Revenue From Contracts With Customers: (IFRS 15)
Revenue From Contracts With Customers: (IFRS 15)
Revenue From Contracts With Customers: (IFRS 15)
WITH CUSTOMERS
(IFRS 15)
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Definition of terms
• Income - increase in economic benefits during the accounting
period in the form of inflows or enhancements of assets or
decease of liabilities that result in an increase in equity, other than
those relating to contributions from equity participants
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• Contract Asset - an entity’s right to consideration
in exchange for goods or services that the entity
has transferred to a customer when that right is
conditioned on something other than the passage
of time (for example the entity’s future
performance)
• Receivable - an entity’s right to consideration that
is unconditional- i.e. only the passage of time is
required before payment is due.
• Note: where revenue has been invoiced a
receivable is recognized. Where revenue has been
earned but not invoiced, it is recognized as a
contract asset.
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Definitions…(Cont’d)
• Contract liability- an entity’s obligation to transfer goods or
services to a customer for which the entity has received
consideration (or the amount is due) from the customer
• Customer - a party that has contracted with an entity to obtain
goods or services that are an output of the entity’s ordinary
activities in exchange for consideration.
• Performance obligation - a promise in a contract with a customer
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.
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Definitions…(Cont’d)
• Stand- alone selling price - the price at which an entity
would sell a promised good or 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 or services to a customer,
excluding amounts collected on behalf of third parties.
Note: Revenue doesn’t include sales tax , value added
taxes or goods and service taxes which are only
collected for third parties, because these do not
represent an economic benefit flowing to the entity.
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Revenue Recognition
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Revenue Measurement
• Measure revenue at:
- customer consideration adjusted for the
financial effects of significant financing
components.
- measure non-cash consideration at its fair
value.
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IFRS 15’s Five-step Revenue Recognition model
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Step 2: Identify the performance…(Cont’d)
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Test Your Understanding
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Step 3: Determine the Transaction price
• 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, excluding
amounts collected on behalf of third parties (for
example, some sales taxes).
• Issues in determining transaction price:
a. Variable consideration
b. Existence of significant financing component
c. Non-cash consideration
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Variable consideration
• Amount of consideration can vary because
of discounts, rebates, incentives, etc.
• Estimate the amount of variable
consideration using:
Expected Value or
Most likely amount
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Expected value method
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The most likely amount
• The most likely amount is the single most likely amount
in a range of possible consideration amounts (i.e. the
single most likely outcome of the contract).
• The most likely amount may be an appropriate estimate
of the amount of variable consideration if the contract
has only two possible outcomes (for example, an entity
either achieves a performance bonus or does not).
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Variable consideration(Example)
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Variable consideration(Example)….
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Variable consideration (Example)…
Solution:
a)Revenue for the quarter ended September 30,2005
70 laptops sold x Br500/unit=Br35,000
This is because the purchasing pattern shows the Co. may not buy
more than 500 during the year, so not entitled to volume discount,
not appropriate to reduce price to Br450/unit
b)Revenue for the quarter ended December 30,2005
250 additional laptops sold x Br450/unit………………….Br112,500
Less:70 laptops x50/unit (discount on earlier sale) ……….(3,500)
Revenue for the quarter ended Dec. 31,2005…Br109,000
This is because the purchasing pattern shows the Co. may buy more
than 500 during the year, so entitled to volume discount. It is
appropriate to reduce price to Br450/unit
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b. Existence of significant financing component
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Test your understanding
On Sene 27, 2008 Ethiochina plc sold a truck to Bale
Construction Co. for Birr 1.21m. As Bale has shortage of cash to
pay on this date, the two parties agreed the payment date to
be Sene 30, 2010. Currently the cash selling price is Birr 1m
per truck. Ethiochina’s internal rate of return is 10%.
Required:
a. Does the transaction have a significant financing component?
b. What is the amount of revenue from this transaction as of
Sene 30,2008.
c. Show the accounting treatment If there is a significant
financing component
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Solution
a. The cash selling price is Bir1m
promised consideration is Birr 1.21m
This indicates that there is a significant financing
component
b. The amount of revenue as of Sene 30, 2008
is Birr 1m
Receivable………….1m
Sales………………..1m
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Solution….(cont’d)
c. Sene 30,2009
Receivables…………. 0.1m
Finance income……………0.1m
( 0.1x 1m= 0.1m)
Sene 30, 2010
cash 1.21m
Receivables…………….1.1m
Finance income…….. 0 .11m*
* 0.11 = 1.1m x 0.1
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c. Non-cash consideration
• Measure at fair value
• If fair value cannot be estimated, measure
consideration indirectly by reference to stand-
alone selling price of the goods or services
transferred.
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Step 4: Allocate the transaction price to
performance obligations
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Test Your Understanding
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Recognition of revenue (over time)
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Test Your understanding
• Alem enters in to a 24-month telecom plan with the local
mobile operator, Tele PLC. The terms of the plan are as
follows:
• Alem’s monthly fixed fee is Br 500 per month.
• Alem receives a free handset at the inception of the plan.
• Tele PLC sells the same handsets for Br 3000 and the
same monthly prepayment plans without handset for Br
500 per month.
Required:
How should Tele PLC recognize the revenues from this plan
in years 1 and 2 in line with IFRS 15?
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Test Your Understanding
Zoma Construction PLC has the following information about a building that it is
constructing for a client as at June 30, 2019.
Date started October 2018
Total contract revenue Birr 450 million
Costs Incurred to 30/06/2019 230 million
Value of performance obligation satisfied to 30/06/2019 315 million
Amount invoice for work certified to 30/06/2019 270 million
Cash received to 30/06/2019 250 million
Estimated cost to complete 120 million
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