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Applying IFRS
A closer look at IFRS 15, the revenue recognition standardIFRS 15 Revenue from Contracts with Customers
(Updated September 2019)
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Updated September 2019 A closer look at IFRS 15, the revenue recognition standard 2
Overview
The largely converged revenue standards, IFRS 15 Revenue from Contracts
with Customers and Accounting Standards Codification (ASC) 606, Revenue
from Contracts with Customers1 (together with IFRS 15, the standards), that
were issued in 2014 by the International Accounting Standards Board (IASB
or the Board) and the US Financial Accounting Standards Board (FASB)
(collectively, the Boards) provide accounting requirements for all revenue
arising from contracts with customers. They affect all entities that enter into
contracts to provide goods or services to their customers, unless the contracts
are in the scope of other IFRSs or US GAAP requirements, such as those
for leases. The standards, which superseded virtually all legacy revenue
requirements in IFRS and US GAAP, also specify the accounting for costs
an entity incurs to obtain and fulfil a contract to provide goods or services to
customers (see section 9.3) and provide a model for the measurement and
recognition of gains and losses on the sale of certain non-financial assets, such
as property, plant or equipment (see section 2.2.1).
As a result, entities that adopted the standards often found implementation to
be a significant undertaking. This is because the standards require entities to
make more judgements and estimates and they affect entities’ financial
statements, business processes and internal controls over financial reporting.
Following issuance of the standards, the Boards created the Joint Transition
Resource Group for Revenue Recognition (TRG) to help them determine
whether more application guidance was needed on the standards. TRG
members include financial statement preparers, auditors and other users from
a variety of industries, countries, as well as public and private entities.
Members of the joint TRG met six times in 2014 and 2015, and members of the
FASB TRG met twice in 2016.
TRG members’ views are non-authoritative, but entities should consider them as
they implement the standards. In its July 2016 public statement, the European
Securities and Markets Authority (ESMA) encouraged issuers to consider
the TRG discussions when implementing IFRS 15.2 Furthermore, the former
Chief Accountant of the US Securities and Exchange Commission (SEC)
encouraged SEC registrants, including foreign private issuers (that may report
under IFRS), to consult with his office if they are considering applying the
standard in a manner that differs from the discussions in which TRG members
reached general agreement.3
We have incorporated our summaries of topics on which TRG members generally
agreed throughout this publication. Unless otherwise specified, these summaries
represent the discussions of the joint TRG. Where possible, we indicate if
members of the IASB or its staff commented on the FASB TRG discussions.
This publication summarises the IASB’s standard (including all amendments)
and highlights significant differences from the FASB’s standard. It also
addresses topics on which the members of the TRG reached general agreement
and discusses our views on certain topics.
1 Throughout this publication, when we refer to the FASB’s standard, we mean ASC 606
(including the recent amendments), unless otherwise noted. 2 ESMA Public Statement: Issues for consideration in implementing IFRS 15: Revenue from
Contracts with Customers, issued 20 July 2016, available on ESMA's website. 3 Speech by Wesley R. Bricker, 5 May 2016. Available on the SEC’s website.
http://www.esma.europa.eu/sites/default/files/library/2016-1148_public_statement_ifrs_15.pdfhttps://www.sec.gov/news/speech/speech-bricker-05-05-16.html
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3 Updated September 2019 A closer look at IFRS 15, the revenue recognition standard
While entities have adopted the standards, application issues may continue to
arise. Accordingly, the views we express in this publication may evolve as
additional issues are identified. The conclusions we describe in our illustrations
are also subject to change as views evolve. Conclusions in seemingly similar
situations may differ from those reached in the illustrations due to differences
in the underlying facts and circumstances. Please see ey.com/IFRS for our most
recent revenue publications.
http://www.ey.com/ifrs
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Updated September 2019 A closer look at IFRS 15, the revenue recognition standard 4
Contents
Overview ................................................................................................................... 2
1. Objective, effective date and transition .................................................................. 7
1.1 Overview of the standard ......................................................................... 7
1.2 Effective date ......................................................................................... 8
1.3 Transition methods ................................................................................. 8
2. Scope .................................................................................................................. 37
2.1 Scope of IFRS 15 ................................................................................... 37
2.2 Other scope considerations .................................................................... 39
2.3 Definition of a customer ......................................................................... 41
2.4 Collaborative arrangements ................................................................... 42
2.5 Interaction with other standards ............................................................. 43
3. Identify the contract with the customer ............................................................... 54
3.1 Attributes of a contract ......................................................................... 55
3.2 Contract enforceability and termination clauses ....................................... 64
3.3 Combining contracts .............................................................................. 71
3.4 Contract modifications .......................................................................... 73
3.5 Arrangements that do not meet the definition of a contract under the
standard .................................................................................................... 86
4. Identify the performance obligations in the contract .......................................... 89
4.1 Identifying the promised goods or services in the contract ........................ 89
4.2 Determining when promises are performance obligations ........................ 101
4.3 Promised goods or services that are not distinct .................................... 128
4.4 Principal versus agent considerations ................................................... 129
4.5 Consignment arrangements ................................................................. 149
4.6 Customer options for additional goods or services .................................. 149
4.7 Sale of products with a right of return ................................................... 164
5. Determine the transaction price ........................................................................ 166
5.1 Presentation of sales (and other similar) taxes ....................................... 168
5.2 Variable consideration ......................................................................... 169
5.3 Refund liabilities ................................................................................. 191
5.4 Rights of return .................................................................................. 192
5.5 Significant financing component ........................................................... 197
5.6 Non-cash consideration ....................................................................... 213
5.7 Consideration paid or payable to a customer .......................................... 217
5.8 Non-refundable upfront fees ................................................................ 226
5.9 Changes in the transaction price ........................................................... 230
6. Allocate the transaction price to the performance obligations ............................ 231
6.1 Determining stand-alone selling prices .................................................. 231
6.2 Applying the relative stand-alone selling price method ............................ 248
6.3 Allocating variable consideration .......................................................... 251
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5 Updated September 2019 A closer look at IFRS 15, the revenue recognition standard
6.4 Allocating a discount ........................................................................... 256
6.5 Changes in transaction price after contract inception ............................. 260
6.6 Allocation of transaction price to components outside the scope of
IFRS 15 .................................................................................................... 263
7. Satisfaction of performance obligations ............................................................. 265
7.1 Performance obligations satisfied over time .......................................... 266
7.2 Control transferred at a point in time .................................................... 304
7.3 Repurchase agreements ...................................................................... 312
7.4 Consignment arrangements ................................................................. 319
7.5 Bill-and-hold arrangements .................................................................. 320
7.6 Recognising revenue for licences of intellectual property ........................ 324
7.7 Recognising revenue when a right of return exists .................................. 324
7.8 Recognising revenue for customer options for additional goods or
services ................................................................................................... 324
7.9 Breakage and prepayments for future goods or services ......................... 325
8. Licences of intellectual property ........................................................................ 329
8.1 Identifying performance obligations in a licensing arrangement ............... 330
8.2 Determining the nature of the entity’s promise in granting a licence ........ 337
8.3 Transfer of control of licensed intellectual property ................................ 343
8.4 Licence renewals ................................................................................. 348
8.5 Sales-based or usage-based royalties on licences of intellectual property . 349
9. Other measurement and recognition topics ........................................................ 362
9.1 Warranties .......................................................................................... 362
9.2 Onerous contracts ............................................................................... 370
9.3 Contract costs .................................................................................... 372
10. Presentation and disclosure ............................................................................. 401
10.1 Presentation requirements for contract assets and contract liabilities .... 402
10.2 Presentation requirements for revenue from contracts with customers .. 411
10.3 Other presentation considerations ...................................................... 413
10.4 Disclosure objective and general requirements ..................................... 414
10.5 Specific disclosure requirements ........................................................ 415
10.6 Transition disclosure requirements ..................................................... 432
10.7 Disclosures in interim financial statements .......................................... 432
Appendix A: Extract from EY’s IFRS Disclosure Checklist ....................................... 433
Appendix B: Illustrative examples included in the standard and references in this
publication ............................................................................................................ 442
Appendix C: TRG discussions and references in this publication ............................. 446
Appendix D: IFRS IC discussions and references in this publication ......................... 449
Appendix E: Defined terms ..................................................................................... 451
Appendix F: Changes to the standard since issuance .............................................. 452
Appendix G: Summary of important changes to this publication ............................. 453
Appendix H: Summary of differences from US GAAP .............................................. 456
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Updated September 2019 A closer look at IFRS 15, the revenue recognition standard 6
What you need to know
• IFRS 15 provides a single source of revenue requirements for all entities in
all industries. It represents a significant change from legacy IFRS.
• IFRS 15 applies to revenue from contracts with customers and replaced
all of the legacy revenue standards and interpretations in IFRS, including
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 and SIC-31 Revenue
– Barter Transaction involving Advertising Services.
• IFRS 15 is principles-based, consistent with legacy revenue requirements,
but provides more application guidance. The lack of bright lines requires
increased judgement.
• The standard may have had little effect on some entities, but may have
required significant changes for others, especially those entities for which
legacy IFRS provided little application guidance.
• IFRS 15 also specifies the accounting treatment for certain items not
typically thought of as revenue, such as certain costs associated with
obtaining and fulfilling a contract and the sale of certain non-financial
assets.
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7 Updated September 2019 A closer look at IFRS 15, the revenue recognition standard
1. Objective, effective date and transition
1.1 Overview of the standard
The revenue standards the Boards issued in May 2014 were largely converged
and superseded virtually all legacy revenue recognition requirements in IFRS
and US GAAP, respectively. The Boards’ goal in joint deliberations was to
develop revenue standards that:4
• Remove inconsistencies and weaknesses in the legacy revenue recognition
literature
• Provide a more robust framework for addressing revenue recognition issues
• Improve comparability of revenue recognition practices across industries,
entities within those industries, jurisdictions and capital markets
• Reduce the complexity of applying revenue recognition requirements by
reducing the volume of the relevant standards and interpretations
• Provide more useful information to users through expanded disclosure
requirements
The standards provide accounting requirements for all revenue arising from
contracts with customers. They affect all entities that enter into contracts to
provide goods or services to their customers, unless the contracts are in the
scope of other IFRSs or US GAAP requirements, such as those for leases. The
standards also specify the accounting for costs an entity incurs to obtain and
fulfil a contract to provide goods or services to customers (see section 9.3) and
provide a model for the measurement and recognition of gains and losses on
the sale of certain non-financial assets, such as property, plant or equipment
(see section 2.2.1).
IFRS 15 replaced all of the legacy revenue standards and interpretations
in IFRS, including 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
and SIC-31 Revenue – Barter Transactions Involving Advertising Services.5
After issuing the standards, the Boards have issued converged amendments on
certain topics (e.g., principal versus agent considerations) and different
amendments on other topics (e.g., licences of intellectual property). The FASB
has also issued several amendments that the IASB has not issued (e.g., non-
cash consideration, consideration payable). See Appendix F for a discussion of
the changes to the standards since issuance.
While we address the significant differences between the IASB’s final standard
and the FASB’s final standard throughout this publication, the primary purpose
of this publication is to describe the IASB’s standard, including all amendments
to date, and focus on the effects for IFRS preparers.6 As such, we generally
refer to the ‘standard’ in the singular.
1.1.1 Core principle of the standard
The standard describes the principles an entity must apply to measure and
recognise revenue and the related cash flows. The core principle is that an
4 IFRS 15 (2016).IN5. 5 IFRS 15.C10. 6 For more information on the effect of the new revenue standard for US GAAP preparers,
refer to our Financial Reporting Developments: Revenue from contracts with customers (ASC 606), Revised September 2019, available on EY AccountingLink.
http://www.ey.com/UL/en/AccountingLink/Accounting-Link-Home
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Updated September 2019 A closer look at IFRS 15, the revenue recognition standard 8
entity recognises revenue at an amount that reflects the consideration to
which the entity expects to be entitled in exchange for transferring goods
or services to a customer.7
The principles in IFRS 15 are applied using the following five steps:
1. Identify the contract(s) with a customer
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations in the
contract
5. Recognise revenue when (or as) the entity satisfies a performance
obligation
Entities need to exercise judgement when considering the terms of
the contract(s) and all of the facts and circumstances, including implied
contract terms. Entities also have to apply the requirements of the
standard consistently to contracts with similar characteristics and in similar
circumstances.8 To assist entities, IFRS 15 includes detailed application
guidance. The IASB also published more than 60 illustrative examples that
accompany IFRS 15. We list these examples in Appendix B to this publication
and provide references to where certain examples are included in this publication.
1.2 Effective date
IFRS 15 became effective for annual reporting periods beginning on or after
1 January 2018. Early adoption was permitted, provided that fact was
disclosed.
FASB differences
The FASB’s standard became effective for public entities, as defined, for
fiscal years beginning after 15 December 2017 and for interim periods
therein.9 Non-public entities (i.e., an entity that does not meet the definition
of a public entity in the FASB’s standard) are required to adopt the standard
for fiscal years beginning after 15 December 2018 and for interim periods
within fiscal years beginning after 15 December 2019. That is, non-public
entities are not required to apply the standard in interim periods in the year
of adoption.
US GAAP public and non-public entities were permitted to adopt the standard
as early as the original public entity effective date (i.e., fiscal years beginning
after 15 December 2016, including interim periods therein).
1.3 Transition methods (updated October 2018)
IFRS 15 requires retrospective application. However, it allows either a ’full
retrospective’ adoption (in which the standard is applied to all of the periods
7 IFRS 15.2. 8 IFRS 15.3. 9 The FASB’s standard defines a public entity as one of the following: A public business
entity (as defined); A not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed or quoted on an exchange or an over-the-counter market; An employee benefit plan that files or furnishes financial statements with the US SEC. An entity may meet the definition of a public business entity solely because its financial statements or financial information is included in another entity’s filing with the SEC. The SEC staff said it would not object if these entities adopt the new revenue standard using the effective date for non-public entities rather than the effective date for public entities.
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9 Updated September 2019 A closer look at IFRS 15, the revenue recognition standard
presented) or a ‘modified retrospective’ adoption. See sections 1.3.2 and 1.3.3
below, respectively.
The following are the dates relevant to transition:
• The date of initial application – the start of the reporting period in which
an entity first applies IFRS 15.10 This date of initial application does not
change, regardless of the transition method that is applied. Examples of
dates of initial application for different year-ends include:
Year ending Date of initial application
31 December 2018 1 January 2018
30 June 2019 1 July 2018
• The beginning of the earliest period presented – the start of the earliest
reporting period presented within an entity’s financial statements for the
reporting period in which the entity first applies IFRS 15. This is relevant
for entities using the full retrospective adoption method. For example:
Beginning of the earliest period presented
Year ending (one comparative period)
(two comparative periods)
31 December 2018 1 January 2017 1 January 2016
30 June 2019 1 July 2017 1 July 2016
1.3.1 Definition of a completed contract (updated September 2019)
IFRS 15 defines a completed contract as a contract in which the entity has
fully transferred all of the goods or services identified in accordance with legacy
IFRS.11 Depending on the manner an entity elects to transition to IFRS 15, an
entity may not need to apply IFRS 15 to contracts if they have completed
performance before the date of initial application or the beginning of the
earliest period presented (depending on the practical expedient) (see
sections 1.3.2 and 1.3.3), even if they have not yet received the consideration
and that consideration is still subject to variability. Applying a completed
contract practical expedient might also affect an entity’s revenue recognition in
subsequent reporting periods. That is, if an entity applies a practical expedient
for completed contracts, it continues to apply its legacy revenue policy to its
completed contracts, instead of IFRS 15. In some cases, even though an entity
will have fully transferred its identified goods or services, there may still be
revenue to recognise in reporting periods after adoption of IFRS 15.
The IASB noted in the Basis for Conclusions that ‘transferred all of the goods
or services’ is not meant to imply that an entity would apply the ‘transfer of
control’ notion in IFRS 15 to goods or services that have been identified in
accordance with legacy IFRS. Rather, it is performance in accordance with
legacy requirements (i.e., those in IAS 11, IAS 18 and related Interpretations),
as noted in IFRS 15.BC441. “Consequently, in many situations the term
‘transferred’ would mean ‘delivered’ within the context of contracts for the sale
of goods and ‘performed’ within the context of contracts for rendering services
and construction contracts. In some situations, the entity would use judgement
when determining whether it has transferred goods or services to the
customer.”12
10 IFRS 15.C2(a). 11 IFRS 15.C2(b). 12 IFRS 15.BC445D.
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Updated September 2019 A closer look at IFRS 15, the revenue recognition standard 10
Consider the following examples (assuming the modified retrospective
transition method is applied):
• Contract is completed — a retailer sold products to a customer on
31 December 2017, with immediate delivery. The customer has a poor
credit history. Therefore, the retailer required the customer to pay half
of the consideration upfront and half within 60 days. In accordance with
IAS 18, the retailer recognised half of the consideration at the time of
the sale. However, the retailer concluded it was not probable that it would
be able to collect the remainder and deferred recognition of this amount.
Because the goods were delivered prior to the date of initial application of
IFRS 15 (e.g., 1 January 2018) and collectability concerns were only the
reason for delaying recognition of revenue under IAS 18, the contract is
considered completed under IFRS 15 (see Question 1-5 below).
• Contract is not completed — an entity entered into a contract to provide
a service and loyalty points to a customer on 31 January 2017. In
accordance with IFRIC 13, the entity allocated a portion of the total
contract consideration to the loyalty points and deferred revenue
recognition until the points were exercised on 15 January 2018. The entity
completed the required service within six months and recognised revenue
related to the service over that period in accordance with IAS 18. As at
the date of initial application of IFRS 15 (e.g., 1 January 2018), the entity
had not yet performed in relation to the loyalty points. As a result, the
contract was not considered completed under IFRS 15 (see Question 1-7
below).
How we see it
As discussed above, determining which contracts are completed at transition
may require significant judgement, particularly if legacy IFRS did not provide
detailed requirements that indicated when goods had been delivered or
services performed (e.g., licences of intellectual property).
Entities should not consider elements of a contract that did not result in
recognition of revenue under legacy IFRS (e.g., warranty provisions) when
assessing whether a contract is complete.
FASB differences
The definition of a ‘completed contract’ is not converged between IFRS and
US GAAP. A completed contract under ASC 606 is defined as one for which
all (or substantially all) of the revenue was recognised in accordance with
legacy US GAAP that was in effect before the date of initial application.13
The different definitions could lead to entities having a different population
of contracts to transition to the revenue standards under IFRS and US GAAP,
respectively. However, the Board noted in the Basis for Conclusions that
an entity could avoid the consequences of these different definitions by
choosing to apply IFRS 15 retrospectively to all contracts, including
completed contracts.14
13 As defined in ASC 606-10-65-1(c)(2). 14 IFRS 15.BC445I.
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11 Updated September 2019 A closer look at IFRS 15, the revenue recognition standard
Frequently asked questions
Question 1-1: Which elements of a contract must be considered when
determining whether a contract meets the definition of a completed
contract?
An entity must consider all of the elements (or components) in a contract
that give rise to revenue in the scope of legacy IFRS. It should not consider
the elements of a contract that do not result in recognition of revenue
(e.g., warranty provisions accounted for in accordance with IAS 37
Provisions, Contingent Liabilities and Contingent Assets) when assessing
whether a contract is complete.
For example, under legacy IFRS, an entity may have accounted for a
financing component (i.e., separating the interest income or expense
from the revenue). Doing so effectively split the contract into a revenue
component and a financing component. In our view, the financing component
would not be considered in determining whether the goods or services have
transferred to the customer (i.e., it would not affect the assessment of
whether the contract meets the definition of a completed contract).
In addition, income elements that are not within the scope of IFRS 15 need
not be considered. For example, IAS 18 applied to dividends and provided
guidance on the recognition of interest and fees integral to the issuance of
a financial instrument. None of these elements would be considered when
determining whether a contract meets the definition of a completed contract
for transition to IFRS 15. This is because:
• Dividends are not within the scope of IFRS 15.15
• The guidance that was previously included in the illustrative examples
to IAS 18 for fees integral to the issuance of a financial instrument is
now included within IFRS 9 Financial Instruments.16
• Interest income will continue to be accounted for in accordance with
the effective interest method as set out in IFRS 9.17
Question 1-2: Do the requirements in IFRS 15 for identifying a contract
(including contract duration) affect the identification of a contract under
legacy IFRS?
When determining whether a contract is completed, an entity considers
the requirements of legacy IFRS and not IFRS 15. In order to determine
whether a contract is completed, an entity needs to determine the boundaries
of a contract, including the term of the contract, whether it was combined
with other contracts, whether it was modified, etc. That is, an entity must
identify what is the contract in order to assess if it meets the definition of
a completed contract.
Considering the requirements of IFRS 15 could lead to different outcomes
from legacy IFRS. IFRS 15 provides detailed requirements to assist entities
in identifying a contract, including determining the contract duration.
These requirements are more detailed than legacy IFRS and could result in
outcomes that are different under IFRS 15 (e.g., an entity may conclude a
contract is of a shorter duration than the stated contractual term in certain
circumstances under IFRS 15. Refer to section 3.2 for further discussion).
15 IFRS 9.5.7.1A and IFRS.9.5.7.6. 16 IFRS 9.B5.4.1-B5.4.3. 17 IFRS 9 Appendix A, IFRS 9.5.4.1, IFRS 9.B5.4.1-B5.4.7.
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Updated September 2019 A closer look at IFRS 15, the revenue recognition standard 12
Frequently asked questions (cont’d)
While legacy IFRS did not provide detailed requirements for identifying the
contract, accounting policies and an entity’s past practice may be informative
in identifying the contract, including determining: (a) what the entity
considered the contract to be (e.g., master supply agreement or individual
purchase orders); and (b) the contract duration (i.e., the stated contractual
term or a shorter period).
Consider the following examples:
Illustration 1-1 — Definition of completed contract: contract duration
Scenario 1
On 30 June 2016, Entity A entered into a contract with a customer to
provide services for 24 months. The customer was required to pay a fixed
monthly fee of CU150, which remained constant during the contract term
of 24 months, regardless of the time needed to provide the services or the
actual usage from the customer each day. The customer could cancel the
contract at any time without penalty by giving Entity A one month’s notice.
Entity A had not received any cancellation notice up to 1 January 2017
and, based on past experience, Entity A did not expect customers to cancel
within the first year. For this contract, Entity A concluded that the contract
duration under legacy IFRS was the stated contractual term of 24 months.
Entity A’s accounting policy for these types of contracts under IAS 18
stated that revenue from providing monthly services to customers was
recognised over the service period, on a monthly basis. While not explicitly
stated in its accounting policy, Entity A had typically treated the stated
contractual term as the duration of the contract (unless the customer
cancelled or the contract was modified), being the period over which the
contractual rights and obligations were enforceable.
Assume that Entity A adopts IFRS 15 on 1 January 2018 using the full
retrospective method. Entity A also uses the practical expedient in
IFRS 15.C5(a)(ii) not to restate contracts that meet the definition of
a completed contract, as defined in IFRS 15.C2(b), at the beginning of
the earliest period presented (i.e., 1 January 2017; Entity A presents
one comparative period only).
Under IFRS 15, Entity A is likely to conclude that the contract is a month-
to-month contract. However, when determining whether the contract is
completed, Entity A only considers legacy IFRS. Entity A might have noted
that its accounting policy under IAS 18 did not focus on the identification
of contract duration and, therefore, perhaps the contract is neither a 24-
month contract nor a month-to-month contract. Entity A had accounted
for this type of service contract based on monthly invoicing and, arguably,
that accounting treatment is similar to the accounting treatment of
a month-to-month contract. However, while not explicitly stated, Entity A
had generally viewed the stated contractual term as the period over which
the rights and obligations are enforceable.
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13 Updated September 2019 A closer look at IFRS 15, the revenue recognition standard
Frequently asked questions (cont’d)
Illustration 1-1 — Definition of completed contract: contract duration
(cont’d)
Furthermore, Entity A cannot cancel the contract with the customer and
is obliged to render services for the entire contract period of 24 months,
unless a termination notice is provided by the customer which would limit
Entity A’s obligation to provide services for the next 30 days from the
notification date. Since no cancellation notice had been submitted by
the customer at least one month before 1 January 2017, approximately
18 months of services still had to be provided as at the beginning of
the earliest period presented (i.e., 1 January 2017). Therefore, Entity A
concludes that the contract does not meet the definition of a completed
contract and would need to be transitioned to IFRS 15.
Scenario 2
Assume the same facts as Scenario 1, with the exception that the
customer submitted an early termination notice on 30 November 2016.
Similar to Scenario 1, the contract duration under legacy IFRS would have
been the stated contractual term of 24 months. However, in this scenario,
the customer has submitted the termination notice on 30 November 2016.
Therefore, Entity A concludes that the term of the contract ceased on
31 December 2016.
Entity A cannot cancel the contract with the customer and is obliged
to render services for the entire contract period of 24 months, unless
a termination notice is provided by the customer which limits Entity A’s
obligation to provide service for the next 30 days from the notification
date. Since Entity A had provided all services prior to 31 December 2016,
Entity A concludes that the contract is a completed contract. Entity A
continues to apply its legacy accounting policy (developed in accordance
with IAS 18) to any remaining consideration still to be recognised.
Scenario 3
Assume the same facts as Scenario 1, with the exception that the
customer was required to pay a non-refundable upfront fee of CU50
at commencement of the contract (in addition to the monthly fixed fee).
The customer can cancel the contract at any time without penalty, with a
month’s notice period. The customer cancelled the contract on
30 November 2016.
In its financial statements, Entity A’s accounting policy for these types of
contracts under IAS 18 stated that revenues from non-refundable upfront
fees were deferred over the average customer retention period. The
customer retention period was estimated to be two years. Therefore,
the deferred revenue was recognised as revenue on a straight-line basis
over the next 24 months.
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Updated September 2019 A closer look at IFRS 15, the revenue recognition standard 14
Frequently asked questions (cont’d)
Illustration 1-1 — Definition of completed contract: contract duration
(cont’d)
Similar to Scenario 2, the contract duration under legacy IFRS would have
been the stated contractual term of 24 months. However, the customer
had submitted the termination notice on 30 November 2016 and,
therefore, Entity A concludes that the term of the contract ceased on
31 December 2016.
Entity A’s legacy accounting policy for the non-refundable upfront fee
referred to recognition of deferred income over the average customer
retention period, not the contractual term. The definition of a completed
contract is not dependent on all revenue being recognised, but rather on
all goods and services being transferred to the customer. Furthermore,
the period over which revenue is recognised does not affect the contract
duration. As such, recognition of this upfront fee is not relevant in
determining whether the contract is a completed contract. All previously
contracted services had been provided to the customer up to the date of
cancellation. Therefore, the contract is a completed contract.
Entity A continues applying its legacy accounting policy (developed
in accordance with IAS 18) to any remaining consideration still to be
recognised. However, given that the customer has terminated the contract
early, Entity A needs to reassess, in line with the requirements of IAS 18,
the period over which this remaining revenue arising from the non-
refundable upfront fee would be recognised.
Question 1-3: When determining whether an entity has ‘transferred all
goods or services’, does it consider the requirements of IFRS 15 for
‘transfer of control’?
No. The IASB noted in the Basis for Conclusions that ‘transferred all of
the goods or services’ is not meant to imply that an entity would apply the
‘transfer of control’ notion in IFRS 15 to goods or services that have been
identified in accordance with legacy IFRS. Rather, an entity is required to
determine whether it has transferred all the goods or services in accordance
with the requirements in legacy IFRS, as noted in IFRS 15.BC441 (see
Question 1-4 below).
“Consequently, in many situations the term ‘transferred’ would mean
‘delivered’ within the context of contracts for the sale of goods and
‘performed’ within the context of contracts for rendering services and
construction contracts. In some situations, the entity would use judgement
when determining whether it has transferred goods or services to the
customer”.18
18 IFRS 15.BC445D.
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15 Updated September 2019 A closer look at IFRS 15, the revenue recognition standard
Frequently asked questions (cont’d)
Question 1-4: If some or all of revenue has not been recognised under
legacy IFRS, would that prevent the contract from being completed?
Possibly. The definition of a completed contract is not dependent on an entity
having recognised all related revenue. However, the requirements in legacy
IFRS with respect to the timing of recognition may provide an indication of
whether the goods or services have been transferred.
IAS 18 provided the following five criteria, all of which needed to be satisfied
in order to recognise revenue from the sale of goods:19
• The entity had transferred to the buyer the significant risks and rewards
of ownership of the goods.
• The entity retained neither continuing managerial involvement to the
degree usually associated with ownership nor effective control over
the goods sold.
• The amount of revenue could be measured reliably.
• It was probable that the economic benefits associated with the
transaction would flow to the entity.
• The costs incurred or to be incurred in respect of the transaction could
be measured reliably.
IAS 18 viewed the passing of risks and rewards as the most crucial of the five
criteria, giving the following four examples of situations in which an entity
may have retained the significant risks and rewards of ownership:20
• When the entity retained an obligation for unsatisfactory performance
not covered by normal warranty provisions.
• When the receipt of the revenue from a particular sale was contingent
on the derivation of revenue the buyer from its sale of the goods.
• When the goods were shipped subject to installation and the installation
was a significant part of the contract which had not yet been completed
by the entity.
• When the buyer had the right to rescind the purchase for a reason
specified in the sales contract and the entity was uncertain about the
probability of return.
Understanding the reasons for the accounting treatment under legacy IFRS
may, therefore, assist entities in determining whether the goods or services
have been transferred and the completed contract definition has been met.
However, judgement may be needed in respect of some goods or services.
Assume, for example, that an entity sells products, but cannot recognise
revenue immediately. The delayed recognition of revenue may be because of
factors related to the timing of transfer, such as a bill-and-hold arrangement,
or because the goods or services have been transferred, but not all of the
criteria for recognition have been met.
19 IAS 18.14. 20 IAS 18.16.
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Updated September 2019 A closer look at IFRS 15, the revenue recognition standard 16
Frequently asked questions (cont’d)
Question 1-5: If collectability concerns delayed recognition of revenue
under legacy IFRS, would that prevent the contract from being completed?
If collectability concerns were the only reason for delaying recognition
of revenue under legacy IFRS (i.e., because it was not probable that the
economic benefits associated with the transaction would flow to the entity),
it would not prevent a contract from meeting the definition of a completed
contract. However, it is important to ensure that this was the only reason for
the delay in recognition. Consider the following examples:
Illustration 1-2 — Definition of completed contract: collectability
Scenario 1
In November 2016, Entity A entered into a contract with a customer to
deliver 1,000 products with immediate delivery. Because of the customer’s
poor credit history, Entity A agreed that the customer could pay for 60%
of the products on the date of delivery and the remaining 40% within
60 days of the delivery date. Under its previous accounting policy (in
accordance with IAS 18.14), Entity A only recognised revenue for 60%
of the consideration and deferred recognition of the remaining 40% until
it was probable that this amount would be collected (provided the other
criteria in IAS 18.14 were met). Collectability of the remaining 40% of
the consideration became probable at the end of January 2017.
Assume that Entity A adopts IFRS 15 on 1 January 2018 and uses
the full retrospective method to transition. Entity A also uses the practical
expedient in IFRS 15.C5(a)(ii) not to restate contracts that meet the
definition of a completed contract, as defined in IFRS 15.C2(b), at the
beginning of the earliest period presented.
At the beginning of the earliest period presented (i.e., 1 January 2017;
Entity A presents one comparative period only), Entity A had transferred
all goods identified in the contract by delivering 1,000 products to the
customer and had recognised 60% of the revenue. Although Entity A
could only partially recognise the revenue from the sale of the 1,000
products (because it was not probable whether it would collect 40% of
the consideration), this does not affect the determination of whether the
identified goods were transferred to the customer. Therefore, Entity A
considers the contract as completed. Entity A continues to account for
the contract in accordance with its legacy accounting policy (developed in
accordance with IAS 18).
Scenario 2
In January 2016, Entity A entered into a contract with a customer to
construct a highly specialised system on the customer’s premises that
was expected to be completed within 11 months. The consideration of
CU100,000 took into account the particularities of the customer’s specific
premises. The repayment schedule corresponded to the performance
completed to date and Entity A applied the percentage of completion
method in accordance with IAS 11.25, recognising revenue in the
accounting period in which the relevant services were rendered.
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17 Updated September 2019 A closer look at IFRS 15, the revenue recognition standard
Frequently asked questions (cont’d)
Illustration 1-2 — Definition of completed contract: collectability
(cont’d)
Upon completion of the highly specialised system, Entity A had collected
the consideration of CU100,000 and recognised an equal amount as
revenue. However, in October 2016, while executing the construction
activities, Entity A incurred unexpected additional costs to adjust the initial
design of the highly specialised system due to certain changes in the
customer’s premises that had not been communicated at contract
inception. Entity A filed a claim for these unexpected costs, requesting an
increase in the consideration of CU1,000. The construction was completed
in November 2016. In February 2017, Entity A agreed with its customer to
settle the claim at an amount of CU500 to be paid within three months.
Assume that Entity A adopts IFRS 15 on 1 January 2018 and uses the full
retrospective method to transition. Entity A also uses the practical
expedient in IFRS 15.C5(a)(ii) not to restate contracts that meet the
definition of a completed contract, as defined in IFRS 15.C2(b), at the
beginning of the earliest period presented.
At the beginning of the earliest period presented (i.e., 1 January 2017),
Entity A had transferred all goods and services identified in the contract by
completing the construction and delivering the highly specialised system
to the customer. The fact that Entity B had submitted a claim for additional
consideration for the identified goods and services that had already been
transferred to the customer is not relevant when determining whether
the identified goods or services have been transferred. Therefore, Entity A
considers the contract as completed. Entity A continues to account for
the contract in accordance with its legacy accounting policy (developed in
accordance with IAS 11).
Question 1-6: When did legacy IFRS consider licences to be transferred?
Legacy IFRS provided limited guidance to assist entities in determining when
a licence of intellectual property was transferred (i.e., when the significant
risks and rewards of ownership of the licence transferred to the customer in
accordance with IAS 18.14(a)). Therefore, entities need to use significant
judgement to determine whether a contract involving the licence of
intellectual property meets the definition of a completed contract.
IAS 18.33 stated that "royalties accrue in accordance with the terms of the
relevant agreement and are usually recognised on that basis unless, having
regard to the substance of the agreement, it is more appropriate to recognise
revenue on some other systematic and rational basis”. IAS 18.IE20 stated
that “fees and royalties paid for the use of an entity’s assets (such as
trademarks, patents, software, music copyright, record masters and motion
picture films) are normally recognised in accordance with the substance of
the agreement. As a practical matter, this may be on a straight-line basis over
the life of the agreement, for example, when a licensee has the right to use
certain technology for a specified period of time … In some cases, whether or
not a licence fee or royalty will be received is contingent on the occurrence of
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Updated September 2019 A closer look at IFRS 15, the revenue recognition standard 18
Frequently asked questions (cont’d)
a future event. In such cases, revenue is recognised only when it is probable
that the fee or royalty will be received, which is normally when the event has
occurred.”
Since the guidance provided in this paragraph and the illustrative examples to
IAS 18 focused on the recognition of revenue, it may be difficult to determine
when the entity transferred the significant risks and rewards of ownership to
the customer. If an entity has recognised revenue over time under legacy
IFRS, it needs to carefully assess the reason for this treatment.
It may be helpful to assess whether or not there were remaining or ongoing
obligations related to the licence, as discussed in IAS 18.IE20:
• If the licence of intellectual property was an in-substance sale and there
were no remaining obligations to perform, it is likely that the significant
risks and rewards of ownership transferred to the customer at the time of
sale.
As discussed in IAS 18.IE20: “An assignment of rights for a fixed fee or
non-refundable guarantee under a non-cancellable contract which
permits the licensee to exploit those rights freely and the licensor has
no remaining obligations to perform is, in substance, a sale. An example
is a licensing agreement for the use of software when the licensor has
no obligations subsequent to delivery. Another example is the granting
of rights to exhibit a motion picture film in markets where the licensor
has no control over the distributor and expects to receive no further
revenues from the box office receipts. In such cases, revenue is
recognised at the time of sale.”
• In all other instances, an entity needs to use judgement to determine
when the licensee could exploit the rights under the licence freely and the
licensor had no remaining obligations to perform. This may be helpful in
understanding whether the ongoing obligations mean that the significant
risks and rewards of ownership did not pass at a single point in time, but
over a period of time. Furthermore, this assessment could help in
determining whether it is over the entire licence period or a shorter
period and might include considering factors such as:
• The reason that the contract is cancellable (if applicable)
• The nature of any restrictions over use of the intellectual property.
For example, whether it is a characteristic of the licence itself (e.g.,
the countries covered by the licence) or restricts the licensor’s
ability to use the rights received (e.g., the licensor cannot use the
intellectual property before a specified date)
• The nature of any remaining obligations and the period in/over which
those obligations apply
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19 Updated September 2019 A closer look at IFRS 15, the revenue recognition standard
Frequently asked questions (cont’d)
Consider the following examples:
Illustration 1-3 — Definition of completed contract: licences
Scenario 1
On 1 January 2016, Entity A entered into a three-year contract that
granted rights to exhibit a film at cinemas and allowed for multiple
showings within a specific period for a non-refundable upfront fee of
CU9,000. The delivery of the film was the only activity that Entity A was
obliged to perform in the contract and there was no further involvement
or other obligations for Entity A. The film was delivered to the customer
on 1 January 2016 and Entitly A concluded that the significant risks and
rewards of ownership transferred on that date.
Entity A’s legacy IFRS accounting policy for this type of contracts stated
that revenue was recognised in full upon commencement of the licence
period, because that was the first point at which the customer had the
risks and rewards of ownership and all the criteria for revenue recognition
were met at that date.
Assume that Entity A adopts IFRS 15 on 1 January 2018 and uses the full
retrospective method to transition. Entity A also uses the practical
expedient in IFRS 15.C5(a)(ii) not to restate contracts that meet the
definition of a completed contract, as defined in IFRS 15.C2(b), at the
beginning of the earliest period presented.
According to Entity A’s previous accounting policy, revenue was
recognised in full upon commencement of the licence period (i.e., on
1 January 2016) and Entity A had no further involvement beyond that
point. Therefore, at the beginning of the earliest period presented
(i.e., 1 January 2017), the contract is completed. Entity A continues to
account for the contract in accordance with its legacy accounting policy
(developed in accordance with IAS 18).
Scenario 2
Assume the same facts as Scenario 1, with the exception that the fee
was contingent upon the occurrence of a future event, specifically the
purchase price was based on a percentage of the box office receipts during
the stated contract term (i.e., three years).
Entity A concluded that the significant risks and rewards of ownership
transferred to the customer on 1 January 2016, when the film was
delivered.
The existence of a sales-based royalty earned over the two-year period
after adoption of IFRS 15 does not affect the timing of transfer to the
customer because Entity A had no further obligations to perform. The
licence fee is contingent on box office receipts. In such cases, IAS 18.IE20
stated that “revenue is recognised only when it is probable that the fee or
royalty will be received, which is normally when the event has occurred.”
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Updated September 2019 A closer look at IFRS 15, the revenue recognition standard 20
Frequently asked questions (cont’d)
Illustration 1-3 — Definition of completed contract: licences (cont’d)
However, this does not give rise to an additional obligation for Entity A.
Therefore, it does not affect the timing of transfer to the customer.
Therefore, at the beginning of the earliest period presented
(i.e., 1 January 2017), the contract is completed. Entity A continues to
account for the contract in accordance with its legacy accounting policy
(developed in accordance with IAS 18).
Scenario 3
Assume the same facts as Scenario 1, with the exception that, along
with the delivery of the film, Entity A supported the promotion of the films
through promotional and marketing campaigns for a period of 18 months
after the film was delivered to the customer.
Entity A’s legacy IFRS accounting policy for this type of contracts stated
that “promotional and marketing campaigns are not separately identifiable
components in a contract in which it grants rights to exhibit and broadcast
films. Revenue is recognised as the promotional and marketing campaigns
are performed on a straight-line basis over the period of the licence.”
Entity A concluded that, while the film was delivered on 1 January 2016,
the significant risks and rewards of ownership of the deliverable (i.e., the
film and services, together) did not transfer to the customer until the
services were provided (i.e., 30 June 2017).
The contract included multiple components because Entity A had to
provide promotional support services in addition to the delivery of the
licence. However, Entity A had considered IAS 18.13 and determined that
these services were not separately identifiable components to which
revenue needed to be allocated. Instead, revenue was recognised for both
the licence and the promotional support services during the licence period,
as Entity A provided the services.
The contract is not considered completed because Entity A had to transfer
additional services after transferring the right to exhibit the film. The fact
that Entity A had not separately allocated the consideration to each
component in the contract did not relieve it from its obligations to
undertake the promotional activities over the following 18 months.
Therefore, at the beginning of the earliest period presented
(i.e., 1 January 2017), Entity A still had to perform and provide the
remaining promotional support services to the customer up to 30 June
2017. Accordingly, the contract does not meet the definition of a
completed contract. The contract needs to be transitioned to IFRS 15.
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21 Updated September 2019 A closer look at IFRS 15, the revenue recognition standard
Frequently asked questions (cont’d)
Question 1-7: When did legacy IFRS consider loyalty points to be
transferred?
Under legacy IFRS, an entity would not have ‘transferred’ loyalty points
granted to a customer until the points were redeemed or expired.
Entities need to carefully assess their loyalty programmes as points typically
arose from several contracts with the same customer(s). Since IFRIC 13
required that such programmes be treated as a revenue element in a
contract, rather than a cost accrual, a contract would not be considered
complete until the loyalty points arising from that contract have been
redeemed or have expired.
Entities that operate loyalty programmes may face practical challenges in
determining which contracts gave rise to unexpired and unused loyalty
points and, therefore, which contracts are not yet completed (and must be
transitioned to IFRS 15). Some entities may have data within their systems
that assist them in identifying those contracts for each customer. However,
if an entity has not specifically tracked such information by customer,
the terms and conditions of the loyalty programme may assist entities in
understanding whether/when points expire, in order to identify the likely
timing of the original transaction that gave rise to the point(s). Furthermore,
it may help to understand whether the entity used a first-in-first-out approach
to the utilisation of loyalty points or some other approach.
Consider the following example:
Illustration 1-4 — Definition of completed contract: loyalty
programmes
Entity A sells goods to retail customers. The customers can enter into
a loyalty programme such that when they purchase goods, they receive
1 loyalty point for every CU100 spent on goods purchased from Entity A.
Customers can redeem their accumulated loyalty points for discounts
on future purchases from Entity A. When redeemed, 1 point entitles the
customer to a CU1 discount, which is assumed to be the fair value of each
loyalty point. Points awarded expire in two years from the award day.
Entity A recognises revenue from sales of goods when customers buy
them at the point of sale. According to IFRIC 13, Entity A allocated the fair
value of the consideration received or receivable in respect of the initial
sale between the award points and the initial good sold.
On 1 November 2016, Entity A sold CU10,000 worth of goods and granted
100 loyalty points to a customer. Using a relative fair value approach,
Entity A allocated CU9,901 to the sale of goods and CU99 to the loyalty
points. The revenue from the sale of goods was recognised immediately.
However, revenue recognition for the loyalty points was deferred until the
points were exercised or expired. On 1 January 2017, the customer had
not used the points.
Assume that Entity A adopts IFRS 15 on 1 January 2018 and uses the full
retrospective approach to transition. Entity A also uses the practical
expedient in IFRS 15.C5(a)(ii) not to restate contracts that meet the
definition of a completed contract, as defined in IFRS 15.C2(b), at the
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Updated September 2019 A closer look at IFRS 15, the revenue recognition standard 22
Frequently asked questions (cont’d)
Illustration 1-4 — Definition of completed contract: loyalty
programmes (cont’d)
beginning of the earliest period presented (i.e., 1 January 2017; Entity A
presents one comparative period only).
As at the beginning of the earliest period presented, Entity A concludes
that the loyalty points have not yet been exercised or expired.
At the beginning of the earliest period presented (i.e., 1 January 2017),
Entity A had delivered the goods to the customer that triggered the award
of the unredeemed loyalty points. However, at that date, Entity A had
not yet performed in relation to the loyalty points that represented a
separately identifiable component of the initial sale transaction in which
they were granted. Therefore, the contract does not meet the definition
of a completed contract. The contract needs to be transitioned to IFRS 15.
1.3.2 Full retrospective adoption (updated October 2018)
Entities electing the full retrospective adoption must apply the provisions of
IFRS 15 to each period presented in the financial statements, in accordance
with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors,
subject to the practical expedients created to provide relief, as discussed below.
Extract from IAS 8
Applying changes in accounting policies
19. Subject to paragraph 23:
(a) an entity shall account for a change in accounting policy resulting from
the initial application of an IFRS in accordance with the specific
transitional provisions, if any, in that IFRS; and
(b) when an entity changes an accounting policy upon initial application of
an IFRS that does not include specific transitional provisions applying to
that change, or changes an accounting policy voluntarily, it shall apply
the change retrospectively.
20. For the purpose of this Standard, early application of an IFRS is not
a voluntary change in accounting policy.
21. In the absence of an IFRS that specifically applies to a transaction, other
event or condition, management may, in accordance with paragraph 12,
apply an accounting policy from the most recent pronouncements of other
standard-setting bodies that use a similar conceptual framework to develop
accounting standards. If, following an amendment of such a pronouncement,
the entity chooses to change an accounting policy, that change is accounted
for and disclosed as a voluntary change in accounting policy.
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23 Updated September 2019 A closer look at IFRS 15, the revenue recognition standard
Extract from IAS 8 (cont’d)
Retrospective application
22. Subject to paragraph 23, when a change in accounting policy is applied
retrospectively in accordance with paragraph 19(a) or (b), the entity shall
adjust the opening balance of each affected component of equity for the
earliest prior period presented and the other comparative amounts disclosed
for each prior period presented as if the new accounting policy had always
been applied.
Limitations on retrospective application
23. When retrospective application is required by paragraph 19(a) or (b),
a change in accounting policy shall be applied retrospectively except to the
extent that it is impracticable to determine either the period-specific effects
or the cumulative effect of the change.
24. When it is impracticable to determine the period-specific effects of
changing an accounting policy on comparative information for one or more
prior periods presented, the entity shall apply the new accounting policy
to the carrying amounts of assets and liabilities as at the beginning of the
earliest period for which retrospective application is practicable, which may
be the current period, and shall make a corresponding adjustment to the
opening balance of each affected component of equity for that period.
25. When it is impracticable to determine the cumulative effect, at the
beginning of the current period, of applying a new accounting policy to all
prior periods, the entity shall adjust the comparative information to apply
the new accounting policy prospectively from the earliest date practicable.
26. When an entity applies a new accounting policy retrospectively, it applies
the new accounting policy to comparative information for prior periods as
far back as is practicable. Retrospective application to a prior period is not
practicable unless it is practicable to determine the cumulative effect on the
amounts in both the opening and closing statements of financial position
for that period. The amount of the resulting adjustment relating to periods
before those presented in the financial statements is made to the opening
balance of each affected component of equity of the earliest prior period
presented. Usually the adjustment is made to retained earnings. However,
the adjustment may be made to another component of equity (for example,
to comply with an IFRS). Any other information about prior periods, such
as historical summaries of financial data, is also adjusted as far back as is
practicable.
27. When it is impracticable for an entity to apply a new accounting policy
retrospectively, because it cannot determine the cumulative effect of
applying the policy to all prior periods, the entity, in accordance with
paragraph 25, applies the new policy prospectively from the start of the
earliest period practicable. It therefore disregards the portion of the
cumulative adjustment to assets, liabilities and equity arising before that
date. Changing an accounting policy is permitted even if it is impracticable to
apply the policy prospectively for any prior period. Paragraphs 50–53 provide
guidance on when it is impracticable to apply a new accounting policy to one
or more prior periods.
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Updated September 2019 A closer look at IFRS 15, the revenue recognition standard 24
Under the full retrospective method, entities have to apply IFRS 15 as if it
had been applied since the inception of all its contracts with customers that
are presented in the financial statements. That is, an entity electing the full
retrospective method has to transition all of its contracts with customers
to IFRS 15 (subject to the practical expedients described below), not just
those that are not considered completed contracts as at the beginning of the
earliest period presented. This means that for contracts that were considered
completed (as defined) before the beginning of the earliest period, an entity still
needs to evaluate the contract under IFRS 15 in order to determine whether
there was an effect on revenue recognised in any of the years presented in the
period of initial application (unless an entity elects to use one of the practical
expedients described below).
During deliberations on the original standard, the IASB seemed to prefer the full
retrospective method, under which all contracts with customers are recognised
and measured consistently in all periods presented within the financial
statements, regardless of when the contracts were entered into. This method
also provides users of the financial statements with useful trend information
across all periods presented.
However, to ease the potential burden of applying it on a fully retrospective
basis, the IASB provided the following practical expedients:
Extract from IFRS 15
C3. An entity shall apply this Standard using one of the following two
methods:
(a) retrospectively to each prior reporting period presented in accordance
with IAS 8 Accounting Policies, Changes in Accounting Estimates and
Errors, subject to the expedients in paragraph C5; or
…
C5. An entity may use one or more of the following practical expedients when
applying this Standard retrospectively in accordance with paragraph C3(a):
(a) for completed contracts, an entity need not restate contracts that:
(i) begin and end within the same annual reporting period; or
(ii) are completed contracts at the beginning of the earliest period
presented.
(b) for completed contracts that have variable consideration, an entity may
use the transaction price at the date the contract was completed rather
than estimating variable consideration amounts in the comparative
reporting periods.
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25 Updated September 2019 A closer look at IFRS 15, the revenue recognition standard
Extract from IFRS 15 (cont’d)
(c) for contracts that were modified before the beginning of the earliest
period presented, an entity need not retrospectively restate the contract
for those contract modifications in accordance with paragraphs 20-21.
Instead, an entity shall reflect the aggregate effect of all of the
modifications that occur before the beginning of the earliest period
presented when:
(i) identifying the satisfied and unsatisfied performance obligations;
(ii) determining the transaction price; and
(iii) allocating the transaction price to the satisfied and unsatisfied
performance obligations.
(d) for all reporting periods presented before the date of initial application,
an entity need not disclose the amount of the transaction price allocated
to the remaining performance obligations and an explanation of when the
entity expects to recognise that amount as revenue (see paragraph 120).
C6. For any of the practical expedients in paragraph C5 that an entity uses,
the entity shall apply that expedient consistently to all contracts within all
reporting periods presented. In addition, the entity shall disclose all of the
following information:
(a) the expedients that have been used; and
(b) to the extent reasonably possible, a qualitative assessment of the
estimated effect of applying each of those expedients.
While the practical expedients provide some relief, an entity still needs to use
judgement and make estimates. For example, an entity needs to use judgement
in estimating stand-alone selling prices when there has been a wide range of
selling prices and when allocating the transaction price to satisfied and
unsatisfied performance obligations if there have been several performance
obligations or contract modifications over an extended period. Furthermore,
if an entity applies the practical expedient for contract modifications, it is still
required to apply the standard’s contract modification requirements (see
section 3.4) to modifications made after the beginning of the earliest period
presented under IFRS 15 (e.g., modifications made after 1 January 2017 for an
entity with a 31 December year-end that adopts the standard using the full
retrospective method and presents one comparative period only).
Illustration 1-5 — Transition practical expedient for contract
modifications
Entity A entered into a contract with a customer to sell equipment for
CU1 million and provide services for five years for CU20,000 annually.
The equipment was delivered on 1 January 2013 and the service contract
commenced at that time. The equipment and the service contract are separate
performance obligations.
In 2015, the contract was modified to extend it by five years and to provide
an additional piece of equipment for CU1 million. The additional equipment
will be delivered during 2018 and is a separate performance obligation.
Entity A elects to apply the practical expedient on contract modifications in
accordance with IFRS 15.C5(c).
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Updated September 2019 A closer look at IFRS 15, the revenue recognition standard 26
Illustration 1-5 — Transition practical expedient for contract
modifications (cont’d)
The total transaction price for the modified contract is CU2,200,000
[CU1 million (equipment) + CU1 million (equipment) + (10 years x CU20,000
(service))], which is allocated to the two products and the service contract
based on the relative stand-alone selling price of each performance
obligation. See section 6 for discussion on allocating the transaction price
to performance obligations.
The transaction price allocated to the second piece of equipment and the
remaining unperformed services would be recognised when or as they are
transferred to the customer.
FASB differences
The FASB’s standard includes a similar practical expedient for contract
modifications at transition for entities that elect to apply the full
retrospective method. Entities would also apply the FASB’s practical
expedient to all contract modifications that occur before the beginning
of the earliest period presented under the standard in the financial
statements. However, this could be a different date for IFRS preparers
and US GAAP preparers depending on the number of comparative periods
included within an entity’s financial statements (e.g., US GAAP preparers
often include two comparative periods in their financial statements) and
whether an entity is a public or non-public entity for US GAAP purposes (see
section 1.2).
Unlike IFRS 15, the FASB’s standard does not allow an entity that uses the
full retrospective method to apply ASC 606 only to contracts that are not
completed (as defined) as at the beginning of the earliest period presented.
An entity that elects to apply the standard retrospectively must also provide
the disclosures required in IAS 8, as follows:
Extract from IAS 8
Disclosure
28. When initial application of an IFRS has an effect on the current period or
any prior period, would have such an effect except that it is impracticable to
determine the amount of the adjustment, or might have an effect on future
periods, an entity shall disclose:
(a) the title of the IFRS;
(b) when applicable, that the change in accounting policy is made in
accordance with its transitional provisions;
(c) the nature of the change in accounting policy;
(d) when applicable, a description of the transitional provisions;
(e) when applicable, the transitional provisions that might have an effect
on future periods;
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27 Updated September 2019 A closer look at IFRS 15, the revenue recognition standard
Extract from IAS 8 (cont’d)
(f) for the current period and each prior period presented, to the extent
practicable, the amount of the adjustment.
(i) for each financial statement line item affected; and
(ii) if IAS 33 Earnings per Share applies to the entity, for basic and
diluted earnings per share;
(g) the amount of the adjustment relating to periods before those presented,
to the extent practicable; and
(h) if retrospective application required by paragraph 19(a) or (b) is
impracticable for a particular prior period, or for periods before those
presented, the circumstances that led to the existence of that condition
and a description of how and from when the change in accounting policy
has been applied.
Financial statements of subsequent periods need not repeat these
disclosures.
An entity must make the above disclosures in the period in which a new
standard is applied for the first time. Financial statements in subsequent periods
need not repeat the required disclosures. The IASB provided some additional
relief from disclosures (through optional practical expedients) for an entity that
elects to apply IFRS 15 on a fully retrospective basis. Although permitted to
do so, an entity need not present the quantitative information required by
IAS 8.28(f) for periods other than the annual period immediately preceding
the first annual period for which IFRS 15 is applied (the ‘immediately preceding
period’).
Frequently asked questions
Question 1-8: Does an entity have to apply elected practical expedients to
all periods and to all contracts?
Yes. Entities may elect to apply none, some, or all of the practical expedients.
However, if an entity elects to use a practical expedient, it must apply it
consistently to all contracts within all periods presented under IFRS 15. It
would not be appropriate to apply the selected practical expedient to some,
but not all, of the periods presented under IFRS 15. Entities that choose to
use some, or all, of the practical expedients are required to provide additional
qualitative disclosures (i.e., the types of practical expedients the entity has
applied and the likely effect of their application).21
Question 1-9: If an entity is able to exclude from transition those contracts
that are completed (e.g., because it applies one of the optional practical
expedients), how does it account for those completed contracts?
Depending on the way in which an entity adopts IFRS 15, it may be able to
exclude contracts that meet the definition of a completed contract from the
population of contracts to be transitioned to IFRS 15 (i.e., it would not
need to restate those contracts). This is illustrated in section 1.3.1 in
Illustrations 1-1 through 1-4.
21 IFRS 15.C6.
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Updated September 2019 A closer look at IFRS 15, the revenue recognition standard 28
Frequently asked questions (cont’d)
The Basis for Conclusions clarifies that “if an entity chooses not to apply IFRS
15 to completed contracts in accordance with paragraph C5(a)(ii) or
paragraph C7, only contracts that are not completed contracts are included
in the transition to IFRS 15. The entity would continue to account for the
completed contracts in accordance with its accounting policies based on
legacy IFRS”.22
For example, an entity might elect to apply the standard retrospectively
using the full retrospective method and use the practical expedient in
IFRS 15.C5(a)(ii) not to restate contracts that meet the definition of a
completed contract at the beginning of the earliest period presented
(i.e., 1 January 2017 for an entity with a 31 December year-end that
presents one comparative period only). Therefore, the entity also does not
record an asset for incremental costs to obtain contracts under IFRS 15 (see
section 9.3.1) that meet the definition of a completed contract as at the
beginning of the earliest period presented. Furthermore, any assets or
liabilities related to completed contracts that are on the balance sheet prior
to the date of the earliest period presented continue to be accounted for
under legacy IFRS after the adoption of IFRS 15. Note that a similar optional
practical expedient is available under the modified retrospective method (see
section 1.3.3).
1.3.3 Modified retrospective adoption (updated October 2018)
The standard provides the following requirements for entities applying the
modified retrospective transition method:
Extract from IFRS 15
C3. An entity shall apply this Standard using one of the following two
methods:
(a) …
(b) retrospectively with the cumulative effect of initially applying this
Standard recognised at the date of initial application in accordance with
paragraphs C7–C8.
…
C7. If an entity elects to apply this Standard retrospectively in accordance
with paragraph C3(b), the entity shall recognise the cumulative effect of
initially applying this Standard as an adjustment to the opening balance of
retained earnings (or other component of equity, as appropriate) of the
annual reporting period that includes the date of initial application. Under this
transition method, an entity may elect to apply this Standard retrospectively
only to contracts that are not completed contracts at the date of initial
application (for example, 1 January 2018 for an entity with a 31 December
year-end).
22 IFRS 15.BC445E.
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29 Updated September 2019 A closer look at IFRS 15, the revenue recognition standard
Extract from IFRS 15 (cont’d)
C7A. An entity applying this Standard retrospectively in accordance with
paragraph C3(b) may also use the practical expedient described in
paragraph C5(c), either:
(a) for all contract modifications that occur before the beginning of the
earliest period presented; or
(b) for all contract modifications that occur before the date of initial
application.
If an entity uses this practical expedient, the entity shall apply the expedient
consistently to all contracts and disclose the information required by
paragraph C6.
C8. For reporting periods that include the date of initial application, an entity
shall provide both of the following additional disclosures if this Standard is
applied retrospectively in accordance with paragraph C3(b):
(a) the amount by which each financial statement line item is affected in the
current reporting period by the application of this Standard as compared
to IAS 11, IAS 18 and related Interpretations that were in effect before
the change; and
(b) an explanation of the reasons for significant changes identified in C8(a).
Entities that elect the modified retrospective method apply the standard
retrospectively to only the most current period presented in the financial
statements (i.e., the initial period of application). To do so, the entity has to
recognise the cumulative effect of initially applying IFRS 15 as an adjustment
to the opening balance of retained earnings (or other appropriate components
of equity) at the date of initial application.
How we see it
When an entity applies the modified retrospective method, there is no effect
on the statement of financial position as at the beginning of the preceding
period (third statement of financial position according to IAS 1.40A).
Furthermore, IFRS 15 does not require an entity to provide restated
comparative information in its financial statements or in the notes to
the financial statements (e.g., disaggregated revenue disclosures in the
comparative period) under this method. Therefore, we believe the inclusion
of a third statement of financial position as at that date is not required.
Under this method, IFRS 15 is applied either to all contracts at the date
of initial application (e.g., 1 January 2018 for an entity with a 31 December
year-end, see section 1.2 above) or only to contracts that are not completed at
this date. Depending on how an entity elects to apply the modified retrospective
method, it has to evaluate either all contracts or only those that are not
completed before the date of initial application, as if the entity had applied the
standard to them since inception. An entity is required to disclose how it has
ap