Ifrs 15

REVENUE FROM
CONTRACTS WITH CUSTOMERS

IFRS 15
Webster Sigauke - Chartered Accountants Academy

Scope
Evaluate contracts
under other
Interest &
applicable standard
dividends
first
IAS 39/IFRS 9 – Financial instruments

All contracts IFRS 15 –
with IFRS 16 – Leases Residual
customers Standard
IFRS 4 – Insurance

The five step model
• Step 1: Identify the
Step 2: Identify the
separate performance
contract(s) with the
obligations in the
customer
contract(s)
Step 4: Allocate the Step 3: Determine the

transaction price transaction price
Step 5: Recognise revenue when (or as) a

performance obligation is satisfied

Revenue recognition

Single
contract
Identify the Combined

contract contract
Contract
modification
Contract combination
Knowledge check
• Choose the correct option
A Supplier enters into two contracts in the same week with a
Manufacturer to:
1. Construct a tool for the Manufacturer, and
2. Supply the Manufacturer parts using the tool. The Supplier will
recover its cost for the tool from the Manufacturer.
Should the Supplier combine the contracts?
Yes No
• Appears that the contracts were negotiated with single
commercial objective (construct tool and provide
parts that will be produced using it)
• Pricing is related (no profit margin on tool)
PwC
Contract modifications [par 18-21]

Contract modification
Example
SinghCo enters into 3-year service contract with A for $150 000 per
year. At beginning of 3rd year, parties agree to modify the contract:
• Fee for 3rd year $120,000
• Extend the contract for additional 3 years @ $100,000
(standalone selling price = $120,000)
Year Original terms Modified terms Accounting

1 150,000
2 150,000
3 150,000 120,000 105,000
4 100,000 105,000 Modification
5 100,000 105,000 prospective
6 100,000 105,000
PwC
Step 2 – Identify the performance obligations
Is a good or service distinct?
Capable of being distinct?

i.e. Benefit from good or
service on its own or
with other readily
available goods or services
Distinct
Distinct in the context
of the contract?
i.e. Good/service
not being used as an input
to create an output

Separate performance obligations
Individual Group of Series of

distinct good integrated goods homogeneous
or service 01 or service
Text to go 01
here go here go here go here go here go here go here
‘services’
Text to go here go here go here go here go here go here go
here
Dependent on 02
Text to go here go here go here go here go here go here go here
Sold separately
Text to go here go here go here go here go here go
02 Homogeneous
here go here
or or interrelated with and
can be used other items in the consistent pattern
separately 03
03
contract ofheretransfer
Text to go here go
here go here
go here go hereover
go here go
time
Text to go here go here go here go here go here go here go here
Text to go here go here go here go here go here go here go here 04
04
• Post customer support / • Construction contracts
maintenance • Complex installations • Daily cleaning service
• Loyalty point schemes • Customised software • Security service
• Free goods or gifts solutions • Call centre processing

Separate performance obligations
Knowledge check
The entity has never sold Product Y and Service Z separately, but Product Y can be used on its
own without Service Z (for example, a photocopier without maintenance).
Are Product Y and Service Z separate performance obligations?
Yes No
PwC
Principles to practice – Identify the
performance obligations? (1)
Facts Question
An OEM sells a vehicle to a dealer
with ‘free’ vehicle maintenance for Would the maintenance service be
the first three years or 30,000 a separate performance obligation
miles of ownership. of the OEM?
The maintenance is performed by

independent dealers of the OEM
and the OEM compensates the
dealer a pre-determined amount
per event for performing the
maintenance.
The individual can purchase a

similar maintenance service
contract from a third party.
PwC
Principles to practice – Identify the
performance obligations? (2)
Solution
Granting a right (such as free maintenance) that the dealer
can provide to its customer is likely to be a performance
obligation of the OEM.
Are the vehicle and maintenance services distinct?

1) The customer can benefit from the vehicle separately
from the maintenance since they are sold separately in
the marketplace. What amount
2) There is no integration of goods or services or should be
allocated to each
customisation, nor is the vehicle highly interrelated element?
with the maintenance (the customer could purchase the
vehicle without using the free maintenance).
The vehicle and maintenance are distinct performance

obligations of the OEM.
PwC
Factors that may affect the transaction price
Variable
consideration Transaction
price =
Significant Amount of
financing consideration to
component which the entity
expects to be
Non-cash entitled to in
consideration exchange for
transferring
Consideration goods or services
payable to
customers

Significant financing component
• Customer or entity receives

significant benefit of financing
• Period between performance and

payment is one year or less
No adjustment when • Variable based on factors outside
control of customer or entity
e.g. sales-based royalty
• Timing is at discretion of customer
e.g. gift vouchers
• Timing difference arises for reasons
other than providing financing
e.g. secure the right to a product

Knowledge check
Manufacturer enters into an agreement with its customer to build a submarine. Upfront
consideration paid by a customer is $100,000 to finance the manufacturers work in progress.
Discount rate that would be reflected in a separate financing transaction between parties =
9.7%.
What is the transaction price in this arrangement?
1. $100,000
2. Less that $100,000
3. More than $100,000
PwC
Impact of the financing adjustment on Manufacturer
Accounting entries?
Year 0 Year 1 Year 2 Year 3 Total
Bank 100,000 - - -
Deferred revenue -100,000 -69,700 -36,460 -
Revenue - -40,000 -40,000 -40,000 -120,000

Interest paid - 9,700 6,760 3,540 20,000
- -30,300 -33,240 -36,460 -100,000
PwC
How to allocate the transaction price
1 2 3
Allocate to each performance obligation based
Transaction price (and on relative stand-alone selling price unless
any subsequent changes) clear that discount or variable consideration
relates to only one good/service
Should be estimated if the actual

Stand-alone selling price selling price is not directly
observable
• Cost plus reasonable margin

Possible estimation • Market prices similar good/service
methods include • Residual approach when selling
price is highly variable

Allocation of transaction price
Example
KaviCo sells a vehicle with a 3 year service plan for $100,000. The
stand-alone selling price of vehicle and service plan is $100,000 and
$25,000 respectively.
•Step 2 Step 3 and 4 Step 5
Performance Determine & allocate Recognise revenue when (as) performance
obligations transaction price obligation is satisfied
Yr 0 Yr 1 Yr 2 Yr 3
80,000 80,000 - - -
Vehicle
100,000/125,000 x 100,000
20,000 - 6,667 6,667 6,667
Service Plan*
25,000/125,0000 x 100,000
• * Assuming no significant finance component

* Assuming service is provided evenly over period
•
PwC
Allocation of transaction price
Knowledge check
Choose the correct option
Product X is sold for $5m. Y and Z are sometimes sold together and the combined selling price
is always $7m.
Reminder: Total transaction price is $12m
How is the consideration allocated? A B
no change new allocation
Product X 4 5
Product Y 4 3.5
Product Z 4 3.5
PwC
Revenue recognition
▪ Phase 5
▪ Recognise revenue when the performance obligation is satisfied
▪ Upon completion of the obligation

and control is transferred to the
client/customer
e.g. when I take control of my new
house

Revenue recognition
Versus
Timing of when revenue is recognised

might be consistent with current practice
for most entities.
This should however not be assumed
for all contracts.
This implies that

timing could
differ?

Recognise revenue as contract is being satisfied
• When to recognise revenue from:

– Hand set
– Modem
– Voice
– Data
Handset- on delivery
Installation- on installation
Voice + data- monthly over the
contract period

Contract Costs

Case Study
• Telone incurred $100 000 of lawyers fees and technical fees in

obtaining the 10 year contract to provide fixed voice lines to
NMB bank during the year. Telone also spent $500 000 in
acquisition of telecom equipment and software, handsets +
modems and labour as other costs necessary to set up the
landline network required to service NMB bank’s branches
nationwide.
Telone is not sure on how to account for these costs and has
asked for your advice.

Cost to fulfil a contract

Contract costs
Incremental Costs- IFRS15.91 Cost to fulfil a contract

• Definition: Costs incurred to obtain a • Definition- refer para 97-98
contract with a customer that it would
not have incurred if the contract had • Acc treatment: refer to para 95
not been obtained.- e.g. sales
commission
• Acc Treatment: capitalise as an asset
and amortise of the contract term

Classify Telone’s Contract costs
Incremental Costs- IFRS15.91 Cost to fulfil a contract

• $100 000 for obtaining the contract • $500 000 to fulfil the contract

IFRS 15 Special Considerations
Warranties Repurchase agreements
Right of return Agent vs Principal
Customer option to obtain

Disclosure
additional goods or services
Licenses Contract costs
Transition Bill-and-Hold and

Consignment arrangements

Sales with a right of return [B20-B21]
To account for the transfer of products with a right of return (and for
some services that are provided subject to a refund), an entity shall
recognise all of the following:
• revenue for the transferred products in the amount of
consideration to which the entity expects to be entitled (therefore,
revenue would not be recognised for the products expected to be
returned);
• a refund liability; and
• an asset (and corresponding adjustment to cost of sales) for its
right to recover products from customers on settling the refund
liability.

Sales with a right of return [B20-B21]
Date of sale Date after return period lapse

Dr Asset (right to recover product) Dr Refund Liability
Dr Cost of Sales Cr Revenue
Cr Inventory
Dr Cost of Sales
Dr Cash Cr Asset (right to recover product)
Cr Refund Liability
Cr Revenue When the 30-day refund period lapses
As sales of the product occur. (assuming no returns).

Principal vs Agent [B34-B38]
Indicators that an entity is an agent (and therefore does not control the good
or service before it is provided to a customer) include the following:
• another party is primarily responsible for fulfilling the contract;
• the entity does not have inventory risk before or after the goods have been
ordered by a customer, during shipping or on return;
• the entity does not have discretion in establishing prices for the other
party’s goods or services and, therefore, the benefit that the entity can
receive from those goods or services is limited;
• the entity’s consideration is in the form of a commission; and
• the entity is not exposed to credit risk for the amount receivable from a
customer in exchange for the other party’s goods or services.

Warranties
-If a customer has the option to purchase a warranty separately

from the product to which it relates, it constitutes a distinct
service and is accounted for as a separate performance
obligation. [B28-B33]

REPURCHASE AGREEMENTS
Definition: a contract in which an entity sells an asset and also

promises or has the option to repurchase the asset. Par B 64

REPURCHASE AGREEMENTS
Forms of repurchase agreements
• An entity has an obligation to repurchase the asset – a forward
• An entity has a right to repurchase the asset – a call option
• An entity has an obligation to repurchase the asset at the

customer’s request - a put option

Example
Potraz constructs 20 boosters in the Binga area to promote communication in
the area. Upon completion, it eventually entered into a contract with
telecom companies to sell the boosters to them $500 000 each. The contract
includes a clause with the following options:
1. Potraz is obliged to repurchase the boosters from the telecoms for $ 50
000 five years after the inception of the contract.
2. Potraz has a right to repurchase the boosters from the telecoms for $ 500
000 3 years after the inception of the contract.
3. Telecoms have the option to sell back the boosters to Potraz after 5 years
for $35 000.
On each option, should Potraz recognize revenue on the sale of the boosters?

RECOGNITION OF FORWARD OR CALL OPTIONS
PRINCIPLE : IF customer does not obtain control of

asset, DO NOT RECOGNISE REVENUE FROM
CONTRACT WITH CUSTOMER

RECOGNITION OF FORWARD OR CALL OPTIONS
LEASE
• if an entity can/must repurchase asset for an
amount that is less than original selling price
FINANCING ARRANGEMENT
• If an entity can/must repurchase an asset for an

amount that is equal to or more than original
selling price
MEASUREMENT OF FORWARD OR CALL OPTIONS
LEASE
– Consider whether appropriate to continue to recognise asset
– Recognise PV of consideration payable to customer
– Difference between consideration received from customer and

amount of consideration payable to customer recognised as
lease income over term of contract

MEASUREMENT OF FORWARD OR CALL OPTIONS
FINANCING ARRANGEMENT
– continue to recognise asset
– recognise financial liability for consideration received from customer
– recognise difference between consideration received from customer and

amount of consideration payable to customer as interest (may be
processing or holding costs).

RECOGNITION OF PUT OPTION
PRINCIPLE : customer has obtained control UNLESS significant

economic incentive to exercise right
ECONOMIC INCENTIVE: relationship of repurchase price to

expected market value of asset at date of repurchase and
amount of time till the right expires Par B 71
If no economic incentive recognise as sale with right of return

Par B 72&74

MEASUREMENT OF PUT OPTION
IF ECONOMIC INCENTIVE TO RETURN
FINANCING
LEASE
ARRANGEMENT
If repurchase price
if repurchase price
less than original
=/more than original
selling price but
selling price & more
higher than expected
than expected market
market value Par B 70
value Par B 73

Gift Cards [B44-B47]

Non-refundable upfront fees [B48-B51]

Licensing[B52-B56]

Bill and Hold [B70-B81]

Material Right [B39-B43]
• Customer options to acquire additional goods or services for

free or at a discount come in many forms, including sales
incentives, customer award credits (or points), contract
renewal options or other discounts on future goods or
services.
• Treatment: if they are a separate performance obligation-
isolate and defer the revenue until satisfied and then recognise
revenue.

Disclosure- par 110
An entity shall disclose qualitative and quantitative information

about all of the following:
• its contracts with customers;
• the significant judgements, and changes in the judgements,
made in applying this Standard to those contracts; and
• any assets recognised from the costs to obtain or fulfil a
contract with a customer.

THANK YOU

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REVENUE FROM

CONTRACTS WITH CUSTOMERS

Webster Sigauke - Chartered Accountants Academy

IAS 39/IFRS 9 – Financial instruments

Webster Sigauke - Chartered Accountants Academy

Step 4: Allocate the Step 3: Determine the

Step 5: Recognise revenue when (or as) a

Webster Sigauke - Chartered Accountants Academy

Webster Sigauke - Chartered Accountants Academy

Identify the Combined

Webster Sigauke - Chartered Accountants Academy

Year Original terms Modified terms Accounting

Capable of being distinct?

Webster Sigauke - Chartered Accountants Academy

Individual Group of Series of

Webster Sigauke - Chartered Accountants Academy

The maintenance is performed by

The individual can purchase a

Are the vehicle and maintenance services distinct?

The vehicle and maintenance are distinct performance

Webster Sigauke - Chartered Accountants Academy

• Customer or entity receives

• Period between performance and

Webster Sigauke - Chartered Accountants Academy

Revenue - -40,000 -40,000 -40,000 -120,000

Should be estimated if the actual

• Cost plus reasonable margin

Webster Sigauke - Chartered Accountants Academy

• * Assuming no significant finance component

▪ Upon completion of the obligation

Webster Sigauke - Chartered Accountants Academy

Timing of when revenue is recognised

This implies that

Webster Sigauke - Chartered Accountants Academy

• When to recognise revenue from:

Webster Sigauke - Chartered Accountants Academy

Webster Sigauke - Chartered Accountants Academy

• Telone incurred $100 000 of lawyers fees and technical fees in

Webster Sigauke - Chartered Accountants Academy

Webster Sigauke - Chartered Accountants Academy

Incremental Costs- IFRS15.91 Cost to fulfil a contract

Webster Sigauke - Chartered Accountants Academy

Incremental Costs- IFRS15.91 Cost to fulfil a contract

Webster Sigauke - Chartered Accountants Academy

Warranties Repurchase agreements

Right of return Agent vs Principal

Customer option to obtain

Licenses Contract costs

Transition Bill-and-Hold and

Webster Sigauke - Chartered Accountants Academy

Webster Sigauke - Chartered Accountants Academy

Date of sale Date after return period lapse

Webster Sigauke - Chartered Accountants Academy

Webster Sigauke - Chartered Accountants Academy

-If a customer has the option to purchase a warranty separately

Webster Sigauke - Chartered Accountants Academy

Definition: a contract in which an entity sells an asset and also

Webster Sigauke - Chartered Accountants Academy

Forms of repurchase agreements

• An entity has an obligation to repurchase the asset – a forward

• An entity has a right to repurchase the asset – a call option

• An entity has an obligation to repurchase the asset at the