Accounting for Revenue

SLFRS 15: Revenue from Contracts with

Customers

Chapter 12
ACC 1340: Financial Accounting
Learning Outcomes

 Identify issues associated with revenue recognition;

 Identify the five- step process involved in the revenue
recognition process;
 Identify the contract with customers and separate
performance obligations in the contract;
 Determine the transaction price and allocate it to the
separate performance obligations;
 Apply five-step process and recognize the revenue of a
company Describe the requirements on presentation and
disclosure as to revenue.

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Relation between Income and
Revenue
 Income is an increase in assets or
decrease in liabilities except
transactions with Equity holders
 Revenue is an income arising from
the ordinary course of business of an
entity
SLFRS 15: Revenue from Contracts
with Customers

Objective is to establishes principles for

reporting useful information to users of financial
statements about the nature, amount, timing and
uncertainty of revenue and cash flows arising
from an entity’s contracts with customers

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SLFRS 15 supersedes the followings standards and interpretations

Before Now
LKAS 11 Construction Contracts
LKAS 18 Revenue
IFRIC 13 Customer Loyalty Programme SLFRS 15
IFRIC 15 Agreements for the Construction of Real Estate
IFRIC 18 Transfers of Assets from Customers
SIC-31 Revenue—Barter Transactions Involving Advertising
Services

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 Five Steps Revenue Model
 An entity should recognize revenue to depict the transfer of promised
goods or services to the customer in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for
those goods or services

Step 1 Step 2 Step 3 Step 4 Step 5

Identify the Identify the Determine Allocate the Recognize
contract(s) performance the transaction revenue
with the obligations transaction price when a
customer in the price performance
contract obligation is
satisfied

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Example 1
 Following information relates ABC Ltd
for the y/e 31.3.2020.
Advance
Order Goods Received
Orders Received
Accepted Delivered with the Order Final
order Rs Value Rs. Settlement
30.3.2020
20.2.2020 3.3.2020
50,000 250,000 5.4.2020
30.3.2020 6.4.2020
05.3.2020
500,000 6.4.2020
4.4.2020 26.4.2020
15.3.2020
60,000 180,000 20.4.2020
Recognize the revenue for the Y/E 31.3.2020
Answer to the example

Rs.

Revenue 250,000

Receivable 200,000

Contract Liability 60,000

Five Steps Revenue Model –Example 2
 Assume that Colombo Dock Yard signs a contract to sell a ship to Sri
Lanka Navy for Rs 100 million

Step 1: Identify the

Colombo Dock Yard signs a contract with to SL Navy to sell a ship
contract with customer

Step 2: Identify the

Colombo Dock Yard has only one performance obligation
Separate performance
(deliver a ship to SL Navy)
obligations in the contract

Step 3: Determine the In this case, the transaction price is straight forward.
transaction price It is Rs 100 million

Step 4: Allocate transaction

In this case, Colombo Dock Yard has only one performance obligation.
price to the separate
So, the transaction price is allocated to it.
performance obligations

Step 5: Recognize revenue

Colombo Dock Yard recognizes revenue of Rs 100 million for the
9 sale
when each performance
Of the ship when the ship is delivered to SL Navy.
obligation is satisfied.
Five Steps Revenue Model –Example 3
 Assume that Colombo Dock Yard signs a contract to sell a ship to Sri Lanka Navy and
provide one year service contract for Rs 110 million. The contract price includes
10% of the price of the ship for the service.
Step 1: Identify the Colombo Dock Yard signs a contract to sell a ship to SL Navy and
contract with customer provide one year service contract

Step 2: Identify the

Colombo Dock Yard has two performance obligations
Separate performance
(deliver a ship and to provide the service)
obligations in the contract

Step 3: Determine the transaction price is straight forward.

transaction price It is Rs 110 million

Step 4: Allocate transaction Colombo Dock Yard has two performance obligations.
price to the separate So, the transaction price is allocated as Rs 100 mn for the sale of ship and
performance obligations Rs 10. mn for the service revenue

Step 5: Recognize revenue Colombo Dock Yard recognizes revenue of Rs 100 million for the sale
when each performance Of the ship when the ship is delivered to SL Navy and Rs. 10 mn10
once
obligation is satisfied. the service is provided
Step 1: Identify the contract(s) with the customer

 A contract is an agreement between two

or more parties that creates enforceable
rights and obligations.

 A contract can be written, oral or implied

by an entity’s business practice.

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Step 1: Identify the contract(s) with the
customer

Required Criteria:

 parties have approved the contract

 Parties committed to perform their respective

obligations

 entity can identify each party’s rights regarding the

goods or services to be transferred

 Entity can identify the payment terms

 the contract has commercial substance

 it is probable that the entity will collect the consideration

Step 1: Identify the Contract(s) with the Customer

 Consider whether the entity;

◼ obtains rights to receive consideration

◼ assumes obligation to transfer goods or

services

 The combination of those rights and performance

obligations gives rise to an asset (net) or a
liability (net)

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Activity 12.1

On February 1, 2020, Arun PLC presented a proposal to transfer a machine for

Rs. 5 million to JK Holdings. On March 1, 2020,JK Holdings accepted the
proposal and entered into a contract with Arun PLC.
As per the contract, Arun PLC requires to transfer the machine on April, 30,
2020 and JK Holdings is required to pay the full contract price on May, 31,
2020.
The cost of the machine to Arun PLC was Rs 3.5 million.

Required:
1. Did a contract exist between Arun PLC and JK Holdings on February 1,
2020? Explain.
2. Does a contract exist between Arun PLC and JK Holdings on March 1,
2020? Explain
3. What is the value of the right of the Arun PLC upon the acceptance of the
contract by JK Holdings?
4. What is the performance obligation of the Arun PLC upon the acceptance of
the contract by JK Holdings?
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 Step 2: Identify the Performance Obligations in the Contract

❑ Performance Obligation - Promises in a contract to transfer goods or

services to a customer

 Performance obligation may be explicit, implicit, or based on customary

business practice

 If goods or services are distinct - it requires to account for each performance

obligation separately.

◼ e.g. Selling a ship is different from providing maintenance services for the ship

 If goods or services are not distinct (promises are interdependent and

interrelated) - Those performance obligations are combined and reported as
one performance obligation
◼ e.g. Promise to supply and install a sophisticated machine such as power plant

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Activity 12.2

A software development firm enters into a contract with a customer to transfer the
following:

Software (license);

Installation service (includes changing the web screen for each user);

Software updates; and

Technical support for 2 years.

The entity sells the above options separately. The installation service is routinely performed
by other entities and does not significantly modify the software. The software remains
functional without the updates and the technical support.

Are the goods or services promised to the customer distinct in terms of SLFRS 15?

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Activity 12.3

Techno(Pvt) Ltd. enters into a contract with a customer to provide a Customer

Relationship Management (CRM) software. In addition to providing the
software, Techno (Pvt) Ltd. promises to perform consulting services by
extensively customizing the software to the customers’ IT environment. The
total consideration of the contract is Rs 900,000.

Are the good or service promised to the customer distinct in terms of

SLFRS 15? Explain.

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Step 3: Determine the Transaction Price

 Transaction Price - The amount of consideration in a

contract which an entity expects to receive from a customer
in exchange for transferring promised goods or services

 An entity shall consider the terms of the contract and its

customary business practices to determine the transaction
price

 When a performance obligation is satisfied, an entity shall

recognise revenue the amount of the transaction price
allocated to that performance obligation

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Step 3: Determine the Transaction Price

The transaction price is usually a fixed

amount of consideration, but it may
sometimes include

◼Variable consideration or

◼Non-cash consideration
Transaction Price – Variable Consideration

 Variable consideration - Consideration of a contract depends

on future events ((Examples Discounts; Refunds; Price concessions;
Performance bonuses; Rebates; Credits; Incentives; and Penalties etc)

 If the consideration is variable, an entity estimates the amount of

consideration and it will be included in the transaction price only if following
two conditions are satisfied.

◼ The entity has experience with a similar contract and can estimate the
cumulative amount of revenue

◼ Based on experience, it is highly probable that a there will not be a

significant reversal of previously recognized revenue.
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Activity 12.4

Comfort Bed (Pvt) Ltd enters into a contract with a customer on 1st January 2020 to sell
beds for Rs.4000 each. If a customer purchases more than 1000 beds in a calendar year
(including prior purchases of the same year), the contract states that the price per unit is
reduced to Rs. 3800 per bed.

As at 31st March 2020, the company had sold 80 beds to a customer, therefore it estimates
that the customer’s purchase will not exceed the 1000 bed threshold required for the
volume discount in the calendar year.

At the beginning of June 2020, the Comfort Bed (Pvt) Ltd acquired another company. With
this strength, the Company has been able to sell an additional 500 beds to the same
customer during the second quarter, ending 30 June 2020. Considering the new facts, the
Comfort Bed now estimates that the customer’s purchases will exceed the 1000 bed
threshold for the calendar year.
Required:
1. Decide whether the consideration of the contract is variable or fixed
2. Revenue to be recognized for the first quarter ending 31st March 2020
3. Revenue to be recognized for the second quarter ending 30th June 2020

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Non-cash Consideration

Seller sometimes receive consideration in a form of other than

cash

E.g. Receive of inventory as the consideration

When non-cash consideration is received, the revenue should

be generally recognized at the fair value of what is received

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Time Value of Money

The transaction price is also adjusted for the effects of the time value of money
if the contract includes a significant financing component and for any
consideration payable by the customer.

E.g. Consideration is paid in advance or in arrears and if it is significant to the

contract, could be adjusted for the effects of the time value of money

Practically, when the interval between the transfer of promised goods or

services and the payment by the customer is expected to be less than 12
months, it does not require to adjust for the effects of the time value of money.

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Activity 12.5

On 01.04.2020, SK PLC sold goods costing Rs.590,000 to a customer. The fair

value of the goods sold is Rs.900,000. However, customer agreed to pay
Rs.1,089,000 on 31.03.2022. The interest rate imputed and determined to be
10%.

Required:

Prepare journal entries to record revenue on 01.04.2020 and 31.03.2021 and

receivables on 31.3.2021 and 31.3.2022

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Step 4: Allocate the transaction price to the performance
obligations in the contract

Allocate the transaction price to each performance obligation 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

One performance obligation exists in the contract - allocating the transaction

price is straight forward.

Many performance obligations in the contract - allocate the transaction price to

the performance obligations in the contract by reference to their relative stand-
alone selling prices

If a stand-alone selling price is not directly observable, an entity will need to

estimate it.

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Activity 12.6

Wave PLC agreed to a total consideration of Rs. 120,000 with the customer
(Received in advance). The relative stand-alone selling prices of performance
obligations are as follows.

Performance obligation Stand-alone selling price (Rs.)

Software license 60,000
Installation service 20,000
Software updates 10,000
Technical support for 2 years 30,000

The above performance obligations will be satisfied at different points in time.

Required:
Explain how Wave PLC recognizes its revenue

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Allocation of discounts

Sometimes the transaction price may include a discount.

Any overall discount is allocated between the performance

obligations on a relative stand-alone selling price basis
(Proportionate allocation) unless any other basis provides
reliable allocation of discounts.

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Activity 12.7

Wave PLC agreed to a total consideration of Rs. 100,000 with the customer
(Received in advance). The relative stand-alone selling prices of performance
obligations are as follows.

Performance obligation Stand-alone selling price (Rs.)

Software license 60,000
Installation service 20,000
Software updates 10,000
Technical support for 2 years 30,000

The above performance obligations will be satisfied at different points in time.

Required:
i) Calculate the total discount amount of the transaction
ii)Allocate the consideration among the performance obligations.

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Step 5: Recognize revenue when the entity satisfies a
performance obligation

 Recognizes revenue when the seller satisfies a performance obligation by

transferring a promised good or service to a customer
 Seller satisfies a performance obligation when the customer obtains control of
that good or service

Control of an asset means having the ability to direct the use of, and obtain substantially
all of the remaining benefits from the asset

 In the case of sale of goods, the performance obligation may be satisfied at a

point in time. Factors which may indicate that control is passed at a point in
time include;
◼ The entity has a present right to receive the payment for the asset;
◼ The entity has transferred legal title to the asset;
◼ The entity has transferred physical possession of the asset;
◼ The customer has significant risks and rewards related to the ownership of the
asset; and
◼ The customer has accepted the asset.

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Step 5: Recognize revenue when the entity satisfies a
performance obligation

 In the case of services, the performance obligation is satisfied when the

service is performed.

 However, when the service is long term, the performance obligation is

satisfied over time by selecting an appropriate method for measuring the
entity’s progress

(e.g. long-term construction contracts).

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Contract Costs

Contract Costs

Costs to fulfill a contract

Incremental costs of obtaining
E.g.
a contract
1. Direct labour
(Costs that an entity incurs to 2. Direct materials
obtain a contract that it would not 3. Allocation of overheads that relate directly
have incurred if the contract had to the contract
not been successfully obtained) 4. Cost that are explicitly chargeable to the
e.g. Sales commission incurred to customer under the contract
get the contract 5. Other costs that are incurred only because
an entity entered into the contract

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Contract Costs - Incremental costs of obtaining a contract

 If the entity expects to recover incremental

costs of obtaining a contract with a customer,
the entity shall recognize those costs as an
asset

 However, practically, if the amortization period

would be one year or less, the incremental
costs of obtaining a contract can be expensed

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Contract Costs - Costs to fulfill a contract

 recognized as an asset only if all of the

following criteria are met:

◼ The costs relate directly to a contract or to an

anticipated contract that the entity can specifically
identify;
◼ The costs generate or enhance resources of the entity
that will be used in satisfying performance obligations
in the future; and
◼ The costs are expected to be recovered.

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Activity 12.8

An IT Consulting Company, wins a competitive bid to provide

consulting services for a period of three years to a new customer.
The following costs were incurred by the entity to obtain the
contract:
Rs.
External legal fees for due diligence 150,000
Travel costs to deliver the proposal 250,000
Commissions paid to sales employees 300,000

Further, the Company has purchased IT equipment for Rs.

120,000, which is to be used only for the consultation of this
customer.

Required: Explain accounting treatment for above costs

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Presentation

 Present the performance of a contract in the Statement of Financial

Position as a contract asset or contract liability, depending on the
relationship between the entity’s performance and the customer’s
payment
 Contract Asset: An entity’s right to consideration in exchange for goods
or services that the entity has transferred to customer when that right is
conditioned on some thing other than passage of time.
 Any rights (unconditional) to consideration shall be presented separately
as a receivable (i.e. Trade Receivables)
 Contract Liability: An entity’s obligation to transfer goods or services to a
customer for which entity has received consideration (or the amount is
due from the customer) from the customer
e.g. advance received from a customer for a future sale.

Contract liability is generally referred to as unearned sales revenue, unearned

service revenue, or another appropriate account title.

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Activity 12.9

On 01.01.2020, Fine PLC enters into a contract to transfer products

A and B to Dev (Pvt) Ltd for Rs. 100,000. The contract specifies
that payment of product A will not take place until product B is
delivered.
Fine PLC determines that stand alone prices are
Rs. 30,000 for product A and
Rs. 70,000 for product B.

Fine PLC delivered product A to Dev (Pvt) Ltd on 01.02.2020.

On 01.03.2020, Fine PLC delivered product B.

Required: Prepare journal entries to record transactions in the

books of Fine PLC.

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Disclosure

An entity shall disclose the qualitative and quantitative information for all of
the following:
 Contracts with customers – These disclosures include the
disaggregation of revenue into appropriate categories, presentation of
opening and closing balances of contract assets and contract liabilities
and significant information relating to their performance obligations.

 Significant judgments–These disclosures include judgments and

changes in these judgments that affect the determination of the
transaction price, the allocation of the transaction price, and the
determination of the timing of revenue.

 Assets recognized from the costs to obtain or fulfill a contract –

These disclosures include the closing balances of assets recognized to
obtain or fulfill a contract, the amount of amortization recognized, and
the method used for amortization.

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End of the Lecture

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