REVENUE RECOGNITION

Dr. Barry Epstein

 About The Author
Barry Jay Epstein, Ph.D., CPA, CFF has practiced as a technical and litigation consultant,
expert witness, writer and lecturer on US GAAP, IFRS, and auditing standards for over forty
years. He is a principal in the Chicago and Detroit (USA) based firm, Cendrowski Corporate
Advisors LLC, and holds degrees from DePaul University (B.S.C., 1967), University of Chicago
(M.B.A., 1969), and University of Pittsburgh (Ph.D., 1979), as well as the CPA and CFF
(certified in financial forensics) designations.

He was a founding and the lead author of the widely-used Wiley GAAP and Wiley IFRS
through 2010, and author of Thomson Reuters Handbook of Accounting and Auditing,
through 2013, and has authored scores of professional articles for major publications.

As a speaker, Dr. Epstein has appeared on over one hundred programs over his career,
including previous lectures delivered in Singapore and Indonesia, as well as in the Middle
East, Canada and the U.S. As an accounting expert, he has testified or assisted in 150
litigation matters, including white-collar (fraud) criminal matters and contractual disputes,
and has assisted the US Securities and Exchange Commission and Commodity Futures
Trading Commission some twenty times. He advised the US Department of Justice on
both the Enron and WorldCom fraud cases, and is currently engaged on several major
cases, including the Parmalat matter, which may be the largest accounting fraud to date,
amounting to US$18 billion.

Barry Jay Epstein, Ph.D., CPA, CFF

Cendrowski Corporate Advisors LLC
Chicago, Illinois USA
bje@cendsel.com
 About the Institute of Singapore Chartered Accountants
The Institute of Singapore Chartered Accountants (ISCA) is the national accountancy body
of Singapore. ISCAs vision is to be a globally recognised professional accountancy body,
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the Designated Entity to confer the Chartered Accountant of Singapore - CA (Singapore) -
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It aims to raise the international profile of the Singapore QP, a post-university professional
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for professional accountants seeking to achieve the CA (Singapore) designation, a prestigious
title that is expected to attain global recognition and portability.

There are about 28,000 ISCA members making their stride in businesses across industries in
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For more information, please visit www.isca.org.sg.

CONTENTS

Background And Introduction 4

Scope of Current Rules Under FRS 18 And Associated Literature 5

Definitions Of Key Terms (In Accordance With FRS 18) 5

Measurement Of Revenue Under FRS 18 5

Identification Of A Transaction 6

Sales Of Goods 6

Renderings Of Services 7

Interest, Royalties, And Dividends 8

Examples Of Specific Revenue Recognition Practices 8

Disclosures 9

IFRS 15: Culmination Of The Joint Iasb-Fasb Revenue Recognition

Project 13
REVENUE RECOGNITION
I. BACKGROUND AND INTRODUCTION

A. The IASB Framework for the Preparation and Presentation of Financial Statements defines income as
both revenue and gains.

B. Revenue can be distinguished from gains.

1. Revenue arises from an entitys ordinary activities.

2. Gains include such non-routine items as the profit on disposal of non-current assets, or on
retranslating balances in foreign currencies, or fair value adjustments to financial and non-financial
assets.

C. Current Singapore FRS 18 prescribes the requirements for the recognition of revenue in an entitys financial
statements. Revenue can take various forms, such as sales of goods, provision of services, royalty fees,
franchise fees, management fees, dividends, interest, subscriptions, and so on.

D. The principal issue in the recognition of revenue is its timing i.e., at what point is it probable that future
economic benefit will flow to the entity and can the benefit be measured reliably?

E. Some of the recent most highly publicized financial scandals that caused turmoil in the world economy
were allegedly the result of financial manipulations resulting from recognizing revenue based on
inappropriate accounting policies. Such financial shenanigans resulting from the use of aggressive revenue
recognition policies have drawn the attention of the accounting world to the importance of accounting for
revenue.

F. It is absolutely critical that the point of recognition of revenue is properly determined.

1. For instance, in case of sale of goods, is revenue to be recognized on receipt of the customer order, on
completion of production, on the date of shipment, or on delivery of goods to the customer, each of
which could be reasonably argued for?

2. The decision as to when and how revenue should be recognized has a significant impact on the
determination of net income for the year (i.e., the bottom line), and thus it is a very critical
element in the entire process of the preparation of the financial statements.

G. Since revenue is a crucial number to users of financial statements in assessing a companys performance
and prospects, the IASB (and the FASB) recently completed a decade-long project to clarify the principles
for recognizing revenue from contracts with customers.

1. The new standard, once implemented, will apply to all contracts with customers except for leases,
financial instruments and insurance contracts, and will have a major impact on financial reporting, as it
will fundamentally change revenue recognition practices.

2. Following this summary of FRS 18 (the current Singapore standard) is a discussion of IFRS 15 (issued
May 2014), Revenue from Contracts with Customers, which presumably will be adopted by Singapore
after deliberation by the authorities.

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 REVENUE RECOGNITION

II. SCOPE OF CURRENT RULES UNDER FRS 18 AND ASSOCIATED LITERATURE

A. The requirements of FRS 18 are to be applied in accounting for revenue arising from:

1. Sale of goods;

2. Rendering of services; and

3. The use by others of the entitys assets thus yielding interest, royalties, or dividends.

B. The standard does not deal with revenue arising from the following items, as they are dealt with by other
standards:

1. Leases (FRS 17)

2. Dividends from investments accounted under the equity method (FRS 28)

3. Insurance contracts (FRS 104)

4. Changes in fair value of financial instruments or their disposal (FRS 39)

5. Changes in the values of current assets (various)

6. Initial recognition and changes in value of biological assets (FRS 41)

7. Initial recognition of agricultural produce (FRS 41)

8. Extraction of minerals (FRS 106)

III. DEFINITIONS OF KEY TERMS (in accordance with FRS 18)

Fair value. The amount for which an asset can be exchanged, or a liability settled, between
knowledgeable, willing parties in an arms-length transaction.
Revenue. The gross inflow of economic benefits during a period arising in the course of ordinary
activities when those inflows result in increases in equity, other than increases relating to contributions
from equity participants.

IV. MEASUREMENT OF REVENUE UNDER FRS 18

A. Revenue is to be measured at the fair value of the consideration received or receivable. In most cases, the
value is easily determined by the sales contract after taking into account trade discounts or rebates.

B. The exchange of goods or services needs to be examined differently. If goods or services of similar nature
and value are exchanged, essentially no economic transaction has occurred and no revenue is recognized.

C. If, however, goods or services of a dissimilar nature are exchanged, a revenue transaction is recognized at
the fair value of the goods or services received. If such fair value is not readily determinable, revenue is
recognized at the fair value of the goods given up or services provided. In both cases, revenue is adjusted
for any cash or cash equivalents transferred.

D. When the cash or cash equivalents is deferred, such as in a financing sale with zero or below market
interest rate, the fair value of the consideration may be less than the nominal amount of cash received

5
 or receivable. In these cases, the difference between the fair value and the nominal amount of the
consideration is recognized as interest revenue in accordance with FRS 39.

E. INT FRS 31 deals with barter transactions involving advertising services. The Interpretation applies to the
measurement of fair value of revenue from these barter transactions. It states the circumstances under
which a seller can reliably measure the fair value of such revenue. The fair value of revenue from this type
of barter transactions can be reliably measured only by reference to non-barter transactions that:

1. Involve advertising similar to the advertising in the barter transaction;

2. Occur frequently;

3. Represent a predominant number of transactions and amount when compared to all transactions to
provide advertising that is similar to advertising in barter transactions;

4. Involve cash and/or another form of consideration (e.g., marketable securities) that has a reliably
measurable fair value; and

5. Do not involve the same counter-party as in the barter transaction.

V. IDENTIFICATION OF A TRANSACTION

Usually when applying the recognition criteria of the standard, one applies it to each transaction. However,
occasions arise with more complex transactions when the criteria need to be applied to components of a
transaction.

VI. SALES OF GOODS

A. The standard prescribes that revenue from the sale of goods should be recognized when all of the
following criteria are satisfied:

1. The significant risks and rewards of ownership of the goods have been transferred to the buyer;

2. The seller retains neither continuing managerial involvement to the degree usually associated with
ownership nor effective control over the goods sold;

3. The amount of the revenue can be reliably measured;

4. It is probable that economic benefits associated with the transaction will flow to the seller; and

5. The costs incurred or to be incurred in respect of the transaction can be measured reliably.

B. The transfer of significant risks and rewards is essential.

1. For example, if goods are sold but the receivable will be collected only if the buyer is able to sell, then
significant risks of ownership are retained by the original seller and no sale is recognized.

C. The point of time at which significant risks and rewards of ownership transfer to the buyer requires careful
consideration involving examining the circumstances surrounding the transaction.

1. Generally, the transfer of significant risks and rewards of ownership takes place when title passes to
the buyer or the buyer receives possession of the goods.

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 REVENUE RECOGNITION

2. However, in some circumstances, the transfer of risks and rewards of ownership does not coincide
with transfer of legal title or the passing of possession, as when a building that is still under
construction is sold.

D. Furthermore, the costs incurred in respect of the transaction must be reliably measured.

E. Very often, contracts for sale of goods can be subject to conditions, such as:

1. Subject to inspection and/or installation. If installation is a quick and simple process (i.e., it forms an
insignificant part of the sales contract), revenue can be recognized on delivery.

2. On approval with a right of return. The contract is recognized when goods are accepted or period of
right of return has lapsed.

3. On consignment. The contract is recognized only when the consignee has sold the goods.

4. Cash on delivery. The contract is recognized when cash is received.

5. Layaway when goods are delivered on final instalment. If history shows that full payment is
normally received, revenue could be recognized when a significant deposit is received and the goods
are on hand and ready for delivery. Otherwise revenue would be recognized only on delivery.

F. In other words, if the seller retains significant risks of ownership, the transaction is not regarded as a sale
for the purposes of recognizing revenue. A seller may retain significant risks of ownership, which may
be manifested in numerous ways. The next case study shows circumstances wherein the seller retains
significant risks of ownership.

G. A transaction is not deemed a sale until it is probable that the future economic benefits will flow to the
entity.

1. In some of the cases, the receipt of consideration may be doubtful. Until the uncertainty is removed,
the sale should not be recognized.

2. When the collection of an amount already recorded by the seller as revenue is doubtful, the
uncollectible amount or the doubtful amount (essentially the bad debt provision) should be charged to
expense instead of an adjustment to revenue.

H. Revenues recognized and the costs (expenses) associated with them should be matched and recognized
simultaneouslythis is essential because if costs cannot be measured reliably, then the related revenue
should not be recognized. In such a situation, any consideration received from such transactions is booked
as a liability.

VII. RENDERINGS OF SERVICES

A. The rendering of services typically involves the entity performing a contractually agreed assignment over a
period of time, whether during a single period or over more than one period. Contracts for the rendering
of services that are related to construction projects are not covered under this standard but are addressed
in FRS 11.

B. Revenue from the rendering of services can be recognized by reference to the stage of completion if the
final outcome can be reliably estimated. This would be the case if all of the following four conditions are
satisfied:

7
 1. The amount of revenue can be measured reliably;

2. It is probable that economic benefits associated with the transaction will flow to the seller;

3. The stage of completion can be measured reliably; and

4. The costs incurred and the cost to complete can be measured reliably.

C. This method of revenue recognition mirrors that prescribed by FRS 11 for construction contracts. The
requirements laid down in that standard are just as applicable for the rendering of services, such as robust
budgeting and costing systems. The methodologies for estimating the proportion of service rendered, such
as surveys, engineering inspections, or the ratio of costs incurred to estimated total costs are also similar.

D. In certain cases, services are performed by an indeterminable number of acts over a specified period of
time.

1. Revenue in such a case should be recognized on a straight-line basis unless it is possible to estimate
the stage of completion by some other method more reliably.

2. Similarly, when in a series of acts to be performed in rendering a service, a specific act is much more
significant than other acts, the recognition is postponed until the significant act is performed.

E. If the outcome cannot be reliably estimated, then revenue is recognized following a cost recovery
approach, i.e., only to the extent that costs are recoverable. Similarly, if it is not probable that the costs
incurred are recoverable, revenue is not recognized and the costs incurred are expensed.

VIII. INTEREST, ROYALTIES, AND DIVIDENDS

A. Revenue arising from the use by others of an entitys asset that yield interest, dividends, or royalties are
recognized in this way:

1. Interest is recognized using the effective interest method. (FRS 39)

2. Royalties are recognized on an accruals basis in accordance with the royalty agreement.

3. Dividends are recognized when the shareholder has a right to receive payment.

B. The cost of acquisition of debt instruments and shares needs to be examined carefully. Very often the cost
includes accrued interest or shares may be cum div or with dividends.

1. In this case, the subsequent receipt of interest or dividends will need to be allocated against the cost
of the instrument rather than recognized as revenue.

2. Similarly, receipt of dividends out of pre-acquisition reserves of subsidiary or associate would be

treated as a reduction in the cost of the investment and not as revenue.

3. Only post-acquisition interest or dividends are recognized as revenue.

IX. EXAMPLES OF SPECIFIC REVENUE RECOGNITION PRACTICES

A. Installation fees are recognized over the period of installation by reference to the stage of completion.

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 REVENUE RECOGNITION

B. Subscriptions usually are recognized on a straight-line basis over the subscription period.

C. Insurance agency commissions would be recognized on commencement of the insurance unless the agent
is likely to have to provide further services, in which case a portion of the revenue would be deferred to
cover the cost of providing that service.

D. Fees from development of customized software are recognized by reference to stage of completion,
including post-delivery support.

E. Event admission fees are recognized when the event occurs. If subscription to a number of events is sold,
the fee is allocated to each event.

F. Tuition fees would be recognized over the period in which tuition is provided.

G. Financial service fees depend on the services that are being rendered. Very often they are treated as an
adjustment to the effective interest rate on the financial instrument that is being created. This would be
the case for origination and commitment fees. Investment management fees would be recognized over
the period of management.

X. DISCLOSURES

A. The required disclosures under FRS 18 address:

1. The entitys revenue recognition accounting policies, including the methods adopted under the stage
of completion approach for the rendering of services;

2. The amount of revenue recognized from each of the categories below:

a. Sale of goods;

b. Rendering of services;

c. Interest;

d. Royalties; and

e. Dividends.

3. Revenue recognized from the exchanges of goods or services from within each of the above
categories.

B. Contingent assets or liabilities, such as costs of warranty, claims, penalties or possible losses, to the extent
applicable (FRS 37).

Revenue Recognition Examples Under Current IFRS (Singapore FRS 18)

Comprehensive Example of Financial Statement Disclosures

Novartis A.G.
Annual Report 2010

9
Critical accounting policies and estimates

Revenue

We recognize product sales when there is persuasive evidence that a sales arrangement exists, title and
risk and rewards for the products are transferred to the customer, the price is fixed and determinable, and
collectibility is reasonably assured. Where contracts contain customer acceptance provisions, typically with
government agencies, we recognize sales upon the satisfaction of acceptance criteria.

At the time of recognizing revenue, we also record estimates for a variety of sales deductions, including
rebate s, discounts, refunds, incentives and product returns. Sales deductions are reported as a reduction
of revenue.

Deductions from Revenues

As is typical in the pharmaceuticals industry, our gross sales are subject to various deductions that are
composed primarily of rebates and discounts to retail customers, government agencies, wholesalers,
health insurance companies and managed healthcare organizations. These deductions represent
estimates of the related obligations, requiring the use of judgment when estimating the effect of these
sales deductions on gross sales for a reporting period. These adjustments are deducted from gross
sales to arrive at net sales. The following summarizes the nature of some of these deductions and how
the deduction is estimated. The US market has the most complex arrangements related to revenue
deductions.

US-Specific Healthcare Plans and Program Rebates

The US Medicaid Drug Rebate Program is administered by State governments using State and Federal
funds to provide assistance to certain vulnerable and needy individuals and families. Calculating the
rebates to be paid involves interpreting relevant regulations, which are subject to challenge or change
in interpretative guidance by government authorities. Provisions for estimating Medicaid rebates are
calculated using a combination of historical experience, product and population growth, product price
increases and the mix of contracts and specific terms in the individual State agreements. These provisions
are adjusted based on established processes and experiences from re-filing data with individual States.

The US Federal Medicare program which funds healthcare benefits to individuals age 65 or older,
provides prescription drug benefits under Part D of the program. This benefit is provided through private
prescription drug plans. Provisions for estimating Medicare Part D rebates are calculated based on the
terms of individual plan agreements, product sales and population growth, product price increases and
the mix of contracts.

We offer rebates to key managed healthcare plans to sustain and increase market share for our
products. These rebate programs provide payors a rebate after they attain certain performance
parameters related to product purchases, formulary status or pre-established market share milestones
relative to competitors. These rebates are estimated based on the terms of individual agreements,
historical experience and projected product growth rates. We adjust provisions related to rebates
periodically to reflect actual experience.

Non-US-Specific Healthcare Plans and Program Rebates

In certain countries, other than the US, we provide rebates to governments and other entities. These
rebates are often mandated by government regulations or laws.

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 REVENUE RECOGNITION

In several countries we enter into innovative pay-for-performance arrangements with certain healthcare
providers, especially in the UK, Germany and Australia. Under these agreements, we may be required to
make refunds to the healthcare providers or to provide additional medicines free of charge if anticipated
treatment outcomes do not meet predefined targets. Potential refunds and the delivery of additional
medicines at no cost are estimated and recorded as a deduction of revenue at the time the related
revenues are recorded. Estimates are based on historical experience and clinical data. In cases where
historical experience and clinical data are not sufficient for a reliable estimation of the outcome, revenue
recognition would be deferred until such history would be available.

Non-Healthcare Plans and Program Rebates, Returns and Other Deductions

Charge-backs occur where our subsidiaries have arrangements with indirect customers to sell products
at prices that are lower than the price charged to wholesalers. A chargeback represents the difference
between the invoice price to the wholesaler and the indirect customers contract price. We account
for vendor charge-backs by reducing revenue by an amount equal to our estimate of charge-backs
attributable to a sale and they are generally settled within one to three months of incurring the liability.
Provisions for estimated charge-backs are calculated using a combination of factors such as historical
experience, product growth rates, payments, level of inventory in the distribution channel, the terms of
individual agreements and our estimate of claims processing time lag.

We offer rebates to group purchasing organizations and other direct and indirect customers to sustain
and increase market share for our products. Since rebates are contractually agreed upon, rebates are
estimated based on the terms of individual agreements, historical experience, and projected product
growth rates.

When we sell a product providing a customer the right to return, we record a provision for estimated
sales returns based on our sales returns policy and historical rates. Other factors considered include
product recalls, expected marketplace changes and the remaining shelf life of the product, and the
entry of generic products. In 2010, sales returns amounted to approximately 1% of gross product sales.
Especially in the Vaccines and Diagnostics Division, where there is often no Novartis-specific historical
return rate experience available, sales are only recorded based on evidence of product consumption or
when the right of return has expired.

We entered into distribution service agreements with major wholesalers, which provide a financial
disincentive for wholesalers to purchase product quantities exceeding current customer demand. Where
possible, we adjust shipping patterns for our products to maintain wholesalers inventories level consistent
with underlying patient demand.

We offer cash discounts to customers to encourage prompt payment. Cash discounts are accrued at the
time of invoicing and deducted from revenue.

Following a decrease in the price of a product, we generally grant customers a shelf stock adjustment
for a customers existing inventory for the involved product. Provisions for shelf stock adjustments, which
are primarily relevant within the Sandoz Division, are determined at the time of the price decline or at
the point of sale if a price decline can be reasonably estimated based on inventory levels of the relevant
product.

Other sales discounts, such as consumer coupons and co-pay discount cards, are offered in some
markets. These discounts are recorded at the time of sale, or when the coupon is issued, and are
estimated utilizing historical experience and the specific terms for each program. If a discount for a
probable future transaction is offered as part of a sales transaction then an appropriate portion of
revenue is deferred to cover this estimated obligation.

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 We adjust provisions for revenue deductions periodically to reflect actual experience. To evaluate
the adequacy of provision balances, we use internal and external estimates of the level of inventory
in the distribution channel, actual claims data received and the lag time for processing rebate claims.
Management also estimates the level of inventory of the relevant product held by retailers and in transit.
External data sources include reports of wholesalers and third-party market data purchased by Novartis.

Notes to the Novartis Group consolidated financial statements

1. Accounting policies.

The Novartis Group (Group or Novartis) consolidated financial statements comply with the International
Financial Reporting Standards (IFRS) as published by the International Accounting Standards Board (IASB).
They are prepared in accordance with the historical cost convention except for items that are required to
be accounted for at fair value. The preparation of financial statements requires management to make
estimates and other judgments that affect the reported amounts of assets and liabilities as well as the
disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual outcomes could differ from those
estimates.

Revenue recognition. Revenue is recognized when there is persuasive evidence that a sales arrangement
exists, title and risks and rewards for the products are transferred to the customer, the price is fixed and
determinable and collectability is reasonably assured. Where contracts contain customer acceptance
provisions, typically with government agencies, sales are recognized upon the satisfaction of acceptance
criteria. Provisions for rebates and discounts granted to government agencies, wholesalers, retail
pharmacies, managed care and other customers are recorded as a reduction of revenue at the time the
related revenues are recorded or when the incentives are offered. They are calculated on the basis of
historical experience and the specific terms in the individual agreements. Provisions for refunds granted
to healthcare providers under innovative pay for performance agreements are recorded as a reduction
of revenue at the time the related revenues are recorded. They are calculated on the basis of historical
experience and clinical data for the product as well as the specific terms in the individual agreements.
In cases where historical experience and clinical data are not sufficient for a reliable estimation of the
outcome, revenue recognition is deferred until such history is available.

Cash discounts are offered to customers to encourage prompt payment and are recorded as revenue
deductions. Wholesaler shelf-inventory adjustments are granted to customers based on the existing
inventory of a product at the time of decreases in the invoice or contract price of a product or at the
point of sale if a price decline is reasonably estimable. Where there is an historical experience of Novartis
agreeing to customer returns or Novartis can otherwise reasonably estimate expected future returns,
Novartis records a provision for estimated sales returns. In doing so it applies the estimated rate of
return, determined based on historical experience of customer returns or considering any other relevant
factors, to the amounts invoiced also considering the amount of returned products to be destroyed versus
products that can be placed back in inventory for resale. Where shipments are made on a re-sale or return
basis, without sufficient historical experience for estimating sales returns, revenue is only recorded when
there is evidence of consumption or when the right of return has expired.

Provisions for revenue deductions are adjusted to actual amounts as rebates, discounts and returns are
processed.

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 REVENUE RECOGNITION

XI. IFRS 15: CULMINATION OF THE JOINT IASB-FASB REVENUE RECOGNITION PROJECT

A. Background

1. Concerns over proper revenue recognition practices have long existed, and studies have shown
that the financial reporting irregularities that have come to light and required large restatements of
previously issued reports over the past decade-plus have disproportionately sprung from improper
revenue recognition. Standard setters, including the IASB, therefore concluded that more prescriptive
guidance was needed. A project to deal with this was ongoing for almost ten years, with the major
developmental efforts occurring over the past four years or so.

2. According to the IASB, the revenue recognition requirements in IAS 18 (Singapore FRS 18) focus on
the occurrence of critical events rather than changes in assets and liabilities.

a. This approach may result in the creation of debits and credits that do not meet the definition of
assets and liabilities under IFRS, and which in principle should not be recognized.

b. In addition, a practical weakness of IAS 18 (Singapore FRS 18) is that it gives insufficient guidance
on contracts that provide more than one good or service to the customer (multiple-element
revenue arrangements).

c. It is unclear under current standards when contracts should be divided into components and how
much revenue should be attributed to each component.

B. The Joint IASB FASB Revenue Recognition Project

1. The IASB began to work independently on the issues of revenue recognition and the concepts of
liabilities and equity. Later it decided to collaborate with the FASB as part of the two Boards joint
convergence program. According to the Boards, the main objectives of this revenue recognition
project were to:

a. Remove inconsistencies and weaknesses in existing revenue recognition standards by providing

clear principles for revenue recognition in a robust framework;

b. Provide a single revenue recognition model which will improve comparability over a range of
industries, companies and geographical boundaries; and

c. Simplify the preparation of financial statements by reducing the number of requirements to which
preparers must refer.

2. The Boards undertook this project to provide clear principles on the timing of revenue recognition,
as well as how much revenue should be recognized. The key principles on which the new model
is based revenue is recognized upon transfer to the customer, measured at transaction price are
consistent with much of current practice, but will differ in some regards. The Boards believe the new
standards will improve financial reporting by:

a. Providing a more robust framework for addressing issues as they arise;

b. Increasing comparability across industries and capital markets;

c. Providing enhanced disclosures; and

d. Clarifying accounting for contract costs.

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C. Revised Approach to Revenue Recognition

1. The revenue recognition project explored various approaches over several years of deliberations and
research. Ultimately, the Boards abandoned the earnings process approach, which is the foundation
for the current FRS 18, and have instead embraced an asset-liability approach.

a. Under the asset-liability approach, revenue is recognized by direct reference to changes in

assets and liabilities that arise from an entitys contract (i.e., its enforceable arrangement) with a
customer, rather than by direct reference to critical events or activities as in the earnings process
approach.

b. The idea is that if an entity has a legally enforceable, noncancelable contract, it should begin to
recognize the assets and liabilities implied by that contract.

c. While this approach does not change the final profit or loss on the completed contract, it opens
up the issue of the timing of recognition, moving from the end of the transaction, the point at
which recognition has traditionally taken place, to the instant where an executory contract exists,
and then re-measuring as the transaction evolves towards completion.

2. Under the new revenue model, a reporting entity will recognize revenue on the basis of changes in
assets and liabilities arising from contracts with customers without consideration of additional
criteria, such as earning and realization, which were income statementoriented threshold conditions
under both prior IFRS and various national GAAP.

a. A contract is an asset to the entity if the remaining rights exceed the remaining performance
obligations, and a contract is a liability if the remaining obligations exceed the remaining rights.

b. To apply this new model, the entity needs to be able to identify the separate liabilities
(performance obligations) that arise from a contract when the customer is committed to pay
for the deliverables.

D. Project Timeline and Course of Development

1. Following the issuance of a Discussion Paper (DP), Preliminary Views on Revenue Recognition in
Contracts with Customers, in December 2008, in which the Boards proposed a single revenue
recognition model that could be applied consistently across various industries, geographical regions,
and transactions, the Boards published for public comment, in June 2010, an Exposure Draft (ED),
Revenue from Contracts with Customers. During the public comment period (which ran from June
through October, 2010), the Boards received nearly one thousand comment letters in response to the
ED.

2. In January 2011, the IASB and FASB began re-deliberations of the June 2010 ED. This process was
completed in June 2011.

3. The Boards goals for the re-deliberation were to clarify the Boards intentions, simplify the proposals
and to align the proposals more closely with current practice.

4. In addition, the Boards focused on three key areas:

a. Effect of the proposed standard on certain industries Despite concerns raised by constituents in
the telecommunications industry about the effect of the Boards proposed standard, the Boards
decided not to revise its requirements.

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 REVENUE RECOGNITION

b. Transition requirements Since the transition requirements for the proposed standard called for
an entity to apply the standard on a retrospective basis, the Boards also provided certain relief to
ease the burden of applying the standard in the first year of application.

c. Determine if the proposal needs to be re-exposed Given the importance of the revenue number
to all entities and the critical need to avoid unintended consequences, the Boards decided that all
interested parties should have the opportunity to comment on the revisions undertaken on the
standard after the June, 2010, ED. In addition, the Board sought specific feedback on the extent
to which the revised requirements were understandable, and to assure that the drafting of the
requirements had not created unintended consequences for specific contracts or industries.

5. In November, 2011, a revised draft standard was issued. The underlying principles of the 2010 draft
were maintained, but the new draft did the following:

a. It added guidance on how to determine when a good or service is transferred over time;

b. It simplified the proposals on warranties;

c. It simplified how an entity would determine a transaction price (including collectibility, time value
of money, and variable consideration);

d. It modified the scope of the onerous test to apply to long-term services only; and

e. It added a practical expedient that permits an entity to recognize as an expense the costs of
obtaining a contract (if one year or less).

6. The issuance of the final standard (IFRS 15, which will in due course be deliberated for adoption as
Singapore FRS 115) occurred in May, 2014.

E. The New Standard IFRS 15

1. The recently promulgated standard, IFRS 15, is a single revenue recognition model that is to be applied
consistently across various industries, geographical regions, and transactions. The core principle
underlying this proposed model is that an entity should recognize revenues in contracts to depict the
transfer of goods or services to customers in an amount that reflects the consideration expected to be
received in exchange for those goods or services.

2. Key principles underlying the proposed standard include the following:

a. Contract-based revenue recognition. The underlying principle is that revenue recognition should
be based on accounting for a contract with a customer. A contract with a customer is viewed as
a series of enforceable rights and performance obligations (i.e., obtained rights to payment from
the customer and assumed obligations to provide goods and services to the customer under that
contract).

b. Revenue is recognized when and as performance obligations set forth in the contract are satisfied.
Revenue arises from increases in an entitys net position (a combination of rights and obligations)
in the contract with a customer as a result of the entity satisfying its performance obligation
under the contract.

c. An entity satisfies a performance obligation when goods or services are transferred to a customer.
Revenue is recognized for each performance obligation when an entity has transferred promised

15
 goods or services to the customer (i.e., as the entity satisfies each performance obligation in the
contract). It is assumed that the entity has transferred that good or service when the customer
obtains control of it.

d. Revenue recognized is the amount of the payment received or to be received from the customer
in exchange for transferring an asset (providing goods or services) to the customer. Consequently,
the transfer of goods or services, is considered to be the transfer of an asset.

e. The amount of revenue is measured based on an allocation of the customers aggregate

consideration. Thus, an entity transferring goods or services at different times will need
to allocate total consideration received to each performance obligation. At inception, the
transaction price is allocated between the performance obligations on the basis of the relative
stand-alone selling prices of the associated goods or services.

f. Re-measurement of performance obligations should take place when they are deemed
onerous. The carrying amount of an onerous performance obligation is increased based on the
entitys expected costs of satisfying that performance obligation, and a corresponding contract
loss is recognized.

F. Scope of the New Standard

1. The new revenue recognition standard supersedes the following current standards:

a. Construction contracts (presently addressed by Singapore FRS 11);

b. Revenue (Singapore FRS 18);

c. Customer loyalty programs (Singapore INT FRS 113);

d. Agreements for the construction of real estate (Singapore INT FRS 115);

e. Transfers of assets from customers (Singapore INT FRS 118); and

f. Barter transactions with customers involving advertising (Singapore INT FRS 31).

2. The scope of the new revenue recognition model includes all contracts with customers with the
exception of:

a. Lease contracts (addressed by Singapore FRS 17);

b. Insurance contracts (Singapore FRS 104);

c. Financial instruments, including financial services fees that are an integral part of the effective
interest rate, and other financial rights or obligations (Singapore FRS 27, 28, 109, 110, and 111,
when adopted); and

d. Non-monetary exchanges between entities in the same line of business to facilitate sales to
customers, or potential customers, other than parties to the exchange (i.e., to third parties).

3. A contract with a customer may be partially within the purview of IFRS 15 and partially within the
domain of another standard (e.g., FRS 17), in which case:

a. If the other standard stipulates how to separate and/or initially measure one or more parts of the

16
 REVENUE RECOGNITION

contract, the reporting entity is to first apply the separation and/or measurement requirements in
that other standard, and the entity would exclude from the transaction price the amount of the
part (or parts) of the contract that are initially measured in accordance with another standard, and
would apply guidance in IFRS 15 to allocate the amount of the transaction price that remains (if
any) to each performance obligation within the scope of IFRS 15 and to any other parts of the
contract identified by the immediately following sub-paragraph.

b. If the other standard does not specify how to separate and/or initially measure one or more parts
of the contract, then the entity is to apply IFRS 15 to separate and/or initially measure the part (or
parts) of the contract.

4. Reporting entities are to apply IFRS 15 to a contract only if the counterparty to the contract is
a customer, defined as a party that has contracted with an entity to obtain goods or services that
are an output of the entitys ordinary activities in exchange for consideration, thus excluding such
counterparties as joint venture partners.

G. The Five Steps in Applying the Core Principle of the New Standard

1. Identify the contracts(s) with the customer;

2. Identify the performance obligations within the contract;

3. Determine the transaction price;

4. Allocate the transaction price to the separate performance obligations; and

5. Recognize revenue when or as a performance obligation is satisfied.

H. Detailed Guidance to the IFRS 15 Provisions: The Five Steps Explained

1. Step One: Identify the contract(s) with the customer.

a. All the following criteria must be satisfied to invoke accounting for a contract with a customer
under the provisions of IFRS 15:

i) The parties to the contract have approved the contract (either in writing, orally or in
accordance with other customary business practices), and they are committed to perform
their respective obligations thereunder;

a) There must be enforceable rights and obligations, which are legal issues that may vary
among jurisdictions, industries and entities, and even within a given entity depending on
class of customer or the nature of promised goods or services.

b) If an arrangement is of indeterminate duration and can be cancelled or modified by

either party without penalty, or automatically renews, the provisions of IFRS 15 would
only be applied to the term, if any, during which the parties have present enforceable
rights and obligations.

c) For the purpose of applying IFRS 15, a contract does not exist if each party to the
contract has the unilateral enforceable right to terminate a wholly unperformed contract
without compensating the other party (or parties); a contract being wholly unperformed
if both of the following criteria are met:

17
 The entity has not yet transferred any promised goods or services to the
customer; and

The entity has not yet received, and is not yet entitled to receive, any
consideration in exchange for promised goods or services.

d) If a contract with a customer meets the above- and below-cited criteria at contract
inception, the reporting entity is not to reassess these criteria unless there is an
indication of a significant change in facts and circumstances, e.g., a significant
deterioration of the customers ability to pay, in which case the reporting entity
would need to reassess whether it is still probable that it would be able to collect the
consideration to which it would be entitled in exchange for the remaining goods or
services to be transferred to the customer.

e) If a contract with a customer does not initially meet the above- and below-cited criteria,
the entity will have to continue assessing the contract to determine if these criteria are
subsequently met, in which case the accounting set forth by IFRS 15 will be invoked.

ii) The entity can identify each partys rights regarding the goods or services to be transferred;

iii) The entity can identify the payment terms for the goods or services to be transferred;

a) When a contract with a customer does not meet the above- and below-cited criteria and
an entity receives consideration from the customer, the reporting entity is to recognize
the consideration received as revenue only when either of the following events has
occurred:

The reporting entity has no remaining obligations to transfer goods or services

to the customer and all, or substantially all, of the consideration promised by the
customer has been received by the entity and is non-refundable; or

The contract has been terminated and the consideration received from the customer
is non-refundable.

b) The reporting entity is to recognize the consideration received from a customer as a

liability until one of the events in the immediately preceding paragraph occurs or until all
the above- and below-cited criteria are subsequently met.

Depending on the facts and circumstances relating to the contract, the liability
recognized represents the reporting entitys obligation to either transfer goods or
services in the future or refund the consideration received.

In either case, the liability is to be measured at the amount of consideration

received from the customer.

iv) The contract has commercial substance (i.e., the risk, timing or amount of the entitys future
cash flows is expected to change as a result of the contract); and

v) It is probable that the entity will collect the consideration to which it will be entitled in
exchange for the goods or services that will be transferred to the customer.

18
 REVENUE RECOGNITION

a) In evaluating whether collectibility of an amount of consideration is probable, the

entity is to consider only the customers ability and intention to pay that amount of
consideration when it is due.

b) The amount of consideration to which the entity will be entitled may be less than
the price stated in the contract if the consideration is variable because the entity
may offer the customer a price concession (discussed below and at IFRS 15, para.
52).

b. A reporting entity is to combine contracts with the same customer and account for them together
if they are entered into at or near the same time, and one or more of the following criteria are
met:

i) The contracts are negotiated as a package with a single commercial objective;

ii) There is price interdependence between the contracts, i.e., the consideration in one contract
depends on the other contract; or

iii) The goods or services in the contracts are interrelated in terms of design, technology or
function.

c. Concerning the accounting ramifications of contract modifications, IFRS 15 provides the

following:

i) A contract modification is a change in the scope or price, or both, of a contract that is

approved by the parties to the contract.

a) These modifications may be, depending on industries and jurisdictions, described as

change orders, variations or amendments.

b) A 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.

c) A contract modification could be approved either in writing or by oral agreement, or

could simply be implied by customary business practices.

d) If one or more of the parties to the contract have not approved a modification, the
reporting entity is to continue to apply IFRS 15 to the existing contract until the contract
modification is approved.

ii) A contract modification may exist even though the parties to the contract have a dispute
about the scope or price, or both, of the modification, or if the parties have approved a
change in the scope of the contract but have not yet determined the corresponding change
in price.

a) In determining whether the rights and obligations that are created or changed by a
modification are enforceable, the reporting entity is to consider all the relevant facts and
circumstances, including the terms of the contract and other evidence.

b) If the parties to a contract have approved a change in the scope of the contract but
have not yet determined the corresponding change in price, the reporting entity is to

19
 estimate the change to the transaction price arising from the modification, consistent
with guidance in IFRS 15 concerning estimating variable consideration (at paras. 5054),
and constraints on estimates of variable consideration (at paras. 5658).

iii) The reporting entity is to account for a contract modification as a separate contract only if
both of the following conditions are present:

a) The scope of the contract increases because of the addition of promised goods or
services that are distinct; and

b) The price of the contract increases by an amount of consideration that reflects the
entitys stand-alone selling prices of the additional promised goods or services and any
appropriate adjustments to that price to reflect the circumstances of the particular
contract; e.g., the reporting entity may adjust the stand-alone selling price of an
additional good or service for a discount that reflects that it is not necessary for the
seller to incur the costs that it would incur when selling a similar good or service to a
new customer.

iv) If a contract modification is not accounted for as a separate contract, the reporting entity
is to account for the promised goods or services not yet transferred (i.e., the remaining
promised goods or services under the original contract) at the date of the contract
modification in whichever of the following ways is applicable:

a) As if it were a termination of the existing contract and the creation of a new contract,
if the remaining goods or services are distinct from the goods or services transferred on
or before the date of the contract modification, with the amount of consideration to be
allocated to the remaining performance obligations (or to the remaining distinct goods
or services in a single performance obligation) being the sum of:

The consideration promised by the customer (including amounts already received

from the customer) that was included in the estimate of the transaction price and
that had not been recognized as revenue; and

The consideration promised as part of the contract modification; or

b) As if it were a part of the existing contract, if the remaining goods or services are not
distinct and, therefore, form part of a single performance obligation that is partially
satisfied at the date of the contract modification; with the effect that the modification
has on the transaction price, and on the entitys measure of progress towards complete
satisfaction of the performance obligation, being recognized as an adjustment to
revenue (either as an increase in or a reduction of revenue) at the date of the contract
modification (i.e., the adjustment to revenue is made on a cumulative catch-up basis); or

c) If the remaining goods or services are a combination of items (a) and (b), above, then
the entity is to account for the effects of the modification on the unsatisfied (including
partially unsatisfied) performance obligations in the modified contract in a manner that
is consistent with the objectives of this paragraph.

2. Step Two: Identify the separate performance obligations within the contract

a. A performance obligation is a promise in a contract with a customer to transfer a good to or

perform a service for the customer. Performance obligations include promises that are implied by

20
 REVENUE RECOGNITION

an entitys business practices, published policies, or specific statements if those promises create a
valid expectation of the customer that the entity will perform.

i) At inception, the reporting entity is to assess the goods and services promised, in order to
ascertain whether separate performance obligations have been packaged together.

ii) Goods or services that are distinct are separate performance obligations.

iii) A series of goods or services that are substantially the same and that have the same pattern
of transfer to the customer constitute a single obligation, if both of these conditions are met:

a) Each distinct good or service would meet the criteria to be a performance obligation
satisfied over time; and

b) In accordance with IFRS 15, the same method would be used to measure the entitys
progress towards complete satisfaction of the performance obligation to transfer each
distinct good or service in the series to the customer.

b. A contract with a customer generally explicitly identifies the goods or services that an entity
promises to transfer to a customer.

i) The performance obligations identified or implied in a contract with a customer may not be
limited to the goods or services that are explicitly stated in that contract.

ii) A contract with a customer may also include promises that are implied by an entitys
customary business practices, published policies or specific statements if, at the time of
entering into the contract, those promises create a valid expectation of the customer that the
entity will transfer a good or service to the customer.

iii) Performance obligations do not include activities that an entity must undertake to fulfill a
contract, unless those activities transfer a good or service to a customer; e.g., if a services
provider needs to perform various administrative tasks to set up a contract, the performance
of those tasks does not transfer a service to the customer as the tasks are performed, and
therefore those setup activities are not a performance obligation.

c. Depending on the contract, promised goods or services may include, but are not limited to, the
following:

i) The sale of goods produced by an entity (e.g., inventory of a manufacturer);

ii) The resale of goods purchased by an entity (e.g., merchandise of a retailer);

iii) The resale of rights to goods or services purchased by an entity (e.g., a ticket resold by an
entity acting as a principal);

iv) The performing of a contractually agreed-upon task (or tasks) for a customer;

v) The providing of a service of standing ready to provide goods or services (e.g., unspecified
updates to software that are provided on a when-and-if-available basis) or of making goods
or services available for a customer to use as and when the customer decides;

vi) The providing of a service of arranging for another party to transfer goods or services to a
customer (e.g., acting as an agent of another party);

21
 vii) The granting of rights to goods or services to be provided in the future that a customer can
resell or provide to its customer (e.g., an entity selling a product to a retailer promises to
transfer an additional good or service to an individual who purchases the product from the
retailer);

viii) The constructing, manufacturing or developing of an asset on behalf of a customer;

ix) The granting of licenses; and

x) The granting of options to purchase additional goods or services (when those options provide
a customer with a material right) .

d. A good or service that is promised to a customer is distinct if both of the following criteria are
met:

i) The customer can benefit from the good or service either on its own or together with other
resources that are readily available to the customer (i.e., the good or service is capable of
being distinct);

a) This condition is met if the good or service could be used, consumed, sold for an
amount that is greater than scrap value or otherwise held in a way that generates
economic benefits.

b) For some goods or services, a customer may be able to benefit from a good or service
on its own.

c) For other goods or services, a customer may be able to benefit from the good or service
only in conjunction with other readily available resources, defined as a good or service
that is sold separately (by the entity or another entity) or a resource that the customer
has already obtained from the entity (including goods or services that the entity will have
already transferred to the customer under the contract), or from other transactions or
events.

d) Various factors may provide evidence that the customer can benefit from a good or
service either on its own or in conjunction with other readily available resources; e.g.,
the fact that the entity regularly sells a good or service separately would indicate that a
customer can benefit from the good or service on its own or with other readily available
resources.

and

ii) The entitys promise to transfer the good or service to the customer is separately identifiable
from other promises in the contract (i.e., the good or service is distinct within the context of
the contract); factors that indicate that an entitys promise to transfer a good or service to a
customer is separately identifiable include, but are not limited to, the following:

a) The entity does not provide a significant service of integrating the good or service with
other goods or services promised in the contract into a bundle of goods or services that
represent the combined output for which the customer has contracted; i.e., the entity
is not using the good or service as an input to produce or deliver the combined output
specified by the customer.

22
 REVENUE RECOGNITION

b) The good or service does not significantly modify or customize another good or service
promised in the contract.

c) The good or service is not highly dependent on, or highly interrelated with, other goods
or services promised in the contract; e.g., the fact that a customer could decide to not
purchase the good or service without significantly affecting the other promised goods or
services in the contract might indicate that the good or service is not highly dependent
on, or highly interrelated with, those other promised goods or services.

e. If a promised good or service is not distinct, the reporting entity is to combine that good or
service with other promised goods or services until it identifies a bundle of goods or services that
is distinct, which, in some cases could result in the entity accounting for all the goods or services
promised in a contract as a single performance obligation.

f. The reporting entity is to recognize revenue when or as it satisfies a performance obligation by

transferring a promised good or service (i.e., an asset) to a customer, where transfer is defined as
the point when (or as) the customer obtains control of that asset.

i) For each performance obligation, the reporting entity is to determine at contract inception
whether it satisfies the performance obligation over time or satisfies the performance
obligation at a point in time.

If an entity does not satisfy a performance obligation over time, the performance
obligation is satisfied at a point in time.

ii) Goods and services are assets, even if only momentarily, when they are received and used (as
in the case of many services).

iii) Control of an asset refers to the ability to direct the use of, and obtain substantially all of the
remaining benefits from, the asset.

iv) Control includes the ability to prevent other entities from directing the use of, and obtaining
the benefits from, an asset, where benefits of an asset are the potential cash flows (inflows
or savings in outflows) that can be obtained directly or indirectly in many ways, such as by:
Using the asset to produce goods or provide services (including public services);
Using the asset to enhance the value of other assets;
Using the asset to settle liabilities or reduce expenses;
Selling or exchanging the asset;
Pledging the asset to secure a loan; and
Holding the asset.

g. When evaluating whether a customer obtains control of an asset, the reporting entity is to
consider any agreement to repurchase the asset.

h. An entity transfers control of a good or service over time and, therefore, satisfies a performance
obligation and recognizes revenue over time, if one of the following criteria is met:

i) The customer simultaneously receives and consumes the benefits provided by the entitys
performance as the entity performs;

23
 ii) The entitys performance creates or enhances an asset (e.g., work in progress) that the
customer controls as the asset is created or enhanced; or

iii) The entitys performance does not create an asset with an alternative use to the entity and
the entity has an enforceable right to payment for performance completed to date.

i. The asset created by an entitys performance does not have an alternative use to an entity if the
entity is either restricted contractually from readily directing the asset for another use during the
creation or enhancement of that asset or limited practically from readily directing the asset in its
completed state for another use.

i) The assessment of whether an asset has an alternative use to the entity is made at contract
inception.

ii) After contract inception, the reporting entity is not to update the assessment of the
alternative use of an asset unless the parties to the contract approve a contract modification
that substantively changes the performance obligation.

j. The entity is to consider the terms of the contract, as well as any laws that apply to the contract,
when evaluating whether it has an enforceable right to payment for performance completed to
date in accordance with conditions set forth in the standard.

k. The right to payment for performance completed to date does not need to be for a fixed amount.

i) However, at all times throughout the duration of the contract, the entity must be entitled
to an amount that at least compensates the entity for performance completed to date if the
contract is terminated by the customer or another party for reasons other than the entitys
failure to perform as promised.

ii) IFRS 15 provides guidance for assessing the existence and enforceability of a right to
payment and whether an entitys right to payment would entitle the entity to be paid for its
performance completed to date.

l. Revenue not realized over a span of time is, by definition, realized at a single point in time.
Determining the precise point in time requires that the considerations noted above (transfer of
control, meaning the ability to direct the use of, and obtain substantially all of the remaining
benefits from, the asset, and/or the ability to prevent other entities from directing the use of, and
obtaining the benefits from, an asset, where the benefits of an asset are the potential cash flows
inflows or savings in outflows) that can be obtained directly or indirectly from it).

m. Additionally, when evaluating revenue to be recognized at a point in time, the following

considerations should be assessed:

i) Whether the reporting entity has a present right to payment for the asset; if a customer is
presently obliged to pay for an asset, this is strong indication that the customer has obtained
the ability to direct the use of, and obtain substantially all of the remaining benefits from, the
asset exchanged.

ii) Whether the customer has legal title to the asset; this too may indicate which party to a
contract has the ability to direct the use of, and obtain substantially all of the remaining
benefits from, an asset or to restrict the access of other entities to those benefits. However,

24
 REVENUE RECOGNITION

if the reporting entity retains legal title solely as protection against the customers failure to
pay, that fact would not preclude the customer from obtaining control of an asset.

iii) Whether the entity has transferred physical possession of the asset, although physical
possession may not coincide with control of an asset.

In some repurchase agreements and in some consignment arrangements, a customer

or consignee may have physical possession of an asset that the reporting entity still
controls, meaning no revenue recognition is warranted.

Conversely, in some bill-and-hold arrangements, the reporting entity may have physical
possession of an asset that the customer actually already controls.

iv) Whether the customer has the significant risks and rewards of ownership of the asset.

When evaluating the risks and rewards of ownership of a promised asset, the reporting
entity is to exclude any risks that give rise to a separate performance obligation in
addition to the performance obligation to transfer the asset.

For example, an entity may have transferred control of an asset to a customer but not
yet satisfied an additional performance obligation to provide maintenance services
related to the transferred asset.

v) Whether the customer has accepted the asset.

3. Step Three: Determine the transaction price

a. The reporting entity is to consider the terms of the contract and its customary business practices
to determine the transaction price.

i) The transaction price is the 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 (e.g., certain sales taxes).

ii) The consideration promised in a contract with a customer may include fixed amounts,
variable amounts, or both.

iii) The effects of the following must be considered in determining transaction price:

a) Variable consideration;

b) Constraining estimates of variable consideration;

c) The existence of a significant financing component in the contract;

d) Non-cash consideration; and

e) Consideration payable to a customer.

b. Variable consideration, if a feature of the transaction price, must be estimated in accounting for
the transaction.

25
i) This may include items such as discounts, rebates, refunds, credits, price concessions,
incentives, performance bonuses, penalties, and so forth.

ii) Variable consideration may also include the effect of contingencies, such as return privileges.

iii) Variable consideration may be explicit in the contract, or may be based on a valid expectation
arising from the reporting entitys customary business practices, published policies or specific
statements to the effect that the entity will accept an amount of consideration that is less
than the price stated in the contract (i.e., that a price concession will be granted).

iv) If there is variability, the reporting entity is to estimate the amount of consideration using one
of the following methods:

a) Expected value, defined as the sum of probability-weighted amounts in a range of

possible consideration amounts; this is most appropriate and feasible if the entity has a
large number of contracts with similar characteristics.

b) The most likely amount, defined as the single most likely amount in a range of possible
consideration amounts; this is most appropriate if the contract has only two possible
outcomes (e.g., if the entity either achieves a performance bonus or does not).

v) Regarding a liability for refunds, if the reporting entity receives consideration from a customer
and expects to refund some or all of that sum to the customer, that should be recognized,
measured at the amount of consideration received (or receivable) for which the entity does
not expect to be entitled (i.e., such amounts are not to be included in the transaction price).

a) The refund liability (and corresponding change in the transaction price and, therefore,
the contract liability) is to be updated at the end of each reporting period for changes in
circumstances.

b) The refund liability relating to a sale with a right of return is accounted for as follows:

Revenue for the transferred products is recognized in the amount of consideration

to which the entity expects to be entitled (i.e., revenue would not be recognized for
the products expected to be returned);

The liability for the expected refund would be recorded; and

An asset (and corresponding adjustment to cost of sales) would be recognized

for the entitys right to recover products from customers on settling the refund
liability, measured by reference to the former carrying amount of the product (e.g.,
inventory), less any expected costs to recover those products, including potential
decreases in the value to the entity of returned products.

At the end of each reporting period, the entity will be required to update the
measurement of the asset arising from changes in expectations about products
to be returned.

This asset will be presented separately from the refund liability.

c) The reporting entity will have to update the measurement of the refund liability at the
end of each reporting period, for changes in expectations about the amount of refunds,
with the effect of any changes being recognized as increases or reductions of revenue.

26
 REVENUE RECOGNITION

c. Constraining (i.e., limiting) the estimates of variable consideration for purposes of recognition
of a transaction price is required if it is deemed highly probable that a significant reversal in the
amount of cumulative revenue recognized will occur when the uncertainty associated with the
variable consideration is subsequently resolved.

i) In making such an assessment, the reporting entity is to consider both the likelihood and the
magnitude of the potential revenue reversal.

ii) Factors that could increase the likelihood or the magnitude of a revenue reversal include,
inter alia, any of the following:

a) The amount of consideration is highly susceptible to factors outside the entitys

influence, e.g., volatility in a market, the judgment or actions of third parties, weather
conditions and a high risk of obsolescence of the promised good or service.

b) The uncertainty about the amount of consideration is not expected to be resolved for a
long period of time.

c) The entitys experience (or other evidence) with similar types of contracts is limited, or
that experience (or other evidence) has limited predictive value.

d) The entity has a practice of either offering a broad range of price concessions or
changing the payment terms and conditions of similar contracts in similar circumstances.

e) The contract has a large number and broad range of possible consideration amounts.

iii) The impacts of any constraints are to be updated at each reporting period, as circumstances
may dictate, and the effects of any revisions are to be allocated to specific performance
obligations.

d. A significant financing component in the contract must be addressed, if it exists, whether or not
set forth explicitly in the contractual arrangement.

i) The objective is to report revenue from product or service sales at amounts that would be
paid in a cash transaction, absent deferred payment terms.

ii) The length of any deferral and prevailing financing terms in the relevant market are to be
considered in making the determination of the amount of the financing component.

iii) However, a significant financing component will not be found to exist if any of the following
exists:

a) The customer paid for the goods or services in advance and the timing of the transfer of
those goods or services is at the discretion of the customer.

b) A substantial amount of the consideration promised by the customer is variable and the
amount or timing of that consideration varies on the basis of the occurrence or non-
occurrence of a future event that is not substantially within the control of the customer
or the entity (for example, if the consideration is a sales-based royalty).

c) The difference between the promised consideration and the cash selling price of the
good or service arises for reasons other than the provision of finance to either the

27
 customer or the entity (e.g., providing the entity or the customer with protection from
the other party failing to adequately complete some or all of its obligations under the
contract), and the difference between those amounts is proportional to the reason for
the difference.

iv) If the payment term is under one year, imputed value of financing can optionally be ignored.

e. Non-cash consideration as part of the transaction price is to be valued at fair value.

f. Consideration payable to a customer includes cash amounts that the reporting entity pays or
expects to pay to the customer, as well as credit or other items (e.g., a coupon or voucher) that
can be applied against amounts owed to the entity.

i) The entity is to account for consideration payable to a customer as a reduction of the

transaction price (i.e., a contra-revenue) unless the payment to the customer is in exchange
for a distinct good or service that the customer transfers to the entity.

ii) If the consideration payable to a customer includes a variable amount, the reporting entity is
to estimate the transaction price (including the effect of any constraints).

iii) If consideration payable to a customer is a payment for a distinct good or service from the
customer, then an entity is to account for the purchase of the good or service in the same
way that it accounts for other purchases from suppliers.

iv) If the amount of consideration payable to the customer exceeds the fair value of the distinct
good or service that the entity receives from the customer, then the entity is to account for
such an excess as a reduction of the transaction price.

v) If the entity cannot reasonably estimate the fair value of the good or service received from
the customer, it must account for all of the consideration payable to the customer as a
reduction of the transaction price.

vi) If consideration payable to a customer is accounted for as a reduction of the transaction

price, the entity is to recognize the reduction of revenue when (or as) the later of either of
the following events occurs:

a) The entity recognizes revenue for the transfer of the related goods or services to the
customer; and

b) The entity pays or promises to pay the consideration (even if conditional on a future
event), where such a promise might only be implied by its customary business practices.

g. If there are subsequent changes to the transaction price:

i) The entity is to allocate the changes to the performance obligations in the contract on the
same basis as at contract inception.

a) Consequently, the entity is not to reallocate the transaction price to reflect changes in
stand-alone selling prices after contract inception.

b) Amounts allocated to an already-satisfied performance obligation are to be recognized

as revenue, or as a reduction of revenue, in the period in which the transaction price
changes.

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 REVENUE RECOGNITION

ii) The entity is to allocate a change in the transaction price entirely to one or more, but not all,
performance obligations or distinct goods or services promised in a series that forms part of a
single performance obligation only if the criteria on allocating variable consideration are met.

iii) The entity is to account for a change in the transaction price that arises as a result of a
contract modification in accordance with contract modification guidance in IFRS 15; but if
the change in the transaction price occurs after a contract modification, the entity is to apply
the guidance immediately above to allocate the change in the transaction price in whichever
of the following ways is applicable:

a) The entity is to allocate the change in the transaction price to the performance
obligations identified in the contract before the modification if, and to the extent that,
the change in the transaction price is attributable to an amount of variable consideration
promised before the modification and the modification is accounted for in accordance
with paragraph 21(a).

b) In all other cases in which the modification was not accounted for as a separate
contract in accordance with paragraph 20, an entity shall allocate the change in the
transaction price to the performance obligations in the modified contract (ie the
performance obligations that were unsatisfied or partially unsatisfied immediately after
the modification).

4. Step Four: Allocate the transaction price to the separate performance obligations

a. Allocating the transaction price is to be based on stand-alone selling prices.

i) To allocate the transaction price to each performance obligation on a relative stand-alone

selling price basis, the reporting entity has to determine the stand-alone selling price at
contract inception of the distinct good or service underlying each performance obligation
in the contract, and then allocate the transaction price in proportion to those stand-alone
selling prices.

a) The stand-alone selling price is the price at which an entity would sell a promised good
or service separately to a customer; the best evidence of which is the observable price
of a good or service when the entity sells that good or service separately in similar
circumstances and to similar customers.

b) A contractually stated price or a list price for a good or service may be the stand-alone
selling price of that good or service, but this cannot be presumed in all cases.

ii) If a stand-alone selling price is not directly observable, the entity is to estimate the stand-
alone selling price at an amount that would result in the allocation of the transaction price
that depicts the amount of consideration the entity would expect to be entitled to for
providing the good or service.

a) When estimating a stand-alone selling price, an entity shall consider all information
(including market conditions, entity-specific factors and information about the customer
or class of customer) that is reasonably available to the entity.

b) In doing so, the entity is to maximize the use of observable inputs and apply estimation
methods consistently in similar circumstances.

29
 iii) Suitable methods for estimating the stand-alone selling price of a good or service include,
inter alia:

a) Adjusted market assessment approach, by evaluating the market in which it sells goods
or services and estimating the price that a customer in that market would be willing to
pay for those goods or services; and/or referring to prices from the entitys competitors
for similar goods or services and adjusting those prices as necessary to reflect the entitys
costs and margins.

b) Expected cost plus a margin approach, by forecasting its expected costs of satisfying a
performance obligation and then add an appropriate margin for that good or service.

c) Residual approach, by estimating the stand-alone selling price by reference to the total
transaction price less the sum of the observable stand-alone selling prices of other goods
or services promised in the contract, but only if one of the following criteria is met:

The entity sells the same good or service to different customers (at or near the same
time) for a broad range of amounts (i.e., the selling price is highly variable because
a representative stand-alone selling price is not discernible from past transactions or
other observable evidence); or

The entity has not yet established a price for that good or service and the good or
service has not previously been sold on a stand-alone basis (i.e., the selling price is
uncertain).

iv) A combination of methods may need to be used to estimate the stand-alone selling prices of
the goods or services promised in the contract if two or more of those goods or services have
highly variable or uncertain stand-alone selling prices.

a) For example, an entity may use a residual approach to estimate the aggregate stand-
alone selling price for those promised goods or services with highly variable or uncertain
stand-alone selling prices and then use another method to estimate the stand-alone
selling prices of the individual goods or services relative to that estimated aggregate
stand-alone selling price determined by the residual approach.

b) When an entity uses a combination of methods to estimate the stand-alone selling price
of each promised good or service in the contract, it must evaluate whether allocating the
transaction price at those estimated stand-alone selling prices would be consistent with
the allocation objective and the requirements for estimating stand-alone selling prices set
forth in IFRS 15.

b. Allocating a discount applied to a bundle of goods and/or services.

i) This situation arises when the sum of the stand-alone selling prices of the promised goods or
services in the contract exceeds the promised consideration in a contract.

ii) Unless the entity has observable evidence that the entire discount relates to only one or
more, but not all, performance obligations in a contract, the entity is to allocate a discount
proportionately to all performance obligations in the contract.

iii) The reporting entity is to allocate a discount entirely to one or more, but not all, performance
obligations in the contract only if all of the following criteria are met:

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 REVENUE RECOGNITION

a) The entity regularly sells each distinct good or service (or each bundle of distinct goods
or services) in the contract on a stand-alone basis;

b) The entity also regularly sells on a stand-alone basis a bundle (or bundles) of some of
those distinct goods or services at a discount to the stand-alone selling prices of the
goods or services in each bundle; and

c) The discount attributable to each bundle of goods or services described in the foregoing
paragraph is substantially the same as the discount in the contract and an analysis of
the goods or services in each bundle provides observable evidence of the performance
obligation (or performance obligations) to which the entire discount in the contract
belongs.

iv) If a discount is allocated entirely to one or more performance obligations in the contract,
the entity is to assign the discount before using the residual approach to estimate the stand-
alone selling price of a good or service.

c. Allocating variable consideration.

i) Variable consideration that is promised in a contract may be attributable to the entire

contract or to a specific part of the contract, such as either of the following:

a) One or more, but not all, performance obligations in the contract (e.g., a bonus may be
contingent on an entity transferring a promised good or service within a specified period
of time); or

b) One or more, but not all, distinct goods or services promised in a series of distinct goods
or services that forms part of a single performance obligation (e.g., the consideration
promised for the second year of a two-year cleaning service contract will increase on the
basis of movements in a specified inflation index).

ii) The reporting entity is to allocate a variable amount (and subsequent changes to that
amount) entirely to a performance obligation or to a distinct good or service that forms part
of a single performance obligation if both of the following criteria are met:

a) The terms of a variable payment relate specifically to the entitys efforts to satisfy the
performance obligation or transfer the distinct good or service (or to a specific outcome
from satisfying the performance obligation or transferring the distinct good or service);
and

b) Allocating the variable amount of consideration entirely to the performance obligation

or the distinct good or service is consistent with the allocation objective of IFRS 15 when
considering all of the performance obligations and payment terms in the contract.

iii) The allocation requirements set forth earlier in this discussion are to be applied to allocate
the remaining amount of the transaction price that does not meet the criteria set forth
immediately above.

d. Dealing with changes to the transaction price after contract inception.

i) Post-inception prices changes can occur for various reasons, such as resolution of a
contractual uncertainty.

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 ii) The reporting entity is to allocate to the performance obligations in the contract any
subsequent changes in the transaction price on the same basis as at contract inception.

a) The transaction price is not to be reallocated to reflect changes in stand-alone selling

prices after contract inception.

b) Amounts allocated to an already-satisfied performance obligation are to be recognized

as revenue, or (if negative) as a reduction of revenue, in the period in which the
transaction price changes.

e. The incremental costs of obtaining a contract are reported as an asset and amortized over
the contract performance period, if recovery is expected to occur, but costs that would have
otherwise also been incurred must be expensed.

f. Costs incurred to fulfill a contract, unless dealt with by another standard, may be treated as an
asset, and amortized, only if all the following criteria are satisfied:

i) The costs relate directly to a contract or to an anticipated contract that the entity can
specifically identify;

ii) The costs generate or enhance resources of the entity that will be used in satisfying (or in
continuing to satisfy) performance obligations in the future; and

iii) It is anticipated that the costs will be recovered.

g. Costs incurred to obtain or fulfill a contract, if capitalized as assets, must be amortized and tested
for impairment, and impairment charges recognized are to be reversed when conditions justify
such accounting treatment.

5 Step Five: Recognize revenue when a performance obligation is satisfied

a. For each performance obligation to be satisfied over time, the reporting entity is to recognize
revenue over time by measuring the progress towards complete satisfaction of that performance
obligation.

i) The objective is to depict an entitys performance in transferring control of goods or services

promised to a customer, thus satisfying its performance obligation.

ii) The entity must apply a single method of measuring progress for each performance
obligation satisfied over time, and apply that method consistently to similar performance
obligations and similar circumstances. At the end of each reporting period, an entity is to re-
measure its progress towards complete satisfaction of a performance obligation satisfied over
time.

b. Allowable methods will include reliance on both input and output measurements, based on
considerations appropriate to the nature of the good or service to be delivered.

i) Any goods or services for which the reporting entity does not transfer control to the
customer are to be excluded from the measurement.

ii) Any goods or services for which the entity does transfer control to a customer when
satisfying that performance obligation are to be included in the measure.

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 REVENUE RECOGNITION

c. As circumstances change, it will be necessary to update the measure of progress to reflect

any changes in the outcome of the performance obligation, and any changes to the measure
of progress are to be accounted for as a change in accounting estimate in accordance with
Singapore FRS 8.

d. Recognition of revenue for a performance obligation over time may only be effected if the
reporting entity can reasonably measure its progress towards complete satisfaction of the
performance obligation.

i) The reporting entity would not be able to reasonably measure its progress towards complete
satisfaction of a performance obligation if it lacks reliable information that would be required
to apply an appropriate method of measuring progress.

ii) In some circumstances (e.g., in the early stages of a contract), the entity might not be able
to reasonably measure the outcome of a performance obligation, but the entity does expect
to recover the costs incurred in satisfying the performance obligation, in which case a cost-
recovery approach (whereby the reporting entity recognizes revenue only to the extent of
the costs incurred) should be employed until such time that it can reasonably measure the
outcome of the performance obligation.

I. Onerous Contracts

1. The reporting entity is to recognize a liability and an expense if the remaining performance obligations
in a contract are onerous.

2. The remaining performance obligations in a contract are onerous if the costs that relate directly to
satisfying the remaining performance obligations exceed the amount of the transaction price allocated
to those performance obligations.

J. Disclosure Requirements

1. In order to assist the users of financial statements to understand the amount, timing and uncertainty
of revenue and cash flows, the enhanced disclosures under the revised standard include:

a. Information about contracts with customers, showing separately (not as part of other types of
revenue)

i) Revenue recognized from contracts with customers, and

ii) Any impairment losses recognized (in accordance with IFRS 9) on any receivables or contract
assets arising from an entitys contracts with customers, which the entity is to disclose
separately from impairments arising from other contracts.

b. Disaggregation of revenue is to be effected in order to inform readers about how revenues would
be affected by economic factors regarding amounts, nature, timing and uncertainty of receipt,
with sufficient information to enable readers to reconcile the disaggregated revenues to disclosure
of segment revenues.

2. Information about extant contracts with customers is to be provided as follows:

a. The opening and closing balances of receivables, contract assets and contract liabilities from
contracts with customers, if not otherwise separately presented or disclosed;

33
 b. Revenue recognized in the reporting period that was included in the contract liability balance at
the beginning of the period; and

c. Revenue recognized in the reporting period from performance obligations satisfied (or partially
satisfied) in previous periods (e.g., changes in transaction price).

3. The reporting entity is furthermore to explain how the timing of satisfaction of its performance
obligations relates to the typical timing of payment and the effect that those factors have on the
contract asset and the contract liability balances; this may be done in qualitative terms.

4. The entity also is to provide an explanation of the significant changes in the contract asset and the
contract liability balances during the reporting period, incorporating both qualitative and quantitative
information, addressing, inter alia:

a. Changes due to business combinations;

b. Cumulative catch-up adjustments to revenue that affect the corresponding contract asset or
contract liability, including adjustments arising from a change in the measure of progress,
a change in an estimate of the transaction price (including any changes in the assessment of
whether an estimate of variable consideration is constrained) or a contract modification;

c. Impairment of a contract asset;

d. A change in the time frame for a right to consideration to become unconditional (i.e., for a
contract asset to be reclassified to a receivable); and

e. A change in the time frame for a performance obligation to be satisfied (i.e., for the recognition
of revenue arising from a contract liability).

5. The outstanding or remaining performance obligations are to be explained, disclosing the following:

a. When the entity typically satisfies its performance obligations (e.g., upon shipment, upon delivery,
as services are rendered or upon completion of service), including when performance obligations
are satisfied in a bill-and-hold arrangement;

b. The significant payment terms (e.g., when payment is typically due, whether the contract has a
significant financing component, whether the consideration amount is variable and whether the
estimate of variable consideration is typically constrained);

c. The nature of the goods or services that the entity has promised to transfer, highlighting any
performance obligations to arrange for another party to transfer goods or services (i.e., if acting
as an agent);

d. Obligations for returns, refunds and other similar obligations; and

e. Types of warranties and related obligations.

6. Remaining performance obligations to which transaction prices had been allocated are to be
elaborated upon as follows:

a. The aggregate amount of the transaction price allocated to the performance obligations that are
unsatisfied (or partially unsatisfied) as of the end of the reporting period; and

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 REVENUE RECOGNITION

b. An explanation of when the entity expects to recognize as revenue the amount disclosed in
accordance with the immediately preceding sub-paragraph, which the entity may disclose in
either of the following ways:

(i) On a quantitative basis using the time bands that would be most appropriate for the
duration of the remaining performance obligations; or

(ii) By using qualitative information.

c. The reporting entity must explain qualitatively whether it is applying certain practical expediencies
provided for by IFRS 15, relating to reduced disclosures for obligations to be completed within a
year and other conditions.

7. Timing of revenue recognition, as affected by judgments and changes in judgments, is to be explained.

Revenue Recognition Examples From 2014 IASB Standard (IFRS 15)

Example 1 - Collectibility of the consideration

An entity, a real estate developer, enters into a contract with a customer for the sale of a building for
S$1 million. The customer intends to open a restaurant in the building. The building is located in an
area where new restaurants face high levels of competition and the customer has little experience in the
restaurant industry.

The customer pays a non-refundable deposit of S$50,000 at inception of the contract and enters
into a long-term financing agreement with the entity for the remaining 95 per cent of the promised
consideration. The financing arrangement is provided on a non-recourse basis, which means that if the
customer defaults, the entity can repossess the building, but cannot seek further compensation from the
customer, even if the collateral does not cover the full value of the amount owed. The entitys cost of the
building is S$600,000. The customer obtains control of the building at contract inception.

In assessing whether the contract meets the criteria in IFRS 15, the entity concludes that one criterion
is not met because it is not probable that the entity will collect the consideration to which it is entitled
in exchange for the transfer of the building. In reaching this conclusion, the entity observes that the
customers ability and intention to pay may be in doubt because of the following factors:

a) The customer intends to repay the loan (which has a significant balance) primarily from income derived
from its restaurant business (which is a business facing significant risks because of high competition in
the industry and the customers limited experience);

b) The customer lacks other income or assets that could be used to repay the loan; and

c) The customers liability under the loan is limited because the loan is non-recourse.

Because the criteria are not all met, the entity applies another provision of IFRS 15 to determine the
accounting for the non-refundable deposit of S$50,000. The entity observes that none of the events
described in the relevant provision have occurred, i.e., the entity has not received substantially all of the
consideration and it has not terminated the contract. Consequently, in accordance with that standard, the

35
 entity accounts for the non-refundable S$50,000 payment as a deposit liability. It continues to account
for the initial deposit, as well as any future payments of principal and interest, as a deposit liability, until
such time that it concludes that the criteria in IFRS 15 are met (i.e., the entity is able to conclude that
it is probable that the entity will collect the consideration) or one of the other events set forth in the
standard has occurred. The entity continues to assess the contract to determine whether the criteria are
subsequently met or whether the other events noted have occurred.

Example 3 Implicit price concession

An entity, a hospital, provides medical services to an uninsured patient in the emergency room. The entity
has not previously provided medical services to this patient but is required by law to provide medical
services to all emergency room patients. Because of the patients condition upon arrival at the hospital,
the entity provides the services immediately and, therefore, before the entity can determine whether the
patient is committed to perform its obligations under the contract in exchange for the medical services
provided. Consequently, the contract does not meet the criteria of IFRS 15 and, in accordance with the
standard, the entity will continue to assess its conclusion based on updated facts and circumstances.

After providing services, the entity obtains additional information about the patient including a review
of the services provided, standard rates for such services and the patients ability and intention to pay
the entity for the services provided. During the review, the entity notes its standard rate for the services
provided in the emergency room is S$10,000. The entity also reviews the patients information and to be
consistent with its policies designates the patient to a customer class based on the entitys assessment of
the patients ability and intention to pay.

Before reassessing whether the criteria in IFRS 15 have been met, the entity considers its various other
provisions. Although the standard rate for the services is S$10,000 (which may be the amount invoiced
to the patient), the entity expects to accept a lower amount of consideration in exchange for the services.
Accordingly, the entity concludes that the transaction price is not S$10,000 and, therefore, the promised
consideration is variable. The entity reviews its historical cash collections from this customer class and
other relevant information about the patient. The entity estimates the variable consideration and
determines that it expects to be entitled to S$1,000.

In accordance with IFRS 15, the entity evaluates the patients ability and intention to pay (i.e., the
credit risk of the patient). On the basis of its collection history from patients in this customer class, the
entity concludes it is probable that the entity will collect S$1,000 (which is the estimate of variable
consideration). In addition, on the basis of an assessment of the contract terms and other facts and
circumstances, the entity concludes that the other criteria of IFRS 15 are also met. Consequently, the entity
accounts for the contract with the patient in accordance with the requirements in IFRS 15.

Example 4 Reassessing the criteria for contract identification

An entity licenses a patent to a customer in exchange for a usage-based royalty. At contract inception,
the contract meets all the criteria in IFRS 15 and the entity accounts for the contract with the customer
in accordance with the requirements in IFRS 15. The entity recognizes revenue when the customers
subsequent usage occurs in accordance with provisions of the standard.

Throughout the first year of the contract, the customer provides quarterly reports of usage and pays
within the agreed-upon period.

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 REVENUE RECOGNITION

During the second year of the contract, the customer continues to use the entitys patent, but the
customers financial condition declines. The customers current access to credit and available cash on hand
are limited. The entity continues to recognize revenue on the basis of the customers usage throughout
the second year. The customer pays the first quarters royalties but makes nominal payments for the usage
of the patent in quarters 2 through 4. The entity accounts for any impairment of the existing receivable in
accordance with IFRS 9, Financial Instruments.

During the third year of the contract, the customer continues to use the entitys patent. However, the
entity learns that the customer has lost access to credit and its major customers and thus the customers
ability to pay significantly deteriorates. The entity therefore concludes that it is unlikely that the customer
will be able to make any further royalty payments for ongoing usage of the entitys patent. As a result
of this significant change in facts and circumstances, in accordance with provisions of IFRS 15, the entity
reassesses the criteria of that standard, and determines that they are not met because it is no longer
probable that the entity will collect the consideration to which it will be entitled. Accordingly, the entity
does not recognize any further revenue associated with the customers future usage of its patent. The
entity accounts for any impairment of the existing receivable in accordance with IFRS 9.

Example 5A Modification of a contract

An entity promises to sell 120 products to a customer for S$12,000 (S$100 per product). The products
are transferred to the customer over a six-month period. The entity transfers control of each product
at a point in time. After the entity has transferred control of 60 products to the customer, the contract
is modified to require the delivery of an additional 30 products (a total of 150 identical products) to the
customer. The additional 30 products were not included in the initial contract.

When the contract is modified, the price of the contract modification for the additional 30 products is
an additional S$2,850, or S$95 per product. The pricing for the additional products reflects the stand-
alone selling price of the products at the time of the contract modification and the additional products are
distinct (defined in accordance with IFRS 15) from the original products.

In accordance with IFRS 15, the contract modification for the additional 30 products is, in effect, a new
and separate contract for future products that does not affect the accounting for the existing contract.
The entity recognizes revenue of S$100 per product for the 120 products in the original contract and S$95
per product for the 30 products in the new contract.

Example 6 Change in the transaction price after a contract modification

On 1 July 20X0, an entity promises to transfer two distinct products to a customer. Product X transfers
to the customer at contract inception and Product Y transfers on 31 March 20X1. The consideration
promised by the customer includes fixed consideration of S$1,000 and variable consideration that is
estimated to be S$200. The entity includes its estimate of variable consideration in the transaction price
because it concludes that it is highly probable that a significant reversal in cumulative revenue recognized
will not occur when the uncertainty is resolved.

The transaction price of S$1,200 is allocated equally to the performance obligation for Product X and the
performance obligation for Product Y. This is because both products have the same stand-alone selling
prices and the variable consideration does not meet the criteria in the standard that requires allocation of
the variable consideration to one but not both of the performance obligations.

37
 When Product X transfers to the customer at contract inception, the entity recognizes revenue of S$600.

On 30 November 20X0, the scope of the contract is modified to include the promise to transfer Product Z
(in addition to the undelivered Product Y) to the customer on 30 June 20X1 and the price of the contract
is increased by S$300 (fixed consideration), which does not represent the stand-alone selling price of
Product Z. The stand-alone selling price of Product Z is the same as the stand-alone selling prices of
Products X and Y.

The entity accounts for the modification as if it were the termination of the existing contract and the
creation of a new contract. This is because the remaining Products Y and Z are distinct from Product
X, which had transferred to the customer before the modification, and the promised consideration for
the additional Product Z does not represent its stand-alone selling price. Consequently, in accordance
with IFRS 15, the consideration to be allocated to the remaining performance obligations comprises the
consideration that had been allocated to the performance obligation for Product Y (which is measured at
an allocated transaction price amount of S$600) and the consideration promised in the modification (fixed
consideration of S$300). The transaction price for the modified contract is S$900 and that amount is
allocated equally to the performance obligation for Product Y and the performance obligation for Product
Z (i.e., S$450 is allocated to each performance obligation).

After the modification but before the delivery of Products Y and Z, the entity revises its estimate of the
amount of variable consideration to which it expects to be entitled to S$240 (rather than the previous
estimate of S$200). The entity concludes that the change in estimate of the variable consideration can
be included in the transaction price, because it is highly probable that a significant reversal in cumulative
revenue recognized will not occur when the uncertainty is resolved. Even though the modification was
accounted for as if it were the termination of the existing contract and the creation of a new contract
in accordance with IFRS 15, the increase in the transaction price of S$40 is attributable to variable
consideration promised before the modification. Therefore, in accordance with provisions of the standard,
the change in the transaction price is allocated to the performance obligations for Product X and Product
Y on the same basis as at contract inception. Consequently, the entity recognizes revenue of S$20 for
Product X in the period in which the change in the transaction price occurs. Because Product Y had not
transferred to the customer before the contract modification, the change in the transaction price that is
attributable to Product Y is allocated to the remaining performance obligations at the time of the contract
modification. This is consistent with the accounting that would have been required by IFRS 15 if that
amount of variable consideration had been estimated and included in the transaction price at the time of
the contract modification.

The entity also allocates the S$20 increase in the transaction price for the modified contract equally to the
performance obligations for Product Y and Product Z. This is because the products have the same stand-
alone selling prices and the variable consideration does not meet the criteria that require allocation of the
variable consideration to one but not both of the performance obligations. Consequently, the amount of
the transaction price allocated to the performance obligations for Product Y and Product Z increases by
S$10 to S$460 each.

On 31 March 20X1, Product Y is transferred to the customer and the entity recognizes revenue of S$460.
On 30 June 20X1, Product Z is transferred to the customer and the entity recognizes revenue of S$460.

Example 8 Modification resulting in cumulative catch-up adjustment to revenue

An entity, a construction company, enters into a contract to construct a commercial building for a
customer on customer-owned land for promised consideration of S$1 million and a bonus of S$200,000

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 REVENUE RECOGNITION

if the building is completed within 24 months. The entity accounts for the promised bundle of goods and
services as a single performance obligation satisfied over time in accordance with IFRS 15 because the
customer controls the building during construction. At the inception of the contract, the entity expects
the following:

Transaction price S$1,000,000

Expected costs 700,000
Expected profit (30%) S$ 300,000

At contract inception, the entity excludes the S$200,000 bonus from the transaction price because it
cannot conclude that it is highly probable that a significant reversal in the amount of cumulative revenue
recognized will not occur. Completion of the building is highly susceptible to factors outside the entitys
influence, including weather and regulatory approvals. In addition, the entity has limited experience with
similar types of contracts.

The entity determines that the input measure, on the basis of costs incurred, provides an appropriate
measure of progress towards complete satisfaction of the performance obligation. By the end of the
first year, the entity has satisfied 60 per cent of its performance obligation on the basis of costs
incurred to date (S$420,000) relative to total expected costs (S$700,000). The entity reassesses the
variable consideration and concludes that the amount is still constrained in accordance with IFRS 15.
Consequently, the cumulative revenue and costs recognized for the first year are as follows:

Revenue S$ 600,000
Costs 420,000
Gross profit S$ 180,000

In the first quarter of the second year, the parties to the contract agree to modify the contract by
changing the floor plan of the building. As a result, the fixed consideration and expected costs increase
by S$150,000 and S$120,000, respectively. Total potential consideration after the modification is
S$1,350,000 (S$1,150,000 fixed consideration + S$200,000 completion bonus). In addition, the
allowable time for achieving the S$200,000 bonus is extended by six months to 30 months from the
original contract inception date.

At the date of the modification, on the basis of its experience and the remaining work to be performed,
which is primarily inside the building and not subject to weather conditions, the entity concludes that it
is highly probable that including the bonus in the transaction price will not result in a significant reversal
in the amount of cumulative revenue recognized in accordance with IFRS 15 and includes the S$200,000
in the transaction price. In assessing the contract modification, the entity evaluates provisions of IFRS 15
and concludes that the remaining goods and services to be provided using the modified contract are not
distinct from the goods and services transferred on or before the date of contract modification; that is, the
contract remains a single performance obligation.

Consequently, the entity accounts for the contract modification as if it were part of the original contract.
The entity updates its measure of progress and estimates that it has satisfied 51.2 per cent of its
performance obligation (S$420,000 actual costs incurred S$820,000 total expected costs). The entity
recognizes additional revenue of S$91,200 [(51.2 per cent complete S$1,350,000 modified transaction
price) - S$600,000 revenue recognized to date] at the date of the modification as a cumulative catch-up
adjustment.

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Example 10 Identifying performance obligations: goods and services not distinct

A contractor enters into a contract to build a hospital for a customer. The entity is responsible for the
overall management of the project and identifies various goods and services to be provided, including
engineering, site clearance, foundation, procurement, construction of the structure, piping and wiring,
installation of equipment and finishing.

The promised goods and services are capable of being distinct in accordance with IFRS 15. That is,
the customer can benefit from the goods and services either on its own or together with other readily
available resources. This is evidenced by the fact that the entity, or competitors of the entity, regularly sells
many of these goods and services separately to other customers. In addition, the customer could generate
economic benefit from the individual goods and services by using, consuming, selling or holding those
goods or services.

However, the goods and services are not distinct within the context of the contract in accordance with
IFRS 15 (on the basis of the factors set forth therein). That is, the entitys promise to transfer individual
goods and services in the contract are not separately identifiable from other promises in the contract. This
is evidenced by the fact that the entity provides a significant service of integrating the goods and services
(the inputs) into the hospital (the combined output) for which the customer has contracted.

Because both criteria of IFRS 15 are not met, the goods and services are not distinct. The entity accounts
for all of the goods and services in the contract as a single performance obligation.

Example 12 Explicit and implicit promises in a contract

A manufacturer sells a product to a distributor (i.e., its customer) who will then resell it to an end
customer.

Case A - Explicit promise of service

In the contract with the distributor, the entity promises to provide maintenance services for no additional
consideration (i.e., free) to any party (i.e., the end customer) that purchases the product from the
distributor. The entity out-sources the performance of the maintenance services to the distributor and
pays the distributor an agreed-upon amount for providing those services on the entitys behalf. If the end
customer does not use the maintenance services, the entity is not obliged to pay the distributor.

Because the promise of maintenance services is a promise to transfer goods or services in the future and
is part of the negotiated exchange between the entity and the distributor, the entity determines that
the promise to provide maintenance services is a performance obligation. The entity concludes that the
promise would represent a performance obligation regardless of whether the entity, the distributor, or a
third party provides the service. Consequently, the entity allocates a portion of the transaction price to the
promise to provide maintenance services.

Case B - Implicit promise of service

The entity has historically provided maintenance services for no additional consideration (i.e., free) to end
customers that purchase the entitys product from the distributor. The entity does not explicitly promise
maintenance services during negotiations with the distributor and the final contract between the entity
and the distributor does not specify terms or conditions for those services.

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However, on the basis of its customary business practice, the entity determines at contract inception that
it has made an implicit promise to provide maintenance services as part of the negotiated exchange with
the distributor. That is, the entitys past practices of providing these services create valid expectations of
the entitys customers (i.e., the distributor and end customers) in accordance with IFRS 15. Consequently,
the entity identifies the promise of maintenance services as a performance obligation to which it allocates
a portion of the transaction price.

Example 13 Assessing whether performance obligation is satisfied at a point in time or

over time

An entity is developing a multi-unit residential complex. A customer enters into a binding sales contract
with the entity for a specified unit that is under construction. Each unit has a similar floor plan and is of a
similar size, but other attributes of the units are different (for example, the location of the unit within the
complex).

Case A - Entity does not have an enforceable right to payment for performance completed to date

The customer pays a deposit upon entering into the contract and the deposit is refundable only if the
entity fails to complete construction of the unit in accordance with the contract. The remainder of the
contract price is payable on completion of the contract when the customer obtains physical possession of
the unit. If the customer defaults on the contract before completion of the unit, the entity only has the
right to retain the deposit.

At contract inception, the entity applies criteria in IFRS 15 to determine whether its promise to construct
and transfer the unit to the customer is a performance obligation satisfied over time. The entity
determines that it does not have an enforceable right to payment for performance completed to date
because, until construction of the unit is complete, the entity only has a right to the deposit paid by the
customer. Because the entity does not have a right to payment for work completed to date, the entitys
performance obligation is not a performance obligation satisfied over time in accordance with IFRS 15.
Instead, the entity accounts for the sale of the unit as a performance obligation satisfied at a point in time
in accordance with criteria in IFRS 15.

Case B - Entity has an enforceable right to payment for performance completed to date

The customer pays a non-refundable deposit upon entering into the contract and will make progress
payments during construction of the unit. The contract has substantive terms that preclude the entity
from being able to direct the unit to another customer. In addition, the customer does not have the
right to terminate the contract unless the entity fails to perform as promised. If the customer defaults on
its obligations by failing to make the promised progress payments as and when they are due, the entity
would have a right to all of the consideration promised in the contract if it completes the construction of
the unit. The courts have previously upheld similar rights that entitle developers to require the customer
to perform, subject to the entity meeting its obligations under the contract.

At contract inception, the entity applies IFRS 15 to determine whether its promise to construct and
transfer the unit to the customer is a performance obligation satisfied over time. The entity determines
that the asset (unit) created by the entitys performance does not have an alternative use to the entity
because the contract precludes the entity from transferring the specified unit to another customer. The
entity does not consider the possibility of a contract termination in assessing whether the entity is able to
direct the asset to another customer.

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 The entity also has a right to payment for performance completed to date in accordance with IFRS 15.
This is because if the customer were to default on its obligations, the entity would have an enforceable
right to all of the consideration promised under the contract if it continues to perform as promised.

Therefore, the terms of the contract and the practices in the legal jurisdiction indicate that there is a
right to payment for performance completed to date. Consequently, the criteria in of IFRS 15 are met
and the entity has a performance obligation that it satisfies over time. To recognize revenue for that
performance obligation satisfied over time, the entity measures its progress towards complete satisfaction
of its performance obligation in accordance with IFRS 15.

In the construction of a multi-unit residential complex, the entity may have many contracts with individual
customers for the construction of individual units within the complex. The entity would account for each
contract separately. However, depending on the nature of the construction, the entitys performance
in undertaking the initial construction works (ie the foundation and the basic structure), as well as the
construction of common areas, may need to be reflected when measuring its progress towards complete
satisfaction of its performance obligations in each contract.

Example 14 Measuring progress towards completion: uninstalled materials

In November 20X2, an entity contracts with a customer to refurbish a 3-story building and install new
elevators for total consideration of S$5 million. The promised refurbishment service, including the
installation of elevators, is a single performance obligation satisfied over time. Total expected costs are
S$4 million, including S$1.5 million for the elevators. The entity determines that it acts as a principal
in accordance with provisions of IFRS 15, because it obtains control of the elevators before they are
transferred to the customer.

A summary of the transaction price and expected costs is as follows:

Transaction price S$ 5,000,000

Expected costs:
Elevators 1,500,000
Other costs 2,500,000
Total expected costs S$ 4,000,000

The entity uses an input method based on costs incurred to measure its progress towards complete
satisfaction of the performance obligation. The entity assesses whether the costs incurred to procure
the elevators are proportionate to the entitys progress in satisfying the performance obligation, in
accordance with IFRS 15. The customer obtains control of the elevators when they are delivered to
the site in December 20X2, although the elevators will not be installed until June 20X3. The costs to
procure the elevators (S$1.5 million) are significant relative to the total expected costs to completely satisfy
the performance obligation (S$4 million). The entity is not involved in designing or manufacturing the
elevators.

The entity concludes that including the costs to procure the elevators in the measure of progress would
overstate the extent of the entitys performance. Consequently, in accordance with IFRS 15, the entity
adjusts its measure of progress to exclude the costs to procure the elevators from the measure of costs
incurred and from the transaction price. The entity recognizes revenue for the transfer of the elevators in
an amount equal to the costs to procure the elevators (i.e., at a zero margin).

As of 31 December 20X2 the entity observes that:

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 REVENUE RECOGNITION

(a) Other costs incurred (excluding elevators) are S$500,000; and

(b) Performance is 20 per cent (= S$500,000 S$2,500,000) complete.

Consequently, at 31 December 20X2, the entity recognizes the following:

Revenue S$2,200,000 a

Cost of goods sold 2,000,000 b

Profit S$ 200,000

a
Calculated as 20% of S$3,500,000 (the transaction price less the cost of the elevators) plus S$1,500,000
b
Cost of sales is S$500,000 plus the cost of the elevators, S$1,500,000

Example 15 Variable consideration: penalties giving rise to variable consideration

An entity enters into a contract with a customer to build an asset for S$1 million. In addition, the
terms of the contract include a penalty of S$100,000 if the construction is not completed within three
months of a date specified in the contract.

The entity concludes that the consideration promised in the contract includes a fixed amount of
S$900,000 and a variable amount of S$100,000 (arising from the penalty).

The entity estimates the variable consideration in accordance with IFRS 15 and considers the standards
requirements on constraining estimates of variable consideration.

Example 16 Constraining estimates of variable consideration: right of return

An entity enters into 100 contracts with customers. Each contract includes the sale of one product for
S$100 (100 total products S$100 = S$10,000 total consideration). Cash is received when control of a
product transfers. The entitys customary business practice is to allow a customer to return any unused
product within 30 days and receive a full refund. The entitys cost of each product is S$60.

The entity applies the requirements in IFRS 15 to the portfolio of 100 contracts because it reasonably
expects that, in accordance with salient provisions of that standard, the effects on the financial statements
from applying these requirements to the portfolio would not differ materially from applying the
requirements to the individual contracts within the portfolio.

Because the contract allows a customer to return the products, the consideration received from the
customer is variable. To estimate the variable consideration to which the entity will be entitled, the entity
decides to use the expected value method set forth by IFRS 15, because it is the method that the entity
expects to better predict the amount of consideration to which it will be entitled. Using the expected
value method, the entity estimates that 97 products will not be returned.

The entity also considers the requirements of IFRS 15 on constraining estimates of variable consideration
to determine whether the estimated amount of variable consideration of S$9,700 (= S$100 97 products
not expected to be returned) can be included in the transaction price. The entity determines that although
the returns are outside the entitys influence, it has significant experience in estimating returns for this
product and customer class. In addition, the uncertainty will be resolved within a short time frame (i.e.,
the 30-day return period). Thus, the entity concludes that it is highly probable that a significant reversal in

43
 the cumulative amount of revenue recognized (i.e., S$9,700) will not occur until the uncertainty is resolved
(i.e., over the return period).

The entity estimates that the costs of recovering the products will be immaterial and expects that the
returned products can be resold at a profit.

Upon transfer of control of the 100 products, the entity does not recognize revenue for the three products
that it expects to be returned. Consequently, in accordance with IFRS 15, the entity recognizes the
following:

Revenue of S$9,700 (= S$100 97 products not expected to be returned);

A refund liability of S$300 (= S$100 refund 3 products expected to be returned); and

An asset of S$180 (= S$60 3 products for its right to recover products from customers on settling
the refund liability).

Example 17 Allocating a discount

An entity regularly sells Products A, B and C individually, thereby establishing the following stand-alone
selling prices:

Product Stand-alone selling price

Product A S$ 40
Product B 55
Product C 45
Total S$ 140

In addition, the entity regularly sells Products B and C together for S$60.

Case AAllocating a discount to one or more performance obligations

The entity enters into a contract with a customer to sell Products A, B and C in exchange for S$100. The
entity will satisfy the performance obligations for each of the products at different points in time.

The contract includes a discount of S$40 on the overall transaction, which would be allocated
proportionately to all three performance obligations when allocating the transaction price using the
relative stand-alone selling price method. However, because the entity regularly sells Products B and C
together for S$60 and Product A for S$40, it has evidence that the entire discount should be allocated to
the promises to transfer Products B and C in accordance with IFRS 15.

If the entity transfers control of Products B and C at the same point in time, then the entity could, as a
practical matter, account for the transfer of those products as a single performance obligation. That is,
the entity could allocate S$60 of the transaction price to the single performance obligation and recognize
revenue of S$60 when Products B and C simultaneously transfer to the customer.

If the contract requires the entity to transfer control of Products B and C at different points in time, then
the allocated amount of S$60 is individually allocated to the promises to transfer Product B (stand-alone
selling price of S$55) and Product C (stand-alone selling price of S$45) as follows:

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 REVENUE RECOGNITION

Product Allocated transaction price

Product B S$ 33 (= S$55 S$100 total stand-alone

selling price S$60)

Product C 27 (= S$45 S$100 total stand-alone

selling price S$60)

Total S$ 60

Case BResidual approach is appropriate

The entity enters into a contract with a customer to sell Products A, B and C as described in Case A. The
contract also includes a promise to transfer Product D. Total consideration in the contract is S$130. The
stand-alone selling price for Product D is highly variable, because the entity sells Product D to different
customers for a broad range of amounts (S$15 S$45). Consequently, the entity decides to estimate the
stand-alone selling price of Product D using the residual approach.

Before estimating the stand-alone selling price of Product D using the residual approach, the entity
determines whether any discount should be allocated to the other performance obligations in the contract
in accordance with IFRS 15.

As in Case A, because the entity regularly sells Products B and C together for S$60 and Product A for
S$40, it has observable evidence that S$100 should be allocated to those three products and a S$40
discount should be allocated to the promises to transfer Products B and C in accordance with IFRS 15.
Using the residual approach, the entity estimates the stand-alone selling price of Product D to be S$30 as
follows:

Product Stand-alone selling price Method

Product A S$ 40 Directly observable

Product B and C 60 Directly observable with discount
Product D 30 Residual approach
Total S$ 130

The entity observes that the resulting S$30 allocated to Product D is within the range of its observable
selling prices (S$15 S$45). Therefore, the resulting allocation (see above table) is consistent with the
allocation objective of IFRS 15 and the requirements set forth in that standard.

Case CResidual approach is inappropriate

The same facts as in Case B apply to Case C except the transaction price is S$105 instead of S$130.
Consequently, the application of the residual approach would result in a stand-alone selling price of
S$5 for Product D (S$105 transaction price less S$100 allocated to Products A, B and C). The entity
concludes that S$5 would not faithfully depict the amount of consideration to which the entity expects
to be entitled in exchange for satisfying its performance obligation to transfer Product D, because S$5
does not approximate the stand-alone selling price of Product D, which ranges from S$15 S$45.
Consequently, the entity reviews its observable data, including sales and margin reports, to estimate the
stand-alone selling price of Product D using another suitable method. The entity allocates the transaction
price of S$130 to Products A, B, C and D using the relative stand-alone selling prices of those products in
accordance with IFRS 15.

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Example 18 Contract liability and receivable

Case A Cancelable contract

On 1 January 20X9, an entity enters into a cancelable contract to transfer a product to a customer on
31 March 20X9. The contract requires the customer to pay consideration of S$1,000 in advance on 31
January 20X9. The customer pays the consideration on 1 March 20X9. The entity transfers the product
on 31 March 20X9. The following journal entries illustrate how the entity accounts for the contract:

(a) The entity receives cash of S$1,000 on 1 March 20X9 (cash is received in advance of performance):

Cash S$1,000
Contract liability S$1,000

(b) The entity satisfies the performance obligation on 31 March 20X9:

Contract liability S$1,000

Revenue S$1,000

Case BNon-cancelable contract

The same facts as in Case A apply to Case B except that the contract is non-cancelable. The following
journal entries illustrate how the entity accounts for the contract:

(a) The amount of consideration is due on 31 January 20X9 (which is when the entity recognizes a
receivable because it has an unconditional right to consideration):

Receivable S$1,000
Contract liability S$1,000

(b) The entity receives the cash on 1 March 20X9:

Cash S$1,000
Receivable S$1,000

(c) The entity satisfies the performance obligation on 31 March 20X9:

Contract liability S$1,000

Revenue S$1,000

If the entity issued the invoice before 31 January 20X9 (the due date of the consideration), the entity
would not present the receivable and the contract liability on a gross basis in the statement of financial
position because the entity does not yet have a right to consideration that is unconditional.

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 REVENUE RECOGNITION

About ISCA Technical Standards Development and Advisory

The Technical Standards Development and Advisory (TSDA) team is part of the Technical Knowledge Centre
and Quality Assurance division of the Institute of Singapore Chartered Accountants (ISCA). It is committed to
supporting the Institute in advancing and promoting technical developments within the profession as part of
the effort to transform Singapore into a leading global accountancy hub by 2020.

ISCA TSDA engages external stakeholders in soliciting meaningful feedback on accounting and auditing related
issues to develop a consistent approach to addressing industry issues identified. It also prescribes auditing and
assurance standards that are closely aligned to international best practices, champions thought leadership
initiatives with key stakeholders and drives projects in collaboration with various ISCA technical committees.

It actively engages international standard setters and strives to be an advocate of matters pertinent to the
development of Singapores accountancy profession. Furthermore, it aims to cultivate a mindset change and
raises awareness of new and revised standards through the publication of articles authored by the team.

Additionally, ISCA TSDA seeks to empower members and the profession at large to achieve their aspirations by
equipping them with relevant technical expertise and this is achieved through the development of a range of
resources that they can tap on.

Knowledge sharing with the accounting community is facilitated through a variety of print and online channels
including the sharing of regular updates and thought leadership articles via in-house publications like the
journal, IS Chartered Accountant, the E-newsletter, ISCA Weekly, and various online knowledge centres
and a technical forum. Seminars and workshops are regularly organised and ISCA TSDA also provides value
added technical clarification services to assist the profession in resolving accounting, auditing and ethics related
issues.

2014 by Dr Barry Epstein

Disclaimer

This document contains general information only and the author and ISCA are not, by means of this document, rendering any professional
advice or services. This document is not a substitute for such professional advice or services, nor should it be used as a basis for any
decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should
consult a professional advisor. Whilst every care has been taken in compiling this document, the author and ISCA make no representations
or warranty (expressed or implied) about the accuracy, suitability, reliability or completeness of the information for any purpose. The author,
ISCA, its employees or agents accept no liability to any party for any loss, damage or costs howsoever arising, whether directly or indirectly
from any action or decision taken (or not taken) as a result of any person relying on or otherwise using this document or arising from any
omission from it.

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Institute of Singapore Chartered Accountants
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