IFRS 15 Revenue from Contracts with Customers Table

IFRS 15 Revenue from Contracts with Customers

Table of contents 1. Objectives 2. Overview and effective date 3. Scope and exemptions 4. The five-step model 5. Other aspects of the model 6. Disclosures 7. Transition considerations Page 1

Objectives Page 2

Objectives IFRS 15: Revenue from contracts with customers Obtain an understanding of the new revenue accounting standard, IFRS 15 Revenue from contracts with customers, including: ► ► Accounting framework and implications Transition considerations Scope and scope exemptions Disclosure impacts Review examples of how IFRS 15 will be applied in practice Page 3

Overview and effective date Page 4

Overview ► ► IFRS 15 Revenue from Contracts with Customers, was issued on May 28, 2014 ► Includes 63 illustrative examples The model addresses revenue arising from contracts with customers ► The IASB and FASB created one comprehensive revenue recognition model for all contracts across virtually all entities and sectors ► New standard replaces virtually all existing IFRS and US GAAP guidance on revenue recognition Page 5

Effective date IFRS Effective for annual periods beginning on or after 1 January 2018 Effective date US GAAP Effective for annual periods beginning on or after 15 December 2017 for public entities. Non-public entities have an optional one-year deferral. IFRS Permitted Early adoption US GAAP Prohibited* *Non-public entities are permitted to adopt up to the public entity effective date. Page 6

Scope and exemptions Page 7

Scope and exemptions IFRS overview What is in scope or affected ► ► Contracts with customers Sale of some non-financial assets that are not an output of the entity’s ordinary activities (e. g. , property, plant and equipment, intangible assets) What is not in scope ► ► ! ► ► Lease contracts within the scope of IAS 17 Leases Insurance contracts within the scope of IFRS 4 Insurance Contracts Financial instruments and other contractual rights or obligations within the scope of IFRS 9 Financial Instruments (or IAS 39 Financial Instruments: Recognition and Measurement), IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IAS 27 Separate Financial Statements and IAS 28 Investments in Associates and Joint Ventures Non-monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers Page 8

The five-step model Page 9

The five-step model Core principle Recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services Step 1: Identify the contract(s) with a customer Step 2: Identify the performance obligations in the contract Step 3: Determine the transaction price Step 4: Allocate the transaction price to the performance obligations Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation Page 10

Step 1: Identify the contract Page 11

Step 1: Identify the contract Definition of a contract A contract is defined as an agreement between two or more parties that creates enforceable rights and obligations Can be written, oral or implied, but must meet specific criteria Does not exist if both parties cancel a wholly unperformed contract without penalty A contract exists only if all the following criteria are met: Parties have approved the contract and are committed to perform Each party’s rights are identifiable Each party’s payment terms are identifiable Contract has commercial substance It is probable the entity will collect the consideration it’s entitled to in exchange for the transfer of goods/services to the customer Page 12

Step 1: Identify the contract Definition of a contract These criteria are assessed at the inception of the arrangement If the criteria are met at inception, reassessment only occurs if there is a significant change in facts and circumstances If the criteria are not met at inception, continue to assess Page 13

Step 1: Identify the contract Combining contracts Two or more contracts entered into at or near the same time with the same customer (or related parties) are combined if any of the following conditions are met: Contracts are negotiated as a package with a single commercial objective Consideration in one contract depends on the price or performance of the other contract Some or all of the goods and services promised in the contracts are a single performance obligation Page 14

Step 1: Identify the contract Combining contracts Multiple contracts may be combined into a portfolio of contracts with similar characteristics if the entity reasonably expects the effects on the financial statements would not materially differ What’s changing? ► IFRS 15 provides more guidance on when to combine contracts than IAS 18, however IFRS preparers currently have a similar requirements in IAS 11 ► Overall, the criteria are generally consistent with the underlying principles in the existing standards. However, the new standard explicitly requires an entity to combine contracts if the criteria are met Page 15

Step 1: Identify the contract Combining contracts – Example Software Co. enters into a contract to licence accounting software to Company A ► A few days later Software Co. agrees in a separate contract to provide consulting services to significantly customize the licensed accounting software so that the acquired software will work in Company A’s IT environment ► As the two contracts were entered into at nearly the same time with the same customer and the goods and services represent a single performance obligation, Software Co. determines that the two contracts have to be combined ► Page 16

Step 2: Identify performance obligations Page 17

Step 2: Identify performance obligations Overview Performance obligation Determining performance obligations Marketing incentives A performance obligation is a promise (explicit or implicit) to transfer to a customer either: ► A distinct good or service ► A series of distinct goods or services that are substantially the same and have the same pattern of transfer Performance obligations are identified at contract inception and determined based on: ► Contractual terms ► Customary business practices Incidental obligations or marketing incentives may be performance obligations (e. g. , “free” maintenance provided by automotive manufacturers, loyalty points provided by a hotel) Does not include activities to satisfy an obligation (e. g. , set-up activities) unless a good or service is transferred Page 18

Step 2: Identify performance obligations Overview What’s changing? ► Current IFRS does not specifically address contracts with multiple deliverables, focusing instead on identifying separate components so as to reflect the substance of the transaction ► As a result, many IFRS preparers have looked to US GAAP, which requires entities to identify the ’deliverables’ within an arrangement but does not define that term ► IFRS 15 requires an entity to identify all promised goods and services and determine which represent separate performance obligations (i. e. , distinct goods or services) ► The standard makes clear that certain activities are not promised goods or services, such as activities that an entity must perform to satisfy its obligation to deliver the promised goods and services (e. g. , administrative activities to set up a contract) Page 19

Step 2: Identify performance obligations Two-step process to identify which goods or services are distinct Step 1 Step 2 Focus on whether the good or service is capable of being distinct Focus on whether the good or service is distinct within the context of the contract Customer can benefit from the individual good or service on its own or Customer can use good or service with other readily available resources Page 20 The good or service is not integrated with, highly dependent on, highly interrelated with, or significantly modifying or customising other promised goods or services in the contract

Step 2: Identify performance obligations Separately identifiable from other promises in the contract Indicators that a good or service is separately identifiable from other promises in the contract (i. e. , distinct in the context of the contract) (Criterion 2) Entity does not provide a significant service of integrating the good or service into a combined item (inputs to produce a combined output) The good or service does not significantly modify or customize other promised goods or services The good or service is not highly dependent on, or highly interrelated with, other promised goods or services Page 21

Step 2: Identify performance obligations Example Entity enters into a contract to manufacture and install customized equipment and provide maintenance services for a five-year period ► Installation services include the integration of multiple pieces of equipment at the customer’s facility in order for the equipment to operate as a single unit ► Equipment cannot operate without installation ► Entity sells equipment and installation services together, does not sell installation separately ► Other vendors can provide the installation services ► The maintenance services are sold separately ► Page 22

Step 2: Identify performance obligations Example Step 1 Step 2 Capable of being distinct Distinct within the context of the contract Equipment Good cannot be used without installation, but customer can obtain installation from another source. Good is capable of being distinct. Move to Step 2. Equipment and installation are highly interrelated. Significant customisation is required during installation. Good isn’t distinct on its own because it must be combined with installation. Installation can be provided by multiple vendors, so service is capable of being distinct. Move to Step 2. See discussion above. Equipment and installation are not distinct from one another. Maintenance Services have a distinct function because they are sold separately. Move to Step 2. Services are not highly interrelated. No integration, modification or customisation required. Services are distinct. In this example, there would be two performance obligations: (1) the equipment and installation because they are not individually distinct; (2) maintenance services because they are distinct services in the contract. Page 23

Step 2: Identify performance obligations Other aspects Rights of return ► Does not represent a separate performance obligation ► The impact should be considered when estimating the transaction price (as a component of variable consideration) Consignment arrangements ► Standard includes indicators of a consignment arrangement ► Revenue is not recognised when the goods are delivered to the consignee if control of the inventory has not transferred Page 24

Step 3: Determine the transaction price Page 25

Step 3: Determine the transaction price Overview 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 Transaction price reflects the effects of the following: Variable consideration (including application of the constraint) Significant financing component Non-cash consideration Consideration paid or payable to a customer Page 26

Step 3: Determine the transaction price Variable consideration ► ► ► Transaction price may vary because of variable consideration Definition of “variable consideration” is broad Identifying variable consideration is an important step in the new model because the constraint has to be considered for each type of variable consideration Common types and events that cause consideration to be variable Bonuses Incentive payments Penalties Refunds Market-based fees Discounts Returns Money-back guarantees Price concessions Volume rebates Service level agreements Liquidating damages Page 27

Step 3: Determine the transaction price Variable consideration Estimating the transaction price Variable consideration is estimated using the approach that better predicts the amount to which the company is entitled based on its facts and circumstances (i. e. , not a “free choice”) The approach should be applied consistently throughout the contract and for similar types of contracts Expected value Most likely amount ► Sum of the probability-weighted amounts in a range of possible outcomes ► The single most likely amount in a range of possible outcomes ► Most predictive when the transaction has a large number of possible outcomes ► May be appropriate when the transaction will produce only two outcomes ► Can be based on a limited number of discrete outcomes and probabilities Page 28

Step 3: Determine the transaction price Price concessions Collecting less than the full price Variable consideration Entering into a contract expecting to collect less than the full transaction price may indicate a price concession Price concessions (including implied price concessions) cause consideration to be variable and should not be included in the estimated transaction price Transaction price Existence of the contract If an entity determines it is not probable of collecting the estimated transaction price, a valid contract does not exist When assessing Step 1 (identify the contract), an entity also must consider Step 3 of the model (determine the transaction price) Distinguishing between customer credit risk (i. e. , bad debt) and implied price concessions (i. e. , reductions of revenue) will require significant judgement Page 29

Step 3: Determine the transaction price Constraint on variable consideration Constraining amounts of variable consideration An entity should include an amount of variable consideration in the transaction price only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur when the uncertainty associated with the variable consideration is resolved IFRS constraint threshold Significant Highly probable “Significant” is relative to cumulative revenue recognised Specific rule for licences of intellectual property Sales- or usage-based royalties should not be included in the transaction price until the customer’s subsequent sales/usage of a good or service occurs or performance obligation is satisfied An entity should update its estimate of the transaction price that includes variable consideration at each reporting date Page 30

Step 3: Determine the transaction price Constraint on variable consideration When evaluating the constraint, entities should consider both the likelihood and magnitude of a revenue reversal Factors that could increase the likelihood or magnitude of a revenue reversal include: The amount is highly susceptible to factors outside the entity’s influence (e. g. , market volatility, weather conditions) ? The uncertainty is not expected to be resolved for a long period of time ? The entity’s experience with similar contracts is limited or has limited predictive value The entity has a practice of offering price concessions or changing payments terms and conditions The contract has a large number and broad range of possible consideration amounts Page 31

Step 3: Determine the transaction price Variable consideration What’s changing? ► For a number of entities, the treatment of variable consideration under the new standard could represent a significant change from current practice ► Under current IFRS, preparers often defer measurement of variable consideration until revenue is reliably measurable, which could be when the uncertainty is removed or when payment is received ► Furthermore, current IFRS permits recognition of contingent consideration, but only if it is probable that the economic benefits associated with the transaction will flow to the entity and the amount of revenue can reliably measured. Some entities, therefore, defer recognition until the contingency is resolved ► Some entities have looked to current requirements under US GAAP to develop their accounting policies in this area. Currently, US GAAP significantly limits recognition of contingent consideration, although certain industries have industry-specific literature that allows for recognition of contingent amounts ► In contrast, the constraint on variable consideration in the new standard is an entirely new way of evaluating variable consideration and is applicable to all types of variable consideration in all transactions ► As a result, depending on the requirements entities were previously applying, some entities may recognise revenue sooner under the new standard Page 32

Step 3: Determine the transaction price Variable consideration – expected value approach – Example ► ► ► Contractor M enters into a contract to construct a corporate headquarters for Company B for CU 25 million Contractor M will also receive a bonus or pay a penalty of CU 25, 000 for each day that the project is completed before or after 30 June 2018, respectively Contractor M uses the expected value approach with the following possible outcomes: Possible outcomes Probability Calculated amount Ten days early - CU 250, 000 50% CU 125, 000 On schedule - CU 0 25% CU$0 Five days late – (CU 125, 000) 25% (CU 31, 250) Probability-weighted estimate ► CU 93, 750 Contractor M would include CU 93, 750 in the transaction price, assuming that the amount is not limited by the constraint Page 33

Step 3: Determine the transaction price Variable consideration ‒ rights of return ► Recognising revenue Refund liability Return assets Rights of return are a form of variable consideration Revenue recognition is limited to amounts for which it is ‘highly probable’ a significant reversal will not occur (i. e. , it is highly probable the goods will not be returned) A refund liability is established for the expected amount of refunds and credits to be issued to customers Corresponding asset and adjustment to cost of sales is recorded for items expected to be returned, based on carrying amount of the asset transferred less costs to recover Return assets must be recorded separately from inventory Return assets are subject to impairment review Page 34

Step 3: Determine the transaction price Variable consideration ‒ rights of return ‒ Example ► ► Retail Corp. sells 200 laptops at a price of CU 200 each and receives a payment of CU 40, 000. The production cost for each laptop is CU 100 Under the sales contract, the customer is allowed to return any undamaged laptop within 30 days and receive a full refund in cash Based on the historical return rate and current estimates Retail Corp. estimates that 10 laptops will be returned Furthermore, it concludes that the costs of recovering the laptops will not be significant and that the laptops can be resold at a profit How should Retail Corp. account for this sale transaction? Page 35

Step 3: Determine the transaction price Variable consideration ‒ rights of return ‒ Example ► Retail Corp. records the following entries on delivery of the laptops to the customer Debit Cash Credit 40, 000 Refund liability 2, 000(a) Revenue 38, 000 To record the sale excluding revenue expected to be returned Asset 1, 000 (b) Cost of Sales 19, 000 Inventory 20, 000 To recognize the cost of sales and the right to recover products from customer (a) CU 200 x 10 (price of the products expected to be returned) (b) CU 100 x 10 (cost of the products expected to be returned) Page 36

Step 3: Determine the transaction price Significant financing component An entity adjusts the transaction price for the effects of the time value of money if the timing of the payments provides either party with a significant benefit of financing Time value of money Evaluation not required if the entity expects the period between transfer of performance obligations and receipt of payment is one year or less If the financing component is not significant to the individual contract, entity is not required to adjust the transaction price Combined effect of: When assessing significance, entity would consider: The difference between promised consideration and the cash selling price Expected time between transfer of the promised goods and services and payment from customer Prevailing interest rates in the relevant market Page 37

Step 3: Determine the transaction price Significant financing component A contract would not have a significant financing component if any of the following factors exists: The customer paid in advance and the timing of the transfer of promised goods or services is at the discretion of the customer A substantial amount of the consideration is variable, and the amount or timing varies based on a future event that is not substantially within the control of the customer or the entity The difference between the promised consideration and the cash selling price arises for reasons other than the provision of finance to either the customer or the entity, and the amount of the difference is proportional to the reason for the difference ► This indicator requires significant judgement ► Examples in the standard include protection from risk of non-performance Page 38

Step 3: Determine the transaction price Significant financing component Entity would use an interest rate that reflects the borrower’s credit risk and expected term of the financing (rate is determined at contract inception) Interest rate Effect of financing would be reflected separately from revenue What’s changing? ► ► Most entities are not in the business of entering into free-standing financing arrangements with their customers. As such, it may be difficult to identify an appropriate rate. Most entities, however, perform some level of credit analysis before financing purchases for a customer. Therefore, they will have some information about the customer’s credit risk. For entities that have different pricing for products depending on the time of payment (e. g. , cash discounts), IFRS 15 indicates they may be able to determine an appropriate discount rate by identifying the rate that discounts the nominal amount of the promised consideration to the cash sales price of the good or service. Page 39

Step 3: Determine the transaction price Non-refundable upfront fees Entities may receive payments from customers before goods or services are provided In many cases, upfront payments are non-refundable Entities must evaluate whether non-refundable upfront fees relate to the transfer of a (future) good or service Set-up activities Fees charged for set-up activities – these activities do not depict the transfer of services to a customer and should be ignored when measuring progress of an entity’s performance The existence of a non-refundable upfront fee may indicate the arrangement includes an option for additional goods or services (e. g. , renewal option for future goods or services at a reduced price) Page 40

Step 3: Determine the transaction price Non-refundable upfront fees ‒ Example ► ► Cloud Co. enters into a contract with a customer for a licence of its software and a non-cancellable one-year subscription to access the licensed application (the cloud service) The contract amount for the software licence is an upfront, nonrefundable fee of CU 1 million The fee for the cloud services is CU 500, 000 for one year The customer has the right to renew the cloud services each year for CU 500, 000 How should Cloud Co. account for this transaction? Page 41

Step 3: Determine the transaction price Non-refundable upfront fees ‒ Example ► ► Cloud Co. determines that the software licence and cloud services are a single performance obligation and that the upfront fee is not associated with the transfer of any other good or service to the customer However, Cloud Co. determines there is an implied performance obligation, the right to renew the cloud services each year for CU 500, 000. This is a material right to the customer because that renewal rate is significantly below the rate the customer paid for the first year of service (CU 1. 5 million in total) Cloud Co. determines that its average customer relationship is three years. As a result, Cloud Co. determines that the performance obligations in the contract include the right to a discounted annual contract renewal and that the customer is likely to exercise twice Therefore, Cloud Co. would allocate the CU 1. 5 million transaction price to the identified performance obligations (i. e. , the cloud services and the renewal options). The amount allocated to the renewal options would be recognised over the renewal periods Page 42

Step 4: Allocate the transaction price Page 43

Step 4: Allocate the transaction price Transaction price is allocated to each separate 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” Transaction price generally allocated based on relative stand-alone selling prices Exceptions If certain criteria are met, the new model provides two potential exceptions, relating to: Variable consideration Discounts Page 44

Step 4: Allocate the transaction price What’s changing? ► IAS 18 does not prescribe an allocation method for multipleelement arrangements. IFRIC 13 mentions two allocation methodologies: allocation based on relative fair value; and allocation using the residual method ► However, IFRIC 13 does not prescribe a hierarchy. Therefore, currently an entity must use its judgement to select the most appropriate methodology, taking into consideration all relevant facts and circumstances and ensuring the resulting allocation is consistent with IAS 18’s objective to measure revenue at the fair value of the consideration ► Entities that do not currently estimate stand-alone selling prices will likely need to involve personnel beyond those in the accounting or finance departments. Personnel responsible for an entity’s revenue recognition policies may need to consult with operating personnel involved in pricing decisions in order to determine estimated stand-alone selling prices, especially when there are limited or no observable inputs Page 45

Step 4: Allocate the transaction price What’s changing (continued)? ► Given the limited guidance in current IFRS on multipleelement arrangements, some entities have looked to US GAAP to develop their accounting policies. The requirement to estimate a stand-alone selling price will not be a new concept for entities that have developed their accounting policies by reference to the multipleelement arrangements requirements in ASC 605 -25. The new requirements in IFRS 15 for estimating a stand -alone selling price are generally consistent with ASC 605 -25, except that they do not require an entity to consider a hierarchy of evidence to make this estimate Page 46

Step 4: Allocate the transaction price Determine stand-alone selling price The price at which an entity would sell a promised good or service separately to a customer No hierarchy like under current US GAAP multiple-element arrangement guidance Best evidence is the observable price in a entity’s stand-alone sales of a good or service When a stand-alone selling price is not observable, entity is required to estimate it Maximize the use of observable inputs Apply estimation methods consistently for goods/services and customers with similar characteristics Three estimation methods are described in IFRS 15, but others or a combination of estimation methods are permitted Use of the residual technique which is one of the three estimation methods is allowed in limited situations Stand-alone selling prices used to perform the initial allocation are not updated after contract inception Page 47

Step 4: Allocate the transaction price Determine stand-alone selling price Observable price Best evidence If not available Possible estimation methods Adjusted market assessment approach Expected cost plus margin approach Estimated price Residual approach Page 48

Step 4: Allocate the transaction price Determine stand-alone selling price ‒ Example 1 ► ► Entity A enters into an agreement to sell hardware, professional services and maintenance services for CU 200, 000 Entity A determines that each of the promised goods or services represents a separate performance obligation Because Entity A frequently sells professional services and maintenance on a stand-alone basis, it uses those transactions to determine stand-alone selling prices of CU 25, 000 and CU 15, 000, respectively Entity A rarely sells the hardware on a stand-alone basis, so it estimates the stand-alone selling price at CU 185, 000 based on the hardware’s underlying cost, Entity A’s targeted margin and the amount of margin Entity A believes the market will bear (i. e. , the expected cost plus a margin approach) Page 49

Step 4: Allocate the transaction price Determine stand-alone selling price ‒ Example 1 Performance obligation Hardware Estimated stand-alone selling price % of relative selling price CU 185, 000 82. 2 Allocated discount CU Allocation of transaction price (20, 600) CU 164, 400 Professional services 25, 000 11. 1 (2, 800) 22, 200 Maintenance services 15, 000 6. 7 (1, 600) 13, 400 (25, 000) CU 200, 000 Total CU 225, 000 100. 0 Page 50 CU

Step 4: Allocate the transaction price Allocation of a discount An entity is required to allocate a discount entirely to one or more (but not all) performance obligation(s) if all of the following criteria are met: The entity regularly sells each distinct good or service (or each bundle of goods or services) in the contract on a stand-alone basis The entity also regularly sells on a stand-alone basis a bundle (or bundles) of some of those distinct goods or services at a discount The discount (when comparing stand-alone sales of a bundle to standalone sales of the distinct goods or services) is substantially the same as the discount in the contract and provides evidence that the entire discount belongs to one (or some) distinct performance obligation(s) Page 51

Step 4: Allocate the transaction price Allocation of a discount What’s changing? The ability to allocate a discount to one or more, but not all, performance obligations in a multiple-element arrangement is a significant change from current practice. This exception gives entities the ability to better reflect the economics of the transaction in certain circumstances ► However, the criteria that must be met to demonstrate that a discount is associated with only one or more, but not all of the performance obligations in the arrangement will likely limit the number of transactions that will be eligible for this exception ► Page 52

Step 4: Allocate the transaction price Allocation of a discount – Example 1 ► ► ► Entity B enters into a contract with a customer to sell a television, speakers and entertainment unit for a total of CU 2, 100 The television and speakers are delivered at the same time On a regular basis, Entity B separately sells the television for CU 1, 700, the speakers for CU 300 and the entertainment unit for CU 300 In addition, Entity B regularly sells the television and speakers as a bundle for CU 1, 800 The customer purchases all three for CU 2, 100, receiving a CU 200 discount for buying the products as a bundle Page 53

Step 4: Allocate the transaction price Allocation of a discount – Example 1 ► Allocation for the contract: Separate performance obligations Television and speakers (sold as a bundle) Entertainment unit Allocated amounts CU 1, 800 300 Total CU 2, 100 Page 54

Step 5: Recognise revenue Page 55

Step 5: Recognise revenue when (or as) performance obligations are satisfied Model is based on transfer of control Control is the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset Control includes the ability to prevent other entities from directing the use of, and obtaining the benefits from, an asset The benefits of an asset are the potential cash flows that can be obtained directly or indirectly in many ways, such as by: Using the asset to produce goods or provide services Using the asset to enhance the value of other assets Using the asset to settle liabilities or reduce expenses Selling or exchanging the asset Pledging the asset to secure a loan Holding the asset Page 56

Step 5: Recognise revenue Overview Transfer Revenue is recognised upon satisfaction of a performance obligation by transferring the promised good or service to a customer. A good or service is considered to be transferred when (or as) the customer obtains control Performance obligations are either satisfied over time or at a point in time Performance obligations To help make this determination, the standard includes criteria for determining when control transfers over time If a performance obligation does not meet any of those criteria, control transfers at a point in time Page 57

Step 5: Recognise revenue Performance obligations satisfied over time Control of goods and services is transferred over time if one of the following three criteria is met: The entity creates or enhances an asset that the customer controls as it is created or enhanced Pure service contracts Performance obligations satisfied over time The entity’s performance does not create an asset with alternative use and the entity has an enforceable right to payment for performance completed to date The customer is receiving and consuming the benefits of the entity’s performance as the entity performs Another entity would not have to re-perform work completed to date ► Disregard potential limitations that would prevent the transfer of a remaining PO to another entity ► Assume another entity fulfilling the remaining PO would not have the benefit of any asset the entity controls Page 58

Step 5: Recognise revenue Performance obligations satisfied over time Revenue is recognised over time by measuring progress toward completion The objective is to most faithfully depict an entity’s performance Apply a single method of measuring progress for each performance obligation satisfied over time Output methods Input methods Apply consistent method for similar performance obligations in similar circumstances If unable to reasonably estimate progress, revenue should not be recognised until progress can be estimated However, if an entity expects to recover the costs, the entity should recognise revenue up to costs incurred Page 59

Step 5: Recognise revenue Performance obligations satisfied over time – Example ► ► Audit Corp. enters into a contract with a customer to provide a consulting service that results in the entity providing a professional opinion to the customer The professional opinion relates to facts and circumstances that are specific to the customer If the customer terminates the consulting contract for reasons other than Audit Corp. ’s failure to perform as promised, the contract requires the customer to compensate Audit Corp. for its costs incurred plus a 15 per cent margin The 15 per cent margin approximates the profit margin that Audit Corp. earns from similar contracts. Is the performance obligation satisfied over time? Page 60

Step 5: Recognise revenue Performance obligations satisfied over time – Example ► ► ► The customer does not simultaneously receive and consume the benefits of the its performance because ► If Audit Corp. were to be unable to satisfy its obligation and the customer hired another consulting firm to provide the opinion, the other consulting firm would need to substantially re-perform the work that Audit Coro. had completed to date, because the other consulting firm would not have the benefit of any work in progress performed ► The nature of the professional opinion is such that the customer will receive the benefits of the entity’s performance only when the customer receives the professional opinion However, the development of the professional opinion does not create an asset with alternative use and Audit Corp. has an enforceable right to payment for its performance completed to date for its costs plus a reasonable margin. Therefore this contract is a performance obligation satisfied over time Consequently, Audit Corp. recognises revenue over time by measuring the progress towards complete satisfaction of the performance obligation Page 61

Step 5: Recognise revenue Control transferred at a point in time The following are indicators of when control is transferred. None of the indicators are individually determinative, and none are more important than others. Note that other factors could be relevant. The entity has a present right to payment for the asset The customer has legal title to the asset The customer has physical possession of the asset The customer has the risks and rewards of ownership of the asset The customer has accepted the asset Page 62

Step 5: Recognise revenue Transfer of control – Example 1 ► ► Software entity enters into a contract with a customer to: ► Licence software that it delivers immediately ► Perform maintenance services consisting of unspecified upgrades on a whenand-if available basis for a three-year term Software entity determines the following: ► The performance obligations are distinct ► The software licence (delivered immediately after contract is finalised) was transferred and is complete (assume for this example the entity determines the licence provides a right to use the intellectual property as it exists at a point in time) ► The maintenance services are satisfied over time ► Performance of the obligation enhances the software licence that the customer controls ► No discernible pattern, so entity concludes recognition ratably over the three-year period best represents satisfaction of the obligation Page 63

Step 5: Recognise revenue Transfer of control – Example 2 Book publisher transfers control with a restriction on distribution ► A book publisher enters into a contract with a book store (customer) to provide 1, 000 physical copies of a highly anticipated book for CU 10, 000 ► The contract stipulates that the customer cannot sell the book until June 15 th, 20 X 4 ► The book publisher delivers the books to the customer on 5 June 5 th, 20 X 4 When does the customer obtain control of the books? Page 64

Step 5: Recognise revenue Transfer of control – Example 2 The concept of a street date may indicate that control has not transferred to the customer ► In this scenario, the book publisher may conclude that the transfer of control of the books does not occur until the street date of June 15 th because the customer does not have the ability to direct the use of and receive the benefit from the books until it is permitted to sell the product on June 15 th even though the books are delivered on June 5 th ► Page 65

Step 5: Recognise revenue Customer acceptance clauses must be considered when determining whether a customer has obtained control of a good or service Determine transfer of control If an entity can objectively determine that control has been transferred and the good or service meets contract specifications, it can recognise revenue (assuming all other conditions to recognise revenue have been met) Recognise revenue Determination of whether acceptance criteria are subjective and have been met requires professional judgement (consistent with current practice) Page 66

Step 5: Recognise revenue Breakage A customer may make non-refundable payments to an entity for the right to receive future goods or services Variable consideration Because breakage causes consideration to be variable, the constraint should be applied to any estimated amounts Unexercised rights are referred to as breakage If an entity estimates it is entitled to a breakage amount Revenue would be recognised in proportion to pattern of rights exercised by customer If an entity estimates it is not entitled to a breakage amount Revenue would be recognised when the likelihood of exercising rights becomes remote Page 67

Step 5: Recognise revenue Breakage ‒ Example ► ► Good Toys Ltd. (GTL), a toy store, sells a CU 75 gift card to a customer. GTL’s gift cards have no fees or expiration dates. For the purposes of this example, assume no jurisdictional unclaimed property laws apply GTL has sold gift cards for a number of years and has reliable historical evidence of breakage. Using an expected value approach, it estimates that 4% of gift card balances will not be redeemed by the customer GTL evaluates the constraint on variable consideration and determines it is highly probable that a significant revenue reversal will not occur for the 4% estimated breakage amount One week later, the customer returns to the store and uses the gift card to purchase CU 48 worth of goods How should GTL account for the sale of and the use of the gift card? Page 68

Step 5: Recognise revenue Breakage ‒ Example ► ► ► At the point of sale of the gift card to the customer, GTL would record a contract liability of CU 75 At the time the customer uses the gift card to purchase CU 48 worth of goods GTL recognises CU 48 of revenue, with a corresponding decrease to the contract liability In addition, GTL recognises estimated breakage revenue, with an offset to the contract liability, of CU 2 at the time of redemption, calculated, as follows: (4% X CU 75) = CU 3 total estimated breakage to be recognised [C U 48/(CU 75 - CU 3)] = 67% estimated redemption to date (CU 3 X 67%) = CU 2 breakage to be recognised at the time of redemption ► ► GTL will continue to recognise revenue for breakage amounts as the remaining gift card balance is redeemed by the customer Once GTL determines that the likelihood of the customer redeeming any remaining balance on the gift card is remote, GTL will recognise revenue and remove the contract liability for the remaining amount Page 69

Other aspects of the model Page 70

Other aspects of the model Contract modifications Onerous contracts Licences Warranties Contract costs Presentation Page 71

Other aspects of the model Contract modifications ► A contract modification is an approved change in the scope or price (or both) of a contract that creates new or changes existing enforceable rights and obligations of the parties to the contract Distinct POs and price = increases by stand-alone selling price ► Separate contract All other modifications Part of original contract Accounting treatment would depend on the nature of the modification Page 72

Other aspects of the model Contract modifications ► Modifications are accounted for differently, depending on the attributes of the remaining goods and/or services Is the contract modification for additional goods and services that are distinct AND at their stand-alone selling price? Yes The new goods and services should be treated as separate contract. No Are the remaining goods and services distinct from those already provided? No Both yes and no Update the transaction price and measure of progress for the single performance obligation (recognise change as a cumulative catch-up to revenue) Blend of two Yes Allocate the remaining transaction price to the remaining goods and services (transaction price for performance obligations already satisfied is not adjusted). Page 73

Other aspects of the model Onerous contracts Guidance on onerous contracts included in previous drafts of the standard was removed ► Boards elected to retain the current guidance on onerous contracts within IAS 37 Provisions, Contingent Liabilities and Contingent Assets ► Under IFRS, the requirements in IAS 37 for onerous contracts apply to all contracts in the scope of IFRS 15. ► The new standard states that entities that are required to recognise a liability for expected losses on contracts under IAS 37 will continue to be required to do so ► Page 74

Other aspects of the model Licences A licence establishes a customer’s rights to intellectual property (IP) of the entity Entity must first determine whether the licence is a distinct performance obligation in the arrangement For a distinct licence, assess the nature of the promise For a licence providing a right to access the IP, revenue is recognised over time if specific criteria are met For a licence providing a right to use the IP as it exists when granted, revenue is recognised at a point in time Sales- or usage-based royalties on licences of IP Royalties cannot be recognised as revenue until the later of when the sale/usage occurs or the performance obligation is satisfied Page 75

Other aspects of the model Licences – Example ► ► Comic Corp. , a creator of comic strips, licenses the use of the images and names of its comic strip characters in three of its comic strips to a customer for a fouryear term. There are main characters involved in each of the comic strips. However, newly created characters appear regularly and the images of the characters evolve over time The customer, an operator of cruise ships, can use the entity’s characters in various ways, such as in shows or parades, within reasonable guidelines. The contract requires the customer to use the latest images of the characters In exchange for granting the licence, the entity receives a fixed payment of CU 1 million in each year of the four-year term Comic Corp. has no other performance obligations other than the promise to grant a licence Does Comic Corp. grant a right to access or to use the IP? Page 76

Other aspects of the model Licences – Example ► In making this determination Comic Corp. considers the following factors: ► ► ► The customer reasonably expects that Comic Corp. will undertake activities that will affect the intellectual property to which the customer has rights (ie the characters) the rights granted by the licence directly expose the customer to any positive or negative effects of Comic Corp. ’s activities because the contract requires the customer to use the latest characters even though the customer may benefit from those activities through the rights granted by the licence, they do not transfer a good or service to the customer as those activities occur Consequently, Comic Corp. concludes that the nature of its promise to transfer the licence is to provide the customer with access to its intellectual property as it exists throughout the licence period Consequently, Comic Corp. accounts for the promised licence as a performance obligation satisfied over time Page 77

Other aspects of the model Warranties Types of warranties service-type warranties assurance-type warranties Does the customer have the option to separately purchase the warranty? Yes No Separate performance obligation Are the services under the warranty beyond “quality assurance” (i. e. , assurance-type warranty) services? Yes Service-type warranty (separate performance obligation) Page 78 No Accrue for the expected warranty costs

Other aspects of the model Warranties Factors to consider when determining whether a warranty promise provides more than “quality assurance” include: Is the warranty required by law? A law requiring a warranty generally indicates the promised warranty is not a performance obligation What is the length of the warranty coverage period? The longer the warranty period, the more likely it is that the promised warranty is a separate performance obligation What is the nature of the tasks that the entity promises to perform? If it is necessary for an entity to perform specified tasks to provide the assurance that a product complies with agreed-upon specifications, then those tasks likely do not give rise to a performance obligation Page 79

Other aspects of the model Product warranties – Example Warranty – example of a separate performance obligation ► Entity A sells 100 ultra-life batteries for CU 20 each and provides the customer with a five-year guarantee that the batteries will withstand the elements and continue to perform to specifications ► Entity A, which normally provides a one-year guarantee to customer purchasing ultra-life batteries, determines that years two through five represent a separate performance obligation ► Entity A determines that CU 1, 700 of the CU 2, 000 transaction price should be allocated to the batteries and CU 300 to the service warranty (based on estimated stand-alone selling prices and a relative selling price allocation) ► Entity A’s normal one-year warranty cost is CU 1 per battery Page 80

Other aspects of the model Product warranties – Example ► Upon delivery of the batteries, Entity A records the following entries: Debit Cash/Receivables CU 2, 000 Revenue CU 1, 700 Contract liability (service warranty) CU 300 Warranty expense CU 100) Accrued warranty costs (assurance warranty) ► ► ► Credit CU 100 The contract liability is recognised as revenue over the service warranty period (years two through five). The costs of providing the service warranty are recognised as incurred The assurance warranty obligation is relieved as defective units are replaced/ repaired during the initial year of the warranty Upon expiration of the assurance warranty period, any remaining assurance warranty obligation is reversed Page 81

Other aspects of the model Incremental costs of obtaining a contract ► Incremental costs of obtaining a contract would be capitalised if they are expected to be recovered ► ► ► Incremental costs are costs that would not have been incurred if the contract had not been obtained Practical expedient to allow immediate expense recognition if the asset’s amortisation period is one year or less Assets are amortised over the period the related good or service are transferred and subject to impairment ► If costs are determined to relate to more than one contract (e. g. , expected contract renewals), amortisation should consider both current and anticipated contracts What’s changing? ► IFRS 15 represents a significant change for entities that currently expense the costs of obtaining a contract and will be required to capitalise them under the new standard. ► In addition, this may be a change for entities that currently capitalise costs to obtain a contract, particularly if the amounts currently capitalised are not incremental and, therefore, would not be eligible for capitalisation under IFRS 15. Page 82

Other aspects of the model Incremental costs of obtaining a contract – Example ► ► ► Entity A has the following incentive plans: ► A bonus plan for sales employees based on new contracts signed during the month ► A bonus plan for sales employees based on a combination of EPS and individual performance evaluations Entity A capitalises amounts from the plan based on new contracts signed because the amounts are expected to be recovered and are incremental to obtaining the contracts ► The asset is amortised over the period the services are provided (e. g. , the average term of the underlying contracts) Entity A accrues for amounts from the plan based on EPS and individual performance evaluations because the amounts are not incremental and not directly attributable to identifiable contracts Page 83

Other aspects of the model Amortisation period – Example ► ► ► Tech Co. enters into a three-year contract with a customer for IT services. To fulfil the contract, Tech Co. incurred set-up costs of CU 60, 000, which it capitalised and will amortise over the term of the contract At the beginning of the third year, the customer renews the contract for an additional two years. Because Tech Co. will benefit from the set-up costs during the additional two-year period, it would change the remaining amortisation period from one year to three years. It adjusts the amortisation expense recognised in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors on changes in estimates However, if Tech Co. had anticipated the contract renewal at contract inception, Tech Co. would have amortised the set-up costs over the anticipated term of the contract, including the expected renewal (i. e. , five years) Page 84

Other aspects of the model Presentation Principle: When either party to a contract has performed, an entity shall present the contract in the statement of financial position as a contract asset, a contract liability or a receivable Does the entity have a right to consideration in exchange for goods or services that the entity has transferred to a customer? Does the entity have a right to consideration that is unconditional, i. e. is only the passage of time is required before payment of that consideration is due? Does the entity have an obligation to transfer goods or services to a customer for which the entity has received consideration (or an amount of consideration is due) from the customer? Page 85 Contract asset Receivable Contract liability

Other aspects of the model Presentation ► ► Contract assets and receivables are subject to impairment review in accordance with IFRS 9/IAS 39 Revenue from contracts with customers is required to be presented separately from other sources of revenue Page 86

Disclosures Page 87

Disclosures Objective To enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers Qualitative and quantitative information about: ► Contracts with customers ► Significant judgements and changes in judgements made when applying the standard to those contracts ► Assets recognised from costs to obtain or fulfil a contract Disclosures Other sources of new disclosures: ► Use of practical expedients ► Transition disclosures ► IAS 8 Accounting Policies, Changes in Accounting Estimates Page 88

Disclosures Overview of disclosure requirements Disclosures Disaggregation of revenue Contracts with customers Contract balances Performance obligations Significant judgements Contract costs Practical expedients Other required disclosures Transition Information type Frequency Quantitative/ qualitative Interim/annual Quantitative/ qualitative Qualitative/ qualitative Quantitative/ qualitative Annual Qualitative Annual Quantitative/ qualitative Annual* * IAS 34 Interim Financial Disclosures requires, however, a statement that the same accounting policies and methods of computation are followed in the interim financial statements as compared with the most recent annual financial statements or, if those policies or methods have been changed, a description of the nature and effect of the change. Page 89

Transition considerations Page 90

Transition considerations IFRS transition methods ► Assumption: the effective date will be deferred as proposed by the IASB and FASB 2015 2016 2017 2018 Comparative period Reporting period Scenario A Retrospective initial application Preparation time: 1, 5 years Scenario B Modified retrospective application R/E IFRS 15 Opening SOFP 1. January 2017 IAS 11 / IAS 18 1 R/E IFRS 15 Preparation time: 2, 5 years 1 Opening SOFP 1. January 2018 Comparability in terms of disclosures: quantification of transition effects Page 91

Transition considerations Full retrospective transition ► Apply new revenue recognition standard to all existing contracts as of January 1, 20171 (for calendar year-end entities) ► ► Will have to keep two sets of books for FY 2017 if the standard creates differences Cumulative catch-up adjustment as of January 1, 2017 for contracts with performance remaining under current guidance Practical expedients ► ► Need to inventory contracts with performance remaining as of January 1, 2017 Need not restate contracts completed before adoption that begin and end within the same annual reporting period (practical expedient 1) Need not estimate variable consideration for contracts completed before adoption (i. e. , use known consideration as of contract completion) (practical expedient 2) Need not disclose the amount of the transaction price allocated to remaining performance obligations for prior periods presented (practical expedient 3) Disclose which expedients used and a qualitative assessment of their effects 1 Assumption: effective date will be deferred to January 1, 2018 Page 92

Transition considerations Modified retrospective transition ► Apply new revenue recognition standard to all existing contracts as of January 1, 20181 ► ► Need to inventory contracts with performance remaining as of January 1, 2018 Cumulative catch-up adjustment as of January 1, 2018 for contracts with performance remaining under current guidance Present comparative period (2017 for calendar year-end entities) under current revenue guidance Required to report in the year of adoption (2018 for calendar year entities) under both the new standard (on the face of the financial statements) and under current guidance (disclosures), requiring two sets of books ► ► Disclose the amount that each financial statement line item is affected, compared with current accounting Explain significant changes 1 Assumption: effective date will be deferred to January 1, 2018 Page 93

Transition considerations Full retrospective approach - Practical expedient 1 - Example Practical expedient 1: Contracts that begin and complete in the same annual reporting period ► Entity B has the following contracts with customers, each of which runs for nine months Contract Starts Completes 1 January 1, 2017 September 30, 2017 2 May 1, 2016 March 31, 2017 3 May 1, 2017 March 31, 2018 The date of initial application for IFRS 15 is January 1, 2018 Contract timelines Comparative period Current Period Contract 1 Contract 2 Contract 3 Jan 1, 2017 Dec 31, 2017 Page 94 Dec 31, 2018

Transition considerations Full retrospective approach - Practical expedient 1 - Example The practical expedient 1: ► applies to Contract 1, because it begins and ends in an annual reporting period before the date of initial application, i. e. in 2017; ► does not apply to Contract 2, because even though Contract 2 is for period of less than 12 months, it is not completed within a single annual reporting period; and ► does not apply to Contract 3, because it is not completed under current GAAP by the date of initial application. Page 95

Transition considerations Transition method summary Key considerations Full retrospective approach Modified retrospective approach Apply to which periods presented? All periods presented Only the most current period presented Apply to which contracts? All contracts that would have existed during all periods presented if the new standard had been applied from contract inception (except for practical expedients) Any contracts existing as of effective date (as if new standard had been applied sinception of contract), as well as any new contracts from that date forward Recognition of the effect of adoption in the financial statements? Follow requirements of IAS 8, cumulative effect of changes to periods prior to periods presented is reflected in opening balance of retained earnings Cumulative effect of changes is reflected in the opening balance of retained earnings in the most current period presented Follow requirements of IAS 8, including disclosure of the reason for the change and the method of applying the change In the year of adoption, disclose the amount each financial statement line item was affected as a result of applying the new standard an explanation of significant changes (effectively requires two sets of books during the year of adoption) Adoption disclosure requirements? Page 96

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