IFRS 15 – REVENUE FROM

CONTRACTS WITH CUSTOMERS

CA Manish C. Iyer and CA Himanshi Aroramanish.iyer@icai.in and cahimanshiarora@gmail.com

Core PrincipleRecognise Revenue to

depict transfer of promised goods or

services to customers

in an amount that

reflects considerati

on

to which entity

expects to be entitled

in exchange for those goods or services

Steps to achieve Core Principle

Identify contract with a customer

Identify separate performance obligations in contract

1

2

Determine transaction price3

Recognise revenue when entity satisfies a performance obligation

4

5

Allocate transaction price to separate performance obligations in

contract

Contract: Agreement between two or more parties that creates enforceable rights & obligations

Essentials of a Contract:- has commercial substance- has been approved by the parties (Written, Oral or Implied)

& commitment to perform obligations- each party’s right regarding goods/services can be identified - payment terms can be identified

Apply proposed revenue requirements to each contract unless specified criteria met for combination of contracts

Step 1: Identify Contract

Performance Obligation: Promise in a contract with a customer to transfer a good or service to customer

Customer: Party that has contracted with entity to obtain goods/services that are output of entity’s ordinary activities

- IFRS to apply only to contract when counterparty is Customer

- IFRS not to apply when counterparty might not be customer but rather a collaborator or partner that shares with entity, risks & benefits of developing a product to be marketed

Step 2: Identify separate performance obligations

Step 2: Identify separate performance obligations (contd.)Step 2: Identify separate performance obligations (contd.)

Entity promises to transfer more than one good or service

Check conditions for Non-Distinct:

- goods/services are highly interrelated & transferring them to customer requires that entity also provide a significant service of integrating goods/services into combined item(s) for which customer has contracted and

- bundle of goods/services is significantly modified or customised to fulfil contract

Yes

Combine with other promised goods/ services until a

distinct bundle is identified

No

Check conditions for Distinct:- sold separately on regular basis or- customer can benefit from good /service either

on its own or together with other resources readily available to him

No

Yes

Account as separate performance obligation

Step 3: Determine Transaction Price

Transaction price: amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer

excluding amounts collected on behalf of third parties

IAS 18 - At FV

AS 9 - May be at charges made to customer at goods supplied or services rendered

Variable consideration: Use expected value or most likely amount whichever can be predicted better

Time Value of Money: Adjust if contract has financing component that is significant to contract

(Exception: 1 year or less)

Step 3: Determine Transaction Price (contd.)

Non-cash consideration: At FV

If FV can’t be estimated reasonably, measure by reference to stand-alone selling price of goods /services

Consideration payable to customer: - Entity pays or expects to pay consideration- to customer or other parties that purchase goods/services from customer

and- customer can apply that amount against amount owed to entity

Reduce from Transaction Price unless payment is in exchange for distinct good/service

Ignore effects of customer credit risk

Step 4: Allocate Transaction Price

Allocate TP to each separate PO Determine stand-alone selling price at contract

inception of good/service underlying each separate PO for allocation purpose

If stand-alone selling price not observable: estimation

Allocation of subsequent changes in TP:- Amount allocated to a satisfied PO: Recognise as

Revenue or as Reduction of Revenue- in period of subsequent change

Step 5: Recognise Revenue

Satisfy Performance Obligation

by transferring a promised

good or service

Customer obtains

control of good or service

Recognise Revenue

Step 5: Recognise Revenue (Contd.)

Customer Obtains Control of Good or Service: Goods and services are assets, even if only momentarily,

when they are received & used (as in case of many services)Control of an asset:- ability to direct use of & obtain substantially all of the

remaining benefits from asset- ability to prevent other entities from directing use of

and obtaining benefits from an asset- benefits are potential cash flows that can be obtained

directly or indirectly in many ways

Step 5: Recognise Revenue (contd.)

Determine whether each Separate PO is satisfied:

Over Time

If either of following conditions is met:

(a) entity’s performance creates or enhances an asset that customer controls as asset is created or enhanced or

(b) entity’s performance does not create asset with an alternative use to entity & at least one of following criteria is met:

- customer simultaneously receives & consumes benefits of entity’s performance as it performs

- another entity would not need to substantially re-perform the work entity has completed to date if that other entity were to fulfil remaining obligation to customer or

- entity has right to payment for performance completed to date & it expects to fulfil contract as promised

Point in time

Entity to consider following indicators of transfer of control (in addition to requirements for control) to determine point in time:

- entity has a present right to payment for asset

- customer has legal title to asset

- entity has transferred physical possession of asset

- customer has significant risks and rewards of ownership of asset

- customer has accepted asset

Step 5: Recognise Revenue (contd.)

Alternative Use:

When evaluating whether asset has alternative use to entity: consider at contract inception effects of contractual and practical limitations on entity’s ability to readily direct the promised asset to another customer

For example, an asset would have an alternative use to entity if asset is largely interchangeable with other assets that entity could transfer to

customer without breaching contract & without incurring significant costs that otherwise would not have been incurred in

relation to that contract.

Conversely, asset would not have an alternative use if contract has substantive terms that preclude entity from directing asset to another

customer or if entity would incur significant costs (for example, costs to rework the asset) to

direct asset to another customer

Step 5: Recognise Revenue (contd.)

PO satisfied over time:- Recognise Revenue over time by consistently

applying method of measuring progress towards complete satisfaction

- Output or Input Method- Update measure of progress over time

PO satisfied at a point in time:

Recognise Revenue when entity satisfy a performance obligation & customer obtains control of promised good/service

THANK YOU

CA Manish C. Iyer and CA Himanshi Aroramanish.iyer@icai.in and cahimanshiarora@gmail.com