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Revenue from Contracts with Customers
17 February 2017
IFRS 15
Why IFRS 15 is important?
What does it mean for entities?
• Revenue recognition principles will change
• P/L may vary to a certain extent
• IT Systems, Accounting Policies, Internal Processes and Controls may be subject to change
What do I need to know now?
• Key challenges
New estimates & judgments required
Retrospective application includes associated data gathering analysis
Change of systems, processes and internal controls
What is it?
• More detailed guidance on revenue recognition which involve significant judgments
• Effective on 1/1/2018 with retrospective application
What does it mean for auditors?
• Identify the key impacts on your clients
• Early discussion with clients on the key impacts and help your clients prepare for the changes
Entities
Key c
halle
ng
es
Auditors
Key fa
cts
IFRS 15
©2017 Deloitte & Touche (M.E.). All rights reserved. IFRS 15 Revenue from Contracts with Customers 1
Overview—the core principle
Identify the contract with a customer
(Step 1)
Identify the performance obligations in the contract
(Step 2)
Determine the
transaction price
(Step 3)
Allocate the transaction price
to the performance obligations
(Step 4)
Recognize revenue when
each performance obligation is
satisfied
(Step 5)
Control approach
(differs from the risks and rewards approach under IAS 18)
Recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entityexpects to be entitled in exchange for those goods or services.
Five-step model to apply the core principle:
IFRS 15 Revenue from Contracts with Customers©2017 Deloitte & Touche (M.E.). All rights reserved. 2
Identify theperformance obligations
(Step 2)
Identify the contract
(Step 1)
Determine the transaction price (Step
3)
Allocate thetransaction price (Step
4)
Recognize revenue (Step 5)
Contract with customerCU 110
Deliver equipment
Provide training services
Provide support services
Provide extended warranty
CU 4
CU 1
Point in time
Over time
Over time
Over time
CU 100
CU 5
Applying the 5 step model—Example
IFRS 15 Revenue from Contracts with Customers©2017 Deloitte & Touche (M.E.). All rights reserved. 3
A legally enforceable contract (incl. oral or implied) must meet all of the following requirements:
A contract is outside the scope if:
Commercial substance.
Contracts are approved and the parties are committed to perform.
Each party’s rights can be identified.
Payment terms can be identified.
The contract is wholly unperformedEach party can unilaterally terminate the contract without
compensation
Step 1 Step 2 Step 3 Step 4 Step 5
It is probable that the entity will collect the consideration to which it will be entitled.
AND
Step 1: Identifying the contract
Collectability threshold
IFRS 15 Revenue from Contracts with Customers©2017 Deloitte & Touche (M.E.). All rights reserved. 4
Identify all (incl. implicit) promised goods/services in the contract
Is the good/service distinct?
Can the customer benefit from the good or service on its own or together with other
readily available resources?
Is the good or service separately identifiable from other promises in the contract?
Account for as a separate performance obligation
Combine two or more promised goods or services
YES NO
CAPABLE OF BEING DISTINCT DISTINCT IN CONTEXT OF CONTRACT
Step 1 Step 2 Step 3 Step 4 Step 5
AND
Step 2: Identifying performance obligations
New
IFRS 15 Revenue from Contracts with Customers©2017 Deloitte & Touche (M.E.). All rights reserved. 5
Transaction price
The transaction price would not be reduced for the effects of customer credit risk.
Excluding credit risk
Variable considerationConsideration amount to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer.
Definition
The amount is fixed and not contingent on the outcome of future events.
Fixed consideration
• Consideration in a form other than cash• Shall be measured at FV
Non-cash consideration
Significant benefit of financing
Estimated and potentially constrainede.g., discounts, rebates, refunds, etc.
What is the transaction price? What does it include?
Consideration payable to customers
• If identified, leads to adjustment in transaction price.
• Practical expedient available.
Reduces transaction price unless payment is made for a distinct good/service.
Step 3: Determining the transaction price Step 1 Step 2 Step 3 Step 4 Step 5
Exception
Exception for sales/ usage based royalties of IP
IFRS 15 Revenue from Contracts with Customers©2017 Deloitte & Touche (M.E.). All rights reserved. 6
Determine standalone selling price
• Estimate the price if unobservable
• Acceptable methods:
• > Adjusted market assessment approach
• > Expected cost plus a margin approach
• > Residual approach
Allocate the transaction price
• Allocate the transaction price to each performance obligation on a relative stand-alone selling price basis.
• Allocate discounts proportionally to all performance obligations unless certain criteria are met.
• Allocate variable consideration and changes in transaction price to all performance obligations unless two criteria are both met.
• Do not reallocate changes in standalone selling price after inception.
Step 1 Step 2 Step 3 Step 4 Step 5
Maximize the use of observable
inputs and apply consistently
Step 4: Allocating the transaction price
Only allowed in limited circumstances
IFRS 15 Revenue from Contracts with Customers©2017 Deloitte & Touche (M.E.). All rights reserved. 7
The seller’s performance creates or enhances an asset controlled by the
customer.
Performance satisfied over time = Revenue recognized over time
The seller does not create an asset that has an alternative use to the seller
and the seller has the right to be paid for performance to date.
OR
Revenue recognized at a point in time
The customer simultaneously receives and consumes the benefit of the seller’s
performance as the seller performs.
IF NOT
Step 1 Step 2 Step 3 Step 4 Step 5
OR
Step 5: Recognizing revenue
IFRS 15 Revenue from Contracts with Customers©2017 Deloitte & Touche (M.E.). All rights reserved. 8
Indicators that control transfers include:
Present right to payment
Legal title of goods and services
Transferred physical possession
Significant risks and rewards of ownership
The customer has accepted the asset
Revenue recognized at a point in time
Step 5: Recognizing revenue Step 1 Step 2 Step 3 Step 4 Step 5
IFRS 15 Revenue from Contracts with Customers©2017 Deloitte & Touche (M.E.). All rights reserved. 9
What are the key changes?
Recognition of revenue at a point in time or over time
Unbundling of contracts
Allocation of total revenue to the unbundled parts
Uncertain revenue or contingent revenue
More extensive disclosure requirements
Key areas:
IFRS 15 Revenue from Contracts with Customers©2017 Deloitte & Touche (M.E.). All rights reserved. 10
Identify the contract with a customer
Identify the performance obligations in the contract
Determine the transaction price
Allocate the transaction price to performance obligations
Recognize revenue when each performance obligation is satisfied
Step 1
Step 2
Step 3
Step 4
Step 5
Collectability
Healthcare
Technology
Unbundling of
contracts
Telecom
Software
Automotive
Uncertain revenue or
contingent revenue
Life Science
Consumer &
Industrial Products
Allocation of total
revenue to the
unbundled parts
Telecom
Recognition of
revenue at a point in
time or over time
Contract
Manufacturer
Real estate
Key impact on revenue recognition
Actual impact will depend on specific customer contracts and what the clients did before
IFRS 15 Revenue from Contracts with Customers©2017 Deloitte & Touche (M.E.). All rights reserved. 11
Example - Contract Manufacturing Industry
Question
Should the revenue be recognized over time or at a point of time?
Answer
Revenue should be recognized over time.
Entity X Customer A
Customer-specific parts, large quantities, repetitive basis
Right to payment even if customer A cancels the contract
No other customers
IFRS 15 Revenue from Contracts with Customers©2017 Deloitte & Touche (M.E.). All rights reserved. 12
Example – Software Industry
Current practice: Entity A might unbundle the licence from the add-on services.
New practice: Entity A will need to use judgement to determine whether to combine the licence and some or all of theprofessional services as one perfomance obligation and recognize revenue over time.
Entity A Customer Y
Sells a software license and provides consulting services for customizing the software
Software is highly customized and the add-on service are necessary
to utilize the software
CU600,000
These services could be provided by a different
supplier
IFRS 15 Revenue from Contracts with Customers©2017 Deloitte & Touche (M.E.). All rights reserved. 13
Example – Real Estate
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 isunder construction. Each unit has a similar floor plan and is of similar size, but for example the location of the unit within the complex is different.The customer pays a non-refundable deposit upon entering into the contract and will make progress payments during construction.
IFRS 15 Revenue from Contracts with Customers©2017 Deloitte & Touche (M.E.). All rights reserved. 14
Current practice: Recognize revenue when apartment is handed over.
New practice: Possibly recognize revenue over time – will depend on facts and circumstances.
This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles setout will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refrainingfrom acting on any of the contents of this publication. Deloitte & Touche (M.E.) would be pleased to advise readers on how to apply the principlesset out in this publication to their specific circumstances. Deloitte & Touche (M.E.) accepts no duty of care or liability for any loss occasioned toany person acting or refraining from action as a result of any material in this publication.
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