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Revenue from contracts with customers - Coggle Diagram
Revenue from contracts with customers
Objective and scope of IFRS 15
IFRS 15 establishes the principles that an entity should apply to report useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer
Under IFRS 15, the transfer of goods and services is based upon the transfer of control rather than the transfer of risks and rewards
IFRS 15 requires the recognition of revenue to reflect the consideration to which the entity expects to be entitled in exchange for those goods or services
IFRS 15 may make little impact for straightforward retail transactions but it has resulted in change in the amount and timing of revenue recognition for long term service contracts
The requirements of IFRS 15 apply to all contracts with customers except
Lease agreements within the scope of IFRS 16
Insurance contracts
Financial instruments
Non-monetary exchanges between entities in the same line of business
5 Step Approach to Recognition
Step 1: Identify the Contract with the Customer
IFRS 15 lays out the following criteria for a contact to exist with a customer
The contract has been approved by the parties involved who are committee to carrying it out
The entity can identify each party's rights and payment terms regarding the goods or services to be transferred
The contract has commercial substance
It is probably that the entity will collect the consideration to which it will be entitled
Step 2: Identify the performance obligations in the contract
FRS 15 requires contracts with more than one performance obligation to be assessed separately
The goal is to separate the contract into parts or separate performance obligations when the promised good or service is distinct
Step 3: Determine the transaction price
The transaction price is the amount of consideration an entity expects from the customer in exchange for transferring goods or services
The consideration may include fixed amounts, variable amounts or both
Step 4: Allocate the transaction price
An entity must allocate the transaction price to each separate performance obligation in proportion to the standalone selling price of the good or service underlying each performance obligation
If an entity sells a bundle of goods and/or services, each performance obligation is assessed as if it could be sold separately and revenue is allocated in proportion to those standalone selling prices
Step 5: Recognise revenue as obligations are performed
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 transferred when the customer obtains control of that asset
Contracts for services are generally performed over a period of time, where an entity transfers control of a good or service over time, it satisfies a performance obligation and recognises revenue over time
Measurement
It must be possible to reasonably measure the outcome of a performance obligation before the related revenue can be recognised
Where it may not be possible to reasonably measure the outcome of a performance obligation, such as in the early stages of a contract, revenue is recognised only to the extent of costs incurred that the entity expects to recover
IFRS 15 requires an entity to capitalise the incremental costs of obtaining a contract with a customer for revenue as an asset, if those cots will be recovered
Presentation and disclosure
IFRS 15 requires any asset or liability arising from the difference between revenue recognised and measured under the standard and payments made by the customer to be included in the SOPF