The benefits of an asset are the potential cash flows (inflows or savings in outflows) that can be obtained directly or indirectly in many ways, such as by: (a) using the asset to produce goods or provide services (including public services); (b) using the asset to enhance the value of other assets; (c) using the asset to settle liabilities or reduce expenses; (d) selling or exchanging the asset; (e) pledging the asset to secure a loan; and (f) holding the asset.

IFRS 15 Step 5 – recognition of revenue (over time)
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 Para 35: An entity satisfies a performance obligation over time if one of the following criteria is met: 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

IFRS 15 Step 5 – recognition of revenue (point in time)
If not over time, then point in time…. recognise revenue when control transfers 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 Para 38 - If a performance obligation is not satisfied over time, an entity satisfies the performance obligation at a point in time. An entity shall consider indicators of the transfer of control, which include, but are not limited to, the following: (a) The entity has a present right to payment for the asset—if a customer is presently obliged to pay for an asset, then that may indicate that the customer has obtained the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset in exchange. (b) The customer has legal title to the asset—legal title may indicate which party to a contract has the ability to direct the use of, and obtain substantially all of the remaining benefits from, an asset or to restrict the access of other entities to those benefits. (c) The entity has transferred physical possession of the asset—the customer’s physical possession of an asset may indicate that the customer has the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset or to restrict the access of other entities to those benefits. (d) The customer has the significant risks and rewards of ownership of the asset—the transfer of the significant risks and rewards of ownership of an asset to the customer may indicate that the customer has obtained the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. (e) The customer has accepted the asset—the customer’s acceptance of an asset may indicate that it has obtained the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset.

IFRS 15 Step 5 – recognition of revenue over time methods of measuring progress
Objective: to depict performance in transferring control of goods or services to the customer. Method Description Examples Advantage Disadvantage Output Based on the value of the goods delivered relative to those undelivered Surveys of performance to date Appraisals of results achieved Milestones reached Units produced or delivered Probably most faithful depiction of entity’s performance May not be directly observable Information may be expensive to obtain Input Based on the entity’s efforts or inputs towards satisfying the performance obligation relative to the total expected inputs Resources consumed Costs incurred Labour hours Machine hours Can recognise revenue on straight-line basis if inputs expended evenly May not be a direct relationship between inputs and transfer of control Para 39: For each performance obligation satisfied over time, an entity shall recognise revenue over time by measuring the progress towards complete satisfaction of that performance obligation. The objective when measuring progress is to depict an entity’s performance in transferring control of goods or services promised to a customer (ie the satisfaction of an entity’s performance obligation). Para 40: An entity shall apply a single method of measuring progress for each performance obligation satisfied over time and the entity shall apply that method consistently to similar performance obligations and in similar circumstances. At the end of each reporting period, an entity shall remeasure its progress towards complete satisfaction of a performance obligation satisfied over time. Para 41: Appropriate methods of measuring progress include output methods and input methods. Methods for measuring progress towards complete satisfaction of a performance obligation Para B14: Methods that can be used to measure an entity’s progress towards complete satisfaction of a performance obligation satisfied over time include the following: (a) output methods; and (b) input methods Output methods Para B15: Output methods recognise revenue on the basis of direct measurements of the value to the customer of the goods or services transferred to date relative to the remaining goods or services promised under the contract. Output methods include methods such as surveys of performance completed to date, appraisals of results achieved, milestones reached, time elapsed and units produced or units delivered. When an entity evaluates whether to apply an output method to measure its progress, the entity shall consider whether the output selected would faithfully depict the entity’s performance towards complete satisfaction of the performance obligation. An output method would not provide a faithful depiction of the entity’s performance if the output selected would fail to measure some of the goods or services for which control has transferred to the customer. For example, output methods based on units produced or units delivered would not faithfully depict an entity’s performance in satisfying a performance obligation if, at the end of the reporting period, the entity’s performance has produced work in progress or finished goods controlled by the customer that are not included in the measurement of the output. Para B17: The disadvantages of output methods are that the outputs used to measure progress may not be directly observable and the information required to apply them may not be available to an entity without undue cost. Therefore, an input method may be necessary. Input methods Para B18: Input methods recognise revenue on the basis of the entity’s efforts or inputs to the satisfaction of a performance obligation (for example, resources consumed, labour hours expended, costs incurred, time elapsed or machine hours used) relative to the total expected inputs to the satisfaction of that performance obligation. If the entity’s efforts or inputs are expended evenly throughout the performance period, it may be appropriate for the entity to recognise revenue on a straight-line basis.

IFRS 15 Step 5 – Recognition of revenue over time measuring progress - miscellaneous
Must apply a single method for each performance obligation. Must apply the method consistently. Changes in measurement of progress → an IAS 8 change in accounting estimate. If cannot measure outcome of performance obligation but expect to at least cover costs → limit revenue to cost incurred. Para 43: As circumstances change over time, an entity shall update its measure of progress to reflect any changes in the outcome of the performance obligation. Such changes to an entity’s measure of progress shall be accounted for as a change in accounting estimate in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. Para 45: In some circumstances (for example, in the early stages of a contract), an entity may not be able to reasonably measure the outcome of a performance obligation, but the entity expects to recover the costs incurred in satisfying the performance obligation. In those circumstances, the entity shall recognise revenue only to the extent of the costs incurred until such time that it can reasonably measure the outcome of the performance obligation.

Sale of goods (and services) when the performance obligation is satisfied at a point in time (see paragraph 38 of IFRS 15)

Section 23 sale of goods the main requirement: risks and rewards model
Recognise revenue from the sale of goods when substantially all the risks and rewards of ownership transfer from the seller seller retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods amount (fair value) of revenue can be measured reliably probable that economic benefits will flow to the seller costs incurred (or to be incurred) in respect of the sale transaction can be measured reliably Measure at fair value of the consideration received/receivable

IFRS 15 Example 1:* identifying the contract collectability of the consideration (slide 1 of 2 slides) A real estate developer enters into a contract with a customer for the sale of a building for $1 million. The customer intends to open a restaurant in the building located in an area where new restaurants face high levels of competition and the customer has little experience in the restaurant industry. The customer pays a non-refundable deposit of $50,000 at inception of the contract and enters into a long-term non-recourse financing agreement with the entity for the remaining 95% of the promised consideration. if the customer defaults, the entity can repossess the building, but cannot seek further compensation from the customer, even if the collateral does not cover the full value of the amount owed. cost of the building = $600,000. The customer obtains control of the building at contract inception. IE3 An entity, a real estate developer, enters into a contract with a customer for the sale of a building for CU1 million. The customer intends to open a restaurant in the building. The building is located in an area where new restaurants face high levels of competition and the customer has little experience in the restaurant industry. IE4 The customer pays a non-refundable deposit of CU50,000 at inception of the contract and enters into a long-term financing agreement with the entity for the remaining 95 per cent of the promised consideration. The financing arrangement is provided on a non-recourse basis, which means that if the customer defaults, the entity can repossess the building, but cannot seek further compensation from the customer, even if the collateral does not cover the full value of the amount owed. The entity’s cost of the building is CU600,000. The customer obtains control of the building at contract inception. Analysis: IE5 In assessing whether the contract meets the criteria in paragraph 9 of IFRS 15, the entity concludes that the criterion in paragraph 9(e) of IFRS 15 is not met because it is not probable that the entity will collect the consideration to which it is entitled in exchange for the transfer of the building. In reaching this conclusion, the entity observes that the customer’s ability and intention to pay may be in doubt because of the following factors: a) the customer intends to repay the loan (which has a significant balance) primarily from income derived from its restaurant business (which is a business facing significant risks because of high competition in the industry and the customer’s limited experience); (b) the customer lacks other income or assets that could be used to repay the loan; and (c) the customer’s liability under the loan is limited because the loan is non-recourse. IE6 Because the criteria in paragraph 9 of IFRS 15 are not met, the entity applies paragraphs 15–16 of IFRS 15 to determine the accounting for the non-refundable deposit of CU50,000. The entity observes that none of the events described in paragraph 15 have occurred—that is, the entity has not received substantially all of the consideration and it has not terminated the contract. Consequently, in accordance with paragraph 16, the entity accounts for the non-refundable CU50,000 payment as a deposit liability. The entity continues to account for the initial deposit, as well as any future payments of principal and interest, as a deposit liability, until such time that the entity concludes that the criteria in paragraph 9 are met (ie the entity is able to conclude that it is probable that the entity will collect the consideration) or one of the events in paragraph 15 has occurred. * Refer to Example 1 of IFRS 15 Revenue from Contracts with Customers

IFRS 15 Example 1:. identifying the contract what do you think
IFRS 15 Example 1:* identifying the contract what do you think? (slide 2 of 2 slides) Is probable that the entity will collect the $1 million consideration? Choose one of: Yes; No (therefore applying paragraphs 15 and 16 accounts for the $50,000 payment as a deposit liability the entity is able to conclude that it is probable that the entity will collect the consideration); or I need more information to decide (specify the information you need). IE3 An entity, a real estate developer, enters into a contract with a customer for the sale of a building for CU1 million. The customer intends to open a restaurant in the building. The building is located in an area where new restaurants face high levels of competition and the customer has little experience in the restaurant industry. IE4 The customer pays a non-refundable deposit of CU50,000 at inception of the contract and enters into a long-term financing agreement with the entity for the remaining 95 per cent of the promised consideration. The financing arrangement is provided on a non-recourse basis, which means that if the customer defaults, the entity can repossess the building, but cannot seek further compensation from the customer, even if the collateral does not cover the full value of the amount owed. The entity’s cost of the building is CU600,000. The customer obtains control of the building at contract inception. Analysis: IE5 In assessing whether the contract meets the criteria in paragraph 9 of IFRS 15, the entity concludes that the criterion in paragraph 9(e) of IFRS 15 is not met because it is not probable that the entity will collect the consideration to which it is entitled in exchange for the transfer of the building. In reaching this conclusion, the entity observes that the customer’s ability and intention to pay may be in doubt because of the following factors: a) the customer intends to repay the loan (which has a significant balance) primarily from income derived from its restaurant business (which is a business facing significant risks because of high competition in the industry and the customer’s limited experience); (b) the customer lacks other income or assets that could be used to repay the loan; and (c) the customer’s liability under the loan is limited because the loan is non-recourse. IE6 Because the criteria in paragraph 9 of IFRS 15 are not met, the entity applies paragraphs 15–16 of IFRS 15 to determine the accounting for the non-refundable deposit of CU50,000. The entity observes that none of the events described in paragraph 15 have occurred—that is, the entity has not received substantially all of the consideration and it has not terminated the contract. Consequently, in accordance with paragraph 16, the entity accounts for the non-refundable CU50,000 payment as a deposit liability. The entity continues to account for the initial deposit, as well as any future payments of principal and interest, as a deposit liability, until such time that the entity concludes that the criteria in paragraph 9 are met (ie the entity is able to conclude that it is probable that the entity will collect the consideration) or one of the events in paragraph 15 has occurred. * Refer to Example 1 of IFRS 15 Revenue from Contracts with Customers

IFRS 15 Example 2:* identifying the contract (slide 1 of 2 slides) consideration is not the stated price—implicit price concession An entity sells 1,000 units of a prescription drug to a customer → promised consideration = $1 million. First sale to a customer in a new region, which is experiencing significant economic difficulty. the seller expects that it will not be able to collect the full amount of the promised consideration. The seller expects the region’s economy to recover over the next two to three years. A relationship with the customer could help it to forge relationships with other potential customers in the region. The entity expects to provide a price concession (accept a lower amount): estimate of variable consideration = $400,000. IE7 An entity sells 1,000 units of a prescription drug to a customer for promised consideration of CU1 million. This is the entity’s first sale to a customer in a new region, which is experiencing significant economic difficulty. Thus, the entity expects that it will not be able to collect from the customer the full amount of the promised consideration. Despite the possibility of not collecting the full amount, the entity expects the region’s economy to recover over the next two to three years and determines that a relationship with the customer could help it to forge relationships with other potential customers in the region. IE8 When assessing whether the criterion in paragraph 9(e) of IFRS 15 is met, the entity also considers paragraphs 47 and 52(b) of IFRS 15. Based on the assessment of the facts and circumstances, the entity determines that it expects to provide a price concession and accept a lower amount of consideration from the customer. Accordingly, the entity concludes that the transaction price is not CU1 million and, therefore, the promised consideration is variable. The entity estimates the variable consideration and determines that it expects to be entitled to CU400,000. Analysis IE9 The entity considers the customer’s ability and intention to pay the consideration and concludes that even though the region is experiencing economic difficulty, it is probable that it will collect CU400,000 from the customer. Consequently, the entity concludes that the criterion in paragraph 9(e) of IFRS 15 is met based on an estimate of variable consideration of CU400,000. In addition, on the basis of an evaluation of the contract terms and other facts and circumstances, the entity concludes that the other criteria in paragraph 9 of IFRS 15 are also met. Consequently, the entity accounts for the contract with the customer in accordance with the requirements in IFRS 15. * Refer to Example 2 of IFRS 15 Revenue from Contracts with Customers

IFRS 15 Example 2:. identifying the contract what do you think
IFRS 15 Example 2:* identifying the contract what do you think? (slide 2 of 2 slides) Is probable that the entity will collect the consideration? Choose one of: Yes, it is probable that the entity will collect the $1,000,000 transaction price; Yes, it is probable that the entity will collect the variable consideration of $400,000; No; or I need more information to decide (specify the information you need). IE7 An entity sells 1,000 units of a prescription drug to a customer for promised consideration of CU1 million. This is the entity’s first sale to a customer in a new region, which is experiencing significant economic difficulty. Thus, the entity expects that it will not be able to collect from the customer the full amount of the promised consideration. Despite the possibility of not collecting the full amount, the entity expects the region’s economy to recover over the next two to three years and determines that a relationship with the customer could help it to forge relationships with other potential customers in the region. IE8 When assessing whether the criterion in paragraph 9(e) of IFRS 15 is met, the entity also considers paragraphs 47 and 52(b) of IFRS 15. Based on the assessment of the facts and circumstances, the entity determines that it expects to provide a price concession and accept a lower amount of consideration from the customer. Accordingly, the entity concludes that the transaction price is not CU1 million and, therefore, the promised consideration is variable. The entity estimates the variable consideration and determines that it expects to be entitled to CU400,000. Analysis IE9 The entity considers the customer’s ability and intention to pay the consideration and concludes that even though the region is experiencing economic difficulty, it is probable that it will collect CU400,000 from the customer. Consequently, the entity concludes that the criterion in paragraph 9(e) of IFRS 15 is met based on an estimate of variable consideration of CU400,000. In addition, on the basis of an evaluation of the contract terms and other facts and circumstances, the entity concludes that the other criteria in paragraph 9 of IFRS 15 are also met. Consequently, the entity accounts for the contract with the customer in accordance with the requirements in IFRS 15. * Refer to Example 2 of IFRS 15 Revenue from Contracts with Customers

IFRS 15 Example 3:* contract modifications modification of a contract for goods (slide 1 of 4 slides) An entity promises to sell 120 products to a customer for $12,000 ($100 per product) → transferred to the customer over a six-month period. The entity transfers control of each product at a point in time. After the entity has transferred control of 60 products to the customer, the contract is modified to require the delivery of an additional 30 products (that were not included in the initial contract). See following slides for Case A and Case B IE19 An entity promises to sell 120 products to a customer for CU12,000 (CU100 per product). The products are transferred to the customer over a six-month period. The entity transfers control of each product at a point in time. After the entity has transferred control of 60 products to the customer, the contract is modified to require the delivery of an additional 30 products (a total of 150 identical products) to the customer. The additional 30 products were not included in the initial contract. * Refer to Example 5 of IFRS 15 Revenue from Contracts with Customers

IFRS 15 Example 3:. contract modifications Case A: what do you think
IFRS 15 Example 3:* contract modifications Case A: what do you think? (slide 2 of 4 slides) Case A: the price of the contract modification for the additional 30 products is an additional $2,850 or $95 per product → reflects the stand-alone selling price. Is the substance of the contract modification (choose one of:) A new and separate contract for 30 future products that does not affect the accounting for the existing contract. Consequently, the entity recognises revenue of $100 per product for the 120 products in the original contract and $95 per product for the 30 products in the new contract; The renegotiation of the original contract (ie $95 per product does not reflect the stand-alone selling price of the additional products). Consequently, the entity applies the requirements in paragraph 21(a) of IFRS 15 and accounts for the modification as a termination of the original contract and the creation of a new contract; or I need more information to decide (specify the information you need)? IE19 An entity promises to sell 120 products to a customer for CU12,000 (CU100 per product). The products are transferred to the customer over a six-month period. The entity transfers control of each product at a point in time. After the entity has transferred control of 60 products to the customer, the contract is modified to require the delivery of an additional 30 products (a total of 150 identical products) to the customer. The additional 30 products were not included in the initial contract. Case A—Additional products for a price that reflects the stand-alone selling price IE20 When the contract is modified, the price of the contract modification for the additional 30 products is an additional CU2,850 or CU95 per product. The pricing for the additional products reflects the stand-alone selling price of the products at the time of the contract modification and the additional products are distinct (in accordance with paragraph 27 of IFRS 15) from the original products. Analysis: IE21 In accordance with paragraph 20 of IFRS 15, the contract modification for the additional 30 products is, in effect, a new and separate contract for future products that does not affect the accounting for the existing contract. The entity recognises revenue of CU100 per product for the 120 products in the original contract and CU95 per product for the 30 products in the new contract. * Refer to Example 5 of IFRS 15 Revenue from Contracts with Customers

IFRS 15 Example 3:* contract modifications modification of a contract for goods (slide 3 of 4 slides) Case B: in negotiating the purchase of an additional 30 products, the parties initially agree on a price of $80 per product. However, the customer discovers that the initial 60 products transferred contained minor defects. The entity promises a partial credit of $15 per product to compensate the customer for the poor quality and incorporates the credit of $900 ($15 credit × 60 products) into the price that the entity charges for the additional 30 products. The contract modification specifies that the price of the additional 30 products is $1,500 or $50 per product. That price comprises the agreed-upon price for the additional 30 products of $2,400, or $80 per product, less the credit of $900. IE19 An entity promises to sell 120 products to a customer for CU12,000 (CU100 per product). The products are transferred to the customer over a six-month period. The entity transfers control of each product at a point in time. After the entity has transferred control of 60 products to the customer, the contract is modified to require the delivery of an additional 30 products (a total of 150 identical products) to the customer. The additional 30 products were not included in the initial contract. Case B—Additional products for a price that does not reflect the stand-alone selling price IE22 During the process of negotiating the purchase of an additional 30 products, the parties initially agree on a price of CU80 per product. However, the customer discovers that the initial 60 products transferred to the customer contained minor defects that were unique to those delivered products. The entity promises a partial credit of CU15 per product to compensate the customer for the poor quality of those products. The entity and the customer agree to incorporate the credit of CU900 (CU15 credit × 60 products) into the price that the entity charges for the additional 30 products. Consequently, the contract modification specifies that the price of the additional 30 products is CU1,500 or CU50 per product. That price comprises the agreed-upon price for the additional 30 products of CU2,400, or CU80 per product, less the credit of CU900. Analysis: IE23 At the time of modification, the entity recognises the CU900 as a reduction of the transaction price and, therefore, as a reduction of revenue for the initial 60 products transferred. In accounting for the sale of the additional 30 products, the entity determines that the negotiated price of CU80 per product does not reflect the stand-alone selling price of the additional products. Consequently, the contract modification does not meet the conditions in paragraph 20 of IFRS 15 to be accounted for as a separate contract. Because the remaining products to be delivered are distinct from those already transferred, the entity applies the requirements in paragraph 21(a) of IFRS 15 and accounts for the modification as a termination of the original contract and the creation of a new contract. IE24 Consequently, the amount recognised as revenue for each of the remaining products is a blended price of CU93.33 {[(CU100 × 60 products not yet transferred under the original contract) + (CU80 × 30 products to be transferred under the contract modification)] ÷ 90 remaining products}. * Refer to Example 5 of IFRS 15 Revenue from Contracts with Customers

IFRS 15 Example 3:. contract modifications Case B: what do you think
IFRS 15 Example 3:* contract modifications Case B: what do you think? (slide 4 of 4 slides) Is the substance of the contract modification (choose one of:) A new and separate contract for 30 future products that does not affect the accounting for the existing contract. Consequently, the entity recognises revenue of $100 per product for the 120 products in the original contract and $50 per product for the 30 products in the new contract; A new and separate contract for 30 future products that does not affect the accounting for the existing contract. Consequently, the entity recognises revenue of $100 per product for the 120 products in the original contract and $80 per product for the 30 products in the new contract; The renegotiation of the original contract (ie neither $50 nor $80 per product reflect the stand- alone selling price of the additional products). Consequently, the entity applies the requirements in paragraph 21(a) of IFRS 15 and accounts for the modification as a termination of the original contract and the creation of a new contract. In accordance with the substance of the new contract, the entity recognises revenue for each of the remaining products at a blended price of $93.33 {[($100 × 60 products not yet transferred under the original contract) + ($80 × 30 products to be transferred under the contract modification)] ÷ 90 remaining products}.; or I need more information to decide (specify the information you need)? IE19 An entity promises to sell 120 products to a customer for CU12,000 (CU100 per product). The products are transferred to the customer over a six-month period. The entity transfers control of each product at a point in time. After the entity has transferred control of 60 products to the customer, the contract is modified to require the delivery of an additional 30 products (a total of 150 identical products) to the customer. The additional 30 products were not included in the initial contract. Case B—Additional products for a price that does not reflect the stand-alone selling price IE22 During the process of negotiating the purchase of an additional 30 products, the parties initially agree on a price of CU80 per product. However, the customer discovers that the initial 60 products transferred to the customer contained minor defects that were unique to those delivered products. The entity promises a partial credit of CU15 per product to compensate the customer for the poor quality of those products. The entity and the customer agree to incorporate the credit of CU900 (CU15 credit × 60 products) into the price that the entity charges for the additional 30 products. Consequently, the contract modification specifies that the price of the additional 30 products is CU1,500 or CU50 per product. That price comprises the agreed-upon price for the additional 30 products of CU2,400, or CU80 per product, less the credit of CU900. Analysis: IE23 At the time of modification, the entity recognises the CU900 as a reduction of the transaction price and, therefore, as a reduction of revenue for the initial 60 products transferred. In accounting for the sale of the additional 30 products, the entity determines that the negotiated price of CU80 per product does not reflect the stand-alone selling price of the additional products. Consequently, the contract modification does not meet the conditions in paragraph 20 of IFRS 15 to be accounted for as a separate contract. Because the remaining products to be delivered are distinct from those already transferred, the entity applies the requirements in paragraph 21(a) of IFRS 15 and accounts for the modification as a termination of the original contract and the creation of a new contract. IE24 Consequently, the amount recognised as revenue for each of the remaining products is a blended price of CU93.33 {[(CU100 × 60 products not yet transferred under the original contract) + (CU80 × 30 products to be transferred under the contract modification)] ÷ 90 remaining products}. * Refer to Example 5 of IFRS 15 Revenue from Contracts with Customers

IFRS 15 Example 4:* contract modifications (slide 1 of 2 slides) change in the transaction price after a contract modification 1 July 2010: an entity promises to transfer two distinct products to a customer. Product X transfers to the customer at contract inception; and Product Y transfers on 31 March 2011. Consideration = fixed consideration $1,000 + variable consideration $200. estimate of variable consideration included in the transaction price → highly probable that a significant reversal in cumulative revenue recognised will not occur when the uncertainty is resolved. transaction price of $1,200 → allocated equally to X and Y. 30 November 2010: the scope of the contract is modified include the promise to transfer Product Z (in addition to the undelivered Product Y) to the customer on 30 June 2011. the price of the contract is increased by $300 (fixed consideration), which does not represent the stand-alone selling price of Product Z. The stand-alone selling price of Product Z is the same as the stand-alone selling prices of Products X and Y. IE25 On 1 July 20X0, an entity promises to transfer two distinct products to a customer. Product X transfers to the customer at contract inception and Product Y transfers on 31 March 20X1. The consideration promised by the customer includes fixed consideration of CU1,000 and variable consideration that is estimated to be CU200. The entity includes its estimate of variable consideration in the transaction price because it concludes that it is highly probable that a significant reversal in cumulative revenue recognised will not occur when the uncertainty is resolved. IE26 The transaction price of CU1,200 is allocated equally to the performance obligation for Product X and the performance obligation for Product Y. This is because both products have the same stand-alone selling prices and the variable consideration does not meet the criteria in paragraph 85 that requires allocation of the variable consideration to one but not both of the performance obligations. IE27 When Product X transfers to the customer at contract inception, the entity recognises revenue of CU600. IE28 On 30 November 20X0, the scope of the contract is modified to include the promise to transfer Product Z (in addition to the undelivered Product Y) to the customer on 30 June 20X1 and the price of the contract is increased by CU300 (fixed consideration), which does not represent the stand-alone selling price of Product Z. The stand-alone selling price of Product Z is the same as the stand-alone selling prices of Products X and Y. IE29 The entity accounts for the modification as if it were the termination of the existing contract and the creation of a new contract. This is because the remaining Products Y and Z are distinct from Product X, which had transferred to the customer before the modification, and the promised consideration for the additional Product Z does not represent its stand-alone selling price. Consequently, in accordance with paragraph 21(a) of IFRS 15, the consideration to be allocated to the remaining performance obligations comprises the consideration that had been allocated to the performance obligation for Product Y (which is measured at an allocated transaction price amount of CU600) and the consideration promised in the modification (fixed consideration of CU300). The transaction price for the modified contract is CU900 and that amount is allocated equally to the performance obligation for Product Y and the performance obligation for Product Z (ie CU450 is allocated to each performance obligation). IE30 After the modification but before the delivery of Products Y and Z, the entity revises its estimate of the amount of variable consideration to which it expects to be entitled to CU240 (rather than the previous estimate of CU200). The entity concludes that the change in estimate of the variable consideration can be included in the transaction price, because it is highly probable that a significant reversal in cumulative revenue recognised will not occur when the uncertainty is resolved. Even though the modification was accounted for as if it were the termination of the existing contract and the creation of a new contract in accordance with paragraph 21(a) of IFRS 15, the increase in the transaction price of CU40 is attributable to variable consideration promised before the modification. Therefore, in accordance with paragraph 90 of IFRS 15, the change in the transaction price is allocated to the performance obligations for Product X and Product Y on the same basis as at contract inception. Consequently, the entity recognises revenue of CU20 for Product X in the period in which the change in the transaction price occurs. Because Product Y had not transferred to the customer before the contract modification, the change in the transaction price that is attributable to Product Y is allocated to the remaining performance obligations at the time of the contract modification. This is consistent with the accounting that would have been required by paragraph 21(a) of IFRS 15 if that amount of variable consideration had been estimated and included in the transaction price at the time of the contract modification. IE31 The entity also allocates the CU20 increase in the transaction price for the modified contract equally to the performance obligations for Product Y and Product Z. This is because the products have the same stand-alone selling prices and the variable consideration does not meet the criteria in paragraph 85 that require allocation of the variable consideration to one but not both of the performance obligations. Consequently, the amount of the transaction price allocated to the performance obligations for Product Y and Product Z increases by CU10 to CU460 each. IE32 On 31 March 20X1, Product Y is transferred to the customer and the entity recognises revenue of CU460. On 30 June 20X1, Product Z is transferred to the customer and the entity recognises revenue of CU460. * Refer to Example 6 of IFRS 15 Revenue from Contracts with Customers

IFRS 15 Example 4:* contract modifications (slide 2 of 2 slides) what do you think?
Is the substance of the contract modification (choose one of:) A new and separate contract for Product Z that does not affect the accounting for the existing contract. Consequently, the entity recognises revenue of $600 for each of Products X and Y in accordance with the original contract and $300 for Product Z in accordance with the new contract; The renegotiation of the original contract (ie $300 does not reflect the stand-alone selling price of Product Z). Consequently, the entity applies the requirements in paragraph 21(a) of IFRS 15 and accounts for the modification as a termination of the original contract and the creation of a new contract for the sale of Products Y and Z (ie $450 each); or I need more information to decide (specify the information you need)? IE25 On 1 July 20X0, an entity promises to transfer two distinct products to a customer. Product X transfers to the customer at contract inception and Product Y transfers on 31 March 20X1. The consideration promised by the customer includes fixed consideration of CU1,000 and variable consideration that is estimated to be CU200. The entity includes its estimate of variable consideration in the transaction price because it concludes that it is highly probable that a significant reversal in cumulative revenue recognised will not occur when the uncertainty is resolved. IE26 The transaction price of CU1,200 is allocated equally to the performance obligation for Product X and the performance obligation for Product Y. This is because both products have the same stand-alone selling prices and the variable consideration does not meet the criteria in paragraph 85 that requires allocation of the variable consideration to one but not both of the performance obligations. IE27 When Product X transfers to the customer at contract inception, the entity recognises revenue of CU600. IE28 On 30 November 20X0, the scope of the contract is modified to include the promise to transfer Product Z (in addition to the undelivered Product Y) to the customer on 30 June 20X1 and the price of the contract is increased by CU300 (fixed consideration), which does not represent the stand-alone selling price of Product Z. The stand-alone selling price of Product Z is the same as the stand-alone selling prices of Products X and Y. IE29 The entity accounts for the modification as if it were the termination of the existing contract and the creation of a new contract. This is because the remaining Products Y and Z are distinct from Product X, which had transferred to the customer before the modification, and the promised consideration for the additional Product Z does not represent its stand-alone selling price. Consequently, in accordance with paragraph 21(a) of IFRS 15, the consideration to be allocated to the remaining performance obligations comprises the consideration that had been allocated to the performance obligation for Product Y (which is measured at an allocated transaction price amount of CU600) and the consideration promised in the modification (fixed consideration of CU300). The transaction price for the modified contract is CU900 and that amount is allocated equally to the performance obligation for Product Y and the performance obligation for Product Z (ie CU450 is allocated to each performance obligation). IE30 After the modification but before the delivery of Products Y and Z, the entity revises its estimate of the amount of variable consideration to which it expects to be entitled to CU240 (rather than the previous estimate of CU200). The entity concludes that the change in estimate of the variable consideration can be included in the transaction price, because it is highly probable that a significant reversal in cumulative revenue recognised will not occur when the uncertainty is resolved. Even though the modification was accounted for as if it were the termination of the existing contract and the creation of a new contract in accordance with paragraph 21(a) of IFRS 15, the increase in the transaction price of CU40 is attributable to variable consideration promised before the modification. Therefore, in accordance with paragraph 90 of IFRS 15, the change in the transaction price is allocated to the performance obligations for Product X and Product Y on the same basis as at contract inception. Consequently, the entity recognises revenue of CU20 for Product X in the period in which the change in the transaction price occurs. Because Product Y had not transferred to the customer before the contract modification, the change in the transaction price that is attributable to Product Y is allocated to the remaining performance obligations at the time of the contract modification. This is consistent with the accounting that would have been required by paragraph 21(a) of IFRS 15 if that amount of variable consideration had been estimated and included in the transaction price at the time of the contract modification. IE31 The entity also allocates the CU20 increase in the transaction price for the modified contract equally to the performance obligations for Product Y and Product Z. This is because the products have the same stand-alone selling prices and the variable consideration does not meet the criteria in paragraph 85 that require allocation of the variable consideration to one but not both of the performance obligations. Consequently, the amount of the transaction price allocated to the performance obligations for Product Y and Product Z increases by CU10 to CU460 each. IE32 On 31 March 20X1, Product Y is transferred to the customer and the entity recognises revenue of CU460. On 30 June 20X1, Product Z is transferred to the customer and the entity recognises revenue of CU460. * Refer to Example 6 of IFRS 15 Revenue from Contracts with Customers

IFRS 15 Step 3 Example 10:* constraining estimates of variable consideration volume discount incentive 1 January 2018 : sell Product A for $100 per unit. If the customer purchases more than 1,000 units in a calendar year → price per unit is retrospectively reduced to $90 per unit (variable consideration). First quarter ended 31 March 2018: sells 75 units estimate: purchases will not exceed 1,000-unit threshold required for volume discount. May 2018: the customer acquires another company Second quarter ended 30 June 2018: sells an additional 500 units of Product A to the customer. Estimate: purchases will exceed 1,000-unit threshold for the calendar year and entity will be required to retrospectively reduce the price per unit to $90. IE124 An entity enters into a contract with a customer on 1 January 20X8 to sell Product A for CU100 per unit. If the customer purchases more than 1,000 units of Product A in a calendar year, the contract specifies that the price per unit is retrospectively reduced to CU90 per unit. Consequently, the consideration in the contract is variable. IE125 For the first quarter ended 31 March 20X8, the entity sells 75 units of Product A to the customer. The entity estimates that the customer’s purchases will not exceed the 1,000-unit threshold required for the volume discount in the calendar year. Analysis IE126 The entity considers the requirements in paragraphs 56–58 of IFRS 15 on constraining estimates of variable consideration, including the factors in paragraph 57 of IFRS 15. The entity determines that it has significant experience with this product and with the purchasing pattern of the entity. Thus, the entity concludes that it is highly probable that a significant reversal in the cumulative amount of revenue recognised (ie CU100 per unit) will not occur when the uncertainty is resolved (ie when the total amount of purchases is known). Consequently, the entity recognises revenue of CU7,500 (75 units × CU100 per unit) for the quarter ended 31 March 20X8. IE127 In May 20X8, the entity’s customer acquires another company and in the second quarter ended 30 June 20X8 the entity sells an additional 500 units of Product A to the customer. In the light of the new fact, the entity estimates that the customer’s purchases will exceed the 1,000-unit threshold for the calendar year and therefore it will be required to retrospectively reduce the price per unit to CU90. IE128 Consequently, the entity recognises revenue of CU44,250 for the quarter ended 30 June 20X8. That amount is calculated from CU45,000 for the sale of 500 units (500 units × CU90 per unit) less the change in transaction price of CU750 (75 units × CU10 price reduction) for the reduction of revenue relating to units sold for the quarter ended 31 March 20X8 (see paragraphs 87 and 88 of IFRS 15). * Refer to Example 24 of IFRS 15 Revenue from Contracts with Customers

IFRS 15 Step 3 Example 13:* the existence of a significant financing component in the contract: advance payment and assessment of the discount rate An entity enters into a contract with a customer to sell an asset. Control will transfer in two years (ie performance obligation satisfied at a point in time). Payment options: Pay $5,000 in two years when the customer obtains control; or Pay $4,000 when the contract is signed (customer elects this option). IE148 An entity enters into a contract with a customer to sell an asset. Control of the asset will transfer to the customer in two years (ie the performance obligation will be satisfied at a point in time). The contract includes two alternative payment options: payment of CU5,000 in two years when the customer obtains control of the asset or payment of CU4,000 when the contract is signed. The customer elects to pay CU4,000 when the contract is signed. Analysis: IE149 The entity concludes that the contract contains a significant financing component because of the length of time between when the customer pays for the asset and when the entity transfers the asset to the customer, as well as the prevailing interest rates in the market. IE150 The interest rate implicit in the transaction is 11.8 per cent, which is the interest rate necessary to make the two alternative payment options economically equivalent. However, the entity determines that, in accordance with paragraph 64 of IFRS 15, the rate that should be used in adjusting the promised consideration is six per cent, which is the entity’s incremental borrowing rate. IE151 The following journal entries illustrate how the entity would account for the significant financing component: (a) recognise a contract liability for the CU4,000 payment received at contract inception: Cash CU4,000 Contract liability CU4,000 (b) during the two years from contract inception until the transfer of the asset, the entity adjusts the promised amount of consideration (in accordance with paragraph 65 of IFRS 15) and accretes the contract liability by recognising interest on CU4,000 at six per cent for two years: Interest expense CU494* Contract liability CU494 *CU494 = CU4,000 contract liability × (6 per cent interest per year for two years). (c) recognise revenue for the transfer of the asset: Contract liability CU4,494 Revenue CU4,494 * Refer to Example 29 of IFRS 15 Revenue from Contracts with Customers

IFRS 15 Example 27:* sale with a right of return
An entity enters into 100 contracts with customers. Total consideration = $10,000 (100 total products x $100), cash received when control of product transfers. Customary business practice of allowing customer to return any unused product within 30 days for a full refund → cost of each product = $60. The costs of recovering the products are immaterial and the returned products can be resold at a profit. The entity has significant experience in estimating returns for this product and customer class. In addition, the uncertainty will be resolved within a short time frame (ie the 30-day return period). Using the expected value method, the entity estimates that 97 products will not be returned. IE110 An entity enters into 100 contracts with customers. Each contract includes the sale of one product for CU100 (100 total products × CU100 = CU10,000 total consideration). Cash is received when control of a product transfers. The entity’s customary business practice is to allow a customer to return any unused product within 30 days and receive a full refund. The entity’s cost of each product is CU60. Analysis: IE111 The entity applies the requirements in IFRS 15 to the portfolio of 100 contracts because it reasonably expects that, in accordance with paragraph 4, the effects on the financial statements from applying these requirements to the portfolio would not differ materially from applying the requirements to the individual contracts within the portfolio. IE112 Because the contract allows a customer to return the products, the consideration received from the customer is variable. To estimate the variable consideration to which the entity will be entitled, the entity decides to use the expected value method because it is the method that the entity expects to better predict the amount of consideration to which it will be entitled. Using the expected value method, the entity estimates that 97 products will not be returned. IE113 The entity also considers the requirements in paragraphs 56–58 of IFRS 15 on constraining estimates of variable consideration to determine whether the estimated amount of variable consideration of CU9,700 (CU100 × 97 products not expected to be returned) can be included in the transaction price. The entity considers the factors in paragraph 57 of IFRS 15 and determines that although the returns are outside the entity’s influence, it has significant experience in estimating returns for this product and customer class. In addition, the uncertainty will be resolved within a short time frame (ie the 30-day return period). Thus, the entity concludes that it is highly probable that a significant reversal in the cumulative amount of revenue recognised (ie CU9,700) will not occur as the uncertainty is resolved (ie over the return period). IE114 The entity estimates that the costs of recovering the products will be immaterial and expects that the returned products can be resold at a profit. IE115 Upon transfer of control of the 100 products, the entity does not recognise revenue for the three products that it expects to be returned. Consequently, in accordance with paragraphs 55 and B21 of IFRS 15, the entity recognises the following: (a) revenue of CU9,700 (CU100 × 97 products not expected to be returned); (b) a refund liability of CU300 (CU100 refund × 3 products expected to be returned); and (c) an asset of CU180 (CU60 × 3 products for its right to recover products from customers on settling the refund liability). Accounting entries: The entity records the following entries on Day 1: Dr Cr Bank 10,000 Refund liability 300 Revenue 9,700 (To recognise the sale excluding revenue on products expected to be returned) Asset – Right to recover 180 Cost of sales 5,820 Inventory 6,000 * Refer to Example 22 of IFRS 15 Revenue from Contracts with Customers

IFRS 15 Step 3 Example 15:* consideration payable to a customer
An entity (a manufacturer of consumer goods) enters into a one-year contract to sell goods to a customer. The customer commits itself to buy at least $15 million of products during the year. The entity makes a non-refundable payment of $1.5 million to the customer at contract inception to compensate the customer for the changes it needs to make to its shelving to accommodate the entity’s products. First month: invoiced amount = $2 million. recognise $1.8 million revenue ($2 million less 10% for payment shelving space treated as a reduction of the $15 million contract price) IE160 An entity that manufactures consumer goods enters into a one-year contract to sell goods to a customer that is a large global chain of retail stores. The customer commits to buy at least CU15 million of products during the year. The contract also requires the entity to make a non-refundable payment of CU1.5 million to the customer at the inception of the contract. The CU1.5 million payment will compensate the customer for the changes it needs to make to its shelving to accommodate the entity’s products. Analysis: IE161 The entity concludes that the payment to the customer is not in exchange for a distinct good or service that transfers to the entity. This is because the entity does not obtain control of any rights to the customer’s shelves. Consequently, the entity determines that, the CU1.5 million payment is a reduction of the transaction price. IE162 The entity concludes that the consideration payable is accounted for as a reduction in the transaction price when the entity recognises revenue for the transfer of the goods. Consequently, as the entity transfers goods to the customer, the entity reduces the transaction price for each good by 10 per cent (CU1.5 million ÷ CU15 million). Therefore, in the first month in which the entity transfers goods to the customer, the entity recognises revenue of CU1.8 million (CU2.0 million invoiced amount less CU0.2 million of consideration payable to the customer). * Refer to Example 32 of IFRS 15 Revenue from Contracts with Customers

IFRS 15 Application guidance consignment arrangements
Delivers product Entity Dealer or distributor Sells End customer Control passed? No Held in consignment → entity does not recognise revenue B77 When an entity delivers a product to another party (such as a dealer or a distributor) for sale to end customers, the entity shall evaluate whether that other party has obtained control of the product at that point in time. A product that has been delivered to another party may be held in a consignment arrangement if that other party has not obtained control of the product. Accordingly, an entity shall not recognise revenue upon delivery of a product to another party if the delivered product is held on consignment. B78 Indicators that an arrangement is a consignment arrangement include, but are not limited to, the following: (a) the product is controlled by the entity until a specified event occurs, such as the sale of the product to a customer of the dealer or until a specified period expires; (b) the entity is able to require the return of the product or transfer the product to a third party (such as another dealer); and (c) the dealer does not have an unconditional obligation to pay for the product (although it might be required to pay a deposit). Indicators of a consignment arrangement include: the product is controlled by the entity until a specified event occurs the entity is able to require the return of the product to a third party, for example, another dealer the dealer does not have an unconditional obligation to pay for the product

IFRS 15 Example 40:* bill-and-hold arrangements bill-and-hold arrangements
1 January 2018 → an entity enters into a contract for the sale of a machine and spare parts: manufacturing lead time = two years. The promises to transfer the machine and spare parts are two distinct performance obligations that will each be satisfied at a point in time. 31 December 2019 → customer pays for the machine and spare parts but only takes physical possession of the machine. the customer inspects and accepts the spare parts but requests that the spare parts be stored at the entity’s warehouse. The customer has legal title to the spare parts and they can be identified as belonging to the customer. The entity stores the spare parts in a separate section of its warehouse and the parts are ready for immediate shipment at the customer’s request. The entity expects to hold the spare parts for two to four years and does not have the ability to use the spare parts or direct them to another customer. Promise to provide custodial services → a performance obligation because it is a service provided to the customer and it is distinct from the machine and spare parts. IE323 An entity enters into a contract with a customer on 1 January 20X8 for the sale of a machine and spare parts. The manufacturing lead time for the machine and spare parts is two years. IE324 Upon completion of manufacturing, the entity demonstrates that the machine and spare parts meet the agreed-upon specifications in the contract. The promises to transfer the machine and spare parts are distinct and result in two performance obligations that each will be satisfied at a point in time. On 31 December 20X9, the customer pays for the machine and spare parts, but only takes physical possession of the machine. Although the customer inspects and accepts the spare parts, the customer requests that the spare parts be stored at the entity’s warehouse because of its close proximity to the customer’s factory. The customer has legal title to the spare parts and the parts can be identified as belonging to the customer. Furthermore, the entity stores the spare parts in a separate section of its warehouse and the parts are ready for immediate shipment at the customer’s request. The entity expects to hold the spare parts for two to four years and the entity does not have the ability to use the spare parts or direct them to another customer. IE325 The entity identifies the promise to provide custodial services as a performance obligation because it is a service provided to the customer and it is distinct from the machine and spare parts. Analysis Consequently, the entity accounts for three performance obligations in the contract (the promises to provide the machine, the spare parts and the custodial services). The transaction price is allocated to the three performance obligations and revenue is recognised when (or as) control transfers to the customer. IE326 Control of the machine transfers to the customer on 31 December 20X9 when the customer takes physical possession. The entity assesses the indicators in paragraph 38 of IFRS 15 to determine the point in time at which control of the spare parts transfers to the customer, noting that the entity has received payment, the customer has legal title to the spare parts and the customer has inspected and accepted the spare parts. In addition, the entity concludes that all of the criteria in paragraph B81 of IFRS 15 are met, which is necessary for the entity to recognise revenue in a bill-and-hold arrangement. The entity recognises revenue for the spare parts on 31 December 20X9 when control transfers to the customer. IE327 The performance obligation to provide custodial services is satisfied over time as the services are provided. The entity considers whether the payment terms include a significant financing component in accordance with paragraphs 60–65 of IFRS 15. * Refer to Example 63 of IFRS 15 Revenue from Contracts with Customers

IFRS 15 Step 5 Example 18:* no enforceable right to payment for performance completed to date .: performance obligation satisfied at a point in time (akin to ‘traditional’ sale of goods) An entity enters into a contract to build an item of equipment. Payment schedule: 10% of contract price as advance payment at contract inception. Regular payments throughout the construction period: 50% of the contract price. Final payment of 40% of the contract price after construction is completed and the equipment has passed the prescribed performance tests. Payments are non-refundable unless the entity fails to perform as promised. If the customer terminates the contract, the entity is entitled only to retain any progress payments received from the customer. The entity has no further rights to compensation from the customer. IE77 An entity enters into a contract with a customer to build an item of equipment. The payment schedule in the contract specifies that the customer must make an advance payment at contract inception of 10 per cent of the contract price, regular payments throughout the construction period (amounting to 50 per cent of the contract price) and a final payment of 40 per cent of the contract price after construction is completed and the equipment has passed the prescribed performance tests. The payments are non-refundable unless the entity fails to perform as promised. If the customer terminates the contract, the entity is entitled only to retain any progress payments received from the customer. The entity has no further rights to compensation from the customer. Analysis: IE78 At contract inception, the entity assesses whether its performance obligation to build the equipment is a performance obligation satisfied over time in accordance with paragraph 35 of IFRS 15. IE79 As part of that assessment, the entity considers whether it has an enforceable right to payment for performance completed to date in accordance with paragraphs 35(c), 37 and B9–B13 of IFRS 15 if the customer were to terminate the contract for reasons other than the entity’s failure to perform as promised. Even though the payments made by the customer are non-refundable, the cumulative amount of those payments is not expected, at all times throughout the contract, to at least correspond to the amount that would be necessary to compensate the entity for performance completed to date. This is because at various times during construction the cumulative amount of consideration paid by the customer might be less than the selling price of the partially completed item of equipment at that time. Consequently, the entity does not have a right to payment for performance completed to date. IE80 Because the entity does not have a right to payment for performance completed to date, the entity’s performance obligation is not satisfied over time in accordance with paragraph 35(c) of IFRS 15. Accordingly, the entity does not need to assess whether the equipment would have an alternative use to the entity. The entity also concludes that it does not meet the criteria in paragraph 35(a) or (b) of IFRS 15 and thus, the entity accounts for the construction of the equipment as a performance obligation satisfied at a point in time in accordance with paragraph 38 of IFRS 15. * Refer to Example 16 of IFRS 15 Revenue from Contracts with Customers (see also Example 59)

Cost of goods sold expense IAS 2 Inventories and Section 13 Inventories
IAS 2 (paragraph 34) and paragraph13.20 of the IFRS for SMEs specify that when inventories are sold, the carrying amount of those inventories must be recognised as an expense in the period in which the related revenue is recognised (see paragraph 31 of IFRS 15) IAS 2 and Section 13 specify how to measure the carrying amount of inventories: the lower of cost and net realisable value (ie estimated selling price less costs to complete and sell) IAS 2 (paragraph 37(d)) and paragraph 13.22(c) of the IFRS for SMEs require disclosure of the amount of inventories recognised as an expense in the period (ie the cost of goods sold)

Cost of goods sold expense other Standards
IAS 2 and Section 13 do not apply to: financial instruments; and biological assets in agricultural activity before harvest IAS 2 and Section 13 also do not apply to the measurement of inventories held by: producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, to the extent that they are measured at net realisable value/fair value less costs to sell in accordance with well-established practices in those industries; and commodity broker-traders who measure their inventories at fair value less costs to sell.

Cost of inventories The cost of inventories comprises all:
costs of purchase costs of conversion other costs incurred in bringing inventories to their present location and condition

Cost of goods sold rebates
IAS 2 (paragraph 11) and paragraph 13.6 of the IFRS for SMEs specify that trade discounts, rebates and other similar items are deducted in determining the cost of inventories The IFRIC clarifies that the following discounts received by a purchaser of goods should be deducted from their cost: cash discounts (August 2002) prompt settlement discounts (November 2004) other rebates and discounts (November 2004) unless the rebate specifically and genuinely refunds selling expenses

Cost of goods sold expense complex supplier arrangements: variable consideration
a convention for variable consideration in IAS 2 Inventories is yet to be codified. Consequently, diversity in practice likely as other IFRSs (relevant when applying the IAS 8 hierarchy) use a range of treatments. However, enhanced disclosures apply (paragraphs 17(c), 122 and 125 of IAS 1) regulatory action, for example, UK FRC regarding Tesco and now focussing on other relevant manufacturers and retailers too

Cost of goods sold complex supplier arrangements: variable consideration continued
Some of the biggest accounting firms provide the following application guidance: if it is probable that the contractual rebate or volume discount will be earned and the amount can be measured reliably, then the discount should be recognised as a reduction in the purchase price of inventory when it is first recognised If not probable then recognised inventory at the gross amount (ie before rebate) until the rebate becomes probable p585 and p586 of KPMG’s Insights into IFRS 2015/2016 p674 and p675 of Deloitte’s iGAAP 2015 (by analogy to IAS 34 Interim Reporting)

Rendering services, construction contracts (and sale of goods) when performance is satisfied over time (see paragraphs 35 to 37 and 39 to 45 of IFRS 15)

Section 23 rendering of services the main requirement: percentage of completion method
Recognise revenue from the rendering of services when: amount (fair value) of revenue can be measured reliably probable that economic benefits will flow to the seller the stage of completion at the end of the reporting period can be measured reliably costs incurred and the cost to be incurred to complete the transaction can be measured reliably Measure at fair value of the consideration received/receivable

IFRS 15 Step 3 Example 14:* non-cash consideration entitlement to non-cash consideration
An entity enters into a contract to provide a weekly service for one year. 1 January 2011: contract signed and work begins immediately. The service is a single performance obligation → services transfer over time. In exchange the customer promises 100 shares of its common stock per week of service (ie total of 5,200 shares). The shares must be paid upon the successful completion of each week of service. Progress towards complete satisfaction of the performance obligation is measured as each week of service is complete. Revenue each week = fair value of 100 shares that are received upon completion of each weekly service. IE156 An entity enters into a contract with a customer to provide a weekly service for one year. The contract is signed on 1 January 20X1 and work begins immediately. The entity concludes that the service is a single performance obligation in accordance with paragraph 22(b) of IFRS 15. This is because the entity is providing a series of distinct services that are substantially the same and have the same pattern of transfer (the services transfer to the customer over time and use the same method to measure progress—that is, a time-based measure of progress). IE157 In exchange for the service, the customer promises 100 shares of its common stock per week of service (a total of 5,200 shares for the contract). The terms in the contract require that the shares must be paid upon the successful completion of each week of service. Analysis: IE158 The entity measures its progress towards complete satisfaction of the performance obligation as each week of service is complete. To determine the transaction price (and the amount of revenue to be recognised), the entity measures the fair value of 100 shares that are received upon completion of each weekly service. The entity does not reflect any subsequent changes in the fair value of the shares received (or receivable) in revenue. * Refer to Example 31 of IFRS 15 Revenue from Contracts with Customers

IFRS 15 Step 5 Example 17:* 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 The entity recognises revenue over time by measuring its progress towards complete satisfaction of that performance obligation. IE67 An entity enters into a contract to provide monthly payroll processing services to a customer for one year. IE68 The promised payroll processing services are accounted for as a single performance obligation in accordance with paragraph 22(b) of IFRS 15. The performance obligation is satisfied over time in accordance with paragraph 35(a) of IFRS 15 because the customer simultaneously receives and consumes the benefits of the entity’s performance in processing each payroll transaction as and when each transaction is processed. The fact that another entity would not need to re-perform payroll processing services for the service that the entity has provided to date also demonstrates that the customer simultaneously receives and consumes the benefits of the entity’s performance as the entity performs. (The entity disregards any practical limitations on transferring the remaining performance obligation, including setup activities that would need to be undertaken by another entity.) Analysis: The entity recognises revenue over time by measuring its progress towards complete satisfaction of that performance obligation in accordance with paragraphs 39–45 and B14–B19 of IFRS 15. * Refer to Example 13 of IFRS 15 Revenue from Contracts with Customers

Construction contracts the basics
When the outcome of the construction contract can be measured reliably, recognise revenue (and contract costs) from construction contracts using the stage of completion method total contract revenue can be measured reliably probable that economic benefits will flow to the seller stage of completion can be determined reliably costs incurred (and costs to complete) can be measured reliably However: recognise an expected loss immediately (like an onerous contract) when the outcome of a contract cannot be measured reliably, recognise contract costs as incurred and limit the recognition of revenue to recoverable contract costs

Construction contracts estimating the stage of completion method
Methods of estimating the stage of completion Usually on the basis of inputs % of contract costs incurred to date over estimated total contract costs. exclude costs incurred for future activities (for example, raw materials inventory and prepayments) On the basis of outputs is also permitted: engineering survey of work performed physical portion of work that has been completed (for example, kilometers of road constructed)

Construction contracts example 1
Entity has a fixed price contract to construct a road for the government that becomes onerous. Original estimates 2014 2015 2016 Revenue 2,000,000 Costs incurred - 200,000 1,100,000 2,100,000 Estimated future costs 1,000,000 800,000 Total expected costs 2,200,000

Construction contracts example 1 continued
Entity calculates percentage of completion. 2014 2015 2016 Costs incurred 200,000 1,100,000 2,100,000 Estimated future costs 800,000 - Total expected costs 1,000,000 2,200,000 Costs incurred/Total expected costs 20% 50% 100%

Revenue and costs on the basis of % of completion and raises a provision for any onerousness in the contract: for 2014 for 2015 Cumulative end of 2015 for 2016 Cumulative end of2016 % complete 20% 50% 100% Revenue 400,000 600,000 1,000,000 2,000,000 Costs (200,000) (900,000) (1,100,000) (1,000,000) (2,100,000) Onerousness (100,000) 100,000 - Profit (loss) 200,000 (400,000)

Construction contracts example 2
Entity has a fixed price contract to construct a bridge using new technologies but cannot initially determine the outcome of the contract. Original estimates 2014 2015 2016 Revenue 2,000,000 Costs incurred - 200,000 750,000 1,200,000 Estimated future costs ? 250,000 Total expected costs 1,000,000

Entity calculates percentage of completion. 2014 2015 2016 Costs incurred 200,000 750,000 1,200,000 Estimated future costs ? 250,000 - Total expected costs 1,000,000 Costs incurred/Total expected costs n/a 75% 100%

Revenue is initially limited to recoverable contract costs; then on % of completion when outcome more reliable. for 2014 for 2015 Cumulative end of 2015 for 2016 Cumulative end of 2016 % complete n/a 75% 100% Revenue 200,000 1,300,000 1,500,000 500,000 2,000,000 Costs (200,000) (550,000) (750,000) (450,000) (1,200,000) Profit - 750,000 50,000 800,000

IFRS 15 Step 5 Example 19:* 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). Customer pays a non-refundable deposit upon entering into the contract and will make progress payments during construction of the unit. The contract precludes the entity from directing the unit to another customer. The customer does not have the right to terminate the contract unless the entity fails to perform as promised. If the customer defaults on its obligations by failing to make the promised progress payments as and when they are due, the entity would have a right to all of the consideration promised in the contract if it completes the construction of the unit. The courts have previously upheld similar rights that entitle developers to require the customer to perform, subject to the entity meeting its obligations under the contract. IE81 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 (for example, the location of the unit within the complex). Case B—Entity has an enforceable right to payment for performance completed to date IE84 The customer pays a non-refundable deposit upon entering into the contract and will make progress payments during construction of the unit. The contract has substantive terms that preclude the entity from being able to direct the unit to another customer. In addition, the customer does not have the right to terminate the contract unless the entity fails to perform as promised. If the customer defaults on its obligations by failing to make the promised progress payments as and when they are due, the entity would have a right to all of the consideration promised in the contract if it completes the construction of the unit. The courts have previously upheld similar rights that entitle developers to require the customer to perform, subject to the entity meeting its obligations under the contract. IE85 At contract inception, the entity applies paragraph 35(c) of IFRS 15 to determine whether its promise to construct and transfer the unit to the customer is a performance obligation satisfied over time. The entity determines that the asset (unit) created by the entity’s performance does not have an alternative use to the entity because the contract precludes the entity from transferring the specified unit to another customer. The entity does not consider the possibility of a contract termination in assessing whether the entity is able to direct the asset to another customer. IE86 The entity also has a right to payment for performance completed to date in accordance with paragraphs 37 and B9–B13 of IFRS 15. This is because if the customer were to default on its obligations, the entity would have an enforceable right to all of the consideration promised under the contract if it continues to perform as promised. IE87 Therefore, the terms of the contract and the practices in the legal jurisdiction indicate that there is a right to payment for performance completed to date. Consequently, the criteria in paragraph 35(c) of IFRS 15 are met and the entity has a performance obligation that it satisfies over time. To recognise revenue for that performance obligation satisfied over time, the entity measures its progress towards complete satisfaction of its performance obligation in accordance with paragraphs 39–45 and B14–B19 of IFRS 15. IE88 In the construction of a multi-unit residential complex, the entity may have many contracts with individual customers for the construction of individual units within the complex. The entity would account for each contract separately. However, depending on the nature of the construction, the entity’s performance in undertaking the initial construction works (ie the foundation and the basic structure), as well as the construction of common areas, may need to be reflected when measuring its progress towards complete satisfaction of its performance obligations in each contract. * Refer to Example 17 of IFRS 15 Revenue from Contracts with Customers

IFRS 15 Step 5 Example 20:* measuring progress towards complete satisfaction of a performance obligation: measuring progress when making goods or services available An owner and manager of health clubs enters into a contract with a customer for one year of access to any of its health clubs. The customer has unlimited use of the health clubs and promises to pay $100 per month. IE92 An entity, an owner and manager of health clubs, enters into a contract with a customer for one year of access to any of its health clubs. The customer has unlimited use of the health clubs and promises to pay CU100 per month. Analysis: IE93 The entity determines that its promise to the customer is to provide a service of making the health clubs available for the customer to use as and when the customer wishes. This is because the extent to which the customer uses the health clubs does not affect the amount of the remaining goods and services to which the customer is entitled. The entity concludes that the customer simultaneously receives and consumes the benefits of the entity’s performance as it performs by making the health clubs available. Consequently, the entity’s performance obligation is satisfied over time in accordance with paragraph 35(a) of IFRS 15. IE94 The entity also determines that the customer benefits from the entity’s service of making the health clubs available evenly throughout the year. (That is, the customer benefits from having the health clubs available, regardless of whether the customer uses it or not.) Consequently, the entity concludes that the best measure of progress towards complete satisfaction of the performance obligation over time is a time-based measure and it recognises revenue on a straight-line basis throughout the year at CU100 per month. Note When the performance obligation is standing ready for a period of time, then the measure of progress is not the extent to which the customer uses the goods or services, see BC160. * Refer to Example 18 of IFRS 15 Revenue from Contracts with Customers

IFRS 15 Step 5 Example 21:* measuring progress towards complete satisfaction of a performance obligation: uninstalled materials In November 20X2, an entity contracts with a customer to refurbish a 3- storey building including installing new elevators. Promised refurbishment service, including the installation of elevators → single performance obligation satisfied over time. Transaction price and expected costs: An input method based on costs incurred is used to measure progress. The customer obtains control of the elevators when they are delivered to the site in December 2012, although the elevators will not be installed until June 2013. As of 31 December 2012 → costs incurred (excluding elevators) = CU500,000. Transaction price $5m Expected costs: Elevators $1.5m Other costs $2.5m Total expected costs $4.0m IE 95: In November 20X2, an entity contracts with a customer to refurbish a 3-storey building and install new elevators for total consideration of CU5 million. The promised refurbishment service, including the installation of elevators, is a single performance obligation satisfied over time. Total expected costs are CU4 million, including CU1.5 million for the elevators. The entity determines that it acts as a principal in accordance with paragraphs B34–B38 of IFRS 15, because it obtains control of the elevators before they are transferred to the customer. IE96 A summary of the transaction price and expected costs is as follows: CU Transaction price 5,000,000 Expected costs: Elevators 1,500,000 Other costs 2,500,000 Total expected costs 4,000,000 IE97 The entity uses an input method based on costs incurred to measure its progress towards complete satisfaction of the performance obligation. The entity assesses whether the costs incurred to procure the elevators are proportionate to the entity’s progress in satisfying the performance obligation, in accordance with paragraph B19 of IFRS 15. The customer obtains control of the elevators when they are delivered to the site in December 20X2, although the elevators will not be installed until June 20X3. The costs to procure the elevators (CU1.5 million) are significant relative to the total expected costs to completely satisfy the performance obligation (CU4 million). The entity is not involved in designing or manufacturing the elevators. Analysis IE98 The entity concludes that including the costs to procure the elevators in the measure of progress would overstate the extent of the entity’s performance. Consequently, in accordance with paragraph B19 of IFRS 15, the entity adjusts its measure of progress to exclude the costs to procure the elevators from the measure of costs incurred and from the transaction price. The entity recognises revenue for the transfer of the elevators in an amount equal to the costs to procure the elevators (ie at a zero margin). IE99 As of 31 December 20X2 the entity observes that: (a) other costs incurred (excluding elevators) are CU500,000; and (b) performance is 20 per cent complete (ie CU500,000 ÷ CU2,500,000). IE100 Consequently, at 31 December 20X2, the entity recognises the following: Revenue 2,200,000* Cost of goods sold 2,000,000+ Profit 200,000 *Revenue recognised is calculated as (20 per cent × CU3,500,000) + CU1,500,000 (CU3,500,000 is CU5,000,000 transaction price – CU1,500,000 costs of elevators.) +Cost of goods sold is CU500,000 of costs incurred + CU1,500,000 costs of elevators. * Refer to Example 19 of IFRS 15 Revenue from Contracts with Customers

Royalties

Section 23 royalties the main requirements
Recognise royalties on the accrual basis in accordance with the substance of the agreement

IFRS 15 Application guidance licensing
Licence → gives the customer rights to the intellectual property of an entity. May include: Software and technology Motion pictures, music and other forms of media and entertainment Franchises Patents, trademarks and copyrights Para B52

IFRS 15 Application guidance licensing (continued)
Licence not distinct from other promised goods or services Licence together with other promised goods or services accounted for as a single performance obligation Example: a licence that the customer can benefit from only in conjunction with a related service Licence is distinct from other goods or services Accounted for as a single performance obligation either: Over time – if right to access intellectual property throughout licence period. Right to access intellectual property if: Licensor will undertake activities that significantly affect the intellectual property; Licence exposes licensee to effects of activities; and Activities are not a good or service to licensee. OR At a point in time – if right to use intellectual property as it exists when the licence is granted. Licence not distinct from other goods or services B54 If the promise to grant a licence is not distinct from other promised goods or services in the contract in accordance with paragraphs 26–30, an entity shall account for the promise to grant a licence and those other promised goods or services together as a single performance obligation. Examples of licences that are not distinct from other goods or services promised in the contract include the following: (a) a licence that forms a component of a tangible good and that is integral to the functionality of the good; and (b) a licence that the customer can benefit from only in conjunction with a related service (such as an online service provided by the entity that enables, by granting a licence, the customer to access content). Licence is distinct from other goods or services B55 If the licence is not distinct, an entity shall apply paragraphs 31–38 to determine whether the performance obligation (which includes the promised licence) is a performance obligation that is satisfied over time or satisfied at a point in time. B56 If the promise to grant the licence is distinct from the other promised goods or services in the contract and, therefore, the promise to grant the licence is a separate performance obligation, an entity shall determine whether the licence transfers to a customer either at a point in time or over time. In making this determination, an entity shall consider whether the nature of the entity’s promise in granting the licence to a customer is to provide the customer with either: (a) a right to access the entity’s intellectual property as it exists throughout the licence period; or (b) a right to use the entity’s intellectual property as it exists at the point in time at which the licence is granted. B58 The nature of an entity’s promise in granting a licence is a promise to provide a right to access the entity’s intellectual property if all of the following criteria are met: (a) the contract requires, or the customer reasonably expects, that the entity will undertake activities that significantly affect the intellectual property to which the customer has rights (see paragraph B59); (b) the rights granted by the licence directly expose the customer to any positive or negative effects of the entity’s activities identified in paragraph B58(a); and (c) those activities do not result in the transfer of a good or a service to the customer as those activities occur (see paragraph 25).

Multiple element sales

Multiple element sales the principle
Section 23 (paragraphs 23.8 and 23.9) and IFRS 15 (paragraphs 22 to 29) require separate accounting for multiple element sales nevertheless, neither Section 23 nor IFRS 15 treat a ‘standard’ warranty as a separate performance obligation

IFRS 15 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 Some examples of promised goods or services: sale of goods produced by an entity (for example, inventory of a manufacturer) resale of goods purchased by an entity (for example, merchandise of a retailer) resale of rights to goods or services purchased by an entity (for example, a ticket resold by an entity acting as a principal) performing a contractually agreed-upon task for the customer (for example, cleaning services) providing a service of standing ready to provide goods or services (for example, unspecified updates to software that are provided on a when-and-if-available basis) arranging for another party to transfer goods or services to a customer (for example, acting as an agent of another party) constructing, managing or developing an asset on behalf of a customer granting a licence granting an option to purchase additional goods or services if it gives the customer a material right Appendix A: A performance obligation is a promise in a contract with a customer to transfer to the customer either: (a) a good or service (or a bundle of goods or services) that is distinct; or (b) a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer. Para 26: examples of promised goods or services The next slide provides some detailed criteria to determine whether or not the goods or services are distinct.

IFRS 15 Step 2 Example 6:* identifying performance obligations goods and services are not distinct (slide 1 of 2 slides) A contractor enters into a contract to build a hospital for a customer. The contractor is responsible for the overall management of the project and identifies various goods and services to be provided, including: engineering site clearance foundation procurement construction of the structure piping and wiring installation of equipment and finishing. The contractor or competitors regularly sells many of these goods and services separately to other customers. The customer could generate economic benefit from the individual goods and services by using, consuming, selling or holding those goods or services. IE45 An entity, a contractor, enters into a contract to build a hospital for a customer. The entity is responsible for the overall management of the project and identifies various goods and services to be provided, including engineering, site clearance, foundation, procurement, construction of the structure, piping and wiring, installation of equipment and finishing. Analysis: IE46 The promised goods and services are capable of being distinct in accordance with paragraph 27(a) of IFRS 15. That is, the customer can benefit from the goods and services either on their own or together with other readily available resources. This is evidenced by the fact that the entity, or competitors of the entity, regularly sells many of these goods and services separately to other customers. In addition, the customer could generate economic benefit from the individual goods and services by using, consuming, selling or holding those goods or services. IE47 However, the goods and services are not distinct within the context of the contract in accordance with paragraph 27(b) of IFRS 15 (on the basis of the factors in paragraph 29 of IFRS 15). That is, the entity’s promise to transfer individual goods and services in the contract are not separately identifiable from other promises in the contract. This is evidenced by the fact that the entity provides a significant service of integrating the goods and services (the inputs) into the hospital (the combined output) for which the customer has contracted. IE48 Because both criteria in paragraph 27 of IFRS 15 are not met, the goods and services are not distinct. The entity accounts for all of the goods and services in the contract as a single performance obligation. * Refer to Example 10 of IFRS 15 Revenue from Contracts with Customers

IFRS 15 Step 2 Example 6:* identifying performance obligations what do you think? (slide 2 of 2 slides) The promised goods and services are capable of being distinct in accordance with paragraph 27(a) of IFRS 15 (ie the customer can benefit from the goods and services either on their own or together with other readily available resources). This is evidenced by the fact that the entity, or competitors of the entity, regularly sells many of these goods and services separately to other customers. In addition, the customer could generate economic benefit from the individual goods and services by using, consuming, selling or holding those goods or services. However, are the goods and services distinct within the context of the contract in accordance with paragraph 27(b) of IFRS 15 (choose one of:) Yes, account for separate performance obligations; No, account for a single performance obligation; or I need more information to decide (specify the information you need)? IE45 An entity, a contractor, enters into a contract to build a hospital for a customer. The entity is responsible for the overall management of the project and identifies various goods and services to be provided, including engineering, site clearance, foundation, procurement, construction of the structure, piping and wiring, installation of equipment and finishing. Analysis: IE46 The promised goods and services are capable of being distinct in accordance with paragraph 27(a) of IFRS 15. That is, the customer can benefit from the goods and services either on their own or together with other readily available resources. This is evidenced by the fact that the entity, or competitors of the entity, regularly sells many of these goods and services separately to other customers. In addition, the customer could generate economic benefit from the individual goods and services by using, consuming, selling or holding those goods or services. IE47 However, the goods and services are not distinct within the context of the contract in accordance with paragraph 27(b) of IFRS 15 (on the basis of the factors in paragraph 29 of IFRS 15). That is, the entity’s promise to transfer individual goods and services in the contract are not separately identifiable from other promises in the contract. This is evidenced by the fact that the entity provides a significant service of integrating the goods and services (the inputs) into the hospital (the combined output) for which the customer has contracted. IE48 Because both criteria in paragraph 27 of IFRS 15 are not met, the goods and services are not distinct. The entity accounts for all of the goods and services in the contract as a single performance obligation. * Refer to Example 10 of IFRS 15 Revenue from Contracts with Customers

IFRS 15 Step 4 – allocating the transaction price to performance obligations: allocation based on stand-alone selling prices 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 one of the following approaches: Evaluate the market in which goods or services are sold and estimate the price that customers in the market would be willing to pay Adjusted market assessment approach Forecast the expected costs of satisfying a performance obligation and then add an appropriate margin for that good or service Expected cost plus a margin approach The total transaction price less the sum of the observable stand-alone selling prices of other goods or services promised in the contract Residual approach (limited applicability) Para 73: The objective when allocating the transaction price is for an entity to allocate the transaction price to each performance obligation (or distinct good or service) 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. Para 74 - To meet the allocation objective, an entity shall allocate the transaction price to each performance obligation identified in the contract on a relative stand-alone selling price basis. Para 79 - Suitable methods for estimating the stand-alone selling price of a good or service include, but are not limited to, the following: (a) Adjusted market assessment approach—an entity could evaluate the market in which it sells goods or services and estimate the price that a customer in that market would be willing to pay for those goods or services. (b) Expected cost plus a margin approach—an entity could forecast its expected costs of satisfying a performance obligation and then add an appropriate margin for that good or service. (c) Residual approach—an entity may estimate the stand-alone selling price by reference to the total transaction price less the sum of the observable stand-alone selling prices of other goods or services promised in the contract. However, an entity may use a residual approach to estimate, in accordance with paragraph 78, the stand-alone selling price of a good or service only if one of the following criteria is met: (i) the entity sells the same good or service to different customers (at or near the same time) for a broad range of amounts (ie the selling price is highly variable because a representative stand-alone selling price is not discernible from past transactions or other observable evidence); 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 basis (ie the selling price is uncertain).

IFRS 15 Step 4 – allocating the transaction price to performance obligations allocation of discounts
Allocate discount proportionately to all performance obligations (POs) in the contract, except when they relate to one or more but not all specific POs Allocate a discount entirely to one or more, but not all, POs if ALL of the following criteria are met: the entity regularly sells each distinct good or service on a stand-alone basis; the entity also regularly sells on a stand-alone basis a bundle (or bundles) of some of those distinct goods or services at a discount; and the discount attributable to each bundle is substantially the same as the discount in the contract and an analysis of the goods or services in each bundle provides observable evidence of the PO or POs to which the entire discount in the contract belongs. An entity allocates a discount to one or more POs before using the residual approach to estimate the stand-alone selling price Discount Allocation of a discount Para 81: A customer receives a discount for purchasing a bundle of goods or services if the sum of the stand-alone selling prices of those promised goods or services in the contract exceeds the promised consideration in a contract. Except when an entity has observable evidence in accordance with paragraph 82 that the entire discount relates to only one or more, but not all, performance obligations in a contract, the entity shall allocate a discount proportionately to all performance obligations in the contract. The proportionate allocation of the discount in those circumstances is a consequence of the entity allocating the transaction price to each performance obligation on the basis of the relative stand-alone selling prices of the underlying distinct goods or services. Para 82: An entity shall allocate a discount entirely to one or more, but not all, performance obligations in the contract if all of the following criteria are met: (a) the entity regularly sells each distinct good or service (or each bundle of distinct goods or services) in the contract on a stand-alone basis; (b) the entity also regularly sells on a stand-alone basis a bundle (or bundles) of some of those distinct goods or services at a discount to the stand-alone selling prices of the goods or services in each bundle; and (c) the discount attributable to each bundle of goods or services described in paragraph 82(b) is substantially the same as the discount in the contract and an analysis of the goods or services in each bundle provides observable evidence of the performance obligation (or performance obligations) to which the entire discount in the contract belongs. Para 83: If a discount is allocated entirely to one or more performance obligations in the contract in accordance with paragraph 82, an entity shall allocate the discount before using the residual approach to estimate the stand-alone selling price of a good or service in accordance with paragraph 79(c).

IFRS 15 Step 4 – allocating the transaction price to performance obligation: allocation of variable consideration Warning! This is a complex area! Allocate variable consideration to one performance obligation (PO) or a distinct part of a PO if both these criteria are met: The terms of the variable payment relate specifically to satisfying this PO etc This allocation would faithfully depict the consideration entity expects for transferring these goods or services to the customer Allocate the remaining amount of the transaction price using the general allocation rules based on stand-alone selling prices and the allocation rules for discounts Variable consideration Allocation of variable consideration Para 84: Variable consideration that is promised in a contract may be attributable to the entire contract or to a specific part of the contract, such as either of the following: (a) one or more, but not all, performance obligations in the contract (for example, a bonus may be contingent on an entity transferring a promised good or service within a specified period of time); or (b) one or more, but not all, distinct goods or services promised in a series of distinct goods or services that forms part of a single performance obligation in accordance with paragraph 22(b) (for example, the consideration promised for the second year of a two-year cleaning service contract will increase on the basis of movements in a specified inflation index). Para 85: An entity shall allocate a variable amount (and subsequent changes to that amount) entirely to a performance obligation or to a distinct good or service that forms part of a single performance obligation in accordance with paragraph 22(b) if both of the following criteria are met: (a) the terms of a variable payment relate specifically to the entity’s efforts to satisfy the performance obligation or transfer the distinct good or service (or to a specific outcome from satisfying the performance obligation or transferring the distinct good or service); and (b) allocating the variable amount of consideration entirely to the performance obligation or the distinct good or service is consistent with the allocation objective in paragraph 73 when considering all of the performance obligations and payment terms in the contract. Para 86: The allocation requirements in paragraphs 73–83 shall be applied to allocate the remaining amount of the transaction price that does not meet the criteria in paragraph 85.

Warranties

IFRS 15 Application guidance warranties
Does the customer have the option to purchase the warranty separately? Service-type warranty Yes A distinct service → account for promised warranty as a performance obligation and allocate a portion of the transaction price to the performance obligation No Does the promised warranty or a part of the promised warranty provide the customer with a service in addition to the assurance that the product complies with agreed-upon specifications? Yes B28 It is common for an entity to provide (in accordance with the contract, the law or the entity’s customary business practices) a warranty in connection with the sale of a product (whether a good or service). The nature of a warranty can vary significantly across industries and contracts. Some warranties provide a customer with assurance that the related product will function as the parties intended because it complies with agreed-upon specifications. Other warranties provide the customer with a service in addition to the assurance that the product complies with agreed-upon specifications. B29 If a customer has the option to purchase a warranty separately (for example, because the warranty is priced or negotiated separately), the warranty is a distinct service because the entity promises to provide the service to the customer in addition to the product that has the functionality described in the contract. In those circumstances, an entity shall account for the promised warranty as a performance obligation and allocate a portion of the transaction price to that performance obligation. B30 If a customer does not have the option to purchase a warranty separately, an entity shall account for the warranty in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets unless the promised warranty, or a part of the promised warranty, provides the customer with a service in addition to the assurance that the product complies with agreed-upon specifications. B32 If a warranty, or a part of a warranty, provides a customer with a service in addition to the assurance that the product complies with agreed-upon specifications, the promised service is a performance obligation. Therefore, an entity shall allocate the transaction price to the product and the service. If an entity promises both an assurance-type warranty and a service-type warranty but cannot reasonably account for them separately, the entity shall account for both of the warranties together as a single performance obligation. No Accounted for in accordance with IAS 37 Assurance-type warranty

Contract costs

IFRS 15 Contract costs Incremental costs of obtaining a contract
Recognised as an asset if: - Incremental For example: Sales commissions - Expected to be recovered Cost incurred regardless of whether contract was obtained → expense when incurred Practical expedient: if amortisation period is one year or less → may expense Costs to fulfil a contract If not within the scope of another standard, recognised as an asset if: - Relate directly to a contract or an anticipated contract - Relate to future performance For example: Pre-contract or setup costs Incremental costs of obtaining a contract Para 91: An entity shall recognise as an asset the incremental costs of obtaining a contract with a customer if the entity expects to recover those costs. Para 92: The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, a sales commission). Para 93: Costs to obtain a contract that would have been incurred regardless of whether the contract was obtained shall be recognised as an expense when incurred, unless those costs are explicitly chargeable to the customer regardless of whether the contract is obtained. Para 94: As a practical expedient, an entity may recognise the incremental costs of obtaining a contract as an expense when incurred if the amortisation period of the asset that the entity otherwise would have recognised is one year or less. Costs to fulfil a contract Para 95: If the costs incurred in fulfilling a contract with a customer are not within the scope of another Standard (for example, IAS 2 Inventories, IAS 16 Property, Plant and Equipment or IAS 38 Intangible Assets), an entity shall recognise an asset from the costs incurred to fulfil a contract only if those costs meet all of the following criteria: (a) the costs relate directly to a contract or to an anticipated contract that the entity can specifically identify (for example, costs relating to services to be provided under renewal of an existing contract or costs of designing an asset to be transferred under a specific contract that has not yet been approved); (b) the costs generate or enhance resources of the entity that will be used in satisfying (or in continuing to satisfy) performance obligations in the future; and (c) the costs are expected to be recovered. Amortisation and impairment Para 99: An asset recognised in accordance with paragraph 91 or 95 shall be amortised on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the asset relates. The asset may relate to goods or services to be transferred under a specific anticipated contract (as described in paragraph 95(a)). Para 101: An entity shall recognise an impairment loss in profit or loss to the extent that the carrying amount of an asset recognised in accordance with paragraph 91 or 95 exceeds: (a) the remaining amount of consideration that the entity expects to receive in exchange for the goods or services to which the asset relates; less (b) the costs that relate directly to providing those goods or services and that have not been recognised as expenses (see paragraph 97). Asset recognised → amortised on a systematic basis Asset impaired if, for relevant goods or services, remaining consideration less than costs not already expensed = impairment loss in profit or loss

Principal versus agent

IFRS 15 Application guidance principal versus agent considerations
If another party is involved in providing goods or services to a customer → determine if entity’s promise is a performance obligation: to provide the specified goods or services itself to arrange for the other party to provide those goods or services Entity is principal → recognise revenue in the gross amount of consideration to which it expects to be entitled Entity is agent → recognise revenue in the amount of fee or commission to which it expects to be entitled B34 When another party is involved in providing goods or services to a customer, the entity shall determine whether the nature of its promise is a performance obligation to provide the specified goods or services itself (ie the entity is a principal) or to arrange for the other party to provide those goods or services (ie the entity is an agent). B35 An entity is a principal if the entity controls a promised good or service before the entity transfers the good or service to a customer. However, an entity is not necessarily acting as a principal if the entity obtains legal title of a product only momentarily before legal title is transferred to a customer. An entity that is a principal in a contract may satisfy a performance obligation by itself or it may engage another party (for example, a subcontractor) to satisfy some or all of a performance obligation on its behalf. When an entity that is a principal satisfies a performance obligation, the entity recognises revenue in the gross amount of consideration to which it expects to be entitled in exchange for those goods or services transferred. B36 An entity is an agent if the entity’s performance obligation is to arrange for the provision of goods or services by another party. When an entity that is an agent satisfies a performance obligation, the entity recognises revenue in the amount of any fee or commission to which it expects to be entitled in exchange for arranging for the other party to provide its goods or services. An entity’s fee or commission might be the net amount of consideration that the entity retains after paying the other party the consideration received in exchange for the goods or services to be provided by that party.

IFRS 15 Application guidance principal versus agent considerations (continued)
Indicators that an entity is an agent include: The entity does not have inventory risk The entity does not have discretion in establishing prices The entity’s consideration is in the form of a commission The entity is not exposed to credit risk Another party is primarily responsible for fulfilling the contract B37 Indicators that an entity is an agent (and therefore does not control the good or service before it is provided to a customer) include the following: (a) another party is primarily responsible for fulfilling the contract; (b) the entity does not have inventory risk before or after the goods have been ordered by a customer, during shipping or on return; (c) the entity does not have discretion in establishing prices for the other party’s goods or services and, therefore, the benefit that the entity can receive from those goods or services is limited; (d) the entity’s consideration is in the form of a commission; and (e) the entity is not exposed to credit risk for the amount receivable from a customer in exchange for the other party’s goods or services.

IFRS 15 Example 29:* principal versus agent: arranging for the provision of goods or services (entity is an agent) An entity operates a website that enables customers to purchase goods from a range of suppliers who deliver the goods directly to the customers. When a good is purchased via the website, the entity is entitled to a commission of 10% of the sales price. The entity’s website facilitates payment between the supplier and the customer at prices that are set by the supplier. The entity requires payment from customers before orders are processed and all orders are non-refundable. The entity has no further obligations to the customer after arranging for the products to be provided to the customer. IE231 An entity operates a website that enables customers to purchase goods from a range of suppliers who deliver the goods directly to the customers. When a good is purchased via the website, the entity is entitled to a commission that is equal to 10 per cent of the sales price. The entity’s website facilitates payment between the supplier and the customer at prices that are set by the supplier. The entity requires payment from customers before orders are processed and all orders are non-refundable. The entity has no further obligations to the customer after arranging for the products to be provided to the customer. Analysis IE232 To determine whether the entity’s performance obligation is to provide the specified goods itself (ie the entity is a principal) or to arrange for the supplier to provide those goods (ie the entity is an agent), the entity considers the nature of its promise. Specifically, the entity observes that the supplier of the goods delivers its goods directly to the customer and thus the entity does not obtain control of the goods. Instead, the entity’s promise is to arrange for the supplier to provide those goods to the customer. In reaching that conclusion, the entity considers the following indicators from paragraph B37 of IFRS 15 as follows: (a) the supplier is primarily responsible for fulfilling the contract—ie by shipping the goods to the customer; (b) the entity does not take inventory risk at any time during the transaction because the goods are shipped directly by the supplier to the customer; (c) the entity’s consideration is in the form of a commission (10 per cent of the sales price); (d) the entity does not have discretion in establishing prices for the supplier’s goods and, therefore, the benefit the entity can receive from those goods is limited; and (e) neither the entity, nor the supplier, has credit risk because payments from customers are made in advance. IE233 Consequently, the entity concludes that it is an agent and its performance obligation is to arrange for the provision of goods by the supplier. When the entity satisfies its promise to arrange for the goods to be provided by the supplier to the customer (which, in this example, is when goods are purchased by the customer), the entity recognises revenue in the amount of the commission to which it is entitled. * Refer to Example 45 of IFRS 15 Revenue from Contracts with Customers

Judgements in recognising revenue

IFRS 15 recognition judgements
Scope: is counterparty a customer or collaborator? Identifying a contract – commercial substance and collectability of consideration Assessing enforceability of rights and obligation Implicit goods and services Contract modifications Identifying performance obligations Evaluation of when control transfers Licensing – intellectual property Determining whether an entity is acting as principal or agent Non-refundable upfront fees Capitalisation of incremental costs of obtaining a contract and costs to fulfil a contract Not exhaustive! Other recognition areas require judgement IFRS 15 introduces new estimates and judgemental thresholds that affect the recognition and measurement of revenue Significant judgement is needed to apply the underlying principles of IFRS 15. Recognition - Sometimes significant judgement is required in identifying the revenue transaction to which the revenue recognition criteria must be applied. For example: Scope: counterparty → customer: IFRS 15 is applied to a contract only if the counterparty to the contract is a customer (para 6). A counterparty may be a collaborator for certain parts of the arrangement and a customer for other parts. Judgement is required for an entity that engages in collaborative arrangements to analyse whether the other parties to such arrangements are customers for some activities, and therefore lead to revenue-generating activities. Identifying a contract – commercial substance and collectability of consideration: determining whether a contract has commercial substance (para 9(d)), particularly in complex arrangements where vendors and customers have several arrangements in place between them, requires judgement. Significant judgement may be required when an entity assesses if it is probable that it will collect the consideration to which it will be entitled in exchange for the goods or services (para 9(e)). Assessing enforceability of rights and obligation: the assessment of enforceability of rights and obligations (para 10) in some jurisdictions or for some arrangements may require significant judgement about whether the rights and obligations are enforceable. Implicit goods and services – performance obligations in a contract may not be limited to goods or services explicitly stated in the contract (para 24). For example, stand-ready obligations may be implicit and not highlighted in the contract. Contract modifications: a contract modification exists when the parties to a contract approve a modification that either creates new or changes existing enforceable rights and obligations of the parties to the contract (para 18). This may require significant judgement particularly if the parties to the contract have a dispute about the scope or the price. Evaluating whether a modification adds distinct goods or services and if so whether the prices of those distinct goods or services reflect their stand-alone selling prices may also require significant judgement. Identifying performance obligations - judgement is required in some multiple element sales to identify performance obligations and determine whether promised goods or services in a contract are distinct. Evaluation of the transfer of control: an asset is transferred when (or as) the customer obtains control of that asset. Sometimes judgement is required to determine the point in time at which control transfers, such as in consignment arrangements when products, for example, cars, are delivered to a dealer for sale to end customers. Licencing – intellectual property: an entity will need to apply judgement in determining whether the guidance on licences applies to an arrangement and assessing whether a licence is distinct may require significant judgement. Furthermore, the evaluation of whether the entity will undertake activities that significantly affect the intellectual property to which the customer has rights (para B58(a)) may be complex. Determining whether an entity is acting as principal or agent – may require judgement. Non-refundable upfront fees - The revenue recognition period extends beyond the initial contractual period if the entity grants the customer the option to renew the contract and that option provides the customer with a material right (para B49). Determining that period may require significant judgement. Capitalisation of incremental costs of obtaining a contract and costs to fulfil a contract – evaluating the ability to capitalise costs of obtaining and fulfilling a contract may require significant judgement. The list of recognition judgements in the slide is not exhaustive!

IFRS 15 measurement judgements
Measuring progress for performance obligations satisfied over time Variable consideration – estimation and probability of significant reversal of revenue Whether a contract contains a significant financing component Measuring the fair value of non-cash consideration Stand-alone selling price – estimation if observable but highly variable or if not directly observable Allocating discounts and variable consideration to multiple performance obligations Amortisation of capitalised incremental costs of obtaining a contract and costs to fulfil a contract – determining appropriate basis and time period Not exhaustive! Other measurement areas require judgement Measurement - In many cases little difficulty is encountered in measuring the transaction price and progress over time. However, in some cases significant judgement may be required. For example: Measuring progress of performance obligations that are satisfied over time: judgement is required when identifying an appropriate method of measuring progress for long-term contracts and other contracts in which revenue is recognised other than evenly over a period of time and estimating the progress towards completion of the contract. Variable consideration – estimating the amount of variable consideration eg a sale with a right to a refund upon return of the product may require judgement. Variable consideration is only included in the transaction price if it is highly probable that the amount of revenue recognised will not be subject to significant future reversal. Significant judgement may be required to estimate the probability of reversal. An entity makes judgements in determining whether, in substance, a particular contract contains a significant financing component and, if so, estimating that component. Measuring the fair value of non-cash consideration may require judgement. Stand-alone selling price : an entity will need to apply judgement when there are observable prices but those prices are highly variable. If a stand-alone selling price is not directly observable, judgement will be required to estimate it. The incremental costs of obtaining a contract and costs to fulfil a contract that satisfy the criteria in IFRS 15 to be recognised as an asset are capitalised and amortised on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the asset relates. An entity will need to exercise judgement in determining the appropriate basis and time period for this amortisation. The list of measurement judgements in the slide is not exhaustive!

Earnings per share

Earnings per share example EPS and presentation of discontinued operations
Entity A has 1,000,000 shares in issue throughout 2015 and 2014 Extract from Entity A’s statement of comprehensive income 2015 ($) 2014 ($) Profit from continuing operations 14,000,000 7,000,000 (Loss)/profit (after tax) from discontinuing operations (8,000,000) 4,000,000 Profit before tax 6,000,000 11,000,000 Income tax (3,000,000) (1,500,000) Profit for the year 3,000,000 9,500,000 Gain (after tax) on revaluation of plant 8,000,000 500,000 Loss (after tax) in value of instruments designated cash flow hedges (1,000,000) ⎻ Comprehensive income for the year 10,000,000

Earnings per share example: presentation of earnings per share
What about other comprehensive income? 2015 ($) 2014 ($) Earnings per share from continuing operations 11.00 5.50 (Loss)/Earnings per share from discontinuing operations (8.00) 4.00 Earnings per share 3.00 9.50

Earnings per share example: share split (sometimes called ‘not for value’ share issue)
On 1 January 2015 Entity A’s shares in issue doubled to 2,000,000 when split 2 for 1. Extract from Entity A’s statement of comprehensive income 2015 ($) 2014 ($) Profit from continuing operations 14,000,000 7,000,000 (Loss)/profit (after tax) from discontinuing operations (8,000,000) 4,000,000 Profit before tax 6,000,000 11,000,000 Income tax (3,000,000) (1,500,000) Profit for the year 3,000,000 9,500,000 Gain (after tax) on revaluation of plant 8,000,000 500,000 Loss (after tax) in value of instruments designated cash flow hedges (1,000,000) ⎻ Comprehensive income for the year 10,000,000

Earnings per share example: share split (sometimes called ‘not for value’ share issue)
2015 ($) 2014 ($) Earnings per share from continuing operations 5.50 2.75 (Loss)/Earnings per share from discontinuing operations (4.00) 2.00 Earnings per share 1.50 4.75 Why does IAS 33 require such restatement of prior period earnings per share?

Earnings per share example: including issue of shares ‘for value’
Assume that on 1 January 2015, Entity A issues 1,000,000 shares in exchange for a competitor’s business (fair value = $100,000,000). Extract from Entity A’s statement of comprehensive income 2015 ($) 2014 ($) Profit from continuing operations 27,000,000 7,000,000 (Loss)/profit (after tax) from discontinuing operations (8,000,000) 4,000,000 Profit before tax 19,000,000 11,000,000 Income tax (6,000,000) (1,500,000) Profit for the year 13,000,000 9,500,000 Gain (after tax) on revaluation of plant 8,000,000 500,000 Loss (after tax) in value of instruments designated cash flow hedges (1,000,000) ⎻ Comprehensive income for the year 20,000,000 10,000,000

Earnings per share example: including issue of shares ‘for value’
2015 ($) 2014 ($) Earnings per share from continuing operations 10.50 5.50 (Loss)/Earnings per share from discontinuing operations (4.00) 4.00 Earnings per share 6.50 9.50

Diluted earnings per share example: including ‘for value’ issue of options to acquire shares
Assume that on 1 January 2015, Entity A issues options to acquire 1,000,000 of its shares (strike price = nominal amount) in exchange for competitor’s business (fair value $100,000,000). Extract from Entity A’s statement of comprehensive income 2015 ($) 2014 ($) Profit from continuing operations 27,000,000 7,000,000 (Loss)/profit (after tax) from discontinuing operations (8,000,000) 4,000,000 Profit before tax 19,000,000 11,000,000 Income tax (6,000,000) (1,500,000) Profit for the year 13,000,000 9,500,000 Gain (after tax) on revaluation of plant 8,000,000 500,000 Loss (after tax) in value of instruments designated cash flow hedges (1,000,000) ⎻ Comprehensive income for the year 20,000,000 10,000,000

Diluted earnings per share example: including ‘for value’ issue of options to acquire shares
2015 ($) 2014 ($) Earnings per share from continuing operations 21.00 5.50 (Loss)/Earnings per share from discontinuing operations (8.00) 4.00 Earnings per share 13.00 9.50 Diluted earnings per share from continuing operations 10.50 Diluted (Loss)/Earnings per share from discontinuing operations (4.00) Diluted earnings per share 6.50

Reporting financial performance

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Reporting financial performance

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