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IFRS 15Revenue from contracts with customers

overview

IFRS 15 stipulates when and in what amount an IFRS reporter has to recognize revenue. In addition, the preparers of the financial statements are required to provide the addressees of the financial statements with more informative and relevant information than before. The standard offers a single, principle-based, five-stage model that is to be applied to all contracts with customers.

IFRS 15 was issued in May 2014 and is to be applied to reporting periods beginning on or after January 1, 2018. Clarifying changes were issued on April 12, 2016, which have the same effective date as the standard itself.

History of the origins of IFRS 15

datedevelopmentRemarks
June 2002Included in the work program of the IASBentire development history of the project
December 19, 2008Discussion paperPreliminary views of revenue recognition from contracts with customers releasedComment deadline on June 19, 2009
June 24, 2010Draft standard ED / 2010/6Revenue from contracts with customers releasedComment deadline on October 22, 2010
November 14, 2011Draft standard ED / 2011/6Revenue from contracts with customers published (republication)The comment period ends on March 13, 2012
May 28, 2014IFRS 15Revenue from contracts with customerspublishedcomes into force for reporting years beginning on or after January 1, 2017
11th September 2015The IASB postpones the effective date to January 1, 2018
The new date of entry into force of IFRS 15 is January 1, 2018
April 12, 2016
Clarification of IFRS 15'Revenue from Contracts with Customers'published
comes into effect for reporting years beginning on or after January 1, 2018;
the clarifications do not contain any changes to the basic principles of the standard, they are pure clarifications and additional transition relief

Relevant interpretations

Changes planned by the IASB

Replaced standards

IFRS 15 replaces the following standards and interpretations:

  • IAS 11Production orders
  • IAS 18revenues
  • IFRIC 13Loyalty programs
  • IFRIC 15Agreements for the construction of real estate
  • IFRIC 18Transfers of Assets from Customers
  • SIC-31Income - exchange of advertising services

Summary of IFRS 15

Goal setting

The objective of IFRS 15 is to create principles that a company must apply when reporting information that is useful for decision-making to the users of the financial statements about the type, amount, timing and uncertainty of revenue and resulting cash flows from a contract with a customer. [IFRS 15: 1] The application of the standard is mandatory for annual reporting periods beginning on or after January 1, 2018. Earlier application is permitted.

scope of application

IFRS 15 Revenue from contracts with customers applies to all contracts with customers with the exception of the following contracts: Leases that are subject to IAS 17Leases fall; Financial instruments and other contractual rights or obligations under IFRS 9Financial instruments, IFRS 10Consolidated financial statements, IFRS 11Joint agreements, IAS 27Separate degrees or IAS 28Shares in associated companies and joint ventures fall; Insurance contracts within the scope of IFRS 4Insurance contracts; and non-financial exchanges between companies in the same industry aimed at facilitating sales to customers or prospects. [IFRS 15: 5]

A contract with a customer may fall partly within the scope of IFRS 15 and partly within the scope of another standard. In this case, the following applies: [IFRS 15: 7]

  • If other standards stipulate how one or more components of the contract are to be separated and / or assessed for the first time, these provisions relating to separation and assessment are to be applied first; the transaction price is then reduced by the amounts that are initially valued according to other standards.
  • If there is no other standard that specifies how one or more components of the contract are to be separated and / or assessed for the first time, IFRS 15 is to be applied.

Essential definitions

[IFRS 15: Appendix A]

contract

an agreement between two or more parties that gives rise to legally enforceable rights and obligations

customer

a party who has entered into a contract with a company for the supply of goods or services that are the result of the ordinary course of business of the company in exchange for consideration

Yield

an increase in economic benefit during the reporting period in the form of inflows or increases in value of assets or decreases in debts that lead to an increase in equity, with the exception of equity increases resulting from contributions from equity owners

Performance obligation

a commitment in a contract with a customer to transfer or provide:

  • a good or a service (or a bundle of goods or services, each of which can be defined independently or
  • a series of independently definable goods or services that are essentially the same and have the same pattern of transmission to the customer

revenues

Income generated in the ordinary course of business of a company

Transaction price

the amount of consideration that a company is expected to receive from customers for the transfer of goods or the provision of services

Accounting rules for revenues

The five-tier frame model

The core principle of IFRS 15 is that a company should record revenue in the amount in which consideration is expected for the performance obligation (s) assumed, i.e. the transfer of goods or the provision of services. This core principle is implemented with a five-stage framework model: [IFRS 15: IN7]

  • Identification of the contract (s) with a customer,
  • Identification of the independent performance obligations in the contract,
  • Determination of the transaction price,
  • Distribution of the transaction price to the performance obligations of the contract,
  • Revenue recognition when the company fulfills its performance obligations.

The application of these rules depends on the specific facts and circumstances in the contract with a customer and will require discretionary decisions.

Step 1: Identifying the contract (s) with a customer

A contract with a customer falls within the scope of IFRS 15 if all of the following conditions are met: [IFRS 15: 9]

  • all parties to the contract agree to the contract,
  • the rights of each party in relation to the goods to be transferred or the services to be provided can be identified,
  • the payment terms for the goods to be transferred or the services to be provided can be identified,
  • the contract has economic substance and
  • the consideration to which the company is entitled in exchange for the goods or services is likely to be received.

If a contract with a customer does not meet all of the above criteria to date, the company will periodically reassess the contract to determine when it meets the above criteria. From that point on, the company will apply IFRS 15 to the contract. [IFRS 15:14]

The standard offers extensive guidelines on how agreed contract changes are to be accounted for. If certain conditions are met, a contract change is accounted for as a separate contract. If not, it is taken into account by changing the accounting treatment of the current contract with the customer. Whether this change is accounted for prospectively or retrospectively depends on whether the remaining goods or services that are still to be delivered or rendered after the contract change can be distinguished from those that were delivered or performed before the change. Further details on accounting for contract changes can be found in the standard. [IFRS 15: 18-21]

step 2: Identification of the independent performance obligations in the contract

At the beginning of the contract, a company must assess the goods or services that have been promised to the customer and identify them as performance obligations: [IFRS 15.22]

  • a good or a service (or a bundle of goods and services) that can be defined independently, or
  • a series of independently definable goods and services that are essentially the same and have the same pattern of transmission to the customer.

A number of independently definable goods or services are transferred to a customer according to the same pattern if the following two criteria are met: [IFRS 15:23]

  • Each independently definable product or service in the series, which the company promises to transfer or provide one after the other, represents a performance obligation that is fulfilled over a period of time (see below) and
  • the progress in terms of the transfer or provision of all independently definable goods and services in this series is determined using the same method

A good or a service can be defined independently if the following two criteria are met: [IFRS 15:27]

  • the customer derives benefits and benefits from the promised goods or services directly or in conjunction with other resources available to him
  • the promised goods or services are separable from other promised goods or services of the same contract.

When assessing whether the promised goods or services are inseparable, the following factors, among others, should be considered: [IFRS 15:29]

  • the company performs significant integration work with regard to grouping or combining the promised goods or services with other goods or services promised in the contract
  • with the goods or services, other goods or services promised in the contract are significantly changed or adapted
  • the promised goods or services depend essentially on or are interrelated with other goods or services promised in the contract

step 3: Determination of the transaction price

The transaction price is the consideration that a company is expected to receive from customers for the transfer of goods or the provision of services. In making this determination, a company must take into account the terms of the contract and its normal business practice. [IFRS 15:47]

In cases where a contract contains elements of variable consideration, the entity estimates the amount of variable consideration that the entity is expected to receive under the contract. [IFRS 15:50] Variable consideration can result, for example, from rebates, rebates, discounts, bonuses, reimbursements, price concessions, incentive agreements, performance bonuses, penalties or similar items. Variable consideration also exists if the company's right to consideration depends on the occurrence of future events. [IFRS 15:51]

In the standard, the issue of the uncertainty of variable consideration is addressed by limiting the amount of variable consideration that can be recognized as revenue. In particular, estimated variable amounts may only be included in the transaction price to the extent that it is highly probable that the subsequent elimination of the uncertainty with regard to the amount of these variable amounts will not lead to a material adjustment in sales. [IFRS 15:56]

However, a different, stricter approach is used for proceeds from the sale or granting of use of intellectual property licenses. Such revenue is only recognized if the underlying sale or use takes place. [IFRS 15: B63]

Step 4: Distribution of the transaction price to the performance obligations of the contract

When a contract has multiple performance obligations, the company distributes the transaction price among the performance obligations in the contract based on stand-alone selling prices. [IFRS 15:74] If a stand-alone selling price is not directly observable, the entity must estimate it. Various methods are proposed in IFRS 15 that can be used to make this estimate, including: [IFRS 15:79]

  • adjusted market valuation
  • expected cost plus a margin
  • Residual method (only allowed in limited circumstances)

Any price discounts granted (i.e. the sum of the individual selling prices exceeds the transaction price) are generally also distributed on the basis of the relative individual selling prices. In certain circumstances, it may be appropriate to spread such a discount over some, but not all, benefit obligations. [IFRS 15:81]

If the consideration has to be paid in advance or afterwards, the company must check whether the contract contains a significant financing agreement. If that is the case, the transaction price must be adjusted to reflect the time value of money. [IFRS 15:60] A practical simplification exists for cases in which the period between the provision of the service and payment by the customer is likely to be less than 12 months. [IFRS 15:63]

Step 5: Revenue recognition when the company fulfills its performance obligations

Revenues are recognized when the power of disposal is transferred; this can be done either at a specific point in time or over a period of time. [IFRS 15:32]

Power of disposal over an asset is defined as the ability to derive benefit from the asset and to determine its further use. This includes the ability to prevent others from gaining benefit from the asset and determining its further use. The benefits that can be drawn from the asset are potential payments (inflows or saved outflows) that can be generated directly or indirectly in various ways, for example through: [IFRS 15: 31-33]

  • Use of the asset to manufacture goods or provide services;
  • Using the asset to increase the value of other assets;
  • Use the asset to pay off debts or reduce expenses;
  • Sale or exchange of the asset;
  • Deposit of the asset as collateral for a loan; and
  • Holding the asset.

An entity recognizes revenue over a period of time when one of the following criteria is met: [IFRS 15:35]

  • With fulfillment by the company, the customer receives the benefit from the service provided and consumes it at the same time.
  • With its performance, the company creates or improves an asset over which the customer has control during the creation or improvement.
  • With its performance, the company creates an asset that cannot be used otherwise by the company; The company is entitled to payment for the services previously provided and can also expect the contract to be fulfilled as agreed.

If a company fails to meet its performance obligations over time, it will meet them at a point in time. Revenue is therefore recognized when the power of disposal is transferred at a certain point in time. Factors that can be used to determine when control will pass include, but are not limited to, the following: [IFRS 15:38]

  • The company currently has the right to receive payment for the asset;
  • the customer has legal ownership of the asset;
  • the company physically (i.e., ownership) transferred the asset;
  • the main risks and rewards of owning the asset lie with the customer; and
  • the customer has accepted the asset.

Contract costs

Costs incurred to obtain a contract should be capitalized as an asset if the company expects reimbursement in the future and these costs would not have been incurred without the contract (for example, success fees paid to agents). As a practical relief, however, these costs can be recognized as an expense immediately if the contract concluded has an expected term of no more than one year. [IFRS 15: 91-94]

Costs incurred to fulfill a contract are only recognized as an asset if all of the following criteria are met: [IFRS 15:95]

  • the cost is directly related to a contract (or a specific expected contract);
  • the costs are incurred for operating resources that are used to meet future performance obligations; and
  • future compensation of costs is expected.

This includes costs such as direct labor costs, direct material costs and shares in overhead costs that are directly related to the contract. [IFRS 15:97]

The capitalized assets must then be written off in accordance with the manner in which the associated goods or services are transferred to or provided to the customer. [IFRS 15:99]

Further implementation guidelines for the practical application of IFRS 15

Topics covered include:

  • Performance obligations that are met over a period of time;
  • Methods for measuring the progress of performance towards the full satisfaction of a performance obligation;
  • Sales with right of return;
  • Guarantees;
  • Principal-agent relationships;
  • Customer options for additional goods or services;
  • not exercised customer rights;
  • non-refundable prepayments;
  • Licensing;
  • Repurchase agreements;
  • Shipping agreements;
  • Bill and hold agreements;
  • Acceptance by the customer; and
  • Breakdown of Income.
These issues must be taken into account when applying IFRS 15

Presentation in the conclusion

Contracts with customers are shown in the balance sheet of a company as a passive contract item, active contract item or as a receivable. This depends on the relationship between the company's performance and the customer's payment. [IFRS 15: 105]

A passive contract item is shown on the balance sheet if the customer has already paid an amount of the consideration before the company has transferred the corresponding goods or provided services. [IFRS 15: 106]

If the company has transferred or provided goods or services to the customer and the customer has not yet paid the corresponding amount of the consideration, an active contract item or a receivable is shown on the balance sheet. This depends on the nature of the company's claim for consideration. An active contract item is recognized if the company's claim to consideration depends on something other than the mere passage of time. A claim is recognized if the company's claim to consideration depends solely on the passage of time.

Active contract items and receivables are accounted for in accordance with IFRS 9 Financial instruments accounted for. Any impairments relating to contracts with customers are measured, presented and provided with information in accordance with IFRS 9. Any differences between the original recognition of a receivable and the correspondingly recognized revenue amount must be recognized as an expense, for example as an impairment loss. [IFRS 15: 107-108]

Information

The disclosure requirements of IFRS 15 aim to enable the users of the financial statements to understand the type, amount, timing and uncertainty of sales and the resulting cash flows from contracts with customers. Therefore, an entity must disclose qualitative and quantitative information on all of the following: [IFRS 15: 110]

  • its contracts with customers;
  • significant discretionary decisions and their changes that were made when the revenue regulations were applied to these contracts; and
  • any asset that results from capitalized costs of obtaining and fulfilling a contract with a customer.

Companies must weigh up the level of detail required to meet the objective underlying the disclosure requirements and what focus should be placed on the individual regulations. A company must group or break down information appropriately to ensure that information that is useful for decision-making is not obscured. [IFRS 15: 111]

In order to achieve the above-mentioned objective, the standard contains a number of new disclosure requirements. For details on these specific requirements, see IFRS 15: 113-129.

Effective date and transitional provisions

The standard is to be applied to financial statements for fiscal years beginning on or after January 1, 2018. Earlier application is permitted. An entity that elects to apply IFRS before January 1, 2018, should disclose this fact in its financial statements. [IFRS 15: C1]

When applying IFRS 15 for the first time, a company must apply the standard in full for the current reporting period. This also includes retrospective application to all contracts that were not yet fulfilled at the beginning of the reporting period. With regard to earlier reporting periods, two options are granted in the transitional provisions: [IFRS 15: C3]

  • full application of IFRS 15 to previous reporting periods (with certain limited practical simplifications); or
  • Retention of the previous amounts reported under the previously applicable standards and recognition of the cumulative effects from the application of IFRS 15 as an adjustment to the opening balance of equity at the time of initial application (beginning of the current reporting period).