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IFRS 15 – Revenue from contracts with customersJune 2014
www.pwc.com
PwC
IFRS 15 - Project objective
2
Clear principles
Robust framework
Comparability across
industries
Simplified guidance
One ModelA single, joint revenue standard
to be applied across all industries and capital markets
Enhanced disclosures
Effective for annual periods beginning on or after 1 January 2017
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A change in mindset
• Reassessment of contracts will be time consuming
• Greatest impact for those that use industry based models
• Transaction price allocated on a relative selling price basis
• Change to model for variable consideration
• Full retrospective application may require running dual systems and gathering of historic data
• More extensive disclosure requirements
• Potential impact on compensation arrangements
Awareness is essential!
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IFRS 15 – Revenue recognition model
IAS 18 /11
Separate models for:
• Construction contracts• Goods• Services
Focus on risk and rewards
Limited guidance on:
• Multiple element arrangements
• Variable consideration• Licences
IFRS 15
Single model for performance obligations:
• Satisfied over time• Satisfied at a point in
time
Focus on control
More guidance:Separating elements, allocating the transaction price, variable
consideration, licences, options, repurchase arrangements
and so on….
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Scope
• Scope exclusions
- Leases, insurance, financial instruments, certain guarantee contracts and certain nonmonetary exchanges
• Contracts with elements in multiple standards - Evaluate under other standards first
Revenue is income from ‘ordinary activities’. A contract has rights and obligations between two or more
parties.
A customer receives a good or service.
5
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Revenue – the five step approach
Step 1 - Identify the contract with the customer
Step 2 - Identify the performance obligations in the contract
Step 3 - Determine the transaction price
Step 4 - Allocate the transaction price
Step 5 - Recognise revenue when (or as) a performance obligation is satisfied
Core principleRevenue recognised to depict transfer of goods or services
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Step 1 – Identify the contract
• Agreement between two or more parties that creates enforceable rights and obligations
• No contract unless customer committed, criteria include:
it is probable that the entity will collect the consideration to which it will be entitled
• Combine two or more contracts with the same customer when:
- negotiated as a package with a single commercial objective;
- amount of consideration to be paid in one contract depends on the price or performance of the other contract; or
- goods or services promised in the contracts are a single performance obligation (see step 2)
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Contract modifications
• Modification accounted for when it creates or changes enforceable rights and obligations
• Accounting depends on whether distinct goods or services added
Distinct goods/services added at price that reflects stand-alone selling price
New separate contract: Prospective accounting only
Remaining goods or services distinct from existing contract, but not at stand-alone selling price
Treated as new contract: Prospective accounting but ‘carry forward’ existing position (e.g. contract liabilities)
Goods / services not distinct from existing contract
Continuation of contract: Cumulative catch up
If combination of above Apply the ‘principles’ above
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Unit of account
• IFRS 15 is applied to each individual ‘contract’- specific guidance on contract combination- ‘step 2’ covers separation of contract into different
promises
• Portfolio approach allowed as practical expedient only if- the entity reasonably expects that the effects of applying
the model to portfolio versus individual contracts would not differ materially
• Judgment required to select size and composition of portfolio
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Step 2 – Identify the performance obligations
Performance obligations are promises to transfer goods or services to a customer that are:
• explicit,
• implicit, or
• arise from customary business practices
Identifying performance obligations is critical to measurement and timing of recognition
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Separate performance obligations
Separate performance obligation if:
• Distinct good or service:
- customer benefits from good/service on its own or with other resources; and
- not dependent on/interrelated with other items in the contract
E.g., consumer goodsE.g., a building, not the individual ‘bricks’
• Series of goods/services that are substantially the same, if consistent pattern of transfer to customer over time
E.g., a daily cleaning service
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Step 3 – Estimating the transaction price
• Probability weighted or best estimate
• More specific guidance covering:
- time value of money
- constraint on variable consideration
- non-cash consideration
- consideration payable to customers: reduction to transaction price unless for a distinct good or service.
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Time value of money
• Adjust consideration, if there is a significant financing component:
- optional if period between payment and performance less than year
- captures advanced payments
• Consider:
- difference between consideration and the cash selling price, and
- Then combined effect of both:◦ time between transfer of goods/services and customer
payment◦ the prevailing interest rates in the relevant market
• Specific examples of when there is no significant financing component
- e.g. transfer at customers’ discretion (customer loyalty programmes)
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Variable consideration
Included in the transaction price only if it is highly probable that there will not be a significant revenue reversal
Uncertainty over long
period of time
Limited experience with similar contracts
Susceptible to factors outside control
Broad range of outcomes
Key effects
• Must recognise ‘minimum amount’ that is highly probable of not reversing
• Reassessed at the end of each reporting period
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Sales and usage-based royalties exception
For licences of intellectual property with a sales or usage based royalty, revenue recognised only when sales/usage
occurs
• ‘highly probable’ constraint does not apply
• not meant to be applied by analogy
The challenges?
• What is a licence?
• What is a sales based or usage based royalty?
• What is intellectual property?
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Step 4 – Allocating the transaction price
• Allocate transaction price to separate performance obligations based on relative standalone selling price:
- Actual or estimated
- Residual ‘approach’ if selling price is highly variable or uncertain (change from current practice)
• Initial allocation and changes to variable consideration might be allocated to a single performance obligation if:
- Contingent payment relates only to satisfaction of that performance obligation, and
- Allocation is consistent with the amount the entity expects to be entitled to for that performance obligation
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Step 5 – Recognition of revenue
Key question: Point in time or over time
• Guidance applies to each separate performance obligation
• First, evaluate if performance obligation satisfied ‘over time’
- recognise revenue based on the pattern of transfer to the customer
• If not point in time
- recognise revenue when control transfers
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When does control transfer over time?
Customer receive benefits as performed/ another would not need
to re-performe.g. cleaning service, shipping
Create/enhance an asset customer controls
e.g. house on customer land
Does not create asset w/alternative use AND
Right to payment for work to datee.g. an ‘audit’ report
No
NoOve
r ti
me
Poin
t in tim
e
Yes
Yes
Yes No
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Indicators of control transfer – point in time
If not over time, then point in time….
Recognise revenue when control transfers
Indicators that customer has obtained control of a good or service:
19
Right to payment for asset
Legal title to asset
Physical possession of asset
Customer has significant risk and
rewards
Customer has accepted the asset
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Licences intellectual property – two types
Right to access if following criteria met:
Right to use
• Right to use IP as it exists at a point in time
• Revenue recognised at a point in time
Right to access
• Right to access to IP as it exists through out the licence period
• Revenue recognised over time
Judgment required
Licensor performs activities that
significantly affect the IP
Rights expose customer to effects of
those activities
Activities are not a separate good /
service
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Contract costs
• Incremental costs of obtaining a contract required to be capitalised if expected to be recovered (e.g. sales commissions)
- May be expensed if expected contract period less than 1 year
• Contract fulfilment costs
- Look to other guidance first (inventory, PPE)
- If out of scope of other standards, required to be capitalised if:
◦ Relate directly to a contract and
◦ Relate to future performance and
◦ Expected to be recovered
• Amortise capitalised costs as control transfers
• Impairment reversals required 21
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Disclosure
Both qualitative and quantitative information including;
• Disaggregated information
• Contract balances and a description of significant changes
• Amount of revenue related to remaining performance obligations and an explanation of when revenue is expected to be recognised
• Significant judgments and changes in judgments
More disclosures
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Transition
2016 2017
Effective date = 1 Jan 2017
Option 1 – Full
retrospective
(Apply IAS 8)
NEW IFRS 15
NEW IFRS 15
Cumulative effect at 1 Jan 2016
Reliefs
For completed contracts:• No adjustment for interims• Hindsight allowed for
variable consideration
Option 2– Prospective
OLD GAAPNEW
IFRS 15
Cumulative effect at 1 Jan 2017
No reliefs
Disclose OLD GAAP
It depends.
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What else haven’t we covered?
• Customer options
• Warranties
• Breakage
• Non-cash consideration
• Consideration payable to the customer
• Returns
• Repurchase options
• Principal or agent
Significantly more implementation guidance than existing IFRS!
Thank you!
https://inform.pwc.com
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
© 2014 PricewaterhouseCoopers LLP. All rights reserved. In this document, "PwC" refers to the UK member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.
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