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Welcome students! Today, we will dive into IFRS 15, a key standard in revenue recognition that impacts companies' financial statements. It's important for transparent financial reporting.

IFRS 15 establishes a comprehensive framework for revenue recognition from contracts with customers. It follows five distinct steps which we'll explore in detail in this padlet.

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Step 1: Identify the Contract(s) with a Customer

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Step 1: Identify the Contract(s) with a Customer

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The first step in IFRS 15 is to identify the contract with the customer. Contracts can be written, verbal, or implied and must be legally enforceable.

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1. All parties approved the contract

2. Payment terms can be identified

3. Probable of cash flow

4. Right of each party can be identified

5. Contract should contain the commercial substance (Risk and Rewards)

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Not meet criteria of contract [AP2RS], recognized as Deferred Income or Contract Asset.

Need to re-access the criteria from time to time.

If criteria cannot met until the end of contract, entity allowed to recognize as revenue when:

a. Received substantially (90%) all the consideration which is not refundable

b. The seller has terminated the contract

JE:

DR Deferred income/Contract Asset

CR Revenue

(To recognise revenue without significant reversal occur)

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Criteria to combine a contract

Contract is negotiated as a Package with a single commercial objective

The amount of consideration to be paid in ONE contract is Dependant on the price or performance of another contract

The goods or services promised in the contract are a Single Performance Obligation

Criteria to split the contract

When the Stand Alone Selling Price is available:

Contract are to be separate since the contract can be DISTINCT from the original contract

When the Stand Alone Selling Price is NOT available:

DISTINCT - Original contract shall lapse/cancelled/terminated and a new contract is created to include the modification

NOT DISTINCT - Adjustment are to be made to the original contract. No new contract is created.

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Criteria of contract modifications

Contract modification exists when the parties to a contract approve a modification that either creates new or changes existing enforceable rights and obligations of the parties to the contract.

Contract modifications are accounted for as a separate contract, if and only if:

contract scope changes due to the addition of distinct goods or services,

change in contract price reflects the standalone selling price of the distinct good or service

Contract modifications that are not accounted for as a separate contract are accounted for as either:

1. Replacement of the original contract with a new contract (if the remaining goods or services under the original contract are distinct from those already transferred to the customer)

2. Continuation of the original contract (if the remaining goods or services under the original contract are not distinct from those already transferred to the customer, and the performance obligation is partially satisfied at modification date).

3. Mixture of (i) and (ii) (if elements of both exist).

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Step 2: Identify Performance Obligations

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Step 2: Identify Performance Obligations

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Performance obligations are the promises made to a customer. These are distinct goods or services to be transferred to the customer. Identifying these is crucial for accurate revenue recognition.

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Distinct:

1. Can benefit on its own or together

2. Separately identifiable from other promise

Non-Distinct:

1. Cannot function without attached to another goods

2. Not seperable

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Distinct (Separable):

1. Software and installation services

Customer can enjoy the software products and installation services individually.

There is benefit from enjoying the software on its own and enjoying the installation services on its own as well.

E.g. Abu can buy the software and install it by himself or ask Acer Company to install for him.

Hence, recognise as two performance obligation.

Non-Distinct (Cannot separate):

1. Construction contract

Consumers cannot enjoy the design, the construction and installation separately because they are highly interrelated (connected with each other).

Basically, the design and construction is shaping how the installation (the outcome).

Hence, recognise as single performance obligation.

Summary:

1. Buy an iphone with 1 year warranty - A single performance obligation

2. Buy an iphone with 1 year warranty + Add on additional warranty - 1 year - Two performance obligation.

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The transaction price is the amount of consideration a company expects to receive in exchange for transferring promised goods or services. This step can involve significant judgment and estimates.

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The entity need to adjust the amount of consideration received to reflect the time value of money

which means it need to be discounted to recognize finance income

(1/1+r^n)

The SFC is exist when the payment term is made more than 1 year, which should reflect time value of money

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Types of variable consideration:

an incentive for early completion

performance bonuses

penalties for late completion

Contingent consideration happens when:

the amount of consideration would be variable

product was sold with a right of return

Recognition criteria:

highly probable that the entity is able to receive the variable consideration

significant reversal will not occur

Example:

1. Discount

2. Premium

3. Voucher

4. Loyalty Points

5. Royalty

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ROT is that the consideration received must be measured at fair value.

Example:

1. Shares

2. Crypto-currency

3. Intellectual property

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It includes any amounts paid or expected to be paid to the customer.

It can be in the form of cash, credits or other items such as coupons, vouchers, discounts, rebates, refunds.

It is treated as a reduction of the revenue.

Example:

1. Rebates

2. Cashback

3. Refund

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The next step is to allocate the transaction price to the performance obligations identified. This allocation is based on the relative standalone selling prices.

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The price is allocated proportionately to the seperate performance obligation based on the stand-alone selling price.

PO 1: transfer of Car with a stand alone selling price of $5,000

PO 2: 2 years service with a stand alone selling price $15 per month.

The transaction price is $4,500

1) first we need to find the % of control (SASP of each Po/total SASP * 100)

Car = 93% ($5,000/$5,360*100)

2 years service = 7% ($360/$5360*100)

revenue :

car = $4,185 (93% x $4,500)

2 years services = $315 (7% x $4,500)

*the revenue for the car will be recognise at the point in time while the revenue from the service will be recognise over time (2 years)

Dr cash $4,500

Cr revenue $4,342.5

Cr Deferred income $157.50

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Revenue is recognized when (or as) the performance obligation is satisfied. This could happen over time or at a point in time depending on the nature of the obligation.

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• Meet any of condition:

1. Simultaneously receive & consume benefit

2. Customer get some control as WIP

3. Specific asset + has enforceable right to payment (no refund)

• Recognised by % progress completion:

Output method: Surveyor will determine

Input method : Internal info (Compare actual vs budget cost)

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Entity has satisfies PO, customer obtains control of promised asset (ie Transfer of control have been achieved)

The asset is considered transferred when the customer obtains the control of the asset which means the customer has ability to direct use of the asset and received substantially all the remaining benefits of the asset.

Example 1:

At the end of year 3, we can recognize it.

Transfer of control (Indicator):

1) Rights to payment

2) Legal title

3) Physical possession

4) Transfer Risks and Rewards

5) Customer accepted the asset

Example 2 (Substantial economic benefits of goods):

Mr Hazmizal want to sent the goods to customer but the customer said to hold it firs. Hence, we should put the goods at a designated area waiting for approval from customer to send the goods at point in time.

Control has been transferred

However, if the goods is being kept to the inventory (not separated from other goods), we might give to other customer first.

Control has not been transferred.