Revenue from Contracts with Customers
IFRS 15 sets the principles to apply when reporting about:
Issued May 2014 and will be effective from 1st January 2017.
The new revenue standard is the result of a joint project between the IASB and the FASB. While the result is a converged standard issued by each Board, there are some minor differences in certain areas.
The two Boards subsequently formed the Revenue Recognition Transition Resource Group (TRG) to identify and discuss implementation issues arising from the new standard.
IFRS 15 replaces the previous revenue Standards:
BRIEF COMPARISON BETWEEN IAS18/11 & IFRS 15
1. Separate models for:
a. Construction contracts
2. Focus on risk and rewards
3. Limited guidance on:
a. Multiple element arrangements
b. Variable consideration
1. Single model for performance obligations:
a. Satisfied overtime
b. Satisfied at a point in time
2. Focus on control
3. More guidance:
a. Separating elements, allocating the transaction price, variable consideration, licenses, options, repurchase arrangements…
NEED FOR CHANGE
– Significant diversity in revenue recognition practices.
– Limited guidance on many important topics, such as accounting for arrangements with multiple elements.
– Difficult to apply to complex transactions due to lack of basis for conclusions.
– New types of transaction emerges.
– Inadequate disclosure or information disclosed was often ‘boilerplate’ in nature or was presented in isolation and without explaining how the revenue recognized related to other information in the financial statements.
– IFRS 15 addresses those deficiencies by specifying a comprehensive and robust framework for the recognition, measurement and disclosure of revenue.
5 STEPS TO RECOGNIZE REVENUE UNDER IFRS15
The main aim of IFRS 15 is to recognize revenue in a way that shows the transfer of goods /services promised to customer in an amount reflecting the expected consideration in return for these goods and services.
5 STEP MODEL FOR REVENUE RECOGNITION
Revenue recognized to depict transfer of goods or services
Step 1-Identify the contract with the customer
Step 2-Identify the performance obligations in the contract
Step 3-Determine the transaction price
Step 4-Allocate the transaction price
Step 5-Recognise revenue when(or as) a performance obligation is satisfied.
STEP 1-IDENTIFY THE CONTRACT WITH CUSTOMER
A contract is an agreement between two or more parties that creates enforceable rights and obligations.
You need to apply IRS 15 to a contract that has the following attributes:
1.Parties to the contract has approved it and are committed to perform.
2.Each party’s right to the goods/services transferred are identified.
3.The payment terms are identified
4.The contract has a commercial substance and
5.it is probable that an entity will collect the consideration.
STEP 2:PERFORMANCE OBLIGATION
1. Performance obligation is any good or service that contract promises to transfer to customer.
It can be either
2. A single good or service, or their bundle that is distinct; or
3. A series of distinct goods or service that are substantially the same pattern of transfer.
STEP 3:TRANSACTION PRICE
1. Step three requires the entity to determine the transaction price, which is the amount of consideration that an entity expects to be entitled to in exchange for the promised goods or services.
2. The transaction price might include variable or contingent consideration.
STEP 4-ALLOCATION OF PRICE
1. Allocate transaction price to separate performance obligations based on relative standalone selling price.
2. Standalone selling price is the observable price of a good or service when the entity sells that good or service separately.
STEP 5:REVENUE RECOGNITION
1. A performance obligation is satisfied and revenue recognised when a promised good or service is transferred to a customer.
2. For example, the total revenue recognized for a cell phone contract would be allocated between the cell phone and the provision of service.
Both qualitative and qualitative information including:
– Dis aggregated information.
– Contract balances and a description of significant changes.
– Amount of revenue related to remaining performance obligations and an explanation of when revenue is expected to be recognized.
– Significant judgements and changes in judgements.
Telephonicasells mobile phones, selling them for ‘free’ when a customer signs up for a 12month contract. The contract cost the customer N45 per month.
Explain how revenue should be recognized in Telephonica Financial Statement.
Note: Vodaphone sells mobile phone without a monthly contract, selling the handset for N240. Call and data charges are N20 per month. Ignore discounting and time value of money.
1. Identify the contract
2. Identify the performance obligation
Sale of handset
Provision of calls and data services.
3. Determine the transaction price
4. Allocate transaction price to performance obligation.
Cost of contract agreement: 12*N45=N540
Calls and data=N240/480*540=N270
5. Revenue recognition
Handset will be recognized at that period
Calls and data will be recognized for 12months.