Correct Presentation Of Revenue In IFRS 15 – FAQ | IFRS

Correct presentation of revenue in IFRS 15

Correct presentation of revenue in IFRS 15 provides explicit presentation 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 requirements.

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.

Reassessment of old revenue disclosures

As part of their adoption of IFRS 15, entities also need to reassess their accounting policy disclosures (as per IAS 1 117). Previously, entities provided brief and, sometimes, boilerplate disclosures of the policies in respect of revenue recognition. The brevity may be due, in part, to the limited nature of the guidance provided in legacy revenue recognition requirements. Given the complexity of the requirements in IFRS 15, the policies that apply to revenues and costs within the scope of the standard are also more challenging to explain and require entities to provide more tailored and detailed disclosures. Correct presentation of revenue in IFRS 15

The disclosure requirements discussed in the following sections are required on an ongoing basis.

Presentation requirements for contract assets and contract liabilities

The revenue model is based on the notion that a contract asset or contract liability is generated when either party to a contract performs, depending on the relationship between the entity’s performance and the customer’s payment.

IFRS 15 References

The standard requires that an entity present these contract assets or contract liabilities in the statement of financial position, as extracted below[efn_note]updated October 2018[/efn_note]: Correct presentation of revenue in IFRS 15

IFRS 15 105.

When either party to a contract has performed, an entity shall present the contract in the statement of financial position as a contract asset or a contract liability, depending on the relationship between the entity’s performance and the customer’s payment. An entity shall present any unconditional rights to consideration separately as a receivable.

IFRS 15 106.

If a customer pays consideration, or an entity has a right to an amount of consideration that is unconditional (ie a receivable), before the entity transfers a good or service to the customer, the entity shall present the contract as a contract liability when the payment is made or the payment is due (whichever is earlier). A contract liability is an entity’s 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.

IFRS 15 107.

If an entity performs by transferring goods or services to a customer before the customer pays consideration or before payment is due, the entity shall present the contract as a contract asset, excluding any amounts presented as a receivable. A contract asset is an entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer. An entity shall assess a contract asset for impairment in accordance with IFRS 9. An impairment of a contract asset shall be measured, presented and disclosed on the same basis as a financial asset that is within the scope of IFRS 9 (see also IFRS 15 113(b)).

IFRS 15 108.

A receivable is an entity’s right to consideration that is unconditional. A right to consideration is unconditional if only the passage of time is required before payment of that consideration is due. For example, an entity would recognise a receivable if it has a present right to payment even though that amount may be subject to refund in the future. An entity shall account for a receivable in accordance with IFRS 9. Upon initial recognition of a receivable from a contract with a customer, any difference between the measurement of the receivable in accordance with IFRS 9 and the corresponding amount of revenue recognised shall be presented as an expense (for example, as an impairment loss).

Performance obligation satisfied

When an entity satisfies a performance obligation by transferring a promised good or service, the entity has earned a right to consideration from the customer and, therefore, has a contract asset. When the customer performs first, for example, by prepaying its promised consideration, the entity has a contract liability. Correct presentation of revenue in IFRS 15

Conditional or unconditional rights

Contract assets may represent conditional or unconditional rights to consideration. The right is conditional, for example, when an entity first must satisfy another performance obligation in the contract before it is entitled to payment from the customer. If an entity has an unconditional right to receive consideration from the customer, the contract asset is accounted for as a receivable and presented separately from other contract assets 1. A right is unconditional if nothing other than the passage of time is required before payment of that consideration is due. Correct presentation of revenue in IFRS 15

Unconditional right or receivable

In the Basis for Conclusions on IFRS 15, the Board explains that in many cases an unconditional right to consideration (i.e., a receivable) arises when an entity satisfies a performance obligation, which could be before it invoices the customer (e.g., an unbilled receivable) if only the passage of time is required before payment of that consideration is due. It is also possible for an entity to have an unconditional right to consideration before it satisfies a performance obligation 2. In some industries, it is common for an entity to invoice its customers in advance of performance (and satisfaction of the performance obligation).

Example

For example, an entity that enters into a non-cancellable contract requiring payment a month before the entity provides the goods or services would recognise a receivable and a contract liability on the date the entity has an unconditional right to the consideration (see Question 6 below for factors to consider when assessing whether an entity’s right to consideration is considered unconditional). In this situation, revenue is not recognised until goods or services are transferred to the customer. Correct presentation of revenue in IFRS 15

Contract assets and trade receivables

In the Basis for Conclusions, the Board noted that making the distinction between a contract asset and a receivable is important because doing so provides users of financial statements with relevant information about the risks associated with the entity’s rights in a contract. Although both are subject to credit risk, a contract asset also is subject to other risks (e.g., performance risk) 3. Correct presentation of revenue in IFRS 15

Alternative presentation names possible

Under the standard, entities are not required to use the terms ’contract asset’ or ’contract liability’, but must disclose sufficient information so that users of the financial statements can clearly distinguish between unconditional rights to consideration (receivables) and conditional rights to receive consideration (contract assets) (see IFRS 15 109).

Presentation of contract balances

The standard provides the following example of presentation of contract balances:

Example 38 — Contract liability and receivable (IFRS 15 IE 198 – IE 200)

Case A—Cancellable contract

On 1 January 20X9, an entity enters into a cancellable contract to transfer a product to a customer on 31 March 20X9. The contract requires the customer to pay consideration of CU1,000 in advance on 31 January 20X9. The customer pays the consideration on 1 March 20X9. The entity transfers the product on 31 March 20X9. The following journal entries illustrate how the entity accounts for the contract:

(a) The entity receives cash of CU1,000 on 1 March 20X9 (cash is received in advance of performance):

Cash

CU1,000

Contract liability

CU1,000

(b) The entity satisfies the performance obligation on 31 March 20X9:

Contract liability

CU1,000

Revenue

CU1,000

Case B—Non-cancellable contract

The same facts as in Case A apply to Case B except that the contract is non-cancellable. The following journal entries illustrate how the entity accounts for the contract:

(a) The amount of consideration is due on 31 January 20X9 (which is when the entity recognises a receivable because it has an unconditional right to consideration):

Receivable

CU1,000

Contract liability

CU1,000

(b) The entity receives the cash on 1 March 20X9:

Cash

CU1,000

Receivable

CU1,000

(c) The entity satisfies the performance obligation on 31 March 20X9:

Contract liability

CU1,000

Revenue

CU1,000

If the entity issued the invoice before 31 January 20X9 (the due date of the consideration), the entity would not present the receivable and the contract liability on a gross basis in the statement of financial position because the entity does not yet have a right to consideration that is unconditional.

Presentation of contract balances

The standard includes another example of presentation of contract balances that illustrates when an entity has satisfied a performance obligation, but does not have an unconditional right to payment and, therefore, recognises a contract asset:

Example 39 — Contract asset recognised for the entity’s performance (IFRS 15 IE 201 – IE 204)

On 1 January 20X8, an entity enters into a contract to transfer Products A and B to a customer in exchange for CU1,000. The contract requires Product A to be delivered first and states that payment for the delivery of Product A is conditional on the delivery of Product B. In other words, the consideration of CU1,000 is due only after the entity has transferred both Products A and B to the customer. Consequently, the entity does not have a right to consideration that is unconditional (a receivable) until both Products A and B are transferred to the customer.

Promises identified

The entity identifies the promises to transfer Products A and B as performance obligations and allocates CU400 to the performance obligation to transfer Product A and CU600 to the performance obligation to transfer Product B on the basis of their relative stand-alone selling prices. The entity recognises revenue for each respective performance obligation when control of the product transfers to the customer.

The entity satisfies the performance obligation to transfer Product A:

Contract asset

CU400

Revenue

CU400

The entity satisfies the performance obligation to transfer Product B and to recognise the unconditional right to consideration:

Receivable

CU1,000

Contract asset

CU400

Revenue

CU600

Current or non-current classification

Unless an entity presents its statement of financial position on a liquidity basis, it needs to present contract assets or contract liabilities as current or non-current in the statement of financial position. Since IFRS 15 does not address this classification, entities need to consider the requirements in IAS 1.

An entity’s operating cycle

The distinction between current and non-current items depends on the length of the entity’s operating cycle. IAS 1 states that the operating cycle of an entity is the time between the acquisition of assets for processing and their realisation in cash or cash equivalents. However, when the entity’s normal operating cycle is not clearly identifiable, it is assumed to be 12 months (IAS 1 68 and IAS 1 70). IAS 1 does not provide guidance on how to determine whether an entity’s operating cycle is ‘clearly identifiable’.

Determine the normal operating cycle

For some entities, the time involved in producing goods or providing services may vary significantly between contracts with one customer to another. In such cases, it may be difficult to determine what the normal operating cycle is. Therefore, entities need to consider all facts and circumstances and use judgement to determine whether it is appropriate to consider that the operating cycle is clearly identifiable, or whether to use the twelve-month default. This assessment is also relevant for other assets and liabilities arising from contracts with customers within the scope of IFRS 15 (e.g., capitalised contract costs to obtain and fulfil a contract).

Assessment current – non-current

Consequently, an entity assesses, based on the contract terms, facts and circumstances, whether a contract asset or contract liability is classified as current or non-current. It considers:

  • For a contract asset: when payment is due (e.g., based on payment schedule agreed with client)
  • For a contract liability: when the entity expects to satisfy its performance obligation(s)

This assessment might lead to a separation of the contract asset or contract liability into a current and a non-current portion.

Impairment assessments

After initial recognition, receivables and contract assets are subject to impairment assessments in accordance with IFRS 9. In addition, if upon initial measurement there is a difference between the measurement of the receivable under IFRS 9 and the corresponding amount of revenue, that difference is presented immediately in profit or loss (e.g., as an impairment loss). IFRS 9 includes different initial measurement requirements for receivables arising from IFRS 15 contracts depending on whether there is a significant financing component. If there is a significant financing component, the receivable is initially measured at fair value (IFRS 9 5.1.1). If there is no significant financing component (or the entity has used the practical expedient in IFRS 15 63), the receivable is initially recognised at the transaction price, measured in accordance with IFRS 15 (IFRS 9 5.1.3).

Receivables at fair value

If the initial measurement of a receivable is at fair value, there may be a number of reasons why differences from the IFRS 15 transaction price may arise (e.g., changes in the fair value of non-cash consideration not yet received). This is the case when the difference is attributable to customer credit risk, rather than an implied price concession. Implied price concessions are deducted from the contract price to derive the transaction price, which is the amount recognised as revenue. Distinguishing between implied price concessions and expense due to customer credit risk requires judgement (see Implicit price concessions).

Separate presentation impairment losses

Impairment losses resulting from contracts with customers are presented separately from other impairment losses (see Contracts with customers in Correct disclosure of revenue in IFRS 15) (IFRS 15 113(b)).

Separate presentation contract assets and liabilities

An entity could also have recognised other assets related to contracts with a customer (e.g., the incremental costs of obtaining the contract and other costs incurred that meet the criteria for capitalisation). The standard requires that any such assets be presented separately from contract assets and contract liabilities in the statement of financial position or disclosed separately in the notes to the financial statements (assuming that they are material). These amounts are also assessed for impairment separately (see Amortisation of capitalised contract costs in Contract costs).

The Q&A section

Question 1

How would an entity determine the presentation of contract assets and liabilities for contracts that contain multiple performance obligations? [TRG meeting 31 October 2014 – Agenda paper no. 7]

TRG members generally agreed that contract assets and liabilities would be determined at the contract level and not at the performance obligation level. That is, an entity does not separately recognise an asset or liability for each performance obligation within a contract, but aggregates them into a single contract asset or liability.

This question arose in part because, under the standard, the amount and timing of revenue recognition is determined based on progress toward complete satisfaction of each performance obligation. Therefore, some constituents questioned whether an entity could have a contract asset and a contract liability for a single contract. An example is when the entity has satisfied (or partially satisfied) one performance obligation in a contract for which consideration is not yet due, but has received a prepayment for another unsatisfied performance obligation in the contract. Members of the TRG generally agreed that the discussion in the Basis for Conclusions was clear that contract asset or contract liability positions are determined for each contract on a net basis. This is because the rights and obligations in a contract with a customer are interdependent – the right to receive consideration from a customer depends on the entity’s performance and, similarly, the entity performs only as long as the customer continues to pay. The Board decided that those interdependencies are best reflected by accounting and presenting contract assets or liabilities on a net basis 4.

After determining the net contract asset or contract liability position for a contract, entities consider the requirements in IAS 1 on classification as current or non-current in the statement of financial position, unless an entity presents its statement of financial position on a liquidity basis (as discussed above in this section).

Question 2

How would an entity determine the presentation of two or more contracts that are required to be combined under the standard? [TRG meeting 31 October 2014 – Agenda paper no. 7] Correct presentation of revenue in IFRS 15

TRG members generally agreed that the contract asset or liability would be combined (i.e., presented net) for different contracts with the same customer (or a related party of the customer) if an entity is otherwise required to combine those contracts under the standard (see section 3.3 for discussion of the criteria for combining contracts). When two or more contracts are required to be combined under the standard, the rights and obligations in the individual contracts are interdependent. Therefore, as discussed in Question 1, this interdependency is best reflected by combining the individual contracts as if they were a single contract. However, TRG members acknowledged that this analysis may be operationally difficult for some entities because their systems may capture data at the performance obligation level in order to comply with the recognition and measurement aspects of the standard.

Question 3

When would an entity offset contract assets and liabilities against other balance sheet items (e.g., accounts receivable)? [TRG meeting 31 October 2014 – Agenda paper no. 7] Correct presentation of revenue in IFRS 15

TRG members generally agreed that, because the standard does not provide requirements for offsetting, entities need to apply the requirements of other standards to determine whether offsetting is appropriate (e.g., IAS 1, IAS 32 Financial Instruments: Presentation). For example, if an entity has a contract asset (or a receivable) and a contract liability from separate contracts with the same customer (that are not required to be combined under the standard), the entity needs to look to requirements outside IFRS 15 to determine whether offsetting is appropriate.

Question 4

Is a refund liability a contract liability (and, thus, subject to the presentation and disclosure requirements of a contract liability)?

An entity needs to determine whether a refund liability is characterised as a contract liability based on the specific facts and circumstances of the arrangement. We believe that a refund liability does not typically meet the definition of a contract liability. When an entity concludes that a refund liability is not a contract liability, it presents the refund liability separately from any contract liability (or asset) and the refund liability is not subject to the disclosure requirements in IFRS 15 116-118 discussed in Contracts with customers in Correct disclosure of revenue in IFRS 15 LIINK. Correct presentation of revenue in IFRS 15

When a customer pays consideration (or consideration is unconditionally due) and the entity has an obligation to transfer goods or services to the customer, the entity recognises a contract liability. When the entity expects to refund some or all of the consideration received (or receivable) from the customer, it recognises a refund liability. A refund liability generally does not represent an obligation to transfer goods or services in the future. Similar to receivables (which are considered a subset of contract assets), refund liabilities could be considered a subset of contract liabilities. We believe refund liabilities are also similar to receivables in that they are extracted from the net contract position and presented separately (if material). This conclusion is consistent with the standard’s specific requirement to present the corresponding asset for expected returns separately (see4 Rights of return) (IFRS 15 B25).

If an entity concludes, based on its specific facts and circumstances, that a refund liability represents an obligation to transfer goods or services in the future, the refund liability is a contract liability subject to the disclosure requirements in IFRS 15 116-118. In addition, in that situation, the entity presents a single net contract liability or asset (i.e., including the refund liability) determined at the contract level, as discussed in Question 1 above. Correct presentation of revenue in IFRS 15

Question 5

How would an entity account for a contract asset that exists when a contract is modified if the modification is treated as the termination of an existing contract and the creation of a new contract? [FASB TRG meeting 18 April 2016 – Agenda paper no. 51] Correct presentation of revenue in IFRS 15

FASB TRG members generally agreed that a contract asset that exists when a contract is modified would be carried forward into the new contract if the modification is treated as the termination of an existing contract and the creation of a new contract (see Creating a new contract or not?). Correct presentation of revenue in IFRS 15

Some stakeholders questioned the appropriate accounting for contract assets when this type of modification occurs because the termination of the old contract could indicate that any remaining balances associated with the old contract must be written off.

FASB TRG members generally agreed that it is appropriate to carry forward the related contract asset in such modifications because the asset relates to a right to consideration for goods or services that have already been transferred and are distinct from those to be transferred in the future. As such, the revenue recognised to date is not reversed and the contract asset continues to be realised as amounts become due from the customer and are presented as a receivable. The contract asset that remains on the entity’s balance sheet at the date of modification continues to be subject to evaluation for impairment under IFRS 15. Correct presentation of revenue in IFRS 15

While the FASB TRG members did not discuss this point, we believe a similar conclusion would be appropriate when accounting for an asset created under IFRS 15, such as capitalised commissions, which exists immediately before a contract modification that is treated as if it were a termination of the existing contract and creation of a new contract. Correct presentation of revenue in IFRS 15

Question 6 Correct presentation of revenue in IFRS 15

If an entity has not transferred a good or service, when does it have an unconditional right to payment?

The standard states in IFRS 15 108 that a receivable is an entity’s right to consideration that is unconditional. In general, we believe it may be difficult to assert that the entity has an unconditional right to payment when it has not transferred a good or service.

However, an entity may enter into non-cancellable contracts that provide unconditional rights to payment from the customer for services that the entity has not yet completed providing or services it will provide in the near future (e.g., amounts invoiced in advance related to a service or maintenance arrangement). When determining whether it is acceptable (or required) to recognise accounts receivable and a corresponding contract liability, the contractual terms and specific facts and circumstances supporting the existence of an unconditional right to payment should be evaluated. Factors to consider include: Correct presentation of revenue in IFRS 15

  1. Does the entity have a contractual (or legal) right to invoice and receive payment from the customer for services being provided currently (and not yet completed) or being provided in the near future (e.g., amounts invoiced in advance related to a service or maintenance arrangement)? Correct presentation of revenue in IFRS 15
  2. Is the advance invoice consistent with the entity’s normal invoicing terms? Correct presentation of revenue in IFRS 15
  3. Will the entity commence performance within a relatively short time frame of the invoice date?
  4. Is there more than one year between the advance invoice and performance?Correct presentation of revenue in IFRS 15

Other presentation considerations

The standard also changes the presentation requirements for products expected to be returned and for those that contain a significant financing component. Consider presentation considerations related to rights of return and significant financing components, respectively. Also refer to contract costs for presentation considerations related to capitalised contract costs to obtain and fulfil a contract.

The Q&A section

Question 7 Correct presentation of revenue in IFRS 15

How should entities classify shipping and handling costs in the income statement?

Under IFRS 15, an entity needs to determine whether shipping and handling is a separate promised service to the customer or if they are activities to fulfil the promise to transfer the good (see Step 2 Identify the performance obligations in the contract). Shipping and handling activities that are performed before the customer obtains control of the related good will be activities to fulfil its promise to transfer control of the good. If shipping and handling activities are performed after a customer obtains control of the related good, shipping and handling is a promised service to the customer and an entity needs to determine whether it acts as a principal or an agent in providing those services.

If an entity determines that the shipping and handling activities are related to a promised good or service to the customer (either the promise to transfer control of the good or the promise to provide shipping and handling services) and the entity is the principal (rather than the agent), we believe the related costs should be classified as cost of sales because the costs would be incurred to fulfil a revenue obligation. However, if the entity determines that shipping and handling is a separate promised service to the customer and it is acting as an agent in providing those services, the related revenue to be recognised for shipping and handling services would be net of the related costs. Correct presentation of revenue in IFRS 15

We believe entities need to apply judgement to determine how to classify shipping and handling costs when it is not related to a promised good or service to the customer. This is because IFRS does not specifically address how entities should classify these costs. While not a requirement of IFRS 15, we would encourage entities to disclose the amount of these costs and the line item or items on the income statement that include them if they are significant. Correct presentation of revenue in IFRS 15

See also: The IFRS Foundation

Correct presentation of revenue in IFRS 15

Correct presentation of revenue in IFRS 15 Correct presentation of revenue in IFRS 15 Correct presentation of revenue in IFRS 15

Correct presentation of revenue in IFRS 15 Correct presentation of revenue in IFRS 15 Correct presentation of revenue in IFRS 15

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