15-IFRS 15 - Summary PDF

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IFRS 15 – REVENUE FROM CUSTOMER CONTRACTS (Replacing IAS 11 (Construction Contracts) & IAS 18 (Revenues)) 5 STAGES: 1. Identification of Contract 2. Identification of Performance Obligation (Is it a single Obligation or there are different Obligations?) 3. Contract Price 4. Allocation of Price of Different Performance Obligation on the basis of Stand-alone Prices (only in case of Different P.Os) 5. Book Revenue

STAGE 1: Identification of Contract IDENTIFICATION OF CONTRACT

Legal Rights

Probable Chances of Economic Outflow

Terms Defined

Legally Enforceable

 Financial Position of Buyer  Financial Usage of Buyer  Past Practice

STAGE 2: Identification of Performance Obligation

 Payment Terms

IDENTIFICATION OF PERFORMANCE OBLIGATION

For Separate Performance Obligation

The entity promise to provide that

Customer gets the benefit of that goods/

goods/ service is separately identifiable

service separately OR together with

from other goods in contract

other goods

Provided Separately

Means market has people in it providing these goods/ services

Benefited Separately

- If both meets, then different Performance Obligations - If anyone meets, then single Performance Obligation

separately

Prepared by: Arsalan M. Khan

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EXAMPLES OF DIFFERENT PERFORMANCE OBLIGATIONS: 1. Books + Teaching 2. Generator + Maintenance Service 3. Drug + Marketing 4. Mobile + Simm Contract 5. Car + Warranty (Buy) 6. Goods Sold + Warehouse Services (Bill & Hold Sales)  “Custodial Services”

EXAMPLES OF SINGLE PERFORMANCE OBLIGATION: 1. Teaching one paper 2. Construction of a bungalow 3. Making a software

STAGE 3: Contract Price 1. Variable consideration can only be booked if its reversal is Impossible/ Improbable E.g. of variable consideration  Penalty/ Incentive Clause (E.g. of Property Construction) - Now if IFRS-15, revenue from “Sale OR Return” can be booked through expectation (E.g. Hyper star) (This was not allowed earlier in IAS-18) - But if Rental possible, then you can’t book variable revenue E.g. Asset Management (Arif Habib, because revenue dependent on stock market index) 2. Variable consideration is booked through statistical tools like

Expected Value Analysis

Most Likely Outcome

- Also if there is a material gap between time of delivery of goods/ services and the time of payment, then we need to consider “ Significant Financing Component” NOTE: Non-cash consideration (Other than cash) from customer will be recorded at its Fair value. 2 Cases of Significant Financing Component EXAMPLE 1: Goods/ Services sold today but payment after 2 years (2 P.Os, 1. Goods, 2. Loan)

P.V of Amount Received = 10,000 Yr. 0 Interest Rate = 10% Entries :

Year 1:

P.V = 11,000

12,100

Yr. 1

Yr. 2

Receivable 10,000 Sales 10,000 -------------------------Receivable 1,000 Interest Income 1,000

Prepared by: Arsalan M. Khan

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-------------------------Receivable 1,100 Interest Income

Year 2:

1,100

End of Tenor: Bank Receivable

12,100 12,100

EXAMPLE 2: Payment received today but Goods/ Services to be delivered after 2 years (In IFRS-15, Treat

this transaction as loan which will be invested in future. In IAS-18, this was treated as deferred income) P.V of Amount Received = 10,000 Yr. 0 Incremental Borrowing Rate = 10%

P.V = 11,000

12,100

Yr. 1

Yr. 2 Delivery of Goods

Bank

10,000 Loan -------------------------Year 1: Interest Expense Loan -------------------------Year 2: Interest Expense Loan End of Tenor (Delivery of Goods): Loan Sales Entries:

10,000 1,000 1,000 1,100 1,100 12,100 12,100

STAGE 4: Allocation of Price on Different Performance Obligations on the basis of standalone Prices Stand-alone Price  $1,000

Generator

1,200

Stand -alone Price  $500

2 Years Maintenance Service NOTE: If (assume) discounting is immaterial, then as per IFRS-15, future year’s income shall be booked as deferred income.

Prepared by: Arsalan M. Khan

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Phone

Stand-alone Price  $100

480

Stand- alone Price  $480

24 Months Network Service

Year 1: Bank

480 Sales Deferred income

281.5 198.5

STAGE 5: Book Revenue BOOK REVENUE

Point in Time

- No Responsibility from now onwards - Book revenue when Control Transfers HINTS: 1. Legal title transferred 2. Possession transferred 3. Risks & Rewards transferred

Prepared by: Arsalan M. Khan

Over Time

3 CASES 1. Customers gets benefit from goods/ services simultaneously (E.g. Teaching) 2. Seller performance creates an asset which comes in the control of customer (E.g. Construction at customer’s plot, i.e. according to stages of completion, book revenue) 3. The asset generated is of specialized nature and of no use to seller + seller has right to receive cash for work done to date. (E.g. Wheel cap making Machine for Toyota with Toyota logo marking technology).

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WARRANTIES

Standard Warranty

Special Warranty/ Bought

 Supplied separately

 By Culture

 Benefitted separately

 By Law

 It is like a separate contract

 This warranty is not a separate performance

 It is treated as separate performance obligation

obligation  This warranty is covered according to IAS-37

 Entry: Bank

 Entry:

120,000

Sales

100,000

Deferred Income

200,000

P&L Provision

MODIFICATION

Treated as a Separate Contract

XXX XXX

Change in price/ scope OR duties

Not Treated as a Separate Contract

 Goods/ services are distinct &

 Goods/ services are not distinct

 Prices charged of those goods/ services

 Prices charged for additional goods/

reflect standalone prices of those goods/

services does not reflect standalone

services (market price of extra work/ job

prices of those goods/ services E.g. Big

done)

Discount (Question)

 Treat It as a separate contract

 Merge it with the existing contract, as a cumulative catch up adjustment

Substance over Form: The economic substance of transactions and events must be recorded in the financial statements rather than just their legal form in order to present a true and fair view of the affairs of the entity.

Prepared by: Arsalan M. Khan

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Issue of Discount: E.g. 2 Markers, Rs. 15 Each & 3rd Marker for Free

Yr. 0

Rs. 30

Entry:

Rs. 0 Bank

30 Sales

Yr. 0

Yr. 1

30

Rs. 20

Rs. 10

Yr. 1

Booking future profits in today’s books is overstating today’s profits and is treated as Fraud in accounting! Therefore; Entry:

Prepared by: Arsalan M. Khan

Bank

30 Sales

20

Deferred income

10

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