Contract assets and receivables shall be accounted for in accordance with IFRS 9. An IFRS 15 impact assessment should be performed, which would include among others, the review of existing contracts with customers and its related accounting treatment, contract renegotiation and modification, to appropriately reflect the economic terms of the transaction, the engagement of legal and accounting advisors to better interpret the terms of the agreement and the applicability of IFRS 15, reconfiguration of front and back-end IT systems to adhere to the standard’s requirements, and other necessary changes to ensure readiness for IFRS 15 adoption. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. The standard should be applied in an entity’s IFRS financial statements for annual reporting periods beginning on or after 1 January 2018. It applies to existing contracts that are not yet complete as of the effective date and new contracts entered into on or after the effective date. In order for IFRS 15 to apply, the customer contracts must meet certain conditions, as shown in the Figure 3 below. This paper deals with the accounting for direct selling costs incurred in obtaining passenger tickets. the costs relate directly to a contract (or a specific anticipated contract); the costs generate  or enhance resources of the entity that will be used in satisfying performance obligations in the future; and, Performance obligations satisfied over time, Methods for measuring progress towards complete satisfaction of a performance obligation, Customer options for additional goods or services, the significant judgments, and changes in the judgments, made in applying the guidance to those contracts; and. Please see, Telecommunications, Media & Entertainment, IFRS (International Financial Reporting Standards), Corporate Responsibility and Sustainability. DTTL and each of its member firms are legally separate and independent entities. IFRS 15 Revenue from contracts with customers: Are you ready for the It is highly advisable to act now and do the necessary assessment and collaborate with the experts on implementation plans to ensure that the entity will be ready when the “Big Change” comes. Airlines may incur costs to obtain a customer contract that would otherwise not have been incurred. When a contract modification is not treated as an additional separate contract based on the above-mentioned criteria, entities need to assess whether the promised goods or services that are still to be transferred under the original contract are distinct from the goods or services already transferred on or before the date of the contract modification (IFRS 15.21). Contract combination happens when you need to account for two or more contract as for 1 contract and not separately. Currently, telecom companies account for revenue differently. IFRS 15 Revenue from contracts with customers: Are you ready for the “Big Change?” has been saved, IFRS 15 Revenue from contracts with customers: Are you ready for the “Big Change?” has been removed, An Article Titled IFRS 15 Revenue from contracts with customers: Are you ready for the “Big Change?” already exists in Saved items. 17 According to IFRS 15, an entity shall recognise the incremental costs of obtaining a contract with a customer as an asset if the entity expects to recover those costs. IFRS 15 is silent on presentation (classification) of incremental costs of obtaining a contract and costs to fulfil a contract. Such revenue is recognised only when the underlying sales or usage occur. IFRS 15 specifies how and when an IFRS reporter will recognise revenue as well as requiring such entities to provide users of financial statements with more informative, relevant disclosures. This will change for annual reporting periods beginning on or after 1 January 2018: IFRS 15 introduces three different approaches to recognising revenue when any contracts are modified. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. Under IFRS 15, telecom companies are required to identify the performance obligations included in the bundled contract (i.e. These topics should be considered carefully when applying IFRS 15. Costs to fulfil a contract are similar in nature to work-in-progress, but they … The standard provides detailed guidance on how to account for approved contract modifications. Expected cost plus a margin approach, and. Whether the latter type of modification is accounted for prospectively or retrospectively depends on whether the remaining goods or services to be delivered after the modification are distinct from those delivered prior to the modification. As such, the amount of revenue to be recognized under IFRS 15 will be significantly different than that recognized with the current accounting standards. © 2020. a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer. a good or service (or bundle of goods or services) that is distinct; or, each distinct good or service in the series that the entity promises to transfer consecutively to the customer would be a performance obligation that is satisfied over time (see below); and. Therefore, an entity should disclose qualitative and quantitative information about all of the following: [IFRS 15:110], Entities will need to consider the level of detail necessary to satisfy the disclosure objective and how much emphasis to place on each of the requirements. Each performance obligation should be capable of being distinct and is separately identifiable in the contract. [IFRS 15:C1], When first applying IFRS 15, entities should apply the standard in full for the current period, including retrospective application to all contracts that were not yet complete at the beginning of that period. Join us for a celebration of 175 years of making an impact that matters. ifrs 15.10 The standard defines a ‘contract’ as an agreement between two or more parties that creates enforceable rights and obligations and specifies that enforceability is a single method of measuring progress would be used to measure the entity’s progress towards complete satisfaction of the performance obligation to transfer each distinct good or service in the series to the customer. The amendments do not change the underlying principles of the standard, just clarify and offer some additional transition relief. Scope and sample 4 3. IFRS 15 contains specific, and more precise guidance to be applied in determining whether revenue is recognised over time (often referred to as ‘percentage of completion’ under existing standards) or at a point in time. Once entered, they are only Each word should be on a separate line. entities currently refer to a number of different standards and principles in accounting for various types of costs incurred using the asset to produce goods or provide services; using the asset to enhance the value of other assets; using the asset to settle liabilities or to reduce expenses; the customer simultaneously receives and consumes all of the benefits provided by the entity as the entity performs; the entity’s performance creates or enhances an asset that the customer controls as the asset is created; or. Incremental costs of obtaining a contract (for example, a sales commission) should be recognised as an asset if they are expected to be recovered. The entity’s performance creates or enhances an asset controlled by the customer. [IFRS 15:97], The asset recognised in respect of the costs to obtain or fulfil a contract is amortised on a systematic basis that is consistent with the pattern of transfer of the goods or services to which the asset relates. The complexities and extent of changes will depend on the nature of the business and the accounting policies and procedures currently implemented. 4. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. [IFRS 15:18-21]. A collection of Butterfly Effect stories highlighting how our Deloitte professionals are positively impacting the lives of women and girls around the world. A practical expedient is available, allowing the incremental costs of obtaining a contract to be expensed if the associated amortisation period would be 12 months or less. Page 15 Revenue from contracts with customers IFRS 15: the new revenue standard Example: Identify performance obligations Multiple performance obligations in a contract Entity enters into a contract to manufacture and install customised equipment and provide maintenance services for a five-year period The acceptable methods of allocating the transaction price include: Step 5 – Recognize revenue as and when the entity satisfies a performance obligation: the entity should recognize revenue at a point in time, except if it meets any of the three criteria, which will require recognition of revenue over time: Actual impact will vary on each specific customer contract and will depend on the accounting treatment prior to implementation of IFRS 15. Step 1: Identify the contract with the customer, A contract with a customer will be within the scope of IFRS 15 if all the following conditions are met: [IFRS 15:9], If a contract with a customer does not yet meet all of the above criteria, the entity will continue to re-assess the contract going forward to determine whether it subsequently meets the above criteria. It also provides guidance on a few of the gray areas on revenue recognition such as contracts involving multiple elements, treatment of costs to obtain and fulfill a contract, and accounting for contract modifications. Discounts given should be allocated proportionately to all performance obligations unless certain criteria are met and reallocation of changes in standalone selling prices after inception is not permitted. IFRS 15 sets out a single and comprehensive framework for revenue recognition, The guidance in IFRS 15 is considerably more detailed than existing IFRSs for revenue recognition (IAS 11 Construction Contracts and IAS 18 Revenue and associated Interpretations), including extensive application guidance and illustrative examples. We go through the new IFRS standard with examples as to what guidance will be provided in future. IFRS 15 includes guidance on both incremental costs of obtaining a contract and costs to fulfil a contract. A. These include, but are not limited to: [IFRS 15:31-33], An entity recognises revenue over time if one of the following criteria is met: [IFRS 15:35], If an entity does not satisfy its performance obligation over time, it satisfies it at a point in time. Residual approach (only permissible in limited circumstances). contracts within its scope. Contracts can be written, oral or implied by an entity’s customary business practices. The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. Telecommunication, software development, and automotive industries. By using this site you agree to our use of cookies. IFRS 15 applies to all contracts with customers, except for those that are within the scope of other IFRSs. However, those incremental costs are limited to the costs that the entity would not have incurred if the contract had not been successfully obtained (e.g. This core principle is delivered in a five-step model framework: [IFRS 15:IN7]. Therefore in today’s article, I would like to show you HOW you should account for construction contracts under IFRS 15. [IFRS 15:91-94], Costs incurred to fulfil a contract are recognised as an asset if and only if all of the following criteria are met: [IFRS 15:95], These include costs such as direct labour, direct materials, and the allocation of overheads that relate directly to the contract. With IFRS 15, real estate companies may now recognize revenue over time as they satisfy performance obligations during the construction period of the development project. For example, telecommunication companies do provide mobile plans that include a mobile handset, call minutes and data package. IFRS 15 Revenue from Contracts with Customers applies to all contracts with customers except for: leases within the scope of IAS 17 Leases; financial instruments and other contractual rights or obligations within the scope of IFRS 9 Financial Instruments, IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IAS 27 Separate Financial Statements and IAS 28 Investments in Associates and Joint Ventures; insurance contracts within the scope of IFRS 4 Insurance Contracts; and non-monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers. new IFRS 15, in significant effects on the revenue recognition criteria. Contracts that are outside the scope of IFRS 15 include leases (IFRS 16 Leases or, for entities that have not yet adopted IFRS 16, IAS 17 Leases), insurance contracts (IFRS 17 Insurance Contracts, or for entities that have not yet adopted 30 IFRS 15 Revenue from Contracts with Customers Page 3 of 4 Effective Date Periods beginning on or after 1 January 2018 Step 2 (c) The entity’s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date. IFRS 15 also includes guidance related to contract costs. Learn how this new reality is coming together and what it will mean for you and your industry. Under IAS 11 an entity that accounted for loss-making . Key findings • Timing of revenue recognition 5 • Variable consideration 9 • Revenue disaggregation 12 • Contract balances 13 • Significant judgements 14 • Costs to obtain or fulfil a contract 16 4. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox. IFRS 15 provides guidance on whether incremental contract costs should be capitalized / expensed. The session discusses the implications of contract modifications and accounting thereof An entity should aggregate or disaggregate disclosures to ensure that useful information is not obscured. IFRS 15 supersedes the current revenue recognition standards including IAS 18 Revenue, IAS 11 Construction Contracts and their related interpretations. Step 2 – Identify the performance obligations in the contract: a performance obligation in a contract is a promise (including implicit) to transfer a good or service to the customer. Application of this guidance will depend on the facts and circumstances present in a contract with a customer and will require the exercise of judgment. IFRS 15 was a result of the convergence work between the International Accounting Standards Board (IASB), the body that promulgates IFRS, and the Federal Accounting Standards Board (FASB), the standard setting body for US GAAP (Generally Accepted Accounting Principles.) [IFRS 15:5], A contract with a customer may be partially within the scope of IFRS 15 and partially within the scope of another standard. An executory contract is a contract made by two parties in which the terms are set to be fulfilled at a later date. Leadership perspectives from across the globe. [IFRS 15:47], Where a contract contains elements of variable consideration, the entity will estimate the amount of variable consideration to which it will be entitled under the contract. [IFRS 15:1] Application of the standard is mandatory for annual reporting periods starting from 1 January 2018 onwards. In order to achieve the disclosure objective stated above, the Standard introduces a number of new disclosure requirements. IFRS 15 Revenue from Contracts with Customers is published by the International Accounting Standards Board (IASB). A receivable is recognised when the entity’s right to consideration is unconditional except for the passage of time. Further detail about these specific requirements can be found at IFRS 15:113-129. DTTL and each of its member firms are legally separate and independent entities. I know I know. Instead, IFRS 15 directs companies to apply the general onerous contract requirements in IAS 37. Accounting for contract costs, such as pre-contract costs and costs to fulfill a contract The revenue standards (ASC 606 and IFRS 15, Revenue from Contracts with Customers) will replace substantially all revenue guidance under US GAAP and IFRS, including the industry-specific guidance for construction-type and production-type contracts. Our thought leadership and Dow Jones news, now at your fingertips, Millennials and Gen Zs hold the key to creating a “better normal”. If certain conditions are met, a contract modification will be accounted for as a separate contract with the customer. It is among the key performance indicators of a business, monitored closely by different stakeholders including market analysts, and often used in benchmarking different players within the same industry. Revenue will therefore be recognised when control is passed at a certain point in time. Accordingly, it is critical that the accounting policy appropriately captures the nature of the business, the terms of agreements with customers, and is in accordance with the applicable accounting standards. There are only disclosure requirements in paragraphs IFRS 15.127-128. Any impairment relating to contracts with customers should be measured, presented and disclosed in accordance with IFRS 9. As entities and groups using the international accounting framework leave the old regime behind, let’s look at the more prescriptive new standard. The standard provides a single, principles based five-step model to be applied to all contracts with customers. Read the following publications to further understand how the sector-specific arrangements are affected, the actions you may need to take, and key considerations you need to focus on. Factors that may indicate the point in time at which control passes include, but are not limited to: [IFRS 15:38], The incremental costs of obtaining a contract must be recognised as an asset if the entity expects to recover those costs. The core principle is to recognize revenue as depicting “the transfer of goods or services” to customers for an “amount that reflects the consideration” to which the “entity expects to be entitled in exchange for those goods or services.”. , or you may have 'compatibility mode ' selected mobile handset, minutes. 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