8/1/2018

IFRS 15 – REVENUE
FROM CONTRACT
WITH CUSTOMERS
Effective date: 1 January 2018

Contents

▪ Overview
▪ The 5-step model illustrated by FPT Telecom
▪ Step 1 – Identify the contract(s)
▪ Step 2 – Identify the performance obligation(s) (POs)
▪ Step 3 – Determine the transaction price (TP)
▪ Step 4 – Allocate the TP to POs
▪ Step 5 – Recognize revenue

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Overview

Superseded Currently effective

▪ IAS 18 – Revenue ▪ IFRS 15 – Revenue from contract with
customers
▪ IAS 11 – Construction contracts
▪ (Equivalent US GAAP – ASC 606)
▪ SIC 31 – Revenue Barter transaction
involving advertising services
▪ IFRIC 13 – Customer loyalties programs
▪ IFRIC 15 – Agreements for the
construction of real estate
▪ IFRIC 18 – Transfers of assets from
customers

Overview

A customer
“a party that contracts with an entity to obtain goods or services that are an output of
the entity’s ordinary activities in exchange for consideration”

Contractors – But not customers

▪ Lessee (IFRS 16 – Leases; IAS 17 - Lease contract)
▪ Insured party (IFRS 4 – Insurance contracts)
▪ Investors (IAS 27 – Separate financial statements; IAS 28 – Investment in associates and
joint ventures; IFRS 3 – Business combination; IFRS 9 – Financial instruments; IFRS 10 –
Consolidated financial statements; IFRS 11 – Joint arrangements)
▪ Purchaser of PPE (IAS 16), Intangible asset (IAS 38)
▪ Non – monetary exchanges between entities in the same line of business to facilitate
sales to customers or potential customers.

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THE 5-STEP MODEL – ILLUSTRATED

BY FPT TELECOM

FPT Telecom

01/02/2017, Ted subscribed for FPT

Telecom’s F6 plan, paid monthly, for 12
months.
(Source: Internet)
FPT normally sells the Wi-Fi modem for
VNĐ300.000 and provides the same
network service for VNĐ170.000 per
month without the modem which can be
used for other network providers.
How should FPT Telecom recognize
revenue from the contract with Ted?

Stand-alone selling price: is the price at which the entity would sell a promised good or service
separately to a customer

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The 5-step model – Illustrated by FPT Telecom

Identify the Identify Determine Allocate TP Revenue

contracts POs the TP to POs recognition

• Contract with Ted • Provide Wi-fi • 180,000 x 12 = • Wi-fi modem: • Wi-fi modem: when
modem 2,160,000 VNĐ 276,923 VNĐ transferred
• Network service • Network service: • Network service:
1,883,077 VNĐ monthly

FPT Telecom – Journal entries

POs Stand-alone selling price Allocating PT to Revenue Billing

POs
Wi-fi modem 300,000 276,923 276,293 0
Network services 2,040,000 1,888,077 157,340 180,000
Total 2,340,000 2,160,000
Journal entries
01/02/2018 28/02/2018

Contract asset 276,923 Cash 180,000

Revenue 276,923 Contract asset 23,077

Revenue 156,923
Contract asset: Entity’s right to consideration in exchange for goods or services that the
entity has transferred to a customer when that right is conditioned on something other than
the passenger of time.

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STEP 1 – IDENTIFY THE

CONTRACT(S)
Attributes of a contract
Contract modification

Attributes of a contract

A contract is an agreement between two or more parties that creates enforceable

rights and obligations.
▪ Parties to the contract have either orthographically or orally approved the contract
and are committed to perform their respective obligations;
▪ The entity can identify each party’s rights regarding the goods or services to be
transferred;
▪ The entity can identify the payment terms for the goods or services to be
transferred;
▪ The contract has commercial substance;
▪ 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.

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Contract modification

Contract modification Contract combination

• Change in the scope or price • The contracts are negotiated

(or both) of a contract that is as a package with a single
approved by the parties to the commercial objective;
contract. • The amount of consideration
• If the modification has not to be paid in one contract
been approve, judgement is depends on the price or
based on enforceability of the performance of the other
modification. contract; or
• The goods or services
promised in the contracts are
a single performance
obligation.

Contract modification – Decision tree

Are additional goods or services

Catch – up adjustment
distinct?

Is additional goods or services

Termination of old contract;
exchanged at their stand-alone?
Creation of new contract
price?

New separate contract

To be distinct, goods or services must

• be capable of being distinct (a customer should be able to benefit from the good or service
on its own, or in combination with other resources the customer has readily at hand)
• be separately identifiable or “distinct within the context of the contract” (promised goods or
services represent individual promises)

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Contract modification – Illustrated example: Ball PC

Ball PC, computer manufacturer, enters into contract with Forward University to deliver
300 computers for total price of CU 600 000 (CU 2 000 per computer). Due to
necessary preparation works, Forward University agrees to deliver computers in 3
separate deliveries during the forthcoming 3 months (100 computers in each delivery).
Forward University takes control over the computers at delivery.
After the first delivery is made, Forward University and Ball PC amend the contract. Ball
PC will supply 200 additional computers (500 in total) with 3% discount from original
price which reflects the normal volume discounts provided in similar contracts with
other customers.
As of 31 December 20X1, Ball PC delivered 400 computers (300 as agreed initially and
100 under the contract amendment).
Required: How should Ball PC account for the revenue from this contract

Contract modification – Illustrated example: Ball PC

Ball PC, computer manufacturer, enters into contract with Forward University to deliver 300
computers for total price of CU 600 000 (CU 2 000 per computer). Due to necessary
preparation works, Forward University agrees to deliver computers in 3 separate deliveries
during the forthcoming 3 months (100 computers in each delivery). Forward University takes
control over the computers at delivery.
After the first delivery is made, Forward University and Ball PC amend the contract. Ball PC
will supply 200 additional computers (500 in total), with 30% discount from original price
because it hopes for the future cooperation with Forward University (nothing even discussed
yet). Besides, Forward University discovered minor defects on 50 computers from first
delivery and as a result, Ball PC agreed to provide partial credit of CU 240 per defected
computer.
As of 31 December 20X1, Ball PC delivered 400 computers (300 as agreed initially and 100
under the contract amendment).
Required: How should Ball PC account for the revenue from this contract

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STEP 2 – IDENTIFY PERFORMANCE

OBLIGATION(S)
Explicit and implicit promises
Distinct criteria
Principle vs. agent considerations

Performance obligations

Promise in a contract with a customer to transfer to the customer

either distinct goods/services or series of distinct goods/services.
Distinct can be both explicit (in the contract) and implicit (based on
practices or policies)

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Explicit vs. Implicit obligations – Illustrated example:

ABC Co

ABC Corp., producer of cleaning machines, sells their cleaning machines to various companies.
Determine the performance obligations in the following contracts:
1) In contract with the client A, ABC promises to deliver 10 cleaning machines for total price of
CU 200 000. The contract A contains a clause about free repair and maintenance service within
2 years after purchase.
2) In contract with the client B, ABC promises to deliver 5 cleaning machines for total price of
CU 100 000. No warranty is promised in the contract, however, ABC Corp. is well-known for its
perfect customer services and providing 1-year free repair services in the past.
3) In contract with the client C, ABC promises to deliver 50 cleaning machines for total price of
CU 1 000 000. No warranty is promised in the contract, and ABC usually does not provide any
free services in the country of client C. However, after the contract is signed, ABC offers free
maintenance service to a client C as a bonus for big order.
Required: Identify performance obligations of ABC Corp. in each scenarios.

Distinct criteria

A customer should be able to benefit from the

• Goods/services is
good or service
capable of being
Nature of distinct. • on its own; or
goods/services • in combination with other available in-hand
resources.

• Goods/services is
• Entity is not using goods/services as an
separately identifiable input to produce or deliver combined
Business model from other output.
of entity goods/services in the • Goods/services does not significantly
contract modify or customize another
good/service.
• Goods/services could not be transferred
independently.

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Distinct criteria – Illustrated example – MWI Corp

How many obligations? How many obligations?

Distinct criteria – Illustrated example

Example 1
The government contracted a construction company to build a
hospital. There are many steps from laying down foundation,
construct wards, surgery rooms, etc.
How many POs in this project?

Example 2
Oracle enters a contract with UEH to provide an ERP system, in
which Oracle provide software license, installation services, 1
month technical support, and 2 year software updates.
How many POs in this contract?

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Principle vs. Agent consideration

Principle: revenue in gross amount

Agent: revenue in net amount (commission)
Indicators:
• Primary responsibility for fulfilling the contract
• Inventory risk
• Customer’s credit risk
• Establishing the price
• Consideration

Principle vs. Agent consideration - Example

Lazada operates a website on which Customers purchases goods

from a range of suppliers. Lazada entitles a commission of 10% of
sales price. The website facilitates payment, but the suppliers set the
prices of products. Lazada requires non-refundable payments from
customers before orders are processed. A customer bought a dress
at $500. How to account for it?
Is the online platform principal or agent?
How to recognize revenue in the book of the online platform?

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STEP 3 – DETERMINE TRANSACTION

PRICE
• Variable consideration
• Constraining estimates in variable consideration
• Significant financing component
• Non-cash consideration
• Consideration payable to customer

Transaction price (TP)

Amount of consideration 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 (i.e. VAT).

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TP – variable consideration

Transaction price can be fixed or variable.

Why variable? Bonus, discount, rebate, incentive.
How to estimate variable consideration?
• Expected value method – Large number of similar transaction; Or
• The Most likely outcome method – Only 2 possible outcomes

TP – variable consideration – Illustrated Ex.: Ai Quoc Const.

Ai Quoc Construction company is contracted to build an office building on or
before a deadline. If Ai Quoc meets the deadline, the contract price is
$100m. Every 10 days delay, the contractor is required to compensate the
customer by $5m. There is 70% chance that the deadline can be met. 15%
chance delay 10 days, 10% chance delay 20 days and 5% chance delay 30
days.
Required
a. What should be the estimated contract price?
b. In year one, Ai Quoc completed 60% of the job. How much revenue should
be recognised?
c. By the end of year two, Ai Quoc completed 90% of the job, and re-
estimated that 95% that it can meet the deadline and only 5% chance that
it would delay by 10 days. How much revenue should be recognised in
year 2?

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TP – Constraining estimates in variable consideration

What? Only include variable consideration in revenue to the extent

that significant amount will not be reversed.
How? More probable than Less

TP – Significant financing component

Entities determine the significance of a financing component at an

individual contract level rather than at a portfolio level.

Factors indicate significant financing component:

• Timing difference between goods or services transferred and
payments due
• Prevailing market interest rate
Except when:
• The timing of the transaction is at the discretion of the customer (Gift card).
• A substantial portion of the consideration is variable and not under the control of the entity or customer
(Sales-based loyalty)
• Difference between the promised consideration and the cash selling price of the goods or services is
due to something other than financing (Withholding payment for guarantee obligation)

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TP – Consideration payable to customer

For distinct goods or services, account for an added obligation.

Not for distinct goods or services, e.g. discount, or refund, reduce

the transaction price

TP – Example of Consideration payable to customer

Example 1: A manufacturer launches hair colour products in a retail

chain store with a contract of 4 years. At initial, manufacturer piles
products of $4m to all the stores of the retail chain stores, who
request manufacturer to pay a ― listing fee‖ of $1m for the new
product launch.
Example 2: A retailer sells a tablet to customer A for $100 on
January 1 and agrees to reimburse customer A for the difference
between the purchase price and any lower price offered by a certain
direct competitors during the 3-month period following the sale. On
a probability-weighted basis, the retailer estimates it will reimburse
the customer $5.

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STEP 4 – ALLOCATE TP TO PO(S)

Stand – alone selling price

Estimate stand-alone price

Adjusted market Expected cost

Residual
assessment plus margin
allocate the remaining
forecasted fulfilment
transaction price to the
Available exchange price costs, adds margin at the
goods or services that do
on a market amount the market would
not have observable
be willing to pay
standalone selling prices

Suitable in situations
suitable in situations
where a competitor offers Suitable where the other
where the direct fulfilment
similar goods or services two approaches are not
costs are clearly
to use as a basis in the applicable
identifiable
analysis

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Estimate stand-alone price – Illustrated example

Vendor Y sells two items: product A and telephone support. Product A is a tangible
product used in a production process. Telephone support is available for one year after
delivery of all products. On January 1, Vendor Y enters into an arrangement with
Customer U to provide Product A on February 1. Telephone support also begins on
February 1 and lasts for one year. Total arrangement consideration is $6,000, due on
delivery of product A. Telephone support does not have an established price and is not
sold separately to customers. Assume that the customers do not renew the telephone
support after year 1 (i.e. there are no standalone sales of support). Vendor Y concludes
that it has enough information on past selling prices to customers on Product A to
support a standalone selling price. The majority of sales of product A to customers in
the same region as Customer U were within the range of $5,000 to $5,500. Vendor Y
decides to use the lower end of the range to establish standalone selling price. The
telephone support has not been sold on a standalone basis and will have to be
estimated

Estimate stand-alone price – Illustrated example

Adjusted Market Assessment Approach. Under the adjusted market assessment

approach, Vendor Y searches for competitors that sell similar telephone support services
on a standalone basis. Assume that Vendor Y finds information that two competitors are
selling these services on a standalone basis between a price range of $1,200 to $1,500.
Based on this information, Vendor Y should consider the price that it could charge similar
customers based on a number of factors: market share, expected profit margin,
customer/geographic segments, distribution channel, etc. After considering these
factors, Vendor Y estimates that it could sell the telephone services for $1,250 to
customers with a similar profile to Customer U. The estimated standalone selling price
would be $1,250 under this approach

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Estimate stand-alone price – Illustrated example

Expected Cost Plus Margin Approach. Under the cost plus margin approach, Vendor Y
determines all of the direct and indirect costs associated with providing the telephone
support. The costs considered include, but are not limited to, the personnel employed to
provide the support, the costs to provide the telephone lines, the telephones and
computer equipment needed to provide the support, etc. After considering all these
costs, Vendor Y concludes that the telephone support will cost $900. After determining
the cost, Vendor Y should determine an appropriate margin that the market would be
willing to pay by considering a number of factors, including: industry sales price averages,
market conditions, profit objectives, margin achieved on similar products, etc. After
considering these factors, Vendor Y determines an appropriate margin in the industry
would be $500. The estimated standalone selling price would be $1,400 under this
approach.

Estimate stand-alone price – Illustrated example

Residual Approach. The residual approach should only be used if (1) the entity does not
have an established price for the telephone support and it has not been sold previously
on a standalone basis or (2) the entity sells the same good or service to multiple
customers for a wide variety of prices (highly variable). Even if one of the two criteria is
met, the company should maximize observable inputs to make an estimate as illustrated
in the adjusted market assessment approach and the expected cost plus margin
approach. If none of these are appropriate, the residual approach can be used. Under the
residual approach, Vendor Y determines the standalone selling price of the telephone
support by reducing the transaction price ($6,000) by the amount of the observable
standalone selling prices, or in this case, Product A ($5,000). The remaining amount of
$1,000 would be considered the standalone selling price of the telephone support under
this approach.

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STEP 5 – RECOGNIZE REVENUE

Over time or a point in time

Contract costs

Revenue recognition

At a point of time Over time

▪ Customer simultaneously receives and ▪ Control of goods or services is
consumes as the entity performs transferred over time
▪ Customer controls the asset enhanced
or created by the entity Input or output
▪ Entity does not create an asset with an
alternative use and has an enforceable
right to payment.

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Contract costs

Cost to obtain a contract Cost to fulfill a contract

▪ Capitalize and amortize in relation to ▪ Capitalize if costs relate directly to
revenue recognition. contract, generate/enhance resources
used in satisfying performance
▪ Example: sales commissions, legal fees, obligations in the future, and are
bonuses for employee. expected to recover.

Contract cost - Example

Ex 1: A UK university offers a HCM agent of $300k ―commission to introduce one student

to study a 4-year degree. How should the University account for it?

Ex 2: A human resource company signed a 3-year contract with a customer to manage the
payroll, monthly salary payment and MPF at monthly fee of $100k. It had incurred the
following costs:

▪ Computer hardware equipment $300

▪ Human resource software $200

▪ Design service $150

▪ Data cleaning and conversion $100

▪ How to treat the various costs?

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Example – Coupon

A retailer sells vacuum cleaners to customers at

$100,000 and provides a coupon for 60% The retailer
estimates that 80% of the customers will exercise the
option for the purchase of, on average, $30,000 of
discounted additional products.
Required: Prepare journal entry at the date of sale of the
vacuum cleaner.

Example – Free product rebate

Phi Thanh Van Cosmetics Co. sells skin care products to

customers at $2,000 per set. If customers buy 3 sets at a
time and fill in an on-line application form within 1 week after
purchase, she would become VIP and be given a welcome gift
that worth of $200 sales value after successful registration.
The vendor estimates , based on recent experience, that 80%
of the customers will complete the on-line registration and
receive the free gift..
Required: Prepare journal entry at the date of sale of a skin
care set.

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Example – Coupon on print advertisement

Manufacturer sells 1,000 boxes of chocolate to supermarkets

chain at $10 each. Supermarkets sell at $15 to customers. The
manufacturer issues coupons in newspapers and magazines to
allow customers $2 dollar reduction in price by presenting the
coupon within 3 months after issue. The manufacturer would
compensate supermarkets for loss of $2 revenue. The
manufacturer estimates 400 coupons would be redeemed
Required
How should the manufacturer account for this contract when
chocolate is transferred to the supermarkets?

Example – Re-estimate variable consideration

An FMCG entity sold shampoo to a customer for $10 per unit on 2

Jan 20x6. If the customer buys 1,000 units in a calendar year, the
price per unit is retrospectively reduced to $9. In the 1st quarter, the
customer bought 75 units only. The entity estimated the customer
cannot exceed the 1,000-unit threshold.
The customer was then acquired by a listed company and become
part of a bigger group. On 1 Jun 20x6, the customer bought 500
units. The entity now estimated the customer would exceed the
1,000-unit threshold.
Required:
How should this transaction be accounted for?

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Example – Customer loyalty programs

A supermarket chain has a customer loyalty program which granted 1

loyalty point for every $10 purchase. Each point is redeemable for $1
discount on future purchase. During period 1 customers purchased
$100,000 and earned 10,000 points Supermarket estimated 95% would be
redeemed for products in future.
By period 1 , 4,500 points have been redeemed.
In period 2, another 4,000 points redeemed. Cumulatively there is 8,500
points redeemed. Now supermarket estimated total redemption 9,700
points would be redeemed
Required:
How should this transaction be accounted for in period 1 and period 2?

Example – Gift card

A customer buys $100 gift card from a coffee chain

store. Valid up to one year from the date of purchase.
Coffee chain store estimates customers would redeem
$90 of the gift card and $10 will expire unused (10%
breakage). Coffee chain store has no obligation to remit
unused fund or any unused gift cards.
In the period, $50 of the gift card has been redeemed.
Required: How should the gift card be accounted for?

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Example – Sale return

Cell phone manufacturers sells 300 new model of handsets to a retail chain store at
$100 each. Cost of manufacturing is $60 each. Manufacturer allows the retail chain to
return any unsold products in 6 months with full refund. Manufacturer uses expected
value method and estimates.
▪ 40% 8 mobiles return
▪ 45% 9 mobiles return
▪ 15% 18 mobiles
Cost of recovering the returned handsets is $80. The unsold handsets, would then be
exported and sold to second-tier markets, at a discounted price of $20 each. (at a
loss of $40 each)
Required: Accounting for above information (For the manufacturer)

THANK YOU!

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