CHAPTER – 6

IFRS 15

IFRS 15 Revenue from Contracts with Customers

Principles of Revenue Recognition
The core principle of IFRS 15 is that an entity recognizes revenue from the transfer of
goods/ services to a customer in an amount that reflects the consideration that the
entity expects to be entitled to in exchange for the goods/services.

Identify Contracts with Customers

Contract – an agreement between two or more parties that creates enforceable rights
and obligations.
Customer – a party that has contracted with an entity to obtain goods or services that
are an output of the entity's ordinary activities in exchange for consideration.

The revenue recognition principles of IFRS 15 apply only when a contract meets all of
the following criteria:
● The parties to the contract have approved the contract (in writing, orally or in
accordance with other customary business practices).
● The entity can identify each party's rights regarding the goods/services in the
contract.
● The payment terms can be identified.
● The contract has commercial substance (i.e. The risk, timing or amount of
future cash flows is expected to change as a result of the contract); and
● It is probable that the entity will collect the consideration due under the
contract.
Identify Performance Obligations
Performance obligation – a promise in a contract with a customer to transfer to a
customer:
● A good/service (or bundle of goods/services) that is distinct; or
● A series of goods/services that are substantially the same and are transferred
in the same way.

If a promise to transfer a good/service is not distinct from other goods and services in
a contract, the goods/services are combined into a single performance obligation.
Factors that indicate that a promise to transfer a good/service is separately identifiable
include that the good/service:
● Is not integrated with other goods/services in the contract (i.e. It is not an input
to deliver a combined output).
● Does not significantly modify or customize another good/service in the contract;
or.
● Does not highly depend on or relate to other goods/services promised in the
contract.
A contract modification (also called a change order or contract variation) is a change
in the scope and/or price of a contract that is approved by the parties to the contract.

Whether a contract modification should be accounted for as a separate contract

depends on the circumstances:

As a separate contract As a termination and As part of the existing

if: creation of a new contract if: contract if:

• Additional promised • The remaining • Additional

goods/services are goods/services are distinct goods/services are
distinct: and from those transferred on not distinct.
or before the date of the
modification.
 • Increase in • The effect on the
consideration transaction price and
reflects the progress towards
additional completion is
goods/services and recognized as an
appropriate adjustment to
adjustment (e.g. for revenue at the date of
discounts) the modification.

Determine the Transaction Price

Transaction price – the amount of consideration to which an entity expects to be
entitled in exchange for transferring promised goods/services to a customer excluding
amounts collected for third parties (e.g. sales tax).

The effects of the following must be considered when determining the transaction
price:

• The timing of the payment. The transaction price is adjusted to reflect any
significant financing benefit to the seller or customer. (no adjustment is
necessary if the transfer of goods/services is within 12 months of the cash
payment).
• Any non-cash consideration. This is measured at fair value (or indirectly by
reference to the stand-alone selling prices of the goods/services promised to
the customer).
• Variable consideration (e.g. due to discounts). An estimated amount is included
in the transaction price only to the extent that it is highly probable that a
significant amount will not be reversed and.
• Consideration payable to the customer (e.g. credits or cash amounts). These
are treated as a reduction in the transaction price (unless provided in exchange
for goods/services received from the customer).
Allocate the Transaction Price
The transaction price is allocated to all separate performance obligations in proportion
to the stand-alone selling price of the goods/services.
Stand-alone selling price – the price at which an entity would sell a promised
good/service separately to a customer.

• The best evidence of stand-alone selling price is the observable price of a

good/service when it is sold separately.
• The stand-alone selling price should be estimated if it is not observable.
The allocation is made at the beginning of the contract and is not adjusted for
subsequent changes in the stand-alone selling prices of the goods/services.

Bundle discounts are allocated in proportion to stand-alone selling prices (unless there
is evidence that the discount relates only to certain performance obligations).
● The best evidence of stand-alone selling price is the observable price of a
good/service when it is sold separately.
● The stand-alone selling price should be estimated if it is not observable.
The allocation is made at the beginning of the contract and is not adjusted for
subsequent changes in the stand-alone selling prices of the goods/services.
Bundle discounts are allocated in proportion to stand-alone selling prices (unless there
is evidence that the discount relates only to certain performance obligations).

Recognize Revenue
Recognize revenue when (or as) a performance obligation is satisfied by transferring
a promised good/service (an asset) to the customer.
An asset is transferred when (or as) the customer gains control of the asset.
The entity must determine whether the performance obligation will be satisfied over
time or at a point in time.
It is satisfied over time if one of the following criteria is met:
● The customer simultaneously receives and consumes the benefits of the
goods/services while the obligation is performed.
 ● The entity's performance creates or enhances an asset that the customer
controls during that creation or enhancement; or
● The entity's performance does not create an asset that the entity has an
alternative use for, and the entity has an enforceable right to receive payment
for performance completed to date.
Revenue recognized over time is based on performance completed using either:
● An input method (e.g. Proportion of costs incurred); or
● An output method (e.g. Number of units produced).

Where the conditions for performance obligations to be satisfied over time are not met,
revenue is recognized at a point in time, that time being when control of a good or
service passes to the customer. Indicators that control has passed include:
● The entity has a present right to payment for the asset.
● The customer has legal title to the asset.
● The entity has transferred physical possession of the asset.
● The customer has the significant risks and rewards of ownership.
● The customer has accepted the asset.

Variable Consideration
Estimation
If the consideration promised in a contract includes a variable amount, the variable
consideration must be estimated.
Examples of variable consideration include:
● Volume discounts (see example 5).
● Incentives (e.g. For early completion)
● Penalties (e.g. For late completion).
● Customer referral bonuses;
● Rebates and refunds; and
● Price concessions.
One of two methods should be used to estimate the amount of variable consideration
(whichever method gives the best prediction):
1. Expected value (i.e. the sum of possible amounts weighted according to their
respective probabilities); or
2. Most likely amount (i.e. the single most likely amount of consideration).
The chosen method should be applied consistently throughout the contract.
The estimated variable consideration should be updated at the end of each reporting
period; any changes in estimate are reflected in the current period financial statements
(i.e. treated prospectively).

Constraints on Estimation
Variable consideration should be included in the transaction price only when it is
highly probable that there will be no reversal of the cumulative revenue recognized
when the uncertainty associated with the variable consideration is resolved.
Both the likelihood and magnitude of revenue reversal should be considered when
assessing this probability.

Factors that increase the likelihood or magnitude include:

● A high likelihood that the variable consideration will change due to factors that
cannot be influenced by the entity (e.g. market performance).
● A long period of uncertainty about the variable consideration before it is
expected to be resolved.
● Limited experience with similar types of contracts.
● A practice of offering a wide range of variable terms or a history of changing
variable terms in similar circumstances.
● A contract with a large number and broad range of possible consideration
amounts.
Allocation to Performance Obligations
Variable consideration may be attributable to:
● an entire contract; or
● a specific part of a contract (e.g. part of the performance obligations or part of
the distinct goods/services promised in a single performance obligation).

Contract Costs
Costs may be incurred to obtain a contract and to fulfil a contract. If certain criteria are
met these may be recognized as an asset.

Costs to Obtain a Contract

Non-incremental costs of obtaining a contract (e.g. a proportion of a sales manager’s
time) are recognized immediately in profit or loss unless they can be recharged to the
customer (whether or not the contract is won).
Incremental costs of obtaining a contract (e.g. sales commissions) are recognized as
an asset if expected to be recovered. The asset is subsequently amortized in a manner
that reflects the transfer of goods/services to the customer.

Costs to Fulfil a Contract

Costs to fulfil a contract are recognized:
● In accordance with a relevant IFRS accounting standard (e.g. IAS 16); or
● As an expense; or
● As an asset

Costs that are always recognized as an expense are:

● General and administrative costs.
● Abnormal costs.
● Costs relating to performance obligations that have been satisfied.
● Costs that cannot be distinguished as relating to satisfied or unsatisfied
performance obligations.
Costs are only recognized as an asset if they:
● Relate directly to a contract or anticipated contract; and
● Generate or enhance resources that the entity will use to satisfy performance
obligations in the future; and
● Are expected to be recovered.
Costs recognized as an asset are amortized over the period in which goods/services
are transferred to the customer.

Amounts Recognized in the Statement of Financial Position

Contract asset – an entity’s right to consideration in exchange for goods or services
that the entity has transferred to a customer when that right is conditioned on
something other than the passage of time (e.g. the entity’s future performance).
Contract liability – an entity’s obligation to transfer goods or services to a customer
for which the entity has received consideration (or the amount is due) from the
customer.
Where cash is received for a customer in advance or after the satisfaction of a
performance obligation, a revenue recognition transaction results in a balance in the
statement of financial position.
● If an entity receives consideration before transferring goods or services to a
customer, the balance is presented as a contract liability. IFRS 15 permits the
use of alternative terms, and this is commonly known as deferred income.
● If an entity transfers goods or services to a customer before receiving
consideration, the recognized balance is either a receivable or a contract asset
(again, alternative terms are permitted). The distinction between a receivable
and contract asset is whether the right to consideration is conditional. Where
conditional only on the passage of time, the balance is a receivable; otherwise,
it is a contract asset.
Specific Transactions
Warranties
Assurance-type (“standard”) warranty – a warranty that provides a customer with
assurance that the related product will function as the parties intended because it
meets agreed-upon considerations.
Service-type (“extended”) warranty – a warranty that provides a customer with a
service in addition to the assurance that the product meets agreed-upon
specifications.
When a customer has the option to purchase a separate warranty it is a distinct service
that is accounted for as a separate performance obligation. A portion of the transaction
price is allocated to the warranty.
If there is no option to purchase a warranty separately, it is accounted for in
accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets,
unless it is a service-type warranty (wholly or in part).
For a service-type warranty, the promised service is a performance obligation, and a
portion of the transaction price is allocated to the warranty.
A warranty including service-type and assurance-type warranties that cannot
reasonably be accounted for separately is accounted for as a single performance
obligation.

Customer Options for Additional Goods and Services

When a customer buys goods/services and is given an option to acquire additional
goods/services for free or at a discount (e.g. customer loyalty points or a discount
voucher), the option is a separate performance obligation if it provides a material right
to the customer that would not be received without entering into the contract.
The transaction price should be allocated between the current purchase and the
additional goods/services based on relative stand-alone selling price.

If the relative stand-alone selling price of the option is not directly observable, it should
be estimated, taking into account:
● Any discount the customer would receive without exercising the option; and
 ● The likelihood that the option will be exercised.
Revenue relating to the additional goods/services should be recognized when the
additional goods/services are provided, or the option expires.

Customers' Unexercised Rights ("Breakage")

A non-refundable prepayment (e.g. for hotel room and flight bookings) gives the
customer a right to receive a good/service in the future. However, customers may not
exercise their right. Unexercised rights are often referred to as breakage.
If the customer does not exercise all contractual rights, the breakage amount is
recognized as revenue unless there is a requirement to remit it to another party (e.g.
a government under unclaimed property laws).
● If entitlement to the breakage amount is expected, it is recognized as revenue
in proportion to the pattern of rights recognized by the customer.
● If entitlement is not expected, the breakage amount is recognized as revenue
when the likelihood that the exercise of the customers' rights becomes remote.

Non-refundable Upfront Fees

A non-refundable "upfront" fee (at contract inception) that relates to a transfer of a
promised good/service should be evaluated to determine whether to account for the
good/service as a separate performance obligation.
If it is an advance payment for future goods/services, it should be recognized as
revenue when the future goods/services are provided.

Licensing
License – a permission that establishes a customer's rights to the intellectual property
(IP) of an entity. Licenses of IP include:
● Software and technology
● Media and entertainment
● Franchises
● Patents, copyrights and trademarks.
If the promise to grant a license is distinct from any other goods/services promised in
the contract, it is a separate performance obligation. Whether the separate
performance obligation is satisfied at a point in time or over time depends on the right
conferred:
● Right to access – provision of access to IP as it exists throughout the license
period; or
● Right to use – transfer of a right to use IP as it exists at the point in time in
which the license is granted.

A license gives a customer the right to access the entity's IP if it meets all of the
following criteria:

• The contract requires or the customer (licensee) expects that the licensor will
undertake activities that will significantly affect the IP.
• The customer is exposed to the positive or negative effects of these activities.
• The activities do not result in the transfer of a good/service to the customer.
A license to access a licensor's IP is accounted for as a performance obligation
satisfied over time.

Sales with a Right of Return

A customer can return a product for various reasons and receive any combination of:
● A full or partial refund;
● A credit note;
● Another product in exchange.

The selling entity should recognize:

● An asset for the amount received/receivable and corresponding entries:
● To revenue (for items not expected to be returned); and
● A refund liability (for items expected to be returned); and
● An asset for its right to recover products from customers (i.e. returns) and a
corresponding adjustment to cost of sales. This is initially measured at the
 former carrying amount of the product less any expected costs to recover the
goods.
The measurement of the refund liability should be updated at each period end and
similar adjustment made to revenue; the measurement of the right to returns should
also be updated with corresponding adjustment to cost of sales.

Principal and Agent Transactions

In a sales transaction an entity may be:
● The principal, if they control the goods or services prior to transfer to the
customer; or
● An agent, if they arrange for goods or services to be provided to a customer by
another party.
Where an entity is the principal, it recognizes revenue when goods or services are
transferred to the customer. Revenue is measured as the gross amount of
consideration expected to be entitled and received from the customer.
Where the entity is an agent, it recognizes revenue when it has arranged for another
party to provide the goods or services. Revenue is measured at the fee or commission
that the agent expects to be entitled to.
Determining whether an entity is agent or principal requires an assessment of whether
that entity controls goods before they are transferred to the customer (for indicators of
control see section 4.1.6).

Further indicators that an entity is principal because it controls goods or services

before they are transferred to the customer include:
● The entity is primarily responsible for fulfilling the promise to provide the
specified goods or services.
● The entity has inventory risk before the good or service is transferred to a
customer.
● The entity has discretion in establishing the price for a specific good or service.
Consignment Arrangements
In a consignment arrangement a manufacturer enters into an arrangement with a retail
outlet to take goods and display them with a view to selling them to customers. This
arrangement is common in the motor industry. The retail outlet (or dealer) does not
control the goods while displaying them and therefore the manufacturer does not
recognize revenue when the goods are transferred.
Indicators that an arrangement is a consignment arrangement include:
● The product is controlled by the manufacturer until a specified event occurs
(e.g. Goods are sold onwards, or a specified period of time expires).
● The manufacturer can require the return of the product or transfer it to another
party.
● The retail outlet/dealer does not have an unconditional obligation to pay for the
product.