Please enable JavaScript.

Coggle requires JavaScript to display documents.

Revenue (Contract costs (IFRS 15 requires an entity to capitalise as an…

- - - - The standard does not rely on the legal definitions of a contract as the standard must be applied internationally across different legal systems
      - All of the following criteria must be met for a contract with a customer to exist for the purposes of the standard
        
        the parties to the contact have approval the contact (in writing, orally or in accordance with other customary business practices) and are committed to perform their respective obligations
        
        the entity can identify each party right's regarding the goods or services to be transferred
        
        the entity can identify the payment terms for the goods or service to be transferred
        
        the contract has commercial substance (i.e the risk, timing or amount of the entity's future cash flows is expected to change as a result of the contract
        
        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, taking into account whether collectability of consideration is probable (i.e in light of the customer's ability and intention to pay that amount of consideration when it is due
      - The standard deals with contracts that are connected to each other and whose effect ought to the be considered in combination and how to deal with contract modifications
    - - Where a contract consists of more than one performance obligation, IFRS 15 requires an entity to unbundle them and assess them separately, to ensure that revenue is only recognised once each performance obligation has been met and hence revenue is truly earned
      - The standard states that an inception of a contract an entity must assess the goods or services promised in it and identify as a performance obligation each promise to transfer to the customer either
        
        a good or service (or a bundle of goods or services) that is distinct or
        
        a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer
      - Distinct goods or services can be very wide ranging as the standard has to cover all types of customer contract but examples are delivery of specified goods by the entity (ie a car), performing tasks as a service (i.e an audit) or providing a standing ready service (i.e updates to software. A good or service is distinct if both of the following criteria is met
        
        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
        
        the entity's promise to transfer the good or service to the customer is separately identifiable from other promises in the contract
      - Different performance obligations will be fulfilled at different times. The standard states that an entity should recognise revenue when the entity satisfies a performance obligation by transferring a promised good or service to the customer. An asset is transfers when or as the customer obtains control of that asset
      - The standard deals with performance obligations that are satisfied at a point in time and which can be straightforward to deal with eg handing over a manufactured asset like a car to a customer. Other situations (eg construction of buildings etc), the standard specified the factors to be taken into account when determining whether a performance obligation has been satisfied
        
        the entity has a present right to payment for the asset
        
        the customer has legal title
        
        the entity has transferred physical possession of the asset
        
        the customer has the significant risks and rewards of ownership of the asset
        
        the customer has accepted the asset
      - Contracts for services are generally performed over time i.e cleaning services. The standard states that an entity transfers control of a good or service over time and therefore satisfied a performance obligation and recognised revenue over time if one the following criteria is met
        
        the customer simultaneously receives and costumes the benefits provided by the entity's performance as the entity performs
        
        the entity's performance cremates and enhances an asset (i.e software) that the customer controls as the asset is created or enhanced
        
        the entity's 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
    - - To the extent that a performance obligation in a contract with a customer has been satisfied, an entity should recognised the related revenue
      - 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
      - Consideration promised with a customer may include fixed amounts, variable amounts or both
      - The standard has a substantial amount of guidance on dealing with variable consideration i.e discounts, rebates, refunds, credits, price concessions, incentives etc.
      - The standard places strictly limits on the extent to which variable consideration can be recognised in situations of uncertain (i.e can only be included in the entity's total revenue for a period if it is highly probably that there will be no significant reversal of revenue recognised once the uncertainty related to the variable consideration is resolved
    - - An entity must allocate the transaction price to each performance obligation (or distinct good or service) in an amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for transferring the promised goods or services to the customer
      - The process for doing so is to use a stand alone selling price basis (i.e each performance obligation is assessed as if it could be sold separately and revenue is allocated in proportion to those stand along selling prices)