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IFRS 15 - Revenue from contracts with customers (Defined terms (Income…
IFRS 15 - Revenue from contracts with customers
Defined terms
Income
Increase in economic benefit during the accounting period
in the form of inflows, or enhancements of assets, or decreases of liabilities that result in an increase in equity
other than those relating to contributions from equity partners (CAPITAL CONTRIBUTION)
Revenue
Income arising in the course of an entity's ordinary activities
Contract
Agreement between two or more parties that creates enforceable rights and obligations
Customer
A party that has contracted with an entity or services that are an output of the entity's ordinary activity in exchange for consideration
Performance Obligation
A promise in a contract with a customer to transfer to the customer either:
a good/service (or bundle thereof) that is distinct or
a series of distinct goods/services that are substantially the same and that have the same pattern of transfer to the customer
Stand alone selling price
The price at which an entity would sell a promised good/service separately to a customer
Transaction Price
The amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods/services to a customer,
This excludes amounts collected on behalf of third parties
5 Step Revenue Model
Identify the
contract
5 Criteria for a contract to exist
I. The parties have
approved
the contract and are committed to perform
II. The entity can identify
each party's rights
regarding the goods and services to be transferred
III. The entity can
identify the payment terms
of those g/s to be transferred
IV. The contract has
commercial substance
(risk,timing or amount of the entity's future cash flows is expected to change as a result of the contract
V. It is
probable
that the entity will collect the
consideration
The contract does not meet the criteria?
Should this occur, consideration is ONLY recognised as an income when:
The entity has
no remaining obligation
to transfer g/s to the customer and all received
consideration is non-refundable
; or
The contract has been
terminated
and the consideration received is
non-refundable
If none of the above is applicable, the consideration is
recognised as a liability
until the contract meets one of the criteria
A contract does not exist if each party has the
unilateral enforceable right
to terminate a wholly unperformed contract without a penalty
Unilateral
= a decision made without the involvement of others
The party having the ability to decide on their own to cancel the contract without the agreement of the other party
Combination of contracts
Each contract meeting the 5 criteria is accounted for separately
2 or more contracts with the
same customer
entered into near the same time
may
be
accounted for as a single contract
The g/s promised under the contract constitute a single performance obligation
Consideration depends on the price or performance under another contract or,
Identify the
performance obligation
in the contract
Distinct
g/s
The customer can
benefit
from the g/s on its
own
or together with other resources readily available to the customer
--> These g/s are
capable
of being distinct
The enitty's promise to transfer the g/s is
separately identifiable
from other promises in the contract
--> These g/s are distinct within the
context of the contract
#
Non-distinct g/s
Not identified as a separate PO
must be combined as one PO
Must be
combined with other g/s
until entity identifies a bundle of g/s that are distinct
A series of distinct g/s
Criteria for the same pattern of transfer
each distinct g/s would meet the criteria to be a performance settled/satisfied over time
Same method
must be
used to measure entity's progress
toward complete satisfaction of the PO to transfer each distinct g/s in the series
--> Simply
: how we measure progress towards the entity transferring the g/s to the consumer must be constant
Determine the
transaction price
Variable consideration
Any amount that is variable under a contract
consideration amount can vary as a result of discounts, rebates and refunds etc
Variable consideration constitutes the
estimation of the amount entity will be entitled
after delivery of g/s
Expected value
Most likely amount
#
Refund Liability
if the entity receives a consideration from a customer and expects to refund a portion of or all of the consideration then: recognise the refund liability for the amount the entity does not expect to be entitled to
the refund liability is the amount that we are not going to receive should we expect to give a refund
Non-cash consideration
Consideration not in cash?
--> Non-cash consideration is measured at
fair value
Inability to measure fair value results in using stand-alone SP of the g/s as a measure
Allocate
the transaction price to the performance obligation in the contract
Allocate transaction price based on
: stand alone price of g/s = amount of consideration
Allocating a discount
if (sum of stand alone selling price) > transaction price
discount is allocated proportionally to all PO’s on a relative stand alone price basis
Recognise
revenue when (or as) the entity satisfies performance obligation
Revenue is recognised when a PO is satisfied by the entity
A PO is satisfied when the entity transfers g/s thereby giving the customer control of that asset
A customer has control of an asset when:
--> Customer has the ability of
direct use
of the asset, AND
--> Customer has ability to receive all
remaining benefits
from asset
PO can be satisfied over a period of time or at a point in time
PO satisfied over a period of time
Criteria (only one need be met)
--> Customer simultaneously
receives and consumes the benefits
as the entity performs;
--> The entity's
performance creates or enhances an asset
controlled by the customer
--> The entity's
performance does not create an asset with an alternative
use to the entity
--> Entity has enforceable
right to payment for performance completed to date
Revenue is recognised based on the measure of progress towards completion
Output method
Revenue recognition based on
g/s produced up to date
This method considers the results of appraisals, milestones reached or units produced
Input method
revenue recognition based on
the entity’s efforts or inputs
This method considers the resources consumed, labour hours expended, costs incurred or time elapsed
PO satisfied at a point in time
This point in time refers to when PO is satisfied
Indicators that control has been transferred to the customer
--> Customer has a
present obligation
to pay for asset
--> Customer has
accepted
asset
--> Customer has
significant RR
for ownership of asset
--> Customer has
physical possession
of asset
--> Customer has
legal title
of asset
AND
means by which estimation is done