Revenue from contracts withcustomers

Prof .Dr. Hisham Elmeligy

Preparedby:

AmrSoliman

Table of contents

Abstract

Key concepts

Reasons for issuing the standard

1. Objective

2. Scope

2.1. Contracts within scope

2.2. Contracts partially in scope

2.3. Portfolio approach

3. The model

3.1. Step 1: identifying the contract

3.2. Step 2: identifying performance obligations

3.3. Step 3: determining the transaction price

3.4. Step 4: allocating the transaction price to performants obligations

3.5. Step 5: recognize revenue when or as the entity satisfied a performance obligation.

4. Contract costs

4.1. Costs of obtaining a contract

4.2. Costs of fulfilling a contract

4.3. Amortization

4.4. Impairment

5. Presentation

6. Disclosure

6.1. Annual disclosure

6.2. Interim disclosures

Key impacts

References

Abstract

The new standard provides a framework that replaces

existing revenue guidance in U.S. GAAP and IFRS. Entities

will apply a five-step model to determine when to

recognize revenue, and at what amount. The model

specifies that revenue should be recognized when or as an

entity transfers control of goods or services to a

customer at the amount to which the entity expects to be

entitled. Depending on whether certain criteria are met,

revenue is recognized over time, in a manner that best

reflects the entity’s performance or at a point in time,

when control of the goods or services is transferred to

the customer.

New qualitative and quantitative disclosure requirements

aim to enable financial statement users to understand the

nature, amount, timing, and uncertainty of revenue and

cash flows arising from contracts with customers.

New standard is effective for annual periods beginning on

or after January 1, 2017 for entities applying IFRS, and

for annual periods beginning after December 15, 2016 for

public business entities and certain not-for-profit

entities applying U.S. GAAP. Early adoption is permitted

only under IFRS.

Key concepts

Revenues

Income arising in the course of an entity's ordinary activities.

Income

Increases in economic benefit during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in an increase inequity, other than those relating to contributions from equity participants.

Contract

An agreement between two or more parties that creates enforceable rights and obligations.

Customer

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.

Contract liability

An entity's obligation to transfer goods or services to acustomer for which the entity has received consideration (or the amount due) from the customer.

Performance Obligation

A promise in a contract with a customer to transfer to the customer either:

a. A good or service (or a bundle of goods or services)that is distinct

b. A series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.

Transaction Price

The amount of consideration to which an entity expects tobe entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected onbehalf of third parties.

Standalone Selling Price

The price at which an entity would sell a promised good or service separately to a customer.

Reasons for issuing new standard?

Revenue is an important number to users of financial statements in assessing an entity’s financial performanceand position. However, previous revenue recognition requirements in U.S. generally accepted accounting principles (GAAP) differ from those in International Financial Reporting Standards (IFRS), and both sets of requirements were in need of improvement.

Previous revenue recognition guidance in U.S. GAAP comprised broad revenue recognition concepts together with numerous revenue requirements for particular industries or transactions, which sometimes resulted in different accounting for economically similar transactions. In contrast, IASB provided limited guidanceand, consequently, the two main revenue recognition standards, IAS 18, Revenue, and IAS 11, Construction Contracts, could be difficult to apply to complex transactions. Additionally, IAS 18 provides limited guidance on important revenue topics such as accounting for multiple-element arrangements.

Accordingly, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS that would:

1. Remove inconsistencies and weaknesses in revenue requirements.

2. Provide a more robust framework for addressing revenueissues.

3. Improve comparability of revenue recognition practicesacross entities, industries, jurisdictions, and capital markets.

4. Provide more useful information to users of financial statements through improved disclosure requirements.

5. Simplify the preparation of financial statements by reducing the number of requirements to which an entitymust refer.

To meet those objectives, the IASB is issuing IFRS 15, Revenue from Contracts with Customers and the FASB is amending the FASB Accounting Standards Codification and creating a new Topic 606, Revenue from Contracts with Customers.

The issuance of these documents completes the joint effort by the FASB and the IASB to meet those objectives and improve financial reporting by creating common revenue recognition guidance for U.S. GAAP and IFRS.

1.ObjectiveIs to establish the principles that an entity shall applyto report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a contract with a customer.

To meet the objective, the core principle of this standard is that an entity shall recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration towhich the entity expects to be entitled in exchange for those goods or services.

2.Scope

2.1. Contracts within scope

An entity shall apply this standard to all contracts withcustomers, except the following:

1. Lease contracts within the scope of "IFRS 17 leases".

2. Insurance contracts within the scope of "IFRS 4 insurance contract".

3. Financial instruments and other contractual rights or obligations within the scope of ( IFRS 9, IFRS 10,IFRS 11, IAS 27, IAS 28).

4. Nonmonetary exchanges between entities in the same line of business to facilitate sales to customers orpotential customers.Ex: two oil company contract to exchange oil to fulfil demand from their customer in different specific location on timely basis.'

An entity shall apply this standard to a contract only ifthe counterparty to the contract is a customer. A

customer is a party that has contracted with an entity toobtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration.

Example:

Company X is in the business of buying and selling commercial property. It sells a property to Purchaser Y. This transaction is in the scope of the new standard, because Purchaser Y has entered into a contract to purchase an output of Company X’s ordinary activities andis therefore considered a customer of Company X.

Conversely, if Company X was instead a manufacturing entity selling its corporate headquarters to Purchaser Y,the transaction would not be a contract with a customer because selling real estate is not an ordinary activity of Company X.

2.2. Partially in scope

A contract with a customer may be partially in the scope of the new standard and partially in the scope of other accounting guidance. If the other accounting guidance specifies how to separate and/or initially measure one ormore parts of a contract, then an entity first applies those requirements. Otherwise, the entity applies the newstandard to separate and/or initially measure the separately identified parts of the contract.

2.3. Portfolio approach

The new standard is generally applied to an individual contract with a customer. However, as a practical expedient, an entity may apply the revenue model to a portfolio of contracts with similar characteristics if the entity reasonably expects that the financial statement effects of applying the new standard to the portfolio or to individual contracts within that portfolio would not differ materially.

3.The model3.1. Step 1: identifying the contract

3.1.1. Criteria to determine whether a contract exists

An entity shall account for a contract with a customer that is within the scope of this standard only when all of the following criteria are met:

1. The parties to the contract have approved the contract (in writing, orally, or in accordance with other customary business practices) and are committed to perform their respective obligations.

2. The entity can identify each party’s rights regarding the goods or services to be transferred.

3. The entity can identify the payment terms for the goods or services to be transferred.

4. The contract has commercial substance that is, (the risk, timing, or amount of the entity’s future cash flows is expected to change as a result of the contract).

5. It is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.

In making the collectibility assessment, an entity considers the customer’s ability and intention (which includes assessing its creditworthiness) to pay the amount of consideration when it is due. This assessmentis made after taking into account any price concessionsthe entity may offer to the customer.

If the criteria are not initially met, an entity continually reassesses the contract against the criteria and applies the requirements of the new standard to the contract from the date on which the criteria are met. Any consideration received for a contract that does not meet the criteria is accounted for under the requirements.

If a contract meets all of the above criteria at contract inception, an entity does not reassess those criteria unless there is an indication of a significantchange in the facts and circumstances. If on reassessment an entity determines that the criteria areno longer met, it ceases to apply the new standard to the contract, but does not reverse any revenue previously recognized.

If each party to the contract has a unilateral enforceable right to terminate a wholly un-performed contract without compensating the other party (or parties), no contract exists.

3.1.2. Combination of contracts

Contracts are combined if they are entered into at (or near) the same time, with the same customer, if either:

1) The contracts are negotiated as a package with a single commercial objective.

2) The consideration for each contract is interdependent on the other,

3) or The overall goods or services of the contracts represent a single performance obligation

3.1.3. Contract modification

A change in enforceable rights and obligations (scope and/or price) is only accounted for as a contract modification, if it has been approved by the parties of the contract, and creates new or changes existing enforceable rights and obligations.

Contract modifications are accounted for as a separate contract if, and only if:

1) The contract scope changes due to the addition of distinct goods or services.

2) The change in contract price reflects the standalone selling price of the additional distinctgood or service.

Contract modifications that are not accounted for as a separate contract are accounted for as either:

1) Replacement of the original contract with a new contract (if the remaining goods or services under the original contract are distinct from those already transferred to the customer)

2) Continuation of the original contract (if the remaining goods or services under the original contract are distinct from those already transferredto the customer, and the performance obligation is partially satisfied at modification date).

3) Mixture of (1) and (2) if elements of both exist.

3.2. Step 2: Identifying performance obligations

At contract inception, an entity shall assess the goods or services promised in a contract with a customer and shall identify (as a performance obligation) each promise to transfer to the customer either:

a. A good or service (or a bundle of goods or services) thatis distinct.

b. A series of distinct goods or services that are substantially the same, and that have the same pattern oftransfer to the customer.

A series of distinct goods or services has the same pattern oftransfer to the customer if both of the following criteria aremet:

1) Each distinct good or service in the series that the entity promises to transfer to the customer would meetthe (paragraph 35) criteria to be a performance obligation satisfied over time:

i. The customer receives and consumes the benefits provided by the entity’s performance as the entity performs.

ii. The entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced.

iii. The entity’s performance does not create an assetwith an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date.

2) Or to be performance obligation satisfied at a point in time, In accordance with paragraph 39: an entity shall recognize revenue over time by measuring the progress toward complete satisfaction of that performance obligation. The objective when measuring progress is to depict an entity’s performance in transferring control of goods or services promised to a customer.

And with paragraph 40: An entity shall apply a single method of measuring progress for each performance obligation satisfied over time, and the entity shall apply that method consistently to similar performance obligations and in similar circumstances. At the end of each reporting period, an entity shall re-measure

its progress toward complete satisfaction of a performance obligation satisfied over time.The same method would be used to measure the entity’s progress toward complete satisfaction of the performance obligation to transfer each distinct good or service in the series to the customer.

3.3. Step 3: Determining the transaction price

An entity shall consider the terms of the contract and its customary business practices to determine the transaction price.

The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (ex: sales taxes) and it may be fixed or variable amounts or both.

The nature, timing, and amount of consideration promised by a customer affect the estimate of the transaction price. When determining the transaction price, an entity shall consider the effects of all of the following:

1. Variable consideration

An amount of consideration can vary because of discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties, or other similar items. Also may vary if an entity’s entitlement to the consideration is contingent on the occurrence or nonoccurrence of a future event.If the consideration promised in a contract includesa variable amount, an entity shall estimate the amount of consideration to which the entity will be entitled in exchange for transferring the promised goods or services to a customer using:

a) Expected value

The entity considers the sum of probability-weighted amounts for a range of possible consideration amounts. This may be an appropriate estimate of the amount of variable consideration if an entity has a large number of contracts with similar characteristics.

b) Most likely amountThe entity considers the single most likely amount from a range of possible consideration amounts. This may be an appropriate estimate ofthe amount of variable consideration if the contract has only two (or perhaps a few) possible outcomes.

The variability relating to the consideration promised by a customer may be explicitly stated in the contract or may be depend on the following circumstances existence:

a. The customer has a valid expectation arising from an entity’s customary business practices, published policies, or specific statements thatthe entity will accept an amount of consideration that is less than the price stated in the contract. That is, it is expectedthat the entity will offer a price concession.

b. Other facts and circumstances indicate that theentity’s intention, when entering into the contract with the customer, is to offer a priceconcession to the customer.

2. Constraining estimates of variable considerationAn entity shall include in the transaction price (some or all) of an amount of variable considerationestimated in accordance with only to the extent thatit is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

Reassessment of Variable Consideration: At the end of each reporting period, an entity shallupdate the estimated transaction price (including updating its assessment of whether an estimate of variable consideration is constrained) to represent faithfully the circumstances present at the end of the reporting period and the changes in circumstances during the reporting period. The entity shall account for changes.

3. The Existence of a Significant Financing Component in the Contract

In determining the transaction price, an entity shall adjust the promised amount of consideration for the effects of the time value of money if the timing of payments agreed to by the parties to the contract, (either explicitly or implicitly) provides the customer or the entity with a significant benefit of financing the transfer of goods or services to the customer.

The objective when adjusting the promised amount of consideration for a significant financing component is to recognize revenue at an amount that reflects what the cash selling price of the promised good or service would have been if the customer had paid cash at the same time that control of that good or service transferred to the customer.

The discount rate used is the rate that would be reflected in a separate financing transaction between the entity and the customer at contract inception.To make this assessment, an entity considers all relevant factors – in particular:

1) The difference, if any, between the amount of promised consideration and the cash selling price of the promised goods or services.

2) The combined effect of the expected length of time between:a. The entity transferring the promised goods

or services to the customer.b. The customer paying for those goods or

services.

3) The prevailing interest rates in the relevant market.

A contract does not have a significant financing component if any of the following factors exists:

1) An entity receives an advance payment where thetiming of the transfer of goods or services to a customer is at the discretion of the customer.

2) A substantial portion of the consideration is variable, and the amount and/or timing of the consideration is outside of the customer’s or entity’s control.

3) The difference between the amount of promised consideration and the cash selling price of thepromised goods or services arises for reasons other than the provision of finance.

The new standard indicates that:

An entity should determine the discount rate atcontract inception, reflecting the credit characteristics of the party receiving credit.

That rate should not be updated for a change incircumstances.

As a practical expedient, an entity is not required to adjust the transaction price for the effects of a

significant financing component if the entity expects, at contract inception, that the period between customer payment and the transfer of goods or services will be one year or less.

For contracts with an overall duration greater than one year, the practical expedient applies if the period between performance and payment for that performance is one year or less.

4. Noncash Consideration

Noncash consideration received from a customer is measured at fair value. If it cannot make a reasonable estimate of the fair value, an entity refers to the estimated selling price of the promised goods or services.

Noncash consideration received from the customer to facilitate an entity’s fulfillment of the contract –e.g., materials or equipment – is accounted for whenthe entity obtains control of those contributed goods or services.

5. Consideration Payable to a Customer

Consideration payable to a customer includes cash amounts that an entity pays, or expects to pay, to the customer (or to other parties that purchase the entity’s goods or services from the customer). Consideration payable to a customer also includes credit or other items (for example, a coupon or voucher) that can be applied against amounts owed to

the entity (or to other parties that purchase the entity’s goods or services from the customer).If the entity cannot reasonably estimate the fair value of the good or service received from the customer, then it accounts for all of the consideration payable to the customer as a reductionof the transaction price.

3.4. Step 4: Allocating the transaction price to performance obligations

The objective when allocating the transaction price is toallocate the transaction price to each performance obligation (or distinct good or service) in an amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for transferring the promised goods or services to the customer.

To meet the allocation objective, an entity shall allocate the transaction price to each performance obligation identified in the contract on a relative standalone selling price basis.

3.4.1. Determine stand-alone selling prices

The standalone selling price is the price at which an entity would sell a promised good or service separately to a customer.

The best evidence of a standalone selling price is the observable price of a good or service when the entity sells that good or service separately in similar circumstances and to similar customers.

Also a contractually stated price or a list price for a good or service may be (but shall not be presumed to be) the standalone selling price of that good or service.

If a standalone selling price is not directly observable,an entity shall estimate the standalone selling price.

Suitable methods for estimating the standalone selling price of a good or service include, but are not limited to, the following:

1. Adjusted market assessment approachAn entity could evaluate the market in which goods or services are sold and estimate the price that customers in the market would be willing to pay.

This approach also might include referring to pricesfrom the entity’s competitors for similar goods or services and adjusting those prices as necessary to reflect the entity’s costs and margins.

2. Expected cost plus a margin approachForecast the expected costs of satisfying a performance obligation and then add an appropriate margin for that good or service.

3. Residual approachAn entity may estimate the standalone selling price by reference to the total transaction price less thesum of the observable standalone selling prices of other goods or services promised in the contract.

The residual approach is appropriate only if the stand-alone selling price of one or more goods or services is highly variable or uncertain, and observable stand-alone selling prices can be established for the other goods or services promisedin the contract.

a. Highly variableThe entity sells the same good or service to different customers at or near the same time for a broad range of prices

b. uncertain The entity has not yet established the price for a good or service and the good or service

has not previously been sold on a stand-alone basis

A combination of methods may need to be used to estimate the standalone selling prices of the goods or services promised in the contract if two or more of those goods orservices have highly variable or uncertain standalone selling prices.

When an entity uses a combination of methods to estimate the standalone selling price of each promised good or service in the contract, the entity shall evaluate whether allocating the transaction price at those estimated standalone selling prices would be consistent with the allocation objective.

3.4.2 .Allocate the transaction price

At contract inception, the transaction price is generallyallocated to each performance obligation on the basis of relative stand-alone selling prices. However, when specified criteria are met, a discount or variable consideration is allocated to one or more, but not all, of the performance obligations in the contract.

After initial allocation, changes in the transaction price are allocated to satisfied and unsatisfied performance obligations on the same basis as at contract inception, subject to certain limited exceptions.

3.4.3. Allocating a discount

If the sum of the stand-alone selling prices of a bundle of goods or services exceeds the promised consideration in a contract, then the discount is allocated proportionately to all of the performance obligations in the contract, unless there is observable evidence that the entire discount relates to only one or more of the performance obligations.

An entity shall allocate a discount entirely to one or more,but not all, performance obligations in the contract if all ofthe following criteria are met:

1) The goods or services (or bundle thereof) in the performance obligation are regularly sold on a stand-alone basis, and at a discount.

2) The discount is substantially the same in amount to the discount that would be given on a stand-alone basis.

3.4.4. Allocating variable consideration

Variable consideration may be attributable to:

1) All of the performance obligations in a contract.

2) One or more, but not all, of the performance obligations in a contract (ex: bonus that is contingent on transferring a promised good or service within a specified time period).

3) One or more, but not all, distinct goods or servicespromised in a series of distinct goods or services that form part of a single performance obligation (an annual increase in the price of cleaning services linked to an inflation index within a facilities management contract).

An entity allocates a variable amount and subsequent changes to that amount, entirely to a performance

obligation, or to a distinct good or service that forms part of a single performance obligation, only if both of the following criteria are met:

1) The variable payment terms relate specifically to the entity’s efforts to satisfy the performance obligation or transfer the distinct good or service (or to a specific outcome of satisfying the performance obligation or transferring the distinct good or service.

2) Allocating the variable amount of consideration entirely to the performance obligation or distinctgood or service is consistent with the new standard’s overall allocation principle when considering all of the performance obligations andpayment terms in the contract.

3.4.5. Changes in the Transaction Price

After contract inception, the transaction price can change for various reasons, including the resolution of uncertain events or other changes in circumstances that change the amount of consideration to which an entity expects to be entitled in exchange for the promised goodsor services.

An entity shall allocate to the performance obligations in the contract any subsequent changes in the transactionprice on the same basis as at contract inception. Consequently, an entity shall not reallocate the transaction price to reflect changes in standalone selling prices after contract inception.

Amounts allocated to a satisfied performance obligation shall be recognized as revenue, or as a reduction of revenue, in the period in which the transaction price changes.

An entity shall account for a change in the transaction price that arises as a result of a contract modification in accordance with paragraphs 18-21. However, for a change in the transaction price that occurs after a contract modification, an entity shall apply paragraphs 87-89 to allocate the change in the transaction price in whichever of the following ways is applicable:

a) The change is attributable to an amount of variable consideration that was promised before the modification.

b) The modification was accounted for as a termination of the existing contract and creation of a new contract.

3.5. Step 5: Recognize Revenue When or as the Entity Satisfies a Performance Obligation

3.5.1. Transfer of control

An entity should recognize revenue when (or as) it satisfies a performance obligation by transferring a promised good or service to a customer. A good or serviceis transferred when (or as) the customer obtains control of that good or service.

‘Control’ refers to the ability to direct the use of, andobtain substantially all of the remaining benefits from, the asset. Control includes the ability to prevent other entities from directing the use of, and obtaining the benefits from, an asset.

The benefits of an asset are the potential cash flows (inflows or savings in outflows) that can be obtained directly or indirectly in many ways, such as by:

1) Using the asset to produce goods or provide services(including public services).

2) Using the asset to enhance the value of other assets.

3) Using the asset to settle liabilities or reduce expenses.

4) Selling or exchanging the asset.5) Pledging the asset to secure loan.6) Holding the asset.

If an entity concludes that it is appropriate to recognize revenue for a bill-and-hold arrangement, then it is also providing a custodial service to the customer.The entity will need to determine whether the custodial service constitutes a separate performance obligation to which a portion of the transaction price is allocated.

3.5.2. Performance obligations satisfied over time

For each performance obligation in a contract, an entity firstdetermines whether the performance obligation is satisfied over time. (Control of the good or service transfers to the customer over time) using the following criteria:

1) The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs.

2) The entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced.

3) The entity’s performance does not create an asset with analternative use to the entity and the entity has an enforceable right to payment for performance completed todate.

If one or more of these criteria are met, then the entity recognizes revenue over time, using a method that depicts its performance.

If none of the criteria is met, control transfers to the customer at a point in time and the entity recognizes revenue at that point in time.

3.5.3. Performance obligations satisfied at a point in time

If a performance obligation is not satisfied over time, then an entity recognizes revenue at the point in time at which it transfers control of the good or service to the customer.

To determine the point in time at which a customer obtains control of a promised asset and an entity satisfies a performance obligation, the entity would consider indicators of the transfer of control, which include, but are not limited to, the following:

1. The entity has a present right to payment for theasset.

2. The customer has legal title to the asset.3. The entity has transferred physical possession of

the asset. 4. The customer has the significant risks and

rewards of ownership of the asset.5. The customer has accepted the asset.

Relevant considerations for some of these indicators include the following:

1. In some cases, possession of legal title is a protective right and may not coincide with the transfer of control of the goods or services to acustomer. (Ex: when a seller retains title solelyas protection against the customer’s failure to pay).

2. In consignment arrangements and some repurchase arrangements, an entity may have transferred physical possession but still retain control.

Conversely, in bill-and- hold arrangements, an entity may have physical possession of an asset that the customer controls.

3. When evaluating the risks and rewards of ownership, an entity excludes any risks that giverise to a separate performance obligation in addition to the performance obligation to transfer the asset.

4. An entity needs to assess whether it can objectively determine that a good or service provided to a customer is in accordance with the specifications agreed in a contract.

4.Contract costs

4.1. Costs of obtaining a contract

An entity capitalizes incremental costs to obtain a contract with a customer (EX: sales commissions) if theentity expects to recover those costs.

However, as a practical expedient, an entity is not required to capitalize the incremental costs to obtain a contract if the amortization period for the asset would be one year or less.Costs that will be incurred regardless of whether the contract is obtained (including costs that are incremental to trying to obtain a contract, such as bidcosts that are incurred even if the entity does not obtain the contract ) are expensed as they are incurred, unless they meet the criteria to be capitalized as fulfillment costs .

4.2. Costs of fulfilling a contract

If the costs incurred in fulfilling a contract with a customer are not in the scope of other guidance (inventory, intangibles, or property, plant, and equipment ) then an entity recognizes an asset only if the fulfillment costs meet the following criteria:

1) They relate directly to an existing contract or specific anticipated contract.

2) They generate or enhance resources of the entity that will be used to satisfy performance obligations in the future.

3) They are expected to be recovered.

If the costs incurred to fulfill a contract are in the scope of other guidance, then the entity accounts for them in accordance with that other guidance.

4.3. AmortizationAn entity amortizes the asset recognized for the costs to obtain (and/or) fulfill a contract on a systematic basis, consistent with the pattern of transfer of the good or service to which the asset relates. This can include the goods or services in an existing contract, and also those to be transferred under a specific anticipated contract (goods or services to be provided following the renewal of an existing contract).

4.4. Impairment

An entity recognizes an impairment loss to the extent that the carrying amount of the asset exceeds the recoverable amount. The recoverable amount is defined as:

The remaining expected amount of consideration to bereceived in exchange for the goods or services to which the asset relates, less

The costs that relate directly to providing those goods or services and that have not been recognized as expenses.

When assessing an asset for impairment, the amount of consideration included in the impairment test is based on an estimate of the amounts that the entity expects to receive. To estimate this amount, the entity uses the principlesfor determining the transaction price, with two key differences:

1) It does not constrain its estimate of variable consideration (Ex: it includes its estimate of variable consideration, regardless of whether the inclusion of this amount could result in a significant revenue reversal if adjusted, and

2) It adjusts the amount to reflect the effects of the customer’s credit risk.

5.Presentation

An entity presents a contract liability or a contract asset in its statement of financial position when either party to the contract has performed.The entity performs by transferring goods or services to the customer, and the customer performs by paying consideration to the entity.

‘Contract liabilities’ are obligations to transfer goods or services to a customer for which the entity

has received consideration, or for which an amount of consideration is due from the customer.

‘Contract assets’ are rights to consideration in exchange for goods or services that the entity has transferred to a customer when that right is conditional on something other than the passage of time.

‘Receivables’ are unconditional rights to consideration. A right to consideration is ‘unconditional’ if only thepassage of time is required before payment of that consideration is due. Receivables are presented separately from contract assets. An entity accounts forreceivables, including their measurement and disclosure, using current guidance. On initial recognition of a receivable, any difference between themeasurement of the receivable and the corresponding amount of revenue recognized is presented as an expense. Any subsequent impairment of the receivable isalso accounted for as an expense.

An entity may use alternative captions for the contractassets and contract liabilities in its statement of financial position. However, it should provide sufficient information to distinguish a contract asset from a receivable.

6.Disclosure

A. Annual disclosure

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.

An entity is required to disclose, separately from other sources of revenue, revenue recognized from contracts with customers, and any impairment losses recognized on receivables or contract assets arising from contracts with customers. If an entity elects either the practical expedient not to adjust the transaction price for a significant financing component or the practical expedient not to capitalize costs incurred to obtain a contract, then itdiscloses that fact.

The standard includes disclosure requirements on:

1. The disaggregation of revenue.

2. Contract balances.

3. Performance obligations.

4. Significant judgments.

5. Assets recognized to obtain or fulfill a contract.

1) Disaggregation of revenue

The new standard requires the disaggregation of revenuefrom contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors, and includes examples of such categories:(Sales channels, timing of transfer a good or service, type of good or service, geography, contract duration, type of contract)

An entity also discloses the relationship between the disaggregated revenue and the entity’s segment disclosures.

In determining these categories, an entity considers how revenue is disaggregated, in:

1. Disclosures presented outside of the financial statements (earnings releases, annual reports, or investor presentations).

2. Information reviewed by the chief operating decision maker for evaluating the financial performance of operating segments.

3. Other information similar to (a) and (b) that isused by the entity or users of the entity’s financial statements to evaluate performance or make resource allocation decisions.

2) Contract balances

An entity is required to disclose all of the following:

1. The opening and closing balances of contract assets, contract liabilities, and receivables fromcontracts with customers (if not otherwise separately presented or disclosed).

2. The amount of revenue recognized in the current period that was included in the opening contract liability balance.

3. The amount of revenue recognized in the current period from performance obligations satisfied (or partially satisfied) in previous periods – e.g., changes in transaction price.

4. An explanation of how the entity’s contracts and typical payment terms will affect its contract asset and contract liability balances.

5. An explanation of the significant changes in the balances of contract assets and contract liabilities, which should include both qualitativeand quantitative information.

Examples could include:

i. Changes arising from business combinations.ii. Cumulative catch-up adjustments to revenue

(and to the corresponding contract balance) arising from a change in the measure of progress, a change in the estimate of the transaction price, or a contract modification.

iii. Impairment of a contract asset.iv. A change in the time frame for a right to

consideration becoming unconditional (reclassified to a receivable) or for a performance obligation to be satisfied (the recognition of revenue arising from a contract liability).

3) Performance obligations

An entity describes the following information about itsperformance obligations:

1. When the entity typically satisfies its performance obligations ( on shipment, on delivery, as services are rendered, or on completion of service).

2. Significant payment terms (whether the contract has a significant financing component, the consideration is variable, and the variable consideration is constrained).

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

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

5. Types of warranties and related obligations.6. The aggregate amount of the transaction price

allocated to performance obligations that are unsatisfied (or partially unsatisfied) at the reporting date. The entity also provides either a quantitative (using time bands) or a qualitative explanation of when it expects that amount to be recognized as revenue.

7. As a practical expedient, an entity is not required to disclose the transaction price allocated to unsatisfied (or partially unsatisfied) performance obligations if:

a. The contract has an original expected durationof one year or less.

b. the entity applies the practical expedient to recognize revenue at the amount to which it has a right to invoice, which corresponds directly to the value to the customer of the entity’s performance completed to date ( a service contract in which the entity bills a fixed hourly amount).

4) Significant judgments

An entity discloses the judgments and changes in judgments made in applying the new standard that affectthe determination of the amount and timing of revenue recognition.Specifically, those judgments used to determine the timing of the satisfaction of performance obligations, the transaction price, and amounts allocated to performance obligations.

For performance obligations that are satisfied over time, an entity describes the method used to recognize revenue.

(A description of the output or input method and how those methods are applied – and why such methods are a faithful depiction of the transfer of goods or services)

For performance obligations that are satisfied at a point in time, the new standard requires a disclosure about the significant judgments made to evaluate when the customer obtains control of the promised goods or services.

An entity also discloses information about the methods, inputs, and assumptions used to:

1. Determine the transaction price, which includesestimating variable consideration, assessing whether the variable consideration is constrained, adjusting the consideration for a significant financing component, and measuring noncash consideration.

2. Allocate the transaction price, including estimating the stand-alone selling prices of promised goods or services and allocating discounts and variable consideration.

3. Measure obligations for returns and refunds, and other similar obligations.

5) Assets recognized for costs to obtain or fulfill acontract with a customer.

An entity discloses the closing balance of assets that are recognized from the costs incurred to obtain or fulfill a contract with a customer, separating them by their main category (acquisition costs, pre-contract costs, set-up costs, and other fulfillment costs) and the amount of amortization and any impairment losses recognized in the reporting period.

An entity describes the judgments made in determining the amount of the costs incurred to obtain or fulfill a contract with a customer and themethod used to determine the amortization for each reporting period.

B. Interim disclosures

Both IFRS and U.S. GAAP require entities to include information about disaggregated revenue in their interim financial reporting. U.S. GAAP further requirespublic business entities, not-for-profit entities that are conduit bond obligors, and employee benefit plans that file or furnish financial statements with the SEC to provide the following disclosures for interim financial reporting, if they are material:

1. The opening and closing balances of contract assets, contract liabilities, and receivables fromcontracts with customers (if they are not otherwise separately presented or disclosed).

2. The amount of revenue recognized in the current period that was included in the opening contract liability balance.

3. The amount of revenue recognized in the current period from performance obligations that were satisfied (or partially satisfied) in previous periods (changes in transaction price).

4. Information about the entity’s remaining performance obligations.

Key impacts

Revenue may be recognized at a point in time or overtime. Entities that currently use the stage- of-completion/percentage-of-completion or proportional performance method will need to reassess whether to recognize revenue over time or at a point in time.

If they recognize it over time, the manner in which progress toward completion is measured may change. Other entities that currently recognize revenue at apoint in time may now need to recognize it over time. To apply the new criteria, an entity will needto evaluate the nature of its performance obligations and review its contract terms, considering what is legally enforceable in its jurisdiction.

Revenue recognition may be accelerated or deferred. Compared with current accounting, revenue recognition may be accelerated or deferred for transactions with multiple components, variable consideration, or licenses. Key financial measures and ratios may be impacted, affecting analyst expectations, earn-outs, compensation arrangements, and contractual covenants.

Revisions may be needed to tax planning, covenant compliance, and sales incentive plans. The timing oftax payments, the ability to pay dividends in some jurisdictions, and covenant compliance may all be affected. Tax changes caused by adjustments to the timing and amounts of revenue, expenses, and capitalized costs may require revised tax planning. Entities may need to revisit staff bonuses and incentive plans to ensure that they remain aligned with corporate goals.

Sales and contracting processes may be reconsidered.Some entities may wish to reconsider current contract terms and business practices (distribution channels) – to achieve or maintain a particular revenue profile.

IT systems may need to be updated. Entities may needto capture additional data required under the new standard – e.g., data used to make revenue transaction estimates and to support disclosures. Applying the new standard retrospectively could meanthe early introduction of new systems and processes,and potentially a need to maintain parallel records during the transition period.

IT systems may need to be updated. Entities may needto capture additional data required under the new standard – e.g., data used to make revenue transaction estimates and to support disclosures. Applying the new standard retrospectively could meanthe early introduction of new systems and processes,and potentially a need to maintain parallel records during the transition period.

Accounting processes and internal controls will needto be revised. Entities will need processes to capture new information at its source – e.g., executive management, sales operations, marketing, and business development – and to document it appropriately, particularly as it relates to estimates and judgments. Entities will also need to consider the internal controls required to ensure the completeness and accuracy of this information – especially if it was not previously collected.

Extensive new disclosures will be required. Preparing new disclosures may be time-consuming, andcapturing the required information may require incremental effort or system changes. There are no exemptions for commercially sensitive information. In addition, IFRS and SEC guidance require entities to disclose the potential effects that recently

issued accounting standards will have on the financial statements when adopted.

Entities will need to communicate with stakeholders.Investors and other stakeholders will want to understand the impact of the new standard on the overall business – probably before it becomes effective. Areas of interest may include the effect on financial results, the costs of implementation, expected changes to business practices, the transition approach selected, and, for IFRS preparers and entities other than public business entities and certain not-for-profit entities reporting under U.S. GAAP, whether they intend to early adopt.

References

International financial reporting standard (IFRS

15)

Financial accounting standard board (Topic 606)

KPMG - Issues In-Depth (September 2014)