This is often referred to as ‘unbundling’, and is done at the beginning of a contract. Cert. It supersedes current revenue recognition guidance including IAS 18, Revenue and IAS 11, Construction Contracts and related Interpretations. ACCA CIMA CPD FIA (ACCA) AAT. ACCA CIMA CAT DipIFR Search. The new standard for revenue recognition, IFRS 15, Revenue from Contracts with Customers, came into effect for accounting periods beginning January 2018. IFRS 15 – Revenue from Contracts with Customers Presented by Richard Martin Head, Corporate Reporting Association of Chartered Certified Accountants This material has been reproduced in the language and form as it was provided. This follows the accruals concept, matching costs incurred to revenue generated on the contract. If a customer orders additional units at a later date, the additional order is considered distinct, even if the order is for identical goods, the price at which the additional units are sold represents a standalone selling price at the time of modification. It is not adjusted to reflect subsequent changes in the standalone selling prices of those goods or services. As entities and groups using the international accounting framework leave the old regime behind, let’s look at the more prescriptive new standard. Whether an entity recognises revenue over the period during which it manufactures a product or on delivery to the customer will depend on the specific terms of the contract. New contract arises as a result of modifications if: a new performance obligation is added to a contract. A modification may be accounted for as a separate contract or a modification of the original contract, depending upon the circumstances of the case. A mobile telephone contract typically bundles together the handset and network connection. To the extent that each of the performance obligations has been satisfied. Circumstances which could result in contracts being combined: Adjustments for the effects of the time value of money (a ‘financing component’): Allocation of transaction price may include allocation of discounts, which are applied: Variable consideration is applied to a specific performance obligation if: Contract modifications may require reassessment how consideration is allocated to performance obligations. Summaries of IAS and IFRS. As a consequence of the above, the timing of revenue recognition may change for some point-in-time transactions when the new standard is adopted. IFR by ACCA (Certificate in International Financial reporting) ... IFRS 15, Revenue from contracts with customers. Objective: The objective of IFRS 15 is to establish the principles that an entity shall 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. Virtual classroom support for learning partners, 2. IFRS 15 provides indicators rather than criteria to determine when a good or service is distinct within the context of the contract. To find out more look at the illustrative practical applications for the most common scenarios. IFRS 15 Revenue from Contracts with Customers Presented by Dwayne Riley ACCA, Additionally, an entity should estimate the transaction price, taking into account: The latter is not required if the time period between the transfer of goods or services and payment is less than one year. Identifying Performance Obligations Recognise revenue when each performance obligation is satisfied. Please visit our global website instead. For example, if an advance payment is required for business purposes to obtain a longer-term contract, then the entity may conclude that a significant financing obligation does not exist. The allocation is based on the relative standalone selling prices of the goods or services promised and is made at inception of the contract. This course explains the scope of IFRS 15 standard, after which the 5 step approach is explained in detail using practical examples and interim tests to enhance understanding. 11. iv. What is the meaning of IFRS 15? 4. IFRS 16 Leases . Disclaimer: the IASB, the IFRS Foundation, the authors and the publishers do not accept responsibility for any loss caused by acting or refraining from acting in reliance on the material in this publication, whether such loss is caused by negligence or otherwise. ACCA BT F1 MA F2 FA F3 LW F4 Eng PM F5 TX F6 UK FR F7 AA F8 FM F9 SBL SBR INT SBR UK AFM P4 APM P5 ATX P6 UK AAA P7 INT AAA P7 UK. This is a price at which the product would be sold on the market, rather than a significantly different price, for example heavily discounted despite the product being the same and of the same quality (for example to entice more future business from that customer). A good or service which has been delivered may not be distinct if it cannot be used without another good or service that has not yet been delivered. This amount excludes amounts collected on behalf of a third party - for example, government taxes. Only incremental costs of obtaining a contract (which would not have been incurred if the contract had not been obtained) to be considered, for example: direct sales commissions payable if contract is awarded - include, costs of running a legal department proving an across-business legal support function - exclude, Capitalise – if expected to be recovered (contract will generate profits), Amortise on a basis that is consistent with the transfer of the goods or services specified in the contract. IFRS 15 will require their separation.". Similarly, goods or services that are not distinct should be combined with other goods or services until the entity identifies a bundle of goods or services that is distinct. The expected value approach represents the sum of probability-weighted amounts for various possible outcomes. Factors that may indicate the passing of control include the present right to payment for the asset or the customer has legal title to the asset or the entity has transferred physical possession of the asset. IAS 8, Accounting policies, changes in accounting estimates and errors. If an entity does not satisfy its performance obligation over time, it satisfies it at a point in time and revenue will be recognised when control is passed at that point in time. Please visit our global website instead, Can't find your location listed? IFRS 15 Revenue from Contracts with Customers 2 Defined terms IFRS 15 defines the following terms that form an integral part of this IFRS. Management should use the approach that it expects will best predict the amount of consideration and it should be applied consistently throughout the contract. There can be few more fundamental areas to change than the top-line number. This differs from IAS 18 where, for example, revenue in respect of goods is recognised when the significant risks and rewards of ownership of the goods are transferred to the customer. The most likely amount represents the most likely amount in a range of possible amounts. "Contracts... must be enforceable, have commercial substance and be approved by the parties to the contract.". Free sign up Sign In. In some cases, it will be clear that a significant financing component exists due to the terms of the arrangement. An entity can only include variable consideration in the transaction price to the extent that it is highly probable that a subsequent change in the estimated variable consideration will not result in a significant revenue reversal. IFRS 15 will require their separation. Accounting for non-current assets. The contract must be approved by all involved. The views expressed are those of the author and do not necessarily reflect the views of UNCTAD. We'd suggest that you use this as a guide when allocating yourself CPD units. Revenue Recognition - IFRS 15 - 5 steps from past papers in ACCA FR (F7). Identify separate performance obligations, 4. The best evidence of standalone selling price is the observable price of a good or service when the entity sells that good or service separately. How should a promised good or service be identified? ifrs 15 Forums › ACCA Forums › ACCA FR Financial Reporting Forums › ifrs 15 This topic has 0 replies, 1 voice, and was last updated 1 month ago by hijo. ACCA CIMA CAT DipIFR Search. An entity satisfies a performance obligation by transferring control of a promised good or service to the customer, which could occur over time or at a point in time. Several accounting pronouncements, including IAS 18 Revenue, have been superseded by the new IFRS 15 Revenue from Contracts with Customers. Acowtancy. Here, we summarise the following five steps of revenue recognition and illustrative practical application for the most common scenarios: New contracts may arise when terms of existing contracts are modified. Recognise revenue when each performance obligation is satisfied, Identify separate performance obligations, Allocate transaction price to performance obligations. Contract modifications: The following are examples of circumstances which do not give rise to a performance obligation: Identifying performance obligations may result in unbundling contracts into performance obligations, or combining contracts into a performance obligation, to recognise revenue correctly. When a contract contains more than one distinct performance obligation, an entity allocates the transaction price to each distinct performance obligation on the basis of the standalone selling price. 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