PFRS 15: Revenue Recognition PDF

03 PFRS 15: Revenue Recognition AFAR By CSD AFAR BY CSD AFAR BY CSD Revenue from Contracts with Customer Definition Core Principle under PFRS 15...

03 PFRS 15: Revenue Recognition AFAR By CSD AFAR BY CSD AFAR BY CSD Revenue from Contracts with Customer Definition Core Principle under PFRS 15 Five-Step Approach REVENUE FROM CONTRACTS WITH CUSTOMER Revenue Revenue depicts the transfer of promised (Hint: CPTA-Revenue) income arising in the course of an entity’s goods or services to customers in an ordinary activities amount that reflects the consideration to vs Gain – represent other items that which the entity expects to be entitled in meet the definition of income and exchange for those goods or services Step 1: Identify the contract with the may or may not arise in the course customer of ordinary activities of an entity Scope vs Income – encompasses both PFRS 15 applies to revenues from contracts revenue and gain with customers, regardless of the nature of e.g. sales, fees, interest, dividends, the contract, except for: Step 2: Identify the performance royalties, rent Lease contracts (PFRS 16) obligations in the contract Insurance Contracts (PFRS 17) Contracts Financial Instruments and other an agreement between two or more contractual rights or obligations (PFRS 9, parties that creates enforceable rights 10, 11, PAS 27, 28) Step 3: Determine transaction price and obligations Non-monetary exchanges between can be written, oral, implied by an entities in the same line of business to entity’s customary business practice facilitate sales to customers Step 4: Allocate the transaction price to the Customers performance obligations 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 Step 5: Recognize revenue when (or as) a performance obligation is satisfied AFAR BY CSD AFAR BY CSD Revenue from Contracts with Customer Old Standards New Standards REVENUE FROM CONTRACTS WITH CUSTOMER PAS 18 Revenue Recognition PFRS 15 Revenue from Contracts with Customers Sale of goods Sale of goods Sale of services Sale of services Royalties Royalties Dividends Construction Contracts Interest PFRS 9 Financial Instruments PAS 11 Construction Contracts Dividends Construction Contracts Interest Key Differences Key Differences PAS 18/11 PFRS 15 Separate models for: Single model for performance obligations: Sale of goods Satisfied over time Sale of services Satisfied at a point in time Royalties Focus on control Focus on risks and rewards Five indicators to determine when control transfers at a point in time To be recognized as revenue: 1. Transfer of risks and rewards; Transfer of risks and rewards 2. Having a right to payment for the asset; 3. The transfer of legal title; 4. The transfer of physical possession; and 5. The customers acceptance AFAR BY CSD AFAR BY CSD Five-Step Model REVENUE FROM CONTRACTS WITH CUSTOMER Is it a lease in scope of PFRS 16? (Exceptions: licenses of IP) Scope partially in scope of PFRS X 15 and partially within mentioned standards? Is it an insurance contract in scope of PFRS 17 Other standards specifies ✓ separation &/or initial ✓ measurement of one/more parts Is it a financial instrument or other contractual rights/obligations in scope of the contract of PFRS 9, 10, 11 or IAS 27, 28? Is it a non-monetary exchange between ✓ X entities in the same line of business to facilitate sales to (potential) customers Apply other Apply standards/exclude PFRS to part(s) from Is it a contract with a customer? part(s) transaction price Do not apply Start with five- X ✓ X PFRS 15 step approach AFAR BY CSD AFAR BY CSD Five-Step Model Step 1: Identify Contracts with the Contract asset Contract liability is a company’s obligation REVENUE FROM CONTRACTS WITH CUSTOMER Customer Two types of contract asset: to transfer goods or services to a customer 1. Unconditional rights – to receive for which the company has receive Contract: consideration because the company has consideration from the customer May be written, oral, or implied satisfied PO with a customer A.k.a., unearned sales revenue, unearned Criteria (all must be met) Should be reported as a receivable service revenue, or any appropriate 1. Approved on the balance sheet account title 2. Rights of each party identified 2. Conditional rights – to receive If cash received > revenue recognized to 3. Payment terms identified consideration because the company has date, there would be a contract liability 4. Commercial substance satisfied one performance obligation but (acting effectively as deferred revenue/ 5. Collectability of consideration probable must satisfy other obligation in the income) contract before it can bill the customer If a contract is loss-making, there will be a A contract does not exist if both of the Should be presented separately as provision recorded to recognize the full following is true: contract assets loss under the onerous contract, as per 1. Neither the seller nor the customer has PAS 37 (treated either as contract liability performed any obligations under the PFRS 15 allows the term receivable and or a provision) contract; and work-in-progress to be used 2. Both the seller and the customer can If revenue > cash received this would be Note: PFRS 15 is not prescriptive about the terminate the contract without penalty included within trade receivables treatment of contract assets or liabilities If costs to date > cost of sales (or cost of Contract asset = Rights received > construction), this would be included Performance obligation within inventory, as work-in-progress Contract liability = Rights received < Performance obligation AFAR BY CSD AFAR BY CSD Five-Step Model Step 2: Identify the performance Contract Modification Step 3: Determine transaction price REVENUE FROM CONTRACTS WITH CUSTOMER obligations in the contract There might be change in contract terms while it is ongoing Transaction Price (TP) Performance Obligation (PO) Companies determine: the amount that an entity expects to be is a promise in a contract to provide a Whether a new contract (and entitled to in exchange for satisfying PO product or service to a customer performance obligations) results or Only includes amounts that the Promise maybe: implicit, explicit, or Whether it is a modification of the entity has rights to under the possibly based on the usual business existing contract present contract (excludes practices amounts collected on behalf of Each promise for a distinct good or Separate PO if both conditions are present: third parties) service = a separate PO Promised goods or services are distinct Usually, straightforward = fixed amount The company has the right to receive an in the contract Distinct if: amount of consideration that reflects Other issues to be considered: Separate utility to the customer standalone selling price of the promised 1. Variable consideration can benefit from it either on its own goods or services 2. Significant financing component or together with other resources 3. Non-cash consideration that are readily available to the Prospective Modification 4. Consideration payable to the customers; AND Company should account for effect of customer Separately identifiable change in period of change the promise to transfer the good or As well as future periods if the change service are separately identifiable affects both from other promises in the contract And not change previously reported results AFAR BY CSD AFAR BY CSD Five-Step Model 1. Variable Consideration 2. Time Value of Money Step 4: Allocate the transaction price to REVENUE FROM CONTRACTS WITH CUSTOMER Price dependent on future events If significant financing component occurs the performance obligations E.g. discounts, rebates, credits, If yes, Interest income or interest expense performance bonuses, royalties recorded separately A transaction price is allocated to the Practical Expedient: if the period is performance obligations based on: Which is better to predict? one year or less = may be the relative fair value Expected Value disregarded the stand-alone price (SSP) Probability-weighted amount If not available, use best estimate May be appropriate if a company has a 3. Non-cash Considerations of what the good or service might large number of contracts with similar Goods, services (equipment, labor) sell for as a standalone unit characteristics GR: Use fair value If none, standalone selling price Approaches in allocating TP (if no SSP) Most likely amount 1. Adjusted market assessment approach Most likely amount in a range of possible 4. Consideration Payable to Customers 2. Estimated cash plus margin approach consideration E.g., discounts, volume rebates, coupons, 3. Residual approach May be appropriate if company has only free products, or services two possible outcomes GR: reduce the consideration received and the revenue to be recognized XPN: payment is exchange for a distinct goods or services AFAR BY CSD AFAR BY CSD Five-Step Model Step 5: Recognize revenue when (or as) a 1 The customer simultaneously receives and consumes the benefits of the REVENUE FROM CONTRACTS WITH CUSTOMER YES performance obligation is satisfied entity’s performance as the entity performs OR another company would not need to substantially re-perform the work the company has completed to AT A POINT IN TIME 1. Overt time – revenue is recognized as date if that other company were to fulfill the remaining obligation to the the entity progresses towards the customer OVER TIME complete satisfaction of the NO performance obligation 2 Company’s performance creates or enhances an asset and controls it The technique selected for YES during the process NO measuring progress should depict transfer of control from the AND either of the two: company to the customer. 3-a Company’s performance does not create an asset with an alternative use OR 3-b the company has a right to payment for its performance completed 2. At a point in time – revenue is to date, and it expects to fulfill the contract as promised recognized when the entity completely satisfies the performance obligation OVER TIME AT A POINT IN TIME Revenue is measured at the amount of the transaction price allocated to the performance obligation satisfied. The following are factors for performance obligation that change over time: 1. Measure progress toward completion 2. Method for measuring progress should depict transfer of control from company to customer. 3. Most common are cost-to-cost and units-of-delivery methods. 4. Objective of methods is to measure extent of progress in terms of costs, units, or value added.