Comprehensive understanding IFRS 15 Disclosures

Comprehensive understanding IFRS 15 Disclosures provides clear disclosure requirements, which are quite detailed and increase the volume of required disclosures that entities have to include in their interim and annual financial statements. Many of the requirements in IFRS 15 involve information that entities did not previously disclose, all in all the usefulness of information in the financial statements should grow using these presentation and disclosure requirements.

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Tailor disclosures to the business

In practice, the nature and extent of changes to an entity’s financial statements depend on a number of factors, including, but not limited to, the nature of its revenue-generating activities and the level of information it previously disclosed.

Improvements of disclosures

In response to criticism that the legacy revenue recognition disclosures are inadequate, the Board sought to create a comprehensive and coherent set of disclosures. As a result, IFRS 15 described the overall objective of the disclosures, consistent with other recent standards, as follows:

IFRS 15 110. The objective of the disclosure requirements is for an entity to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. To achieve that objective, an entity shall disclose qualitative and quantitative information about all of the following:

  1. its contracts with customers (see paragraphs 113–122);
  2. the significant judgements, and changes in the judgements, made in applying this Standard to those contracts (see paragraphs 123–126); and
  3. any assets recognised from the costs to obtain or fulfil a contract with a customer in accordance with paragraph 91 or 95 (see paragraphs 127–128).

Each of these disclosure requirements is discussed further below.

Balancing detailed and aggregated information

The standard requires that an entity consider the level of detail necessary to satisfy the disclosure objective and the degree of emphasis to place on each of the various requirements. The level of aggregation or disaggregation of disclosures requires judgement. Entities are required to ensure that useful information is not obscured (by either the inclusion of a large amount of insignificant detail or the aggregation of items that have substantially different characteristics). An entity does not need to disclose information in accordance with IFRS 15 if it discloses that information in accordance with another standard.

Avoid extended disclosures

As explained in the Basis for Conclusions, many preparers raised concerns that they would need to provide voluminous disclosures at a cost that may outweigh any potential benefits 1. As summarised above, the Board clarified the disclosure objective and indicated that the disclosures described in the standard are not meant to be a checklist of minimum requirements. That is, entities do not need to include disclosures that are not relevant or are not material to them. In addition, the Board decided to require qualitative disclosures instead of tabular reconciliations for certain disclosures.

Understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers

Entities should review their disclosures to determine whether they have met IFRS 15’s disclosure objective to enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. For example, some entities may make large payments to customers that do not represent payment for a distinct good or service and therefore reduce the transaction price and affect the amount and timing of revenue recognised. Although there are no specific requirements in the standard to disclose balances related to consideration paid or payable to a customer, an entity may need to disclose qualitative and/or quantitative information about those arrangements to meet the objective of the IFRS 15 disclosure requirements in the standard if the amounts are material.

The disclosures are required for (and as at) each annual period for which a statement of comprehensive income and a statement of financial position are presented.

Specific disclosure requirements

The following illustration depicts the disclosure considerations, which are discussed further below by category:

Category

Sub-category / Type

Disclosures considerations2

Contracts with customers

Contracts with customers

Quantitative

If not presented separately in the statement of comprehensive income:

  • The amount of revenue recognised from contracts with customers (i.e., IFRS 15) separately from other sources of revenue
  • Any impairment losses from contract with customers separately from other impairment losses

Disaggregation of revenue

Quantitative and qualitative

  • Disaggregation of revenue from contracts with customers into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors
  • Sufficient information to enable users of financial statements to understand the relationship between the disclosure of disaggregated revenue and revenue information that is disclosed for each reportable segment, if the entity applies IFRS 8 Operating Segments

Contract balances

Quantitative and qualitative

  • Opening and closing balances of receivables, contract assets and contract liabilities
  • Revenue recognised in the reporting period that was included in the contract liability balance at the beginning of the period
  • Explanation of how the timing of satisfaction of performance obligations relates to the typical timing of payment and the effect thereof on contract assets and liabilities
  • Explanation of the significant changes in the contract asset and contract liability balances during the reporting period

Performance obligations

Quantitative and qualitative

  • Descriptive information about an entity’s performance obligations (i.e., when typically satisfied, significant payment terms, nature of goods and services, obligations for returns, refunds, and other similar obligations, and types of warranties and related obligations)
  • Revenue recognised in the reporting period from performance obligations satisfied (or partially satisfied) in previous periods
  • Aggregate amount of the transaction price allocated to performance obligations that are unsatisfied (or partially satisfied) as of the end of the reporting period and explanation of when the related revenue is expected to be recognised (subject to certain optional exemptions)

Significant judgements

N/A

Qualitative

Judgements (and changes in judgements) made in determining the timing of satisfaction of performance obligations, the transaction price and amounts allocated to performance obligations, including:

  • For performance obligations satisfied over time, the method used to recognise revenue and why the method faithfully depicts the transfer of goods and services
  • For performance obligations satisfied at a point in time, significant judgements made in evaluating when control transfers to a customer
  • Methods, inputs and assumptions used to estimate variable consideration, adjust consideration for the effects of time value of money, measure non-cash consideration and apply the constraint
  • Methods, inputs and assumptions used to estimate stand-alone selling prices and the use of any allocation exceptions
  • Methods, inputs and assumptions used to measure obligations for returns, refunds and other similar obligations

Costs to obtain or fulfil a contract

N/A

Quantitative and qualitative

  • Judgements made in determining the amount of costs to obtain or fulfil a contract
  • Method used to determine amortisation for each reporting period
  • Closing balances of capitalised contract costs
  • Amount of amortisation and any impairment losses recognised in the period

Practical expedients

N/A

Qualitative

Use of the following practical expedients:

Contracts with customers

The majority of the standard’s disclosures relate to an entity’s contracts with customers3. These disclosures include disaggregation of revenue, information about contract asset and liability balances and information about an entity’s performance obligations. To provide context for the disclosures, the Board decided to require entities to disclose the following amounts related to contracts with customers4:

  • IFRS 15 113(a) requires an entity to disclose (or present in the statement of comprehensive income) the amount of revenue recognised from contracts with customers under IFRS 15 separately from other sources of revenue. For example, a large equipment manufacturer that both sells and leases its equipment should present (or disclose) amounts from these transactions separately.
  • IFRS 15 113(b) also requires an entity to disclose impairment losses from contracts with customers separately from other impairment losses if they are not presented in the statement of comprehensive income separately. As noted in the Basis for Conclusion, the Board felt that separately disclosing the impairment losses on contracts with customers provides the most relevant information to users of financial statements5.

No offsetting

Unless required, or permitted, by another standard, IAS 1 does not permit offsetting of income and expenses within profit or loss or the statement of comprehensive income (IAS 1 32).

After applying the requirements for determining the transaction price in IFRS 15, revenue recognised by an entity may include offsets, for example, for any trade discounts given and volume rebates paid by the entity to its customer. Similarly, in the ordinary course of business, an entity may undertake other transactions that do not generate revenue, but are incidental to the main revenue-generating activities. When this presentation reflects the substance of the transaction or other event, IAS 1 permits an entity to present “the results of such transactions … by netting any income with related expenses arising on the same transaction” (IAS 1 34). An example given in IAS 1 is the presentation of gains and losses on the disposal of non-current assets by deducting from the amount of consideration on disposal the carrying amount of the asset and related selling expenses (IAS 1 34(a)).

Disaggregation of revenue

Entities are required to disclose disaggregated revenue information to illustrate how the nature, amount, timing and uncertainty about revenue and cash flows are affected by economic factors. This is the only disclosure requirement for IFRS preparers that is required in both an entity’s interim and annual financial statements.

As noted above, an entity is required to separately disclose any impairment losses recognised in accordance with IFRS 9 on receivables or contract assets arising from contracts with customers. However, entities are not required to further disaggregate such losses for uncollectible amounts.

Management use of Disaggregation of revenue

While the standard does not specify precisely how revenue should be disaggregated, the application guidance suggests categories for entities to consider. The application guidance indicates that the most appropriate categories for a particular entity depend on its facts and circumstances, but an entity needs to consider how it disaggregates revenue in other communications (e.g., press releases, information regularly reviewed by the chief operating decision maker) when determining which categories are most relevant and useful.

IFRS 15 application guidance

The standard includes the following application guidance on the required disaggregation of revenue disclosures:

IFRS 15 B88

When selecting the type of category (or categories) to use to disaggregate revenue, an entity shall consider how information about the entity’s revenue has been presented for other purposes, including all of the following:

  1. disclosures presented outside the financial statements (for example, in earnings releases, annual reports or investor presentations);

  2. information regularly reviewed by the chief operating decision maker for evaluating the financial performance of operating segments; and

  3. other information that is similar to the types of information identified in paragraph B88 (a) and (b) and that is used by the entity or users of the entity’s financial statements to evaluate the entity’s financial performance or make resource allocation decisions.

IFRS 15 B89

Examples of categories that might be appropriate include, but are not limited to, all of the following:

  1. type of good or service (for example, major product lines);

  2. geographical region (for example, country or region);

  3. market or type of customer (for example, government and nongovernment customers);

  4. type of contract (for example, fixed-price and time-and-materials contracts);

  5. contract duration (for example, short-term and long-term contracts);

  6. timing of transfer of goods or services (for example, revenue from goods or services transferred to customers at a point in time and revenue from goods or services transferred over time); and

  7. sales channels (for example, goods sold directly to consumers and goods sold through intermediaries).

More than one type of revenue categorisation

As noted in the Basis for Conclusions, the Board decided not to prescribe a specific characteristic of revenue as the basis for disaggregation because it intended for entities to make this determination based on entity-specific and/or industry-specific factors that are the most meaningful for their businesses. The Board acknowledged that an entity may need to use more than one type of category to disaggregate its revenue (IFRS 15 BC 336).

No duplications with other IFRS

IFRS 15 112 clarifies that an entity does not have to duplicate disclosures required by another standard. For example, an entity that provides disaggregated revenue disclosures as part of its segment disclosures, in accordance with IFRS 8 Operating Segments, does not need to separately provide disaggregated revenue disclosures if the segment-related disclosures are sufficient to illustrate how the nature, amount, timing and uncertainty about revenue and cash flows from contracts with customers are affected by economic factors and are presented on a basis consistent with IFRS.

Segment disclosures

However, segment disclosures may not be sufficiently disaggregated to achieve the disclosure objectives of IFRS 15. The IASB noted in the Basis for Conclusions that segment disclosures on revenue may not always provide users of financial statements with enough information to help them understand the composition of revenue recognised in the period6. If an entity applies IFRS 8, it is required under IFRS 15 115 to explain the relationship between the disaggregated revenue information and revenue information that is disclosed for each reportable segment. Users of the financial statements believe this information is critical to their ability to understand not only the composition of revenue, but also how revenue relates to other information provided in the segment disclosures. Entities can provide this information in a tabular or a narrative form.

Press release and other data issued

Regulators may review publicly provided information (e.g., investor presentations, press releases) in order to evaluate whether entities have met the objectives of this disclosure requirement. In accordance with IFRS 15 B88, an entity needs to consider how information about its revenue has been presented for other purposes, including information disclosed outside the financial statements, information regularly reviewed by the chief operation decision maker and other similar information used by the entity or users of the financial statements to evaluate the entity’s financial performance or to make resource allocation decisions.

To help determine the appropriate level of revenue disaggregation that is beneficial to users of the financial statements, entities should analyse specific risk factors for each revenue stream. Different risk factors for revenue streams may indicate when disaggregation is required.

Different objectives IFRS 15 IFRS 8

It is important to note that IFRS 15 and IFRS 8 have different objectives. The objective of the segment reporting requirements in IFRS 8 is to enable users of the financial statements to evaluate the nature and financial effects of the business activities in which an entity engages and the economic environment in which it operates (IFRS 8 20). These disclosure requirements are largely based on how the chief operating decision maker (e.g., chief executive officer or chief operating officer) allocates resources to the operating segments for the entity and assesses their performance (IFRS 8 5(b)). They also permit aggregation in certain situations. In contrast, IFRS 15 disclosure requirements focus on how the revenues and cash flows from contracts with customers are affected by economic factors and do not have similar aggregation criteria. As noted above, if an entity concludes that it is necessary to provide disaggregated revenue disclosures along with the segment disclosures required under IFRS 8, it is required under IFRS 15 to explain the relationship between the disclosures.

IFRS Examples disaggregation of revenue

The Board provided an example of the disclosures for disaggregation of revenue, as follows:

Example 41 — Disaggregation of revenue—quantitative disclosure (IFRS 15.IE210-IE211)

An entity reports the following segments: consumer products, transportation and energy, in accordance with IFRS 8 Operating Segments. When the entity prepares its investor presentations, it disaggregates revenue into primary geographical markets, major product lines and timing of revenue recognition (ie goods transferred at a point in time or services transferred over time).

The entity determines that the categories used in the investor presentations can be used to meet the objective of the disaggregation disclosure requirement in paragraph 114 of IFRS 15, which is to disaggregate revenue from contracts with customers into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. The following table illustrates the disaggregation disclosure by primary geographical market, major product line and timing of revenue recognition, including a reconciliation of how the disaggregated revenue ties in with the consumer products, transportation and energy segments, in accordance with paragraph 115 of IFRS 15.

Segments

Consumer products

Transport

Energy

Total

CU

CU

CU

CU

Primary geographical markets

North America

990

2,250

5,250

8,490

Europe

300

750

1,000

2,050

Asia

700

260

0

960

1,990

3,260

6,250

11,500

Major goods/service lines

Office Supplies

600

0

0

600

Appliances

990

0

0

990

Clothing

400

0

0

400

Motorcycles

0

500

0

500

Automobiles

0

2,760

0

2,760

Solar Panels

0

0

1,000

1,000

Power Plant

0

0

5,250

5,250

1,990

3,260

6,250

11,500

Timing of revenue recognition

Goods transferred at a point in time

1990

3260

1000

6250

Services transferred over time

0

0

5,250

5,250

1,990

3,260

6,250

11,500

Contract balances

The Board noted in the Basis for Conclusions that users of the financial statements need to understand the relationship between the revenue recognised and changes in the overall balances of an entity’s total contract assets and liabilities during a particular reporting period 7. As a result, the Board included the following disclosure requirements for an entity’s contract balances and changes in the balances:

Disclosures contract balances and changes in the balances

IFRS 15 116

An entity shall disclose all of the following:

  1. the opening and closing balances of receivables, contract assets and contract liabilities from contracts with customers, if not otherwise separately presented or disclosed;
  2. revenue recognised in the reporting period that was included in the contract liability balance at the beginning of the period; and
  3. revenue recognised in the reporting period from performance obligations satisfied (or partially satisfied) in previous periods (for example, changes in transaction price).
IFRS 15 117

An entity shall explain how the timing of satisfaction of its performance obligations (see paragraph 119(a)) relates to the typical timing of payment (see paragraph 119(b)) and the effect that those factors have on the contract asset and the contract liability balances. The explanation provided may use qualitative information.

IFRS 15 118

An entity shall provide an explanation of the significant changes in the contract asset and the contract liability balances during the reporting period. The explanation shall include qualitative and quantitative information. Examples of changes in the entity’s balances of contract assets and contract liabilities include any of the following:

  1. changes due to business combinations;
  2. cumulative catch-up adjustments to revenue that affect the corresponding contract asset or contract liability, including adjustments arising from a change in the measure of progress, a change in an estimate of the transaction price (including any changes in the assessment of whether an estimate of variable consideration is constrained) or a contract modification;
  3. impairment of a contract asset;
  4. a change in the time frame for a right to consideration to become unconditional (ie for a contract asset to be reclassified to a receivable); and
  5. a change in the time frame for a performance obligation to be satisfied (ie for the recognition of revenue arising from a contract liability).

Entity specific disclosure on contract balances

Entities are permitted to disclose information about contract balances, and changes therein, as they deem to be most appropriate, which would include a combination of tabular and narrative information. The IASB explained in the Basis for Conclusions that these disclosures are intended to provide financial statement users with information they requested on when contract assets are typically transferred to accounts receivable or collected as cash and when contract liabilities are recognised as revenue8.

Disclosure revenue recognition of performance obligations satisfied

In addition to the disclosures on contract balances and changes, the standard requires entities to disclose the amount of revenue recognised in the period that relates to amounts allocated to performance obligations that were satisfied (or partially satisfied) in previous periods (e.g., due to a change in transaction price or in estimates related to the constraint on revenue recognised). As noted in the Basis for Conclusions, the Board noted that this information is not required elsewhere in the financial statements and provides relevant information about the timing of revenue recognised that was not a result of performance in the current period 9.

Example – Contract asset and liability disclosures

The illustration below is an example of how an entity may fulfil these requirements:

Contract asset and liability disclosures

Company A discloses receivables from contracts with customers separately in the statement of financial position. To comply with the other disclosures requirements for contract assets and liabilities, Company A includes the following information in the notes to the financial statements:

20X9

20X8

20X7

Contract asset

CU1,500

CU2,250

CU1,800

Contract liability

CU(200)

CU(850)

CU(500)

Revenue recognised in the period from:

Amounts included in contract liability at the beginning of the period

CU650

CU200

CU100

Performance obligations satisfied in previous periods

CU200

CU125

CU200

We receive payments from customers based on a billing schedule, as established in our contracts. Contract asset relates to our conditional right to consideration for our completed performance under the contract.

Accounts receivable are recognised when the right to consideration becomes unconditional. Contract liability relates to payments received in advance of performance under the contract. Contract liabilities are recognised as revenue as (or when) we perform under the contract. In addition, contract asset decreased in 20X9 due to a contract asset impairment of CU400 relating to the early cancellation of a contract with a customer.

New requirement IFRS 15 contract balances

Disclosing contract assets and liabilities and the revenue recognised from changes in contract liabilities and performance obligations satisfied in previous periods is a change in practice for most entities. In addition, because IFRS 15 116(a) requires entities to separately disclose contract balances from contracts with customers, it is necessary for entities that have material receivables from non-IFRS 15 contracts to separate these balances for disclosure purposes. For example, an entity may have accounts receivable relating to leasing contracts that would need to be disclosed separately from accounts receivable related to contracts with customers.

Entities need to make sure they have appropriate systems, policies and procedures and internal controls in place to collect and disclose the required information. For example, consider a sales-based or usage-based royalty received by the entity in reporting periods after it delivers a right-to-use licence of intellectual property. In this example, the royalties relate to a previously satisfied performance obligation, but are revenue that the entity receives in subsequent periods. As such, it would be disclosed separately in accordance with IFRS 15 116(c).

Performance obligations

To help users of financial statements analyse the nature, amount, timing and uncertainty about revenue and cash flows arising from contracts with customers, the Board decided to require disclosures about an entity’s performance obligations. As noted in the Basis for Conclusions, legacy IFRS required entities to disclose their accounting policies for recognising revenue, but users of financial statements said that many entities provided a ‘boilerplate’ description that did not explain how the policy related to the contracts they entered into with customers10. To address this criticism, IFRS 15 requires an entity to provide more descriptive information about its performance obligations.

An entity is also required to disclose information about remaining performance obligations and the amount of the transaction price allocated to such obligations, including an explanation of when it expects to recognise the amount(s) in its financial statements.

Quantitative and qualitative information

Both quantitative and qualitative information are required as follows:

IFRS 15 119

An entity shall disclose information about its performance obligations in contracts with customers, including a description of all of the following:

  1. when the entity typically satisfies its performance obligations (for example, upon shipment, upon delivery, as services are rendered or upon completion of service), including when performance obligations are satisfied in a bill-and-hold arrangement;

  2. the significant payment terms (for example, when payment is typically due, whether the contract has a significant financing component, whether the consideration amount is variable and whether the estimate of variable consideration is typically constrained in accordance with paragraphs 56–58);

  3. the nature of the goods or services that the entity has promised to transfer, highlighting any performance obligations to arrange for another party to transfer goods or services (ie if the entity is acting as an agent);

  4. obligations for returns, refunds and other similar obligations; and

  5. types of warranties and related obligations.

Transaction price allocated to the remaining performance obligations

IFRS 15 120

An entity shall disclose the following information about its remaining performance obligations:

  1. the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied (or partially unsatisfied) as of the end of the reporting period; and

  2. an explanation of when the entity expects to recognise as revenue the amount disclosed in accordance with paragraph 120(a), which the entity shall disclose in either of the following ways:

    1. on a quantitative basis using the time bands that would be most appropriate for the duration of the remaining performance obligations; or

    2. by using qualitative information.

IFRS 15 121

As a practical expedient, an entity need not disclose the information in paragraph 120 for a performance obligation if either of the following conditions is met:

  1. the performance obligation is part of a contract that has an original expected duration of one year or less; or

  2. the entity recognises revenue from the satisfaction of the performance obligation in accordance with paragraph B16.

IFRS 15 122

An entity shall explain qualitatively whether it is applying the practical expedient in paragraph 121 and whether any consideration from contracts with customers is not included in the transaction price and, therefore, not included in the information disclosed in accordance with paragraph 120. For example, an estimate of the transaction price would not include any estimated amounts of variable consideration that are constrained (see paragraphs 56–58).

Considerations IASB Board

In the Basis for Conclusions, the Board noted that many users of financial statements commented that information about the amount and timing of revenue that an entity expects to recognise from its existing contracts would be useful in their analyses of revenue, especially for long-term contracts with significant unrecognised revenue11. The Board also observed that a number of entities often voluntarily disclose such ‘backlog’ information. However, this information is typically presented outside the financial statements and may not be comparable across entities because there is no common definition of backlog.

Summary Basis for Conclusions

As summarised in the Basis for Conclusions, the Board’s intention in including the disclosure requirements in IFRS 15 120 is to provide users of an entity’s financial statements with additional information about the following:

  1. the amount and expected timing of revenue to be recognised from the remaining performance obligations in existing contracts;
  2. trends relating to the amount and expected timing of revenue to be recognised from the remaining performance obligations in existing contracts; Comprehensive understanding IFRS 15 Disclosures
  3. risks associated with expected future revenue (for example, some observe that revenue is more uncertain if an entity does not expect to satisfy a performance obligation until a much later date); and Comprehensive understanding IFRS 15 Disclosures
  4. the effect of changes in judgements or circumstances on an entity’s revenue.”12

Mix of quantitative and qualitative information

This disclosure can be provided on either a quantitative basis (e.g., amounts to be recognised in given time bands, such as between one and two years and between two and three years) or by disclosing a mix of quantitative and qualitative information. In addition, this disclosure would only include amounts related to performance obligations in the current contract. For example, expected contract renewals that have not been executed and do not represent material rights are not performance obligations in the current contract. As such, an entity does not disclose amounts related to such renewals. However, if an entity concludes that expected contract renewals represents a material right to acquire goods or services in the future (and, therefore, was a separate performance obligation – see Customer options for additional goods or services), the entity includes in its disclosure the consideration attributable to the material right for the options that have not yet been exercised (i.e., the unsatisfied performance obligation(s)). Comprehensive understanding IFRS 15 Disclosures

Disclosure of the transaction price

The disclosure of the transaction price allocated to the remaining performance obligations does not include consideration that has been excluded from the transaction price. However, the standard requires entities to disclose qualitatively whether any consideration is not included in the transaction price and, therefore, is not included in the disclosure of the remaining performance obligations (e.g., variable consideration amounts that are constrained and, therefore, excluded from the transaction price).

Practical expedient – Disclosure remaining (short term) performance obligations

The Board also provided a practical expedient under which an entity can decide not to disclose the amount of the remaining performance obligations for contracts with an original expected duration of less than one year or those that meet the requirements of the right to invoice practical expedient in IFRS 15 B16 (see IFRS 15 121). As explained in measuring progress, the right to invoice practical expedient permits an entity that is recognising revenue over time to recognise revenue as invoiced if the entity’s right to payment is an amount that corresponds directly with the value to the customer of the entity’s performance to date (IFRS 15 121). For example, an entity is not required to make the disclosure for a three-year service contract under which it has a right to invoice the customer a fixed amount for each hour of service provided. If an entity uses this disclosure practical expedient, it is required to qualitatively disclose that fact (IFRS 15 122). Comprehensive understanding IFRS 15 Disclosures

Example -Disclosure remaining (short term) performance obligations

The standard provides the following examples of these required disclosures: Comprehensive understanding IFRS 15 Disclosures

Example 42 — Disclosure of the transaction price allocated to the remaining performance obligations (IFRS 15.IE212-IE219)

On 30 June 20X7, an entity enters into three contracts (Contracts A, B and C) with separate customers to provide services. Each contract has a two-year non-cancellable term. The entity considers the requirements in paragraphs 120–122 of IFRS 15 in determining the information in each contract to be included in the disclosure of the transaction price allocated to the remaining performance obligations at 31 December 20X7.

Contract A

Cleaning services are to be provided over the next two years typically at least once per month. For services provided, the customer pays an hourly rate of CU25.

Because the entity bills a fixed amount for each hour of service provided, the entity has a right to invoice the customer in the amount that corresponds directly with the value of the entity’s performance completed to date in accordance with paragraph B16 of IFRS 15. Consequently, no disclosure is necessary if the entity elects to apply the practical expedient in paragraph 121(b) of IFRS 15.

Contract B

Cleaning services and lawn maintenance services are to be provided as and when needed with a maximum of four visits per month over the next two years. The customer pays a fixed price of CU400 per month for both services. The entity measures its progress towards complete satisfaction of the performance obligation using a time-based measure.

The entity discloses the amount of the transaction price that has not yet been recognised as revenue in a table with quantitative time bands that illustrates when the entity expects to recognise the amount as revenue. The information for Contract B included in the overall disclosure is, as follows:

20X8  20X9Total
CUCUCU
Revenue expected to be recognised on this contract as of 31 December 20X74,800(a) 2,400(b) 7,200
(a) CU4,800 = CU400 × 12 months.
(b) CU2,400 = CU400 × 6 months.

Contract C

Cleaning services are to be provided as and when needed over the next two years. The customer pays fixed consideration of CU100 per month plus a one-time variable consideration payment ranging from CU0–CU1,000 corresponding to a one-time regulatory review and certification of the customer’s facility (ie a performance bonus). The entity estimates that it will be entitled to CU750 of the variable consideration. On the basis of the entity’s assessment of the factors in paragraph 57 of IFRS 15, the entity includes its estimate of CU750 of variable consideration in the transaction price because it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur. The entity measures its progress towards complete satisfaction of the performance obligation using a time-based measure.

The entity discloses the amount of the transaction price that has not yet been recognised as revenue in a table with quantitative time bands that illustrates when the entity expects to recognise the amount as revenue. The entity also includes a qualitative discussion about any significant variable consideration that is not included in the disclosure. The information for Contract C included in the overall disclosure is as follows:

20X8  20X9Total
CUCUCU
Revenue expected to be recognised on this contract as of 31 December 20X71,575(a)788(b)2,363
(a) Transaction price = CU3,150 (CU100 × 24 months + CU750 variable consideration) recognised evenly over 24 months at CU1,575 per year.
(b) CU1,575 ÷ 2 = CU788 (ie for 6 months of the year).

In addition, in accordance with paragraph 122 of IFRS 15, the entity discloses qualitatively that part of the performance bonus has been excluded from the disclosure because it was not included in the transaction price. That part of the performance bonus was excluded from the transaction price in accordance with the requirements for constraining estimates of variable consideration.

The standard also provides an example of how an entity could make the disclosure required by IFRS 15 120(b) using qualitative information (instead of quantitatively, using time bands), as follows: Comprehensive understanding IFRS 15 Disclosures

Example 43 — Disclosure of the transaction price allocated to the remaining performance obligations—qualitative disclosure (IFRS 15.IE220-IE221)

On 1 January 20X2, an entity enters into a contract with a customer to construct a commercial building for fixed consideration of CU10 million. The construction of the building is a single performance obligation that the entity satisfies over time. As of 31 December 20X2, the entity has recognised CU3.2 million of revenue. The entity estimates that construction will be completed in 20X3, but it is possible that the project will be completed in the first half of 20X4.

At 31 December 20X2, the entity discloses the amount of the transaction price that has not yet been recognised as revenue in its disclosure of the transaction price allocated to the remaining performance obligations. The entity also discloses an explanation of when the entity expects to recognise that amount as revenue. The explanation can be disclosed either on a quantitative basis using time bands that are most appropriate for the duration of the remaining performance obligation or by providing a qualitative explanation. Because the entity is uncertain about the timing of revenue recognition, the entity discloses this information qualitatively as follows:

‘As of 31 December 20X2, the aggregate amount of the transaction price allocated to the remaining performance obligation is CU6.8 million and the entity will recognise this revenue as the building is completed, which is expected to occur over the next 12–18 months.’

The Q&A section

Question 8

If an entity determines that it has not met the criteria to use the ‘right to invoice’ practical expedient (e.g., because there is a substantive contractual minimum payment or a volume discount), can the entity still use the disclosure practical expedient under which an entity can decide not to disclose the amount of transaction price allocated to remaining performance obligations? [TRG meeting 13 July 2015 – Agenda paper no. 40]

Members of the TRG generally agreed that the standard is clear that an entity can only use the practical expedient to avoid disclosing the amount of the transaction price allocated to remaining performance obligations for contracts: (a) with an original expected duration of less than one year; or (b) that qualify for the ‘right to invoice’ practical expedient. If a contract does not meet either of these criteria, an entity must disclose the information about remaining performance obligations that is required by IFRS 15 120. However, under these requirements, an entity is able to qualitatively describe any consideration that is not included in the transaction price (e.g., any estimated amount of variable consideration that is constrained). Comprehensive understanding IFRS 15 Disclosures

Stakeholders had questioned whether an entity can still use this disclosure practical expedient if it determines that it has not met the criteria to use the right to invoice practical expedient (e.g., because there is a substantive contractual minimum payment or a volume discount). Comprehensive understanding IFRS 15 Disclosures

Significant judgements

The standard specifically requires disclosure of significant accounting estimates and judgements (and changes in those judgements) made in determining the transaction price, allocating the transaction price to performance obligations and determining when performance obligations are satisfied. Comprehensive understanding IFRS 15 Disclosures

IFRS has general requirements requiring disclosures about significant accounting estimates and judgements made by an entity. Because of the importance placed on revenue by users of financial statements, as noted in the Basis for Conclusion on IFRS 15, the Board decided to require specific disclosures about the estimates used and the judgements made in determining the amount and timing of revenue recognition13. These requirements exceed those in the general requirements for significant judgements and accounting estimates required by IAS 1 and are discussed in more detail below (see IAS 1 122 – 133).

Determining the timing of satisfaction of performance obligations

IFRS 15 requires entities to provide disclosures about the significant judgements made in determining the timing of satisfaction of performance obligations. The disclosure requirements for performance obligations that are satisfied over time differ from those satisfied at a point in time, but the objective is similar – to disclose the judgements made in determining the timing of revenue recognition. Entities must disclose the following information: Comprehensive understanding IFRS 15 Disclosures

Over time

IFRS 15 124

For performance obligations that an entity satisfies over time, an entity shall disclose both of the following:

  1. the methods used to recognise revenue (for example, a description of the output methods or input methods used and how those methods are applied); and

  2. an explanation of why the methods used provide a faithful depiction of the transfer of goods or services.

At a point in time

IFRS 15 125

For performance obligations satisfied at a point in time, an entity shall disclose the significant judgements made in evaluating when a customer obtains control of promised goods or services.

Disclose revenue recognition method

When an entity has determined that a performance obligation is satisfied over time, IFRS 15 requires the entity to select a single revenue recognition method for each performance obligation that best depicts the entity’s performance in transferring the goods or services. Entities must disclose the method used to recognise revenue. Comprehensive understanding IFRS 15 Disclosures

For example, assume an entity enters into a contract to refurbish a multi-level building for a customer and the work is expected to take two years. The entity concludes that the promised refurbishment service is a single performance obligation satisfied over time and it decides to measure progress using a percentage of completion method, based on the costs incurred. The entity discloses the method used, how it has been applied to the contract and why the method selected provides a faithful depiction of the transfer of goods or services.

When an entity has determined that a performance obligation is satisfied at a point in time, the standard requires the entity to disclose the significant judgements made in evaluating when the customer obtains control of the promised goods or services. For example, an entity needs to consider the indicators of the transfer of control listed in IFRS 15 38 to determine when control transfers and disclose significant judgements made in reaching that conclusion. Comprehensive understanding IFRS 15 Disclosures

Determining the transaction price and the amounts allocated to performance obligations

Entities often exercise significant judgement when estimating the transaction prices of their contracts, especially when those estimates involve variable consideration. Comprehensive understanding IFRS 15 Disclosures

Furthermore, significant judgement may be required when allocating the transaction price, including estimating stand-alone selling prices; for example, it is likely that entities will need to exercise judgement when determining whether a customer option gives rise to a material right (see Options to purchase additional goods or services) and in estimating the stand-alone selling price for those material rights. Comprehensive understanding IFRS 15 Disclosures

Disclose qualitative information about the methods, inputs and assumptions

Given the importance placed on revenue by financial statement users, the standard requires entities to disclose qualitative information about the methods, inputs and assumptions used in their annual financial statements, as follows14:

IFRS 15 126

An entity shall disclose information about the methods, inputs and assumptions used for all of the following:

  1. determining the transaction price, which includes, but is not limited to, estimating variable consideration, adjusting the consideration for the effects of the time value of money and measuring non-cash consideration;
  2. assessing whether an estimate of variable consideration is constrained;
  3. allocating the transaction price, including estimating stand-alone selling prices of promised goods or services and allocating discounts and variable consideration to a specific part of the contract (if applicable); and
  4. measuring obligations for returns, refunds and other similar obligations.

Comprehensive understanding IFRS 15 Disclosures

Assets recognised from the costs to obtain or fulfil a contract

As discussed in https://www.faqifrs.com/contract-costs/ , the standard specifies the accounting for costs an entity incurs to obtain and fulfil a contract to provide goods or services to customers. IFRS 15 requires entities to disclose information about the assets recognised to help users understand the types of costs recognised as assets and how those assets are subsequently amortised or impaired. These disclosure requirements are as follows: Comprehensive understanding IFRS 15 Disclosures

IFRS 15 127

An entity shall describe both of the following:

  1. the judgements made in determining the amount of the costs incurred to obtain or fulfil a contract with a customer (in accordance with paragraph 91 or 95); and

  2. the method it uses to determine the amortisation for each reporting period.

IFRS 15 128

An entity shall disclose all of the following:

  1. the closing balances of assets recognised from the costs incurred to obtain or fulfil a contract with a customer (in accordance with paragraph 91 or 95), by main category of asset (for example, costs to obtain contracts with customers, pre-contract costs and setup costs); and

  2. the amount of amortisation and any impairment losses recognised in the reporting period.

Disclose the judgements

Entities are required to disclose the judgements made in determining the amount of costs that were incurred to obtain or fulfil contracts with customers that meet the criteria for capitalisation, as well as the method the entity uses to amortise the assets recognised. For example, for costs to obtain a contract, an entity that capitalises commission costs upon the signing of each contract needs to describe the judgements used to determine the commission costs that qualified as costs incurred to obtain a contract with a customer, as well as the determination of the amortisation period. Comprehensive understanding IFRS 15 Disclosures

The Q&A section

Question 9

How should capitalised contract costs and their amortisation be presented in the statement of financial position and statement of profit and loss and other comprehensive income, respectively?

As discussed in Contract costsCosts to obtain a contract, – Costs to fulfil a contract, Amortisation of capitalised contract costs, IFRS 15 requires incremental costs of obtaining a contract and certain costs to fulfil a contract to be recognised as an asset and that asset to be amortised on a systematic basis. IFRS 15 128 requires separate disclosure of closing balances and the amount of amortisation and impairment losses recognised during the period (see above Assets recognised from the costs to obtain or fulfil a contract). However, the standard is silent on the classification of that asset and the related amortisation.

Under legacy IFRS, IAS 2 included the notion of work in progress (or ‘inventory’) of a service provider. However, this was consequentially removed from IAS 2 and replaced with the relevant requirements in IFRS 15. Furthermore, while these capitalised contract cost assets are intangible, in nature, IAS 38 specifically excludes from its scope intangible assets arising from contracts with customers that are recognised in accordance with IFRS 15 (IAS 38 3(i)). In the absence of a standard that specifically deals with classification and presentation of contract costs, management would need to apply the requirements in IAS 8 to select an appropriate accounting policy (see IAS 8 10 – 12).

Accounting policy

In developing such an accounting policy, we believe that costs to obtain a contract and costs to fulfil a contract need to be considered separately for the purpose of presentation in financial statements:

  • Considering the nature of costs to obtain a contract and the lack of guidance in IFRS, we believe an entity may choose to present these costs as either: Comprehensive understanding IFRS 15 Disclosures
  • A separate class of intangible assets in the statement of financial position and its amortisation in the same line item as amortisation of intangible assets within the scope of IAS 38. This accounting treatment would be similar to the previous practice of accounting for certain subscriber acquisitions costs in the telecommunications industry.

Or Comprehensive understanding IFRS 15 Disclosures Comprehensive understanding IFRS 15 Disclosures 

  • A separate class of asset (similar in nature to work in progress or ‘inventory’) in the statement of financial position and its amortisation within cost of goods sold, changes in contract costs or similar. Comprehensive understanding IFRS 15 Disclosures

    In addition, the entity needs to consider the requirements in IAS 7 Statement of Cash Flows, in particular IAS 7 16(a), when determining the classification of cash flows arising from costs to obtain a contract (i.e., either as cash flow from operating activities or investing activities). Comprehensive understanding IFRS 15 Disclosures

  • In contrast, the nature of costs to fulfil a contract is such that they directly impact the entity’s performance under the contract. Therefore, costs to fulfil a contract should be presented as a separate class of asset in the statement of financial position and its amortisation within cost of goods sold, changes in contract costs or similar.

In general it is considered not appropriate to analogise to the requirements for intangible assets in IAS 38. Instead, such costs are consistent in nature to costs incurred in the process of production, as is contemplated in IAS 2. That is, in nature, they are consistent with work in progress, or ‘inventory’, of a service provider. Whether costs to fulfil a contract meet the criteria for capitalisation in IFRS 15 95 or are expensed as incurred, we believe that presentation of such costs in the statement of profit and loss and other comprehensive income and the presentation of related cash flows in the statement of cash flows needs to be consistent. Comprehensive understanding IFRS 15 Disclosures

Capitalised contract costs are subject to impairment assessments (see contract cost and then Impairment of capitalised contract costs). Impairment losses are recognised in profit or loss, but the standard is silent on where to present such amounts within the primary financial statements. We believe it would be appropriate for the presentation of any impairment losses to be consistent with the presentation of the amortisation expense. Comprehensive understanding IFRS 15 Disclosures

Practical expedients

The standard allows entities to use several practical expedients. IFRS 15 129 requires entities to disclose their use of two practical expedients:

  1. the practical expedient in IFRS 15 63 associated with the determination of whether a significant financing component exists; and

  2. the expedient in IFRS 15.94 for recognising an immediate expense for certain incremental costs of obtaining a contract with a customer (see Contract costsCosts to obtain a contract). Comprehensive understanding IFRS 15 Disclosures

In addition, entities are required to disclose the use of the disclosure practical expedient in IFRS 15 121 (which permits an entity not to disclose information about remaining performance obligations if one of the conditions in the paragraph are met, see Contracts with customers). IFRS 15 provides other practical expedients. Entities need to carefully consider the disclosure requirements of any other practical expedients it uses. Comprehensive understanding IFRS 15 Disclosures

See also: The IFRS Foundation

Comprehensive understanding IFRS 15 Disclosures

Comprehensive understanding IFRS 15 Disclosures

Comprehensive understanding IFRS 15 Disclosures Comprehensive understanding IFRS 15 Disclosures

Comprehensive understanding IFRS 15 Disclosures Comprehensive understanding IFRS 15 Disclosures

Comprehensive understanding IFRS 15 Disclosures Comprehensive understanding IFRS 15 Disclosures

Comprehensive understanding IFRS 15 Disclosures Comprehensive understanding IFRS 15 Disclosures

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