IFRS 15 New Friday

IFRS 15
REVENUE FROM
CONTRACTS WITH
CUSTOMERS
1
This material is the property of Department of Accounting
and Finance, CoBE, AAU. Permission must be obtained from
Learning Objectives
At the completion of studying this
chapter, you will be able to:
Understand revenue recognition issues

Identify the five steps in the revenue
recognition process
Identify other revenue recognition issues
Identify contract costs
Describe presentation and disclosure regarding
revenue.
distinguish between the accounting treatment
of revenue recognition under US GAAP and
LIST OF APPLICABLE IFRS

Topic List
Revenue From Contracts with
Customers
Fair Value
Presentations of Financial
Statements
Standards
IFRS 15
IFRS 13
ISA 1
THE OBJECTIVE OF IFRS 15
The objective of IFRS 15:

to establish the principles that :
an
entity shall apply to report useful
information to users of financial statements
about the nature, amount, timing and
uncertainty of revenue and cash flows arising
from a contract with a customer.
recognising,
measuring
and
disclosing
revenue arising from a contract with a
customer that are not dealt with specifically
in another IFRS.
4
THE SCOPE OF IFRS 15
IFRS 15 Revenue from Contracts with Customers applies to

all contracts with customers except for:
leases IFRS 16;

insurance contracts IFRS 4;
financial instruments and other contractual rights or
obligations IFRS 9; interest and dividend income IFRS 9;
IFRS 10 Consolidated Financial Statements; IFRS 11 Joint
Arrangements; IAS 27 Separate Financial Statements;
IAS 28 Investments in Associates and Joint Ventures;
Nonmonetary exchanges to facilitate sales to customers
Certain transactions may fall partially within the scope
of IFRS 15 and partially within the scope of other
standards
5
THE SCOPE OF IFRS 15
IFRS 15 applies to various revenues generated by

banks, such as fees, commissions and other
income that may result from servicing loans,
asset management, custody services, pension
administration, insurance broking, but are not
limited to those.
Effective date
Annual reporting periods beginning on or after
January 1, 2018, including interim reporting periods
therein (FY 2018)
Early application is permitted
6
REVENUE MEASUREMENT
Revenue is measured as the fair value of the

consideration received or receivable. The nature,
timing and amount of consideration promised by a
customer affect the estimate of the transaction price.
When determining the transaction price, an entity
shall consider the effects of all of the following:
variable consideration;
constraining estimates of variable consideration;
the existence of a significant financing component in
the contract;
non-cash consideration; and
consideration payable to a customer .
7
REVENUE MEASUREMENT
Amounts received on behalf of other parties (e.g.

valued added taxes, amounts collected on behalf
of the principal in agency arrangements) are not
economic benefits flowing to the entity and do
not result in increases in equity. Therefore, they
do not constitute revenue.
REVENUE RECOGNITION
The primary issue in accounting for revenue is

determining when to recognize revenue.
Revenue is recognized when it is probable that
future economic benefits will flow to the entity and
these benefits can be measured reliably.
IFRS 15 identifies the core principle that:
an entity recognizes revenue to depict the
transfer of promised goods or services to
customers in an amount that reflects the
consideration to which the entity expects to be
entitled in exchange for those goods or services.
9
The Five-step Model

Framework
An entity recognizes revenue in accordance with

that core principle by applying the following steps:
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
performance
obligations
(Step 4)
Recognize
revenue when
(or as) the entity
satisfies a
performance
obligation (Step
5)
The Five-step Model Framework
10
Identify Contract with

CustomersStep 1
Contract:
Agreement
between two or more parties that
creates enforceable rights or obligations.

Can
be written, oral, or implied from customary
business practice.
Company
applies the revenue guidance to a
contract according to the following criteria:
11
Contract with Customers

Step 1
A contract with a customer will be within the scope of

IFRS 15 if all the following conditions are met:
the contract has been approved by the parties to the
contract;
each partys rights in relation to the goods or services
to be transferred can be identified;
the payment terms for the goods or services to be
transferred can be identified;
the contract has commercial substance; and
it is probable that the consideration to which the entity
is entitled to in exchange for the goods or services will
12
be collected.
Contract with CustomersStep 1

Contract Modifications
Change in contract terms while it is ongoing.
Companies determine
whether a new contract (and performance
obligations) results or
whether it is a modification of the existing
contract.
Prospective Modification
Company should
- account for effect of change in period of
change as well as future periods if change
affects both.
- not change previously reported results.
14
Contract with Customers

Basic
Accounting
Step
1
Revenue
cannot be recognized until a contract
exists.
Company
obtains rights to receive consideration

and assumes obligations to transfer goods or
services.
Rights
and performance obligations gives rise to an

(net) asset or (net) liability.
Company
Contract
assetnot
= Rights
received
> Performance
does
recognize
contract
assets or
liabilities until one orobligation
both parties to the contract
Contract liability = Rights received < Performance
perform.
obligation
13
Example: Bank B sells to its customers, through its

branches, insurance products on behalf of insurance
company X. under the agreement between B and X, Bank
B promises to provide three types of services, as follows:
Acquisition of new clients in exchange for a fixed of Birr 100

fee to be paid by X on the signing of a new insurance
product
Bank B acquires 20 clients for the year 2016 of which 4 is
waiting VISA to travel to Sweden.
Collection of successive annual premiums, renewals, one-off
payments etc in exchange for 5% fees per person that are
paid by X over time, once the contract is renewed or
premiums collected; and
Bank B expects 6 clients of year 2015 will renewed their
policy in 2016
Consultancy and post-sale services to customers in
exchange for fees that are paid up-front; however, based on
the premium reimbursements that customers are entitled to
claim due to contract or law provisions, B may have to
Under step 1 of the model, Bank B determines

that its agreement with X creates enforceable
rights and obligations based on the following:
Both parties have approved the contract, either
in writing, orally or in accordance with other
customer business practices;
The right s to goods and services and the
payment terms are identified in the contract;
The contract has commercial substance; and
Collection of the consideration from X is
probable.
Identify Performance
ObligationsStep 2
A performance obligation is a contract to provide a

product or service to a customer.
This promise may be explicit, implicit or possibly based on
customary business practice.
The entity should assess the goods or services that have
been promised to the customer either:
a good or service (or bundle of goods or services) that is

distinct; or
a series of distinct goods or services that are substantially
the same and that have the same pattern of transfer to the
customer.
A performance obligation to transfer goods and services is

satisfied when the goods or services are delivered to the
customer and the customer thereby obtains control over
the promised goods or services.
17
Identify Performance Obligations

Step 2
Revenue Recognition Situations

Type of
Transactio
n
Descriptio
n of
Revenue
Timing of
Revenue
Recognitio
n
Sale
Saleofofproduct
product
from
inventory
from inventory
Revenue
Revenuefrom
from
sales
sales
Date
Dateofofsale
sale(date
(date
ofofdelivery)
delivery)
Performing
Performing
aaservice
service
Permitting
Permitting
use
useof
ofan
an
asset
asset
Sale
Saleof
ofasset
asset
other
than
other than
inventory
inventory
Revenue
Revenue
from
fromfees
feesor
or
services
services
Revenue
Revenue
from
from
interest,
interest,
rents,
rents,and
and
royalties
royalties
Gain
Gainor
orloss
loss
on
on
disposition
disposition
Services
Services
performed
performed
and
andbillable
billable
As
Astime
time
passes
passesor
or
assets
assetsare
are
used
used
Date
Date of
of
sale
sale or
or
trade-in
trade-in
15
Identify Performance
ObligationsStep 2
Under step 2, assume that B concludes that there

are two performance obligations. Service (a) is
identified as a distinct performance obligationi.e. the acquisition of new clients. Services (b)and
(c) represent a combined output for which X has
contracted i.e. the banks ability to provide
ongoing services to customers and therefore the
combined bundle is a performance obligation.
Determining Transaction
PriceStep 3
Transaction price
Amount
of consideration that company expects

to receive from a customer.
In
a contract is often easily determined because

customer agrees to pay a fixed amount.
Other
contracts, companies must consider:

Variable consideration
Time value of money
Non-cash consideration
Consideration paid or payable to
customers
LO 5
PriceStep 3
Variable Consideration
Price dependent on future events.
- May include discounts, rebates, credits,
performance bonuses, or royalties.
Companies estimate amount of revenue to recognize.
- Expected value
- Most likely amount
Companies only recognize variable consideration if
1. they have experience with similar contracts and are
able to estimate the cumulative amount of revenue, and
2. based on experience, they do not expect a significant
reversal of revenue previously recognized.
If
these criteria are not met, revenue recognition is

constrained.
21
ESTIMATING VARIABLE CONSIDERATION
Facts: Peabody Construction Company enters into a contract with a
customer to build a warehouse for Birr 100,000, with a performance bonus of
Birr 50,000 that will be paid based on the timing of completion. The amount
of the performance bonus decreases by 10% per week for every week
beyond the agreed-upon completion date. The contract requirements are
similar to contracts that Peabody has performed previously, and
management believes that such experience is predictive for this contract.
Management estimates that there is a 60% probability that the contract will
be completed by the agreed-upon completion date, a 30% probability that it
will be completed 1 week late, and only a 10% probability that it will be
completed 2 weeks late.
Question: How should Peabody account for this revenue arrangement?
22
Question: How should Peabody account for this revenue arrangement?
Management has concluded that the probability-weighted method is the
most predictive approach:
60% chance of Birr 150,000 =
Birr 90,000
43,500
14,000
Birr 147,500
Most likely outcome, if management believes they will meet the

deadline and receive the Birr 50,000 bonus, the total transaction price
would be?
Birr 150,000 (the outcome with 60% probability)
23
PriceStep 3
Time Value of Money

When contract involves a significant financing component.
- Interest accrued on consideration to be paid over time.
-
Fair value determined either by measuring the

consideration received or by discounting the payment
using an imputed interest rate.
Company reports as interest expense or interest
revenue.
Non-Cash Consideration
Goods, services, or other non-cash consideration.
-
Customers sometimes contribute goods or services, such

as equipment or labor,
Companies generally recognize revenue on the basis of
the fair value of what is received.
Consideration Paid or Payable to Customers

May include discounts, volume rebates, coupons, free
products.
In general, these elements reduce the consideration
received and the revenue to be recognized.
24
In this example, step 3 is a critical one, especially if we

look at service(C).
The transaction price is the amount of consideration to
which B expects to be entitled in exchange for
transferring the service to X.
when establishing the amount of consideration, B will
have to consider the risk and magnitude of revenue
reversal that the premium reimbursements climate may
require a higher or lower degree of judgment and
complexity ( e.g. forecasts of the amount of premium
cancellations could also mean estimating customers
behavior) and
different estimation methods (i.e. the expected value or
the most likely amount). Based on this estimate, the
revenue will be recognized only up to the constrained
amount and there will be a net contract asset or liability
depending on the balance of performance under the
contract.
Allocating Transaction Price to

separate performance
obligations Step 4
Where a contract has multiple performance

obligations, an entity will allocate the transaction
price to the performance obligations in the
contract by reference to their relative standalone
selling prices.
If a standalone selling price is not directly
observable, the entity will need to estimate it by
various methods including:
26
Allocating Transaction Price to

separate performance
obligations Step 4
27
Recognize Revenue when (or

as) the entity Satisfies a
Performance ObligationStep 5
Under step 4, Once the transaction price is

determined, it will be allocated to the
performance obligations in the contract based on
their stand alone selling prices.
Services c
Service b and c
28

A company satisfies its performance obligation when the

customer obtains control of the goods or services.
Control of an asset is defined as the ability to direct the
use of and obtain substantially all of the remaining
benefits from the asset.
Companies satisfy performance obligation either
at a point in time or
over a period of time.
29

B will recognize revenue when or as it provides the

services to X. in this example, service (a) is
satisfied at a point in time because X benefits from
the service only when a cline signs a new contract
i.e. X benefits from Bs performance only when
the performance obligation is satisfied at a point in
time because X benefits from the service only
when the performance obligation is satisfied.
However, services (b) and (c) are satisfied over
time, because X simultaneously receives and
consumes the benefits of the services that B
provides to its existing customers.
30
OTHER REVENUE RECOGNITION

ISSUES
Right of return
Repurchase agreements
Warranties
Consignments
Etc
31
RIGHT OF RETURN
Example: Venden Company sells 100 products for Birr

100 each to Amaya Inc. for cash. Venden allows
Amaya to return any unused product within 30 days
and receive a full refund. The cost of each product is
Birr 60. To determine the transaction price, Venden
decides that the approach that is most predictive of
the amount of consideration to which it will be entitled
is the most likely amount. Using the most likely
amount, Venden estimates that:
Three products will be returned.

2.
The costs of recovering the products will be immaterial.
Question:
should
Venden
record
this sale?
3.
TheHow
returned
products
are
expected
to be resold at a profit.
1.
32
RIGHT OF RETURN
Question: How should Venden record this sale?
Venden records the sale as follows with the expectation that three products
will be returned:
Cash
10,000
Sales Revenue [Birr 9,700 x (Birr100 x 97)]
9,700
Refund Liability (Birr 100 x 3)
300
Venden records the cost of goods sold with the following entry.
Cost of Goods Sold
Estimated Inventory Returns (Birr 60 x 3)
Inventory
5,820
180
6,000
33
RIGHT OF RETURN
Question: How should Venden record this sale?
When a return occurs, Venden records the following entries.
Refund Liability (2 x Birr100)
200
Accounts Payable
Returned Inventory (2 x Birr 60)
Estimated Inventory Returns
200
120
120
Companies record the returned asset in a separate account from inventory

to provide transparency.
34
Repurchase Agreements
Transfer control of (sell) an asset to a customer but

have an obligation or right to repurchase.
If obligation or right to repurchase is for an amount

greater than or equal to selling price, then transaction
is a financing transaction.
35
REPURCHASE AGREEMENT
Example: Morgan Inc., an equipment dealer, sells equipment on January 1,
2015, to Lane Company for Birr 100,000. It agrees to repurchase this
equipment on December 31, 2016, for a price of Birr 121,000.
Question: How should Morgan Inc. record this transaction?

Assuming an interest rate of 10 percent is imputed from the agreement,
Morgan makes the following entry to record the financing on January 1, 2015.
Cash
Liability to Lane Company
100,000
100,000
36
Question: How should Morgan Inc. record this transaction?
Morgan Inc. records interest on December 31, 2016, as follows.
Interest Expense
10,000
Liability to Lane Company (Birr100,000 x 10%)
10,000
Morgan Inc. records interest and retirement of its liability to Lane Company
on December 31, 2016, as follows.
Interest Expense
11,000
Liability to Lane Company (Birr 110,000 x 10%)

Liability to Lane Company
11,000
121,000
Cash (Birr 100,000 + Birr 10,000 + Birr 11,000)
121,000
37
Consignments
38
Consignments
39
Warranties
WARRANTIES
Facts: Maverick Company sold 1,000 Refrigerators during 2015 at a total
price of Birr 6,000,000, with a warranty guarantee that the product was free
of any defects. The cost of Refrigerators sold is Birr 4,000,000. The term of
the assurance warranty is two years, with an estimated cost of Birr 30,000.
In addition, Maverick sold extended warranties related to 400 Refrigerators
for 3 years beyond the 2-year period for Birr 2,000.
Question: What are the journal entries that Maverick Company should
make in 2015 related to the sale and the related warranties?
40
Warranties
Question: What are the journal entries that Maverick Company should
make in 2015 related to the sale and the related warranties?
To record the revenue and liabilities related to the warranties:
Cash (Birr 6,000,000 + Birr12,000)
Warranty Expense
6,012,000
30,000
Warranty Liability
30,000
Unearned Warranty Revenue
12,000
Sales Revenue
6,000,000
To reduce inventory and recognize cost of goods sold:

Cost of Goods Sold
Inventory
4,000,000
4,000,000
41
REVENUE RECOGNITION OVER TIME

Under certain circumstances companies recognize
revenue over time.
The most notable context in which revenue may be
recognized over time is long-term construction
contract accounting.
Long-term contracts frequently provide that seller
(builder) may bill purchaser at intervals.
Examples:
Development of military and commercial

aircraft
Space exploration hardware
42

A company recognizes revenue over time if it can reasonably
estimate its progress toward satisfaction of the performance
obligations.
Methods for measuring progress
Output methods
units-of- work-performed method (ratio of units of work
performed to date to estimated total unit of work in project)
Input methods
efforts-expended method (ratio of labor hours, machine
hours or material quantities used to the total units of that
measure of work required to complete the contract),
cost-to-cost method (ratio of actual contract costs incurred
during the reporting period to total estimated contract
costs).
43
Company recognizes revenues and gross profits

each period based upon the progress of the
constructionreferred to as the percentage-ofcompletion method.
Company recognizes revenues and gross profit

when the contract is completed, referred to as
the cost-recovery (zero-profit) method.
44

Percentage-of-Completion Method
Revenue to Recognized Cost-to-Cost Basis
45
PERCENTAGE-OF-COMPLETION METHOD
Illustration: Hardhat Construction Company has a contract to

construct a 4,500,000 bridge at an estimated cost of
4,000,000. The contract is to start in July 2015, and the bridge
is to be completed in October 2017. The following data pertain to
the construction period.
46
ILLUSTRATION 18A-4
47
ILLUSTRATION 18A-5
48
Illustration: Percentage-of-Completion Revenue, Costs, and

Gross Profit by Year
ILLUSTRATION 18A-6
49
PERCENTAGE-OFCOMPLETION
METHOD
50
Illustration: Content of Construction in Process Account

Percentage-of-Completion Method
51
Financial Statement PresentationPercentage-ofCompletion

Computation of Unbilled Contract Price at 12/31/15
52
Financial Statement PresentationPercentage-ofCompletion Method (2015)
53
Financial Statement PresentationPercentage-ofCompletion Method (2016)
54
LONG-TERM CONSTRUCTION CONTRACTS
Cost-Recovery (Zero-Profit) Method

This method recognizes revenue only to the extent of costs
incurred that are expected to be recoverable. Only after all costs
are incurred is gross profit recognized.
55
COST-RECOVERY (ZERO-PROFIT) METHOD
Illustration: Hardhat Construction would report the following

revenues and costs for 20152017.

Cost-Recovery Method
Revenue, Costs, and
Journal Entries

Revenue, Costs, and
Comparison of Gross
Profit Recognized under
Different Methods
LONG-TERM CONSTRUCTION CONTRACTS
Long-Term Contract Losses

1. Loss in Current Period on a Profitable Contract
Percentage-of-completion method only, the estimated

cost increase requires a current-period adjustment of
gross profit recognized in prior periods.
2. Loss on an Unprofitable Contract
Under both percentage-of-completion and costrecovery methods, the company must recognize in the
current period the entire expected contract loss.
LONG-TERM CONTRACT LOSSES
Illustration: Loss in Current Period

Casper Construction Co.
Prepare the journal entries to record revenue and expense for 2014, 2015, and
2016 assuming the estimated cost to complete at the end of 2015 was
$215,436.
Illustration: Loss on Unprofitable Contract

Casper Construction Co.
Prepare the journal entries for 2014, 2015, and 2016 assuming the estimated
cost to complete at the end of 2015 was $246,038 instead of $170,100.
$675,000 683,438 = (8,438) cumulative loss

For the Cost-Recovery method, companies would recognize the
following loss :
COSTS TO FULFILL THE CONTRACT
The incremental costs of obtaining a contract must be

recognized as an asset if the entity expects to recover those
costs.
Costs incurred to fulfill a contract are recognized as an asset if
and only if all of the following criteria are met:
the costs relate directly to a contract (or a specific anticipated

contract);
the costs generate or enhance resources of the entity that will

be used in satisfying performance obligations in the future;
and
the costs are expected to be recovered.

These include costs such as direct labor, direct materials, and
the allocation of overheads that relate directly to the contract.
The asset recognized in respect of the costs to obtain or fulfill a
contract is amortized on a systematic basis.
68
Example: A media company owns and operates radio stations. The

main revenue stream is advertising revenue. Contracts are signed
with various businesses for the sale of airtime.
The account executives obtain these contracts and are
compensated through a 5% commission on the total contract price
for each new contract signed. Executive X has obtained a new twoyear advertising contract with Company ABC. Total contract costs
related to this contract are as follows:
Legal fees (contract drafting (incurred on a no win, no fee basis))

Birr10,000
Commission (paid to the account executive)
Birr7,500
Meals and entertainment (incurred during the sales process) Birr1,750
Creative Directors time (salary allocation of Creative Director to develop
on-air ad) Birr 1,500
Actors (amounts paid to external actors to record the on-air ad) Birr 750
69
The legal fees and commission will be considered an incremental

cost of obtaining a contract because these costs were only
incurred as a result of obtaining the contract. Had the contract not
been obtained, these costs would not have been incurred.
If the legal fees had been incurred prior to obtaining the contract,
they would not be capitalized.
The meals and entertainment costs are not eligible to be
capitalized because they would have been incurred regardless of
whether the contract had been obtained.
The costs related to the Creative Directors time and the costs
associated with hiring actors are direct labor costs associated with
providing the advertising services and are considered to be costs
directly related to the contract and are not covered by any other
standard.
70
PRESENTATION AND
DISCLOSURE
Presentation
Contracts with customers will be presented in an entitys

statement of financial position as
a contract liability,
a contract asset, or a receivable, depending on the

relationship between the entitys performance and the
customers payment.
Any difference between the initial recognition of a receivable
and the corresponding amount of revenue recognized should
also be presented as an expense, for example, an impairment
loss.
71
PRESENTATION AND
DISCLOSURE
Disclosures
Companies disclose qualitative and quantitative information

about the following:
Contracts with customers.
Significant judgments.
Assets recognized from costs incurred to fulfill a contract.
Reconciliation of contract balances.
Remaining performance obligations.
Cost to obtain or fulfill contracts.
Other qualitative disclosures.
72
COMPARISON OF IFRS 15 AND
US GAAP
In May 2014, the IASB and FASB issued a converged

standard on revenue recognition entitled Revenue from
Contracts with Customers.
The boards achieved their goal of reaching the same
conclusions on all requirements for the accounting for
revenue from contracts with customers.
However, there are some minor differences in the standards:
collectability threshold;
interim disclosure requirements;
early application and effective date;
impairment loss reversal; and
non-public entity requirements

73

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IFRS 15

Understand revenue recognition issues

LIST OF APPLICABLE IFRS

THE OBJECTIVE OF IFRS 15

The objective of IFRS 15:

THE SCOPE OF IFRS 15

IFRS 15 Revenue from Contracts with Customers applies to

leases IFRS 16;

THE SCOPE OF IFRS 15

IFRS 15 applies to various revenues generated by

Revenue is measured as the fair value of the

Amounts received on behalf of other parties (e.g.

The primary issue in accounting for revenue is

The Five-step Model

An entity recognizes revenue in accordance with

The Five-step Model Framework

Identify Contract with

between two or more parties that

creates enforceable rights or obligations.

be written, oral, or implied from customary

applies the revenue guidance to a

contract according to the following criteria:

Contract with Customers

A contract with a customer will be within the scope of

Contract with CustomersStep 1

Contract with Customers

cannot be recognized until a contract

obtains rights to receive consideration

and performance obligations gives rise to an

Example: Bank B sells to its customers, through its

Acquisition of new clients in exchange for a fixed of Birr 100

Under step 1 of the model, Bank B determines

A performance obligation is a contract to provide a

a good or service (or bundle of goods or services) that is

A performance obligation to transfer goods and services is

Identify Performance Obligations

Revenue Recognition Situations

Under step 2, assume that B concludes that there

of consideration that company expects

a contract is often easily determined because

contracts, companies must consider:

these criteria are not met, revenue recognition is

Most likely outcome, if management believes they will meet the

Time Value of Money

Fair value determined either by measuring the

Customers sometimes contribute goods or services, such

Consideration Paid or Payable to Customers

In this example, step 3 is a critical one, especially if we

Allocating Transaction Price to

Where a contract has multiple performance

Allocating Transaction Price to

Recognize Revenue when (or

Under step 4, Once the transaction price is

Recognize Revenue when (or

A company satisfies its performance obligation when the

Recognize Revenue when (or

B will recognize revenue when or as it provides the

OTHER REVENUE RECOGNITION

Example: Venden Company sells 100 products for Birr

Three products will be returned.

Sales Revenue [Birr 9,700 x (Birr100 x 97)]

Refund Liability (Birr 100 x 3)

Companies record the returned asset in a separate account from inventory