Introduction

The IASB (in conjunction with the Financial Accounting Standards Board (FASB)) issued IFRS
15, Revenue from Contracts with Customers (Topic 606 under the FASB Accounting Standards
Codification).

Purpose of IFRS 15

The objective of IFRS 15 is to establish the principles that an entity shall apply to 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.

Study material:
IFRS 15, Revenue from Contracts with Customers

Learning Objectives
After studying this module, you must be able to do the following at an advanced level (or relating
to case study scenarios):
 Identify contracts within and outside IFRS 15 (scope).
 Identify performance obligations in a contract.
 Determine the transaction price in a contract.
 Allocate the transaction price to the performance obligations in a contract.
UNIVERSITY OF LIMPOPO  Determine when revenue in a contract should be recognised (i.e. when or as an entity
TURFLOOP CAMPUS
satisfies a performance obligation).
 Perform the necessary accounting procedures when there is a contract modification.
FACULTY OF MANAGEMENT & LAW
 Determine when to expense or capitalise incremental costs of obtaining a contract and
SCHOOL OF ACCOUNTANCY perform the initial and subsequent accounting for any costs capitalised.
 Determine when to expense or capitalise costs to fulfil a contract and perform the initial and
CCAA 180 subsequent accounting for any costs capitalised.
MODULE: 7
REVENUE FROM CONTRACTS WITH CUSTOMERS Assessment possibilities
[IFRS 15]
Given the fact that the revenue figure is an important number to users of financial statements, it
is fair to expect the topic to be assessed regularly making it a popular topic. A great deal of
questions at ITC (Initial Assessment of Competence – 2025) and PGDA/CTA level often take the
form of discursive questions including calculations. Students must, however, understand that
calculation type questions as well as questions on presentation, disclosure and journals are
always possible.
Overview of IFRS 15, Revenue from Contracts with Customers Summary of examples included in the module:
1. Objective (15.1) purpose of the standard.
2. Scope (15.3) Please note: All examples include references to theory however this is for learning
3. Recognition purposes only. In assessments students should directly apply the theory.
 Step 1: Identifying the contract (.9-.16)
 Combination of contracts (.17) Example Content covered Source
 Contract modifications (.18-.21) 1 Identifying a contract with a customer Module
 Step 2: Identifying performance obligations 2 Combination of contracts Module
 Promises in contracts with customers (.24-25) 3 Series of distinct services Module
 Distinct goods or services (.26-30) 4 Goods and services that are not distinct (Example 10) IFRS Standards Part B
 Step 5: Recognition of revenue as (or when) a performance obligation is satisfied 5 Distinct goods and services Module
(.31-34) 6 Right of return (Example 22) IFRS Standards Part B
 Performance obligations satisfied over time (.35-37) 7 Penalty gives rise to variable consideration (Example IFRS Standards Part B
 Performance obligations satisfied at a point in time (.38) 20)
 Measuring progress towards complete satisfaction of a performance obligation (.39- 8 Estimating variable consideration (Example 21) IFRS Standards Part B
45) 9 Advance payment and assessment of discount rate IFRS Standards Part B
(Example 29)
4. Measurement
10 Entitlement to non-cash consideration (Example 31) IFRS Standards Part B
 Step 3: Determining the transaction price (.47-49)
11 Consideration payable to a customer (Example IFRS Standards Part B
 Variable consideration (.50-59)
32)
 The existence of a significant financing component in the contract (.60-65)
12 Allocation of the transaction price Module
 Non-cash consideration (.66-69)
13 Transaction allocation methodology (Example 33) IFRS Standards Part B
 Consideration payable to a customer (.70-72)
14 Allocation of a discount to some, not all, of the Module
 Step 4: Allocating the transaction price to the performance obligations (.73-75) performance obligations
 Allocation based on stand-alone selling prices (.76-80) 15 Customer simultaneously receives and consumes Module
 Allocation of a discount (.81-83) benefits
 Allocation of variable consideration (.84-86) 16 Performance obligation satisfied overtime Module
 Changes in the transaction price (.87-90) 17A Entity’s performance does not create an asset with an Module
5. Contract costs alternative use to the entity (Example 15)
 Incremental costs of obtaining a contract (.91-94) 17B Right to payment for performance completed to date Module
 Costs to fulfil a contract (.95-98) (Example 16)
 Amortisation and impairment (.99-104) 18 Performance obligation satisfied over time Module
6. Presentation (.105-109) 19 Enforceable right to payment for performance IFRS Standards Part B
7. Disclosure (.110-129) completed to date; Performance obligation satisfied at
a point in time (Example 16)
Appendix A 20 Measuring progress when making goods or services IFRS Standards Part B
 Definitions available (Example 18)
Appendix B 21 Uninstalled materials (Example 19) IFRS Standards Part B
 Application Guidance (integral part of IFRS 15) 22 Modification of a contract for goods (Example 5) IFRS Standards Part B
23 Modification resulting in a cumulative catch-up IFRS Standards Part B
adjustment to revenue (Example 8)
24 Contract liability and receivable (Example 38) IFRS Standards Part B
25 Contract asset recognised for the entity’s performance IFRS Standards Part B
(Example 39)
26; 26A Warranties (Example 44) IFRS Standards Part B
27 Arranging for the provision of goods or services IFRS Standards Part B
(entity is an agent) (Example 48)
28 Customer loyalty programme (Example 52) IFRS Standards Part B

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 29 Non-refundable upfront fee (Example 53) IFRS Standards Part B  What is the price of the contract?
30 Retail: Consignment arrangement Module  Variable consideration (price can change, estimate price, e.g. discounts)
31 Bill and hold arrangement (Example 63) IFRS Standards Part B  Financing component
32 Costs that give rise to an asset (Example 37) IFRS Standards Part B  Non-Cash compensation
 Compensation payable to the customer (warranties, return payments etc.)
4. Allocation of transaction price
5. Recognise revenue
Students should refer to the relevant source for the examples above
 Once off or over a period of time (input & output method)
Study Approach
Objective of IFRS 15 (.1)
To establish the principles that an entity shall apply to report useful information to users of
Work through the module and the relevant sections of IFRS 15 to ensure that you thoroughly
financial statements about the nature, amount, timing and uncertainty of revenue and cash
understand and gain a proper understanding of the learning objectives. Pay particular attention flows arising from a contract with a customer.
to the accompanying examples as they are very important in enhancing your understanding of
the learning outcomes. Ensure you have a thorough understanding of the five step model of Core principle (.2)
IFRS 15 after studying this section. Any question on this topic will require you to make An entity shall recognise revenue to depict the transfer of promised goods or services to
reference to one or more of these five steps hence its importance. The five steps are also customers in an amount that reflects the consideration to which the entity expects to be entitled
included under IFRS 15.2. Cognisant of the fact that this topic is usually assessed in a theory in exchange for those goods or services.
question, it is vital that you have a good understanding and strategy on how to answer such
Familiarise yourself with the following definitions (under appendix A in IFRS 15)
questions.  Contract
 Contract asset
How to answer theory questions
 Contract liability
 Customer
The required provides guidance in terms of the breadth and depth of your response. The
breadth refers to the principles being assessed (which step/s) while the depth refers to the  Income
level of detail (dictated by the number of marks) that one would include in their response. If  Performance obligation
you are required to discuss the accounting treatment in terms of IFRS 15, discuss all 5 steps.  Revenue
If the question is for a low number of marks or not enough information is given, discuss only  Stand-alone selling price (of a good or service)
the “problem areas”. For example, if the question provides a lot of information and is for a high  Transaction price (for a contract with a customer)
number of marks, then all 5 steps will be discussed. The required will provide guidance as to
how many steps you have to discuss (refer to page 5 for further detail). Applying IFRS 15 to a portfolio of contracts as a practical expedient
As a practical expedient, an entity may apply IFRS 15 to a portfolio of contracts (or
In certain instances, the standard has specific provisions for certain items (for example performance obligations) with similar characteristics if the entity reasonably expects that the
contract modifications and customer loyalty program). Discuss these items in terms of the effects on the financial statements of applying the standard to the portfolio would not differ
specific paragraphs applicable to them. Only supplement these with the general parts of the materially from applying it to the individual contracts (or performance obligations) within that
standard if the question requires more depth and the scenario has insufficient information. portfolio. In doing so, an entity uses estimates and assumptions that reflect the size and
composition of the portfolio.
Also study in a similar manner and always identify the steps/special provision you are
addressing in your attempts. NB: A practical expedient is an accounting policy election allowed by the International
Accounting Standards Board (IASB) that provides relief from the burden on financial statement
The process during examination must therefore be as follows: preparers to apply the requirements of an accounting standard.
 Identify the scope (e.g. is the issue in IFRS 15 or another standard).
 Identify the problem area (specific provision / general requirements of IFRS 15). Scope
 Determine the principle being tested in the problem area (Step 2 or Step 3). IFRS 15 applies to all contracts with customers (see definition in IFRS 15), with the exception
 Plan your response considering the depth required to obtain the allocated marks. of those noted in IFRS 15.5.

The steps and the elements that are the most important in each step are: Contracts partially within IFRS 15 and partially within another
1. Contract Accounting procedure:
2. Performance obligations (a) if the other standard specifies how to perform a split, apply that other standard first and
 Distinct exclude from the transaction price the amount allocated to the component outside IFRS
 Different components of goods and services (determine only the components, e.g. 15. Apply IFRS 15 to the remaining component.
different goods, and services in one contract) (b) If the other standard does not provide split guidance, apply IFRS 15 to split the
3. Transaction price components of the contract.

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The five step model (to meet the core principle) [refer to IFRS 15.2] An entity shall account for a contract with a customer that is within the scope of IFRS 15 only
when all of the following criteria are met (par .9):
•Identify the contract(s) with a customer. a) the parties to the contract have approved the contract (in writing, orally or in accordance
Step 1 with other customary business practices) and are committed to perform their respective;
obligations.
•Identify the performance obligations in the contract.
Step 2  There is an invoice (which is a contract) between the Gem Stores and the customer (Mr
Mobotja) and it appears both parties are committed to their respective obligations.
•Determine the transaction price.
Step 3 b) the entity can identify each party’s rights regarding the goods or services to be transferred;
 Gem Stores’ obligation is to supply an i7 HP laptop to Mr Mabotja. The customer’s (Mr
Step 4
•Allocate the transaction price to the performance obligations in the contract. Mabotja) obligation is to pay R14 100 to Gem Ltd for the laptop.
c) the entity can identify the payment terms for the goods or services to be transferred;
Step 5
•Recognise revenue when (or as) the entity satisfies a performance obligation.  The customer (Mr Mabotja) has to pay R14 100 to Gem Stores on 31 August 2023.
d) the contract has commercial substance (i.e. the risk, timing or amount of the entity’s future
cash flows is expected to change as a result of the contract); and
Please note:  The transaction has commercial substance since Gem Stores will give up inventory
Steps 1, 2 and 5 address the RECOGNITION of revenue and steps 3 and 4 the (laptop) for an amount of R14 100. This is not a direct swap of similar goods or services.
MEASUREMENT of revenue. You must, therefore, be aware which steps to consider when e) it is probable that the entity will collect the consideration to which it will be entitled in
required to discuss (i) the recognition of revenue, (ii) measurement of revenue or (iii) both the exchange for the goods or services that will be transferred to the customer.
recognition and measurement of revenue. You must remember from the conceptual  It appears Gem Stores will be able to collect the consideration it is entitled to since Mr
framework that RECOGNITION deals with WHEN to record an item and MEASUREMENT Mabotja passed a credit check (which assesses his ability and intention to pay).
deals with the AMOUNT at which an item should be recorded.
Conclusion
Step 1: Identify the contract(s) with a customer The criteria to account for a contract in terms of IFRS 15 are met, therefore, the contract must
Contract: Agreement between two or more parties that creates enforceable rights & be recognized in terms of IFRS 15, Revenue From Contracts With Customers, when the entity
obligations. satisfies the performance obligation (that is when it delivers the laptop to Mr Mabotja).

An entity shall account for a contract with a customer that is within IFRS 15 only when all of Exam technique
the criteria in IFRS 15.9 are met. After studying FRS 15.9, assess your knowledge with the Never quote theory but rather directly apply it to the information provided in the scenario. As
example below: a pervasive skill, always end your discussion with a conclusion and that conclusion must be
in line with the body of your discussion.
Example 1: Identifying a contract with a customer
Wholly unperformed contract (.12)
Gem Stores sold an i7 HP laptop computer to Mr Mabotja on 1 May 2023 for an invoice amount A contract does not exist if each party to the contract has the unilateral (independent)
of R14 100 including VAT. The amount is payable on 31 August 2023. It is Gem Stores’ policy enforceable right to terminate a wholly unperformed contract without compensating the other
that no customer is granted credit without passing a credit check. All the necessary procedures party (or parties).
were complied with before granting Mr Mabotja the 3 months credit. A contract is wholly unperformed if both of the following criteria are met:
(a) the entity has not yet transferred any promised goods or services to the customer; and
Required: (b) the entity has not yet received, and is not yet entitled to receive, any consideration in
Discuss if the contract between Gem Stores and Mr Mabotja should be recognised as
exchange for promised goods or services.
contract in terms of IFRS 15, Revenue from Contracts with Customers.

Solution Subsequent review of a contract

Possibility 1: Contract meets the contract criteria – no further reassessment is necessary
A contract is an agreement between two or more parties that creates enforceable rights and unless there is an indication of a significant change in facts and circumstances. Subject
obligations (def, or par.10). amount received to steps 2-5 to recognise revenue.
 The invoice between Gem Stores and Mr Mobotja is a contract.
Possibility 2: Contract did not initially meet contract criteria – continuously reassess contract
to determine if criteria are subsequently met. Treat any amount received as a liability. The
A customer is a party that has contracted with an entity to obtain goods or services that are
amount shall be recognised as revenue only if either of the following has occurred:
an output of the entity’s ordinary activities in exchange for consideration.
(a) the entity has no remaining obligations to transfer goods or services to the customer and
 Gem Stores’ ordinary business is, among other things, the selling of laptops.
all, or substantially all (at least 95%), of the consideration promised by the customer has
 Mr Mabotja has contracted with Gem Ltd to obtain a laptop (an output of Gem Stores’
ordinary activity) in exchange for consideration. Mr Mobotja is, therefore, a customer been received by the entity and is non-refundable; or
of Gem. (b) the contract has been terminated and the consideration received from the customer is
non-refundable.

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 Contract modifications
Combination of contracts To be covered later in the module.

The following flow chart determines when contracts can be combined and treated as a single Step 2: Identifying performance obligations
contract (this is different from the practical expedient of applying IFRS 15 to a portfolio of
contracts as was discussed earlier). 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
Are the contracts entered into at or near the same time with the
No customer either (.22):
same customer (or related parties of the customer)? (a) a good or service (or a bundle of goods or services) that is distinct; or
(b) a series of distinct goods or services that are substantially the same and that have the
Yes same pattern of transfer to the customer (see later)
Is one or more of the following criteria met? Do not combine
(a) the contracts are negotiated as a package with a single commercial contracts, i.e., A series of distinct goods or services has the same pattern of transfer to the customer if both
objective; account for of the following criteria are met (.23):
(b) the amount of consideration to be paid in one contract depends on contracts (a) each distinct good or service in the series that the entity promises to transfer to the
the price or performance of the other contract; or separately
No customer would meet the criteria to be a performance obligation satisfied over time; and
(c) the goods or services promised in the contracts (or some goods or
(b) the same method would be used to measure the entity’s progress towards complete
services promised in each of the contracts) are a single performance
obligation (see later) satisfaction of the performance obligation to transfer each distinct good or service in the
NB: This an “OR” test – only one requirement should be met series to the customer.

Yes After familiarising yourself with the above sections attempt the following example to evaluate
Combine contracts, i.e., account for contracts together as a single your understanding:
contract
Example 3: Series of distinct services
After familiarising yourself with the above sections attempt an example to evaluate your FNB Bank entered into a contract with SABC 1. According to the contract, SABC 1 to air a total
understanding: of 90 similar FNB adverts for a period of 90 days once daily at 20h15 from Monday to Friday.
In return, FNB will pay a total flat fee of R50 000 for all the adverts.
Example 2: Combination of contracts
Company X sells medical equipment which functions as designed without any customisation (a) Each advert in the total 90 adverts qualifies as a performance obligation satisfied overtime
or modification. Also, it can be installed without the assistance of X. On 4 January 2024, X (this is because once the advert has been aired it does not have to be re-aired even if the
entered into an agreement to sell medical equipment to Customer P. On 15 February 2024, contract was to be transferred by SABC 1 to another broadcaster. Each advert is therefore
entered into a separate contract to provide services to modify the equipment already sold to a partial satisfaction of the performance obligation [the airing of 90 similar adverts]). See
P. The modification will enhance and change the functionality of the equipment. Both later discussion on the subject.
negotiations were concluded by the same personnel in the two entities. (b) Each advert aired on any of the 90 days represents 1/90 progress towards satisfaction of
the performance obligation and has the same pattern of transfer to the customer.
Required:
Discuss whether the two contracts should be combined or treated as separate contracts. Conclusion
The contract to air the 90 adverts is therefore a series of distinct goods or services that are
Suggested solution substantially the same and that have the same pattern of transfer to the customer.
 Although the contracts are entered into separately, the contracts are entered into on
1 January 2024 and 15 February 2024, these periods are significantly closer to each Distinct goods or services
other.
 The contracts are also concluded by the same personnel in both entities. A good or service promised to a customer is distinct if it meets the criteria in IFRS 15.27.
 The sale of the equipment and the customisation have a single commercial objective To determine when a customer can benefit from the good or service either on its own or
which is to provide customised medical equipment together with other resources that are readily available to the customer, you may refer to IFRS
 Also, the equipment and the customisation constitute a single performance obligation 15.28
because the customisation significantly modifies the equipment (.29(b))
What is a readily available resource?
Conclusion  a good or service that is sold separately (by the entity or another entity) or a resource that
 Therefore, the two contracts should be combined and accounted for as a single the customer has already obtained from the entity (including goods or services that the
contract. entity will have already transferred to the customer under the contract) or from other
transactions or events.

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What is an example of a factor that provides evidence that a customer can benefit from a
good or service either on its own or together with other readily available resources? Therefore, the handset is distinct in the context of the contract.
 the fact that the entity regularly sells a good or service separately (.28)
Airtime and data
Since the airtime and the data are supplied together, at the beginning of each month, there is
To assess whether an entity’s promise to transfer a good or service to a customer is separately
no need to assess them separately since revenue related to them will be recognised at the
identifiable, refer to IFRS 15.29.
same time. The assessment of the airtime and the data is, therefore, done concurrently.
After familiarising yourself with the above sections attempt the following examples to evaluate
The airtime and data
your understanding:
(a) Integration/input test
Example 4: Goods and services that are not distinct (Example 10)
 The handset, airtime and data bundles are separate in this contract because they are
not inputs to a single asset, i.e. a combined output. The entity is not using the
Additional factors: handset, airtime or data bundles as inputs to produce or deliver a combined output
The entity is providing a significant service of integrating the goods and services (the for which the customer has contracted. There is no SIGNIFICANT service of
inputs) into a hospital building (a combined output) for which the customer has contracted. integrating the handset, airtime and data bundles being provided by MTN although
the three come as a package.
Example 5: Distinct goods and services
(b) Modification/customisation test
MTN enters into a contract with Miss Tsepiso that includes the delivery of an S20 Samsung  None of the items in the contract (handset, airtime nor the data bundles) modifies or
Galaxy handset. For a period of 24 months, Miss Tsepiso will also receive free R350 airtime
customises (or converts) the other when provided to the customer as a package.
plus free 100 mega bites (mb) of data bundles as part of the contract.
(c) High dependency/high interrelatedness
Discuss whether the handset, airtime and the data (mega bites) should be treated as single
 The customer could purchase the handset from another retailer and the airtime and
performance obligations.
data from MTN or vice versa. This evidences that the three items in the contract are
Refer to IFRS 15.27 for the relevant theory that should be applied.
not highly dependent on other goods promised in the contract and are, therefore,
 Miss Tsepiso can sell the handset for an amount that is greater than scrap value. She
individually distinct.
can also benefit from the handset by using a sim card she already has or can buy from
another retailer or the same retailer in a separate contract. The handset is, therefore,
Conclusion
distinct.
 Miss Tsepiso can benefit from the airtime and the data bundles using either a handset MTN concludes that it does not need to evaluate whether the airtime and the data bundles are
from MTN or from another retailer e.g. Nashua, Takealot, CnA. The airtime and the distinct from each other because they will be provided over the same concurrent period and
data bundles are, therefore, distinct. have the same pattern of transfer to Miss Tsepiso (a series of distinct goods or services that
are substantially the same and that have the same pattern of transfer to the customer).
Factors that indicate that an entity’s promise to transfer a good or service to a customer is MTN will, therefore, identify two performance obligations namely; (i) the handset and (ii) the
separately identifiable include: airtime plus the data bundles.
Handset Step 3: Determine the transaction price
The handset is capable of being distinct because after it is received, it could be sold for an
amount greater than scrap value. Alternatively, the handset can be used on WIFI, used as a For guidance on how to determine the transaction price and identify factors that affect its
calendar, used as a GPS tool with offline maps among other uses. Therefore, the handset estimation, refer to IFRS 15.47-48.
does not necessarily require the airtime and data be useful.
Variable consideration
MTN does not provide a significant service of integrating the handset with any of the other The promised consideration may vary due to the existence of variable consideration in the
items promised to the customer. In other words, neither the handset nor any of the other contract. Refer to IFRS 15.50-52 for guidance on how to account for variable consideration
promised items are used as an input to create a combined output for which the customer and possible examples of variable consideration.
contracted.
An entity shall estimate an amount of variable consideration by using either the expected
The handset neither modifies nor customises (changes the form of) the other promised items value method or the most likely amount, depending on which method the entity expects to
in the contract. better predict the amount of consideration to which it will be entitled. Refer to IFRS 15.53-54
for further details.
The handset is not highly dependent on the other promises in the contract. The customer
could purchase only the handset from MTN without making the handset or any of the promises Refund liability
useless. In the context of the contract, the handset is not dependent on the other promises to An entity shall recognise a refund liability if the entity receives consideration from a customer
provide economic benefits as intended by the customer. and expects to refund some or all of that consideration to the customer. For guidance on how

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to measure the refund liability initially and subsequently, refer to IFRS 15.55. (to be further Cost of sales (P/L) (60x2) 120
discussed under step 5). Inventory (SFP) (60x1) 60
Asset for right to recover product to be returned (SFP) 180
Constraining estimates of variable consideration (60x3)
An entity shall include in the transaction price some or all of an amount of variable Recognise return of 5 products by customers
consideration estimated only to the extent that it is highly probable that a significant reversal
in the amount of cumulative revenue recognised will not occur when the uncertainty associated
with the variable consideration is subsequently resolved. (.56)
Example 7: Penalty gives rise to variable consideration (Example 20)
After familiarising yourself with the above sections attempt the following examples to evaluate
It is not the mere transfer of the completed asset (building) that entitles the entity to the total
your understanding:
consideration of R1 million. The entity may or may not be entitled to a portion of the
consideration (i.e. R100 000 subject to penalty) depending on when the building is completed.
Example 6: Right of return (Example 22)
Discuss whether the R100 000 (variable consideration) must form part of the
The following journal entries will be processed: transaction price?
Dr Cr In order for a variable consideration to form part of the transaction price, the entity estimates
Bank (SFP) (100x100) 10 000 the variable consideration (par .50–54 of IFRS 15) and considers the requirements on
Revenue (P/L) (97x100) 9 700 constraining estimates of variable consideration. An entity shall estimate an amount of variable
Refund liability (SFP) (3x100) 300 consideration by using either of the following methods, depending on which method the entity
Revenue form transfer of goods with a right to return expects to better predict the amount of consideration to which it will be entitled (para .53):
a. The expected value—the expected value is the sum of probability-weighted amounts in
a range of possible consideration amounts. An expected value may be an appropriate
Cost of sales (P/L) (R60x97) 5 820
estimate of the amount of variable consideration if an entity has a large number of
Asset for right to recover product to be returned (SFP)(R60x3) 180 contracts with similar characteristics.
Inventory (SFP) (R60x100) 6 000 b. The most likely amount—the most likely amount is the single most likely amount in a
range of possible consideration amounts (i.e. the single most likely outcome of the
In addition to the information provided in Example 6, assume that the customer returned 5 contract). The most likely amount may be an appropriate estimate of the amount of
products. variable consideration if the contract has only two possible outcomes (for example, an
entity either achieves a performance bonus or does not).
The following journal entries will be processed:
Dr Cr There are only two possible outcomes regarding the penalty, that is, the entity will either meet
Refund liability (SFP) (3x100) 300 the three months deadline or not. Therefore, the entity must determine the most likely amount
based on the most likely outcome (par .53(b)).
Revenue (P/L) (2x100) 200
Bank (SFP) (5x100) 500 An entity shall include in the transaction price some or all of an amount of variable
Refund for goods sold with a right to return consideration estimated above (par .53) only to the extent that it is highly probable that a
significant reversal in the amount of cumulative revenue recognised will not occur when the
Inventory (SFP) (60x5) 300 uncertainty associated with the variable consideration is subsequently resolved.
Asset for right to recover product to be returned (SFP)(60x3) 180
Cost of sales (P/L) (2x60) 120 In assessing whether it is highly probable that a significant reversal in the amount of
Recognise return of 5 products by customers cumulative revenue recognised will not occur once the uncertainty related to the variable
consideration is subsequently resolved, an entity shall consider both the likelihood and the
magnitude of the revenue reversal.
In addition to the information provided in Example 6, assume that only the customer If the entity determines that it is highly probable that it will meet the three months deadline,
returned 1 product then it expects to be entitled to the R100 000 linked to the penalty. In that case, the transaction
price will be R1 000 000 (900 000+100 000).
The following journal entries will be processed:
Dr Cr However, if the entity determines that it is not highly probable that it will meet three months
deadline, then it cannot demonstrate that it is highly probable that a significant reversal in the
Refund liability (SFP) (3x100) 300
amount of cumulative revenue recognised will not occur when the uncertainty associated with
Revenue (P/L) (2x100) 200 the variable consideration is subsequently resolved. In that case, the transaction price is
Bank (SFP) (1x100) 100 constrained to R900 000, that is, excluding the variable consideration. (the weighted average
Refund for goods sold with a right to return is not used here as the method used is the most likely out).

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For guidance on how to account for subsequent changes in circumstances that affect the Determining the transaction price
estimated transaction price, refer to IFRS 15.59.
Please note:
An entity shall allocate to the performance obligations in the contract any subsequent changes
in the transaction price on the same basis as at contract inception. Consequently, an entity The expected value method is the most appropriate method in relation to the estimation of the
shall not reallocate the transaction price to reflect changes in stand-alone selling prices after effect of the possible penalty or incentive because there is a wide range of possible completion
contract inception. Amounts allocated to a satisfied performance obligation shall be dates.
recognised as revenue, or as a reduction of revenue, in the period in which the transaction
price changes (para .88). Should the variable considerations be included in the transaction price?

After familiarising yourself with the above sections attempt the following example to evaluate For guidance on how to constrain (limit) estimates of variable consideration, refer to IFRS
your understanding: 15.56-57. Afterwards, evaluate your understanding by incorporating the additional information
into Example 8.
Example 8: Estimating variable consideration (Example 21)
Because the completion date based on weighted average is 16 March 2016, an additional
Please note: amount of R140 000 (10 000 x 14) will be included in the transaction price if the entity
determines that it is highly probable that a significant reversal in the amount of cumulative
Using the expected value method, it is estimated that the construction of the customised asset revenue recognised will not occur once the uncertainty related to the variable consideration is
will be competed on 16 March 2016. Based on previous trends, the entity is confident that it subsequently resolved.
will meet specified rating defined in the contract.
Furthermore, an additional R150 000 will be included in the transaction price as it is highly
probable that a significant reversal in the amount of cumulative revenue recognised will not
occur once the uncertainty related to the variable consideration is subsequently resolved. This
is because the entity has a past history of meeting the specified rating.

Conclusion
The transaction price for the contract will be R5 290 000, that is, R5 000 000 plus an estimated
variable consideration of R290 000 (140 000+150 000).

The existence of a significant financing component in the contract

Refer to IFRS 15.60-61 for guidance on how to identify and account for a significant financing
component in a contract. For exceptions that would result in a contract not having a significant
financing component, refer to IFRS 15.62.

As a practical expedient, an entity need not adjust the promised amount of consideration
for the effects of a significant financing component if the entity expects, at contract inception,
that the period between when the entity transfers a promised good or service to a customer
and when the customer pays for that good or service will be one year or less.

Discounting factor (interest rate) - an entity shall use the discount rate that would be
reflected in a separate financing transaction between the entity and its customer at contract
inception. That rate would reflect the credit characteristics of the party receiving financing in
the contract, as well as any collateral or security provided by the customer or the entity,
including assets transferred in the contract.
Accounting for the interest revenue or interest expense – an entity shall present the
effects of financing (interest revenue or interest expense) separately from revenue from
contracts with customers in the statement of comprehensive income (in profit or loss). Interest
revenue or interest expense is recognised only to the extent that a contract asset (or
receivable) or a contract liability is recognised in accounting for a contract with a customer.

After familiarising yourself with the above sections attempt the following example to evaluate
your understanding:
Example 9: Advance payment and assessment of discount rate (Example 29)

15 16
Alternative solution After familiarising yourself with the above sections attempt the following example to evaluate
your understanding:
Determining whether there is a significant financing component.
The entity concludes that the contract contains a significant financing component because of Example 10: Entitlement to non-cash consideration (Example 31)
the customer pays for the asset at contract inception while the entity transfers the asset to the
Consideration payable to a customer
customer in 2 years (i.e. greater than the practical expedient of 1 year), and it also considers
the prevailing interest rates in the market. Refer to IFRS 15.70-72 for guidance on how to account for consideration payable to a
customer.
Determining the interest rate to use
The interest rate implicit (implied) in the transaction is 11.8 per cent (FV=5 000, N=2, PV=4
After familiarising yourself with the above sections attempt the following example to evaluate
000, I/Y=?=11.8), which is the interest rate necessary to discount the future payment to the
your understanding:
present value (cash price of 4 000). However, the rate that should be used in adjusting the
promised consideration is 6%, which is the entity’s incremental borrowing rate from the
customer which takes into account the entity’s credit characteristics. Because the entity is Example 11: Consideration payable to a customer (Example 32)
receiving payment before it performs (delivers on its promise) it is in essence receiving funding
Please note:
hence it is the borrower.
The consideration payable to a customer is therefore pro-rated to each rand of sales rather
than deducted from the first revenue amounts.
Accounting for the significant financing component

Year 1 (beginning) Dr Cr Step 4: Allocating the transaction price to performance obligations

Bank (SFP) 4 000 Refer to IFRS 15.76-80 for guidance on how to allocate the transaction price and determine
Contract liability (SFP) 4 000 the stand-alone selling price. Take note, this step is not applicable to contracts with one
Revenue received in advance performance obligation unless it comprises of a series of goods identified as one
performance obligation.
Year 1 (end)
Finance cost (P/L) (4 000x0.06) 240 Stand-alone selling price is the price at which an entity would sell a promised good or service
Contract liability (SFP) 240 separately to a customer. The best evidence of a stand-alone selling price is the observable
Finance cost on contract liability price of a good or service when the entity sells that good or service separately in similar
circumstances and to similar customers. A contractually stated price or a list price for a good
Year 2 (end) or service may be (but shall not be presumed to be) the stand-alone selling price of that good
Finance cost (P/L) ((4 000+240)x0.06) 254 or service.
Contract liability (SFP) 254
Finance cost on contract liability After familiarising yourself with the above sections attempt the following example to evaluate
your understanding:
Contract liability (SFP) (4 000+240+254) 4 494
Revenue (P/L) 4 494 Example 12: Allocation of the transaction price
Revenue on sale of asset
MTM enters into a 12 month phone contract in which the customer is provided with a bundle
Please note: of goods including a Hu-are-we handset and a wireless plan for R560 per month. The wireless
The significant financing component would have been recognised as finance income (or plan consists of data, calls and texts. MTM identified the handset and the plan as separate
interest revenue) if goods or services were transferred to the customer and payment was performance obligations. MTM regularly sells the handset on its own for R4 500. It offers the
delayed for (or spread over) a period exceeding 1 year. wireless plan on its own on a 12 month plan for R55 per month.

Non-cash consideration The amounts at which MTM regularly sells the handset (R4 500) and the wireless plan
(R55*12) represent the standalone selling prices that will be used to allocate the contract price.
For guidance on how to determine the transaction price for contracts in which a customer
promises consideration in a form other than cash, refer to IFRS 15.66-68. Even though the handset is being transferred at contract inception and the customer paying
over 12 months, no significant financing component exists because the practical expedient is
Please note: applicable.
This is in contrast to IAS 16, PPE were the cost of an asset acquired by way of an exchange
is determined by reference to (i) the FV of the asset given up (ii) or if that FV cannot be reliably
determined, the FV of the asset received.

17 18
The allocation of the contract price of R6 720 (560*12) will be done as follows:
For each performance obligation identified in Step 2, an entity shall determine at contract
Performance Stand-alone selling Allocation Calculation inception whether it satisfies the performance obligation over time or satisfies the performance
obligation prices obligation at a point in time. If an entity does not satisfy a performance obligation over time,
Handset 4 500 5 860 4500/5160*6 720 the performance obligation is satisfied at a point in time.
Wireless plan 660 860 660/5160*6 720
5 160 6 720 Performance obligations satisfied over time

Refer to IFRS 15.35-37 and IFRS 15.B3-B13 for the guidance on determining whether the
Allocation of a discount
performance obligation is satisfied over time.
Refer to IFRS 15.81-83 for guidance on how to identify when a discount is applicable and
how to allocate it.
A further look at the requirements for performance to be satisfied over time.
After familiarising yourself with the above sections attempt the following examples to evaluate Customer simultaneously receives and consumes the benefits provided by the entity’s
your understanding: performance as the entity performs

Examples include routine or recurring services (such as a cleaning service) in which the
Example 13: Transaction allocation methodology (Example 33)
receipt and simultaneous consumption by the customer of the benefits of the entity’s
performance can be readily identified. Under these circumstances, once the customer has
Example 14: – Allocation of a discount to some, not all, of the performance obligations
received the service, it is not possible for that customer to resale or transfer the benefit of that
An entity enters into a contract with a customer to sell Products A, B and C in exchange for service to another customer (hence simultaneous receipt and consumption).
R100. The entity will satisfy the performance obligations for each of the products at different
points in time. The entity regularly sells Product A separately at a price of R40, B at R60 and After familiarising yourself with the above sections attempt the following examples to evaluate
C at R30. The entity also regularly sells product B and C for R60, as a bundle. your understanding:

Alternative presentation of the solution Example 15: Customer simultaneously receives and consumes benefits

Allocation methodology SABC enters into a contract with FNB Ltd to broadcast its advertisement once a day for two
The total of the stand-alone selling prices is R130, yet the transaction price is R100. The months. In return, SABC will receive a total flat fee of R500 000.
products have therefore been sold a discount of R30 (130 -100). Because the entity usually
sells product B and C as a bundle for R60 when the stand-alone selling price total is R90, Discuss if the performance obligation is satisfied over time or at a point in time.
meaning the bundle is sold at a discount of R30 (90-60). The discount in the contract will If the performance obligation was transferred from SABC to another entity, FNB Ltd would
therefore be full allocated to product B and C as follows: have consumed the benefit of the advertisements already broadcasted by SABC. The other
entity would therefore not need to rebroadcast advertisements previously broadcasted by
Stand-alone Weight Allocation SABC in order to fulfil the remaining performance obligation. As the advert is aired, the FNB
selling price brand is marketed and it is not possible for FNB, after such airing of the advert, to transfer the
Product B 60 2/3 40 (60x2/3) benefit to another customer.
Product C 30 1/3 20 (60x1/3)
90 1 60 Conclusion
Therefore, FNB simultaneously receives and consumes the benefits of the advertising. The
performance obligation is satisfied overtime and SABC recognises revenue as it broadcasts
The total transaction price of contract will therefore be allocated as follows: each advertisement.
Allocation of the
TP Example 16: Performance obligation satisfied overtime
Product A 40
Product B 40 On 1 July 2014, Siyazama (Pty) Ltd entered into a contract with Netcare Ltd to build a
Product C 20 customised hospital in Polokwane. The hospital is being built on land that is owned by Netcare
100 Ltd.

Discuss if the performance obligation is satisfied over time or at a point in time.

Step 5: Recognise revenue when (or as) entity satisfies a performance obligation
Criterion 1: Customer simultaneous receives and consumes the benefit.
Refer to IFRS 15.31-34 for guidance on when to recognise revenue. Should Siyazama (Pty) Ltd transfer the performance obligation to build the hospital to another
entity when the hospital project is at say 40% complete, the other company will not have to
Link the concept of control to the conceptual framework.

19 20
reperform the work already performed by Siyazama (Pty) Ltd. Therefore, Netcare Ltd Criterion 3 Met The development of the tax opinion does not create an
simultaneous received and consumed the benefits transferred to it by Siyazama (Pty) Ltd. the entity’s asset with an alternative use to Madiba because it
performance does relates to facts and circumstances that are specific to
Criterion 2: The performance by Siyazama creates or enhances an asset (for example, work not create an asset Malema. Therefore, there is a practical limitation on
in progress) that the customer controls as the asset is created or enhanced (i.e. customer with an alternative
controls the asset as it is created or enhanced). Netcare Ltd owns the land on which the Madiba’s ability to readily direct the asset to another
use to the entity
hospital is being constructed, therefore, it controls the hospital as it is constructed. Siyazama and the entity has customer. The contract’s terms provide Madiba with an
(Pty) Ltd performance is, therefore, creating or enhancing an asset that the customer is an enforceable enforceable right to payment, for its performance
controlling. right to payment for completed to date, of its costs incurred plus a
performance reasonable margin of 15%.
Conclusion completed to date
Because criterion 1 and 2 are satisfied, Siyazama Ltd will recognise revenue from the
construction of the hospital will be recognised based on the stage of completion as the Conclusion
performance obligation is satisfied overtime. Because one of the three criteria is met, Madiba recognises revenue relating to the consulting
services over time.
Example 17A: Entity’s performance does not create an asset with an alternative use to the
entity (Example 15) Conversely, if Madiba determined that it did not have a legally enforceable right to payment if
Malema terminated the consulting contract for reasons other than its failure to perform as
Example 17B: Right to payment for performance completed to date (Example 16) promised, then none of the three criteria would be met and the revenue from the consulting
service would be recognised at a point in time – probably on completion of the engagement
Please note: and delivery of the professional opinion.
The payment schedule specified in a contract does not necessarily indicate whether an entity
has an enforceable right to payment for performance completed to date. Performance obligations satisfied at a point in time (.38)

Example 18: Performance obligation satisfied overtime If a performance obligation is not satisfied over time (par .35–37) an entity satisfies the
performance obligation at a point in time. To determine the point in time at which a customer
Madiba Tax Practitioners (Madiba) enters into a contract to provide a tax opinion on Malema obtains control of a promised asset and the entity satisfies a performance obligation, refer to
(Pty) Ltd based on Malema (Pty) Ltd’s (Malema’s) specific facts and circumstances. If guidance in IFRS 15.31–34.
Malema terminates the consulting contract for reasons other than Madiba’s failure to perform
After familiarising yourself with the above sections attempt the following example to evaluate
as promised, then the contract requires Malema to compensate Madiba for its costs incurred your understanding:
plus a 15% margin. The 15% margin approximates to the profit margin that Madiba earns from
similar contracts. Example 19: Enforceable right to payment for performance completed to date (Example 16)
Assessment of whether revenue must be recognised overtime
Alternative solution
Criterion Conclusion Rationale
Criterion 1 Not met Malema only derives benefit from Madiba’s work when Discuss whether the performance obligation to build the equipment is a performance
Customer an opinion is provided. Therefore, before completion, obligation satisfied overtime.
simultaneous Malema has no benefit to simultaneously receive and
receives and consume as Madiba performs. A performance obligation is satisfied overtime if any of the following three criterion are met:
consumes the Criterion Conclusion Rationale
If Madiba did not issue the tax opinion and Malema hired
benefit. Criterion 1 Not met Trimmer cannot benefit from the equipment until it is
another consulting firm, then the other firm would need
to substantially re-perform the work completed to date, Customer completed. Therefore, before completion Trimmer has
simultaneous no benefit to simultaneously receive and consume as
because it would not have the benefit of any work in
receives and Equip performs.
progress performed by Madiba (IFRS 15.B4(b)). consumes the
Accordingly, Malema does not simultaneously receive Also, after the equipment has been received, it can be
benefit.
and consume the benefits of its performance. used sold or at an amount greater than scrap value.
Criterion 2 Not met Madiba is not creating or enhancing an asset which Therefore, Trimer Ltd does not simultaneously receive
Customer controls Malema obtains control as it performs because the tax and consume the benefits of Equip Ltd’s performance.
the asset as it is opinion is delivered to Malema only on completion. Criterion 2 Not met Equip Ltd is not creating or enhancing an asset of which
created or The customer Trimmer controls as it performs because the equipment
enhanced controls the asset is manufactured at Equip’s premises (factory),

21 22
 as it is created or therefore, there is nothing to demonstrate Trimmer’s
Performance obligation (PO)
enhanced control of the equipment as it is manufactured.
Therefore, it appears that Trimmer does not benefit from
the incomplete work-in-progress. Satisfied at a point in time: Satisfied overtime:
Criterion 3 (recognise revenue based on progress
(recognise revenue at point
3.1 The entity’s Not met The equipment being manufactured is regularly sold by when control of asset is towards complete satisfaction of PO)
performance does Equip Ltd, therefore, it has an alternative use to Equip transferred to customer) Estimate progress
not create an asset as it can be sold to another entity should Trimmer (the
with an alternative
customer) terminate the contract.
use to the entity.
Output estimation method Input estimation method
3.2 The entity has Even though the payments made by the customer are
an enforceable non-refundable, the cumulative amount of those (customer based) (entity based)
right to payment for payments is not expected, at all times throughout the
performance contract, to at least correspond to the amount that would
completed to date be necessary to compensate the entity for performance Method Description Examples
completed to date. This is because at various times Output Based on direct measurements – Surveys of performance to date
during construction the cumulative amount of of the value to the customer of – Appraisals of results achieved
consideration paid by the customer might be less than goods or services transferred to – Milestones reached
the selling price of the partially completed item of date, relative to the remaining – Time elapsed
goods or services promised
equipment at that time. Consequently, the entity does
under the contract
not have a right to payment for performance completed
to date.
Method Description Examples
Conclusion
Because none of the three criterions is met, Equip Ltd recognises revenue from the Input Based on an entity’s efforts or - Resources consumed
construction of the equipment at a point in time (that is when it is completed, and control is inputs towards satisfying a - Costs incurred
transferred to Trimmer. performance obligation, relative - Time elapsed
to the total expected inputs into - Labour hours expended
Measuring progress towards complete satisfaction of a performance obligation the satisfaction of that - Machine hours used
performance obligation
This section is only applicable to performance obligations satisfied overtime. An entity shall
recognise revenue over time by measuring the progress towards complete satisfaction of that
performance obligation. An entity shall apply a single method of measuring progress for each After familiarising yourself with the above sections attempt the following examples to evaluate
performance obligation satisfied over time and the entity shall apply that method consistently your understanding:
to similar performance obligations and in similar circumstances. At the end of each reporting
period, an entity shall remeasure its progress towards complete satisfaction of a performance
Example 20: Measuring progress when making goods or services available (Example 18)
obligation satisfied over time.

Refer to IFRS 15.B14-B19 for guidance on the methods for measuring progress towards
complete satisfaction of a performance obligation. Example 21: Uninstalled materials (Example 19)

Reasonable measure of progress Contract modifications (.18-21)

An entity shall recognise revenue for a performance obligation satisfied over time only if the Refer to IFRS 15.18-21 for guidance on how to identify and account for a contract modification.
entity can reasonably measure its progress towards complete satisfaction of the performance Below is a summary of the thought process you should follow when accounting for a contract
obligation. An entity would not be able to reasonably measure its progress towards complete modification.
satisfaction of a performance obligation if it lacks reliable information that would be required
to apply an appropriate method of measuring progress. In those circumstances, the entity shall
recognise revenue only to the extent of the costs incurred until such time that it can reasonably
measure the outcome of the performance obligation.

23 24
 Example 22: Modification of a contract for goods (Example 5)

Case A—Additional products for a price that reflects the stand-alone selling price
Contract modification is approved by parties to the contract
Additional considerations:

i. Does the scope the of the contract increase because of the addition of Should the contract modification be treated as a separate contract?
promised goods or services that are distinct?  the scope of the contract increased by 30 products that are distinct (see par .27)
and  the contract price increased by R2 850 (R95/unit) which is the stand alone price at the
ii. Does the price of the contract increase by an amount of consideration contract modification date.
that reflects the entity’s stand-alone selling prices of the additional
promised goods or services and any appropriate adjustments to that price to Case B—Additional products for a price that does not reflect the stand-alone selling price
reflect the circumstances of the particular contract?.
Should the contract modification be treated as a separate contract?
 the scope of the contract increased by 30 products that are distinct (see par .27)
Yes No
 the contract price increased by R2 400 (R80/unit) when the stand-alone selling price
Treat modification as a Do not treat modification as a
separate contract as. separate contract was R2 850 (R95/unit) at the contract modification date.

Scenario B
Scenario A Scenario C Example 23: Modification resulting in a cumulative catch-up adjustment to revenue
Are the remaining goods
Are the remaining goods or or services not distinct Are the remaining (Example 8)
services distinct from the and, therefore, form part goods a combination of
goods or services transferred of a single performance items in Scenario A Please note:
on or before the date of the obligation that is partially (distinct) and Scenario
B (non-distinct)? The entity is performing a significant service of integrating (combining) the goods and services
contract modification? satisfied at the date of the
contract modification? to produce a combined output (the building) for which the customer has contracted).

If yes If yes Presentation

Account for distinct When either party to a contract has performed, an entity shall present the contract in the
Account for the contract If yes
modification as if it were a portion per scenario A statement of financial position as a contract asset or a contract liability, depending on the
termination of the existing An entity shall account for relationship between the entity’s performance and the customer’s payment. An entity shall
and
contract and the creation of the contract modification as present any unconditional rights to consideration separately as a receivable.
a new contract (see par if it were a part of the non-distinct portion per
.21(a)and .21)b). existing contract scenario B. Contract liability
A contract liability is an entity’s obligation to transfer goods or services to a customer for which
How much of the consideration the entity has received consideration (or an amount of consideration is due) from the customer.
should be allocated to the distinct
good and servise (new contract)? Determine the revenue
Sum of: An adjustment to revenue portion for the distinct
(either as an increase or portion as per scenario Customer pays consideration or entity has a right to an
1. consideration promised by the decrease to revenue) at A and amount of consideration that is unconditional (receivable)
customer (including amount the date of the contract
already received from the for the non-distinct
modification (ie. the portion as per scenario
customer which has not yet been adjustment to revenue is Entity has not yet performed (i.e. entity has not yet
recognised as revenue). B
made on a catch-up basis. transferred the promised good or service to the customer)
2. consideration promised as part
of the contract modification.
Contract liability

After familiarising yourself with the above sections attempt the following examples to evaluate Please note:
your understanding: Revenue received in advance is an example of a contract liability. However, not all contract
liabilities are revenue received in advance.
Contract asset

25 26
 Other issues relating to the five steps of revenue recognition [from Appendix B]
A contract asset is an entity’s right to consideration in exchange for goods or services that the
entity has transferred to a customer.
Please note:
Entity performs (i.e. entity transfers a good or service to Par. B1 [of Appendix B] provides a listing of the various categories of additional guidance
customer) provided by the appendix. The additional guidance is very important, and students must
remember to refer to it when answering revenue questions on tricky scenarios.

Customer has not yet paid, or payment is not yet Warranties (B28-B33)
due
A company may provide warranties in accordance with law or the entity’s customary business.
The question arises whether the warranties must be treated as a separate performance
Contract asset
obligation. Refer to IFRS 15.B28-B33 for guidance on how to account for various types of
warranties that the entity may offer.
Receivable
After familiarising yourself with the above sections attempt the following examples to
A receivable is an entity’s right to consideration that is unconditional. A right to consideration
evaluate your understanding:
is unconditional if only the passage of time is required before payment of that consideration is
due. For example, an entity would recognise a receivable if it has a present right to payment
even though that amount may be subject to refund in the future. An entity shall account for a Example 26: Warranties
receivable in accordance with IFRS 9, Financial Instruments.
Samsung grants its customers a standard warranty with the purchase of its product. Under
Upon initial recognition of a receivable from a contract with a customer, any difference the warranty, Samsung provides assurance that the product complies with agreed
between the measurement of the receivable in accordance with IFRS 9 and the corresponding specifications and will operate as promised for three years from the date of purchase.
amount of revenue recognised shall be presented as an expense (for example, as an
impairment loss). Khutso (the customer) also chooses to purchase an extended warranty for two additional
years.
Please note Samsung will have two performance obligations in the contract as follows.
The term ‘bad debts’ has been replaced by ‘impairment loss’ due to changes in IFRS 9. On
the other side, there will be nothing called ‘provision for bad debts’ but rather ‘allowance for Contract
credit losses’ using IFRS 9 terminology.
Not a performance
Performance obligation Performance obligation
After familiarising yourself with the above sections attempt the following examples to evaluate obligation
your understanding:
Transfer of product Extended warranty Standard warranty
Example 24: Contract liability and receivable (Example 38)
IFRS 15 IFRS 15 IAS 37
(a) Cancellable contract

Please note:
The extended warranty is a performance obligation because it can be purchased separately
On 31 January 20X9, since contract is cancellable, the entity does not have an unconditional and is distinct based on the Step 2 criteria.
right to payment, therefore, no journal entry is processed.
The component of the standard warranty that provides assurance that the product
Example 25: Contract asset recognised for the entity’s performance (Example 39) complies with stated specifications is an assurance-type warranty, and therefore is not a
performance obligation. As a consequence, Samsung accounts for the standard warranty
under IAS 37 when control of the product transfers to the customer.

27 28
Example 26A: Warranties (Example 44) is the party the customer believes is responsible for fulfilling
the promise

Principal versus agent considerations (B34-B38) The entity has inventory risk The entity:

– obtains or commits itself to obtaining, the specified

When another party is involved in providing goods or services to a customer, the entity shall good or service before obtaining a contract with a
determine whether the nature of its promise is a performance obligation to provide the customer
specified goods or services itself (i.e. the entity is a principal) or to arrange for the other party – is liable for damage and product loss for inventory in its
to provide those goods or services (i.e. the entity is an agent). possession before sale to the end customer, including
loss in inventory value
Principal
– is liable for customer returns
An entity is a principal if the entity controls a promised good or service before the entity
transfers the good or service to a customer. When an entity that is a principal satisfies a – commits to a minimum order quantity

performance obligation, the entity recognises revenue in the gross amount of consideration – has no right to return unsold inventory to the supplier
to which it expects to be entitled in exchange for those goods or services transferred.
The entity has discretion in The amount paid to the supplier is:
Agent establishing prices for specified
– a fixed price per unit
goods or services
An entity is an agent if the entity’s performance obligation is to arrange for the provision of
– not a commission or fee basis, which is fixed in
goods or services by another party. When an entity that is an agent satisfies a performance terms of either an amount of currency or a
obligation, the entity recognises revenue in the amount of any fee or commission to which it percentage of the value of the underlying goods or
expects to be entitled in exchange for arranging for the other party to provide its goods or services
services.
Control assessment Please note:
Goods or Goods or If an entity involved in the transfer of the goods or services is not a principal, it is an agent.
services services Therefore, disprove a principal to prove an agent.
Intermediary
Supplier End customer
(entity)
After familiarising yourself with the above sections attempt the following example and other
Does not
prescribed examples in the IFRS guide - Part B to evaluate your understanding:
Obtains control obtain control

Principal Agent Example 27: Arranging for the provision of goods or services (entity is an agent) (Example
48)

Please note:
For further guidance on how to determine if an entity is a principal or agent refer to IFRS
15.B34-B38. The entity has no credit risk because the customers pay for the vouchers when purchased.
Indicator Relevant considerations To determine whether the entity is a principal or an agent, the entity considers the nature of
its promise and whether it takes control of the voucher (i.e. a right) before control transfers to
The entity is primarily The entity:
the customer. In making this determination, the entity considers the following indicators:
responsible for providing specified – is responsible for acceptability of the specified good
goods or services or service (a) the entity is not responsible for providing the meals itself, which will be provided by the
– has discretion with respect to accepting and restaurants;
rejecting orders from customers (b) the entity does not have inventory risk for the vouchers because they are not purchased
– can source the good or service ordered by the before being sold to customers and the vouchers are non-refundable;
customer from more than one supplier
(c) the entity has some discretion in setting the sales prices for vouchers to customers, but
– is responsible for delivery and any loss or damage
between pick up from the supplier and delivery to the end the sales prices are jointly determined with the restaurants; and
customer (d) the entity’s consideration is in the form of a commission, because it is entitled to a
– is responsible for the sales strategy stipulated percentage (30 per cent) of the voucher price.

29 30
Also work through illustrative examples 45-48. The payment of non-refundable upfront fees is a common business practice. Refer to IFRS
15.B48-51 for guidance on how to account for non-refundable upfront fees and other related
Customer options for additional goods or services (B39-B43) costs.

Customer options to acquire additional goods or services for free or at a discount come in After familiarising yourself with the above sections attempt the following example to evaluate
many forms, including sales incentives, customer award credits (or points), contract renewal your understanding:
options or other discounts on future goods or services. Customer loyalty programmes are a
Example 29: Non-refundable upfront fee (Example 53)
common example here.
Consignment arrangements (B77-B78)
Refer to IFRS 15.B40-13 for guidance on how to determine whether an option grants the
When an entity delivers a product to another party (such as a dealer or a distributor)
customer a material right. Furthermore, you will find guidance on how to account for the
for sale to end customers, the entity shall evaluate whether that other party has obtained
option.
control of the product at that point in time. Refer to IFRS 15.B77-78 for further guidance on
how to evaluate whether a contract is a consignment arrangement and when to recognise
After familiarising yourself with the above sections attempt the following example to evaluate
your understanding: revenue.

Example 28: Customer loyalty programme (Example 52) After familiarising yourself with the above sections attempt the following example to evaluate
your understanding:
Please note:
The portion of the transaction price allocated to the loyalty points expected to be redeemed Example 30: Retail - Consignment arrangement
is determined at the option grant date and is NOT revised for any subsequent changes in
Kotini Ltd enters into a 60 day consignment contract to ship 1,000 sneakers to Sports Sin (SS)
the number of points expected to be redeemed. In the example, that price remained at R8 676
stores. SS is obligated to pay Kotini an amount of R2 500 per pair sneakers that is sold. During
despite the change in the total points expected to be redeemed from 9 500 to 9 700.
the contract period, Kotini has a right to instruct SS to return or transfer the sneakers to
The following journal entries will be processed to account for the transaction in Example 28, another retailer. SS is also responsible for accepting returns of sneakers by unsatisfied
assume control of the products transfer to the customer on sale: customers. Returns are subject to the customers returning the sneakers in their original
packaging and presenting proof of purchase. Once returned, Kotini arranges to refund SS .
Dr Cr
Period 1 Kotini concludes that control of the sneakers has not transferred to SS because:
J1 Bank (SFP) 100 000
Revenue (P/L) 91 324  SS does not have an unconditional obligation to pay for the sneakers until they have
Contract liability (SFP) 8 676
Sale of products under a customer loyalty programme been sold to a customer.

End of year 1  Kotini can request SS to return or transfer the sneakers to another retailer at any time
J2 Contract liability (SFP) 4 110 before SS sells them to its customers
Revenue (P/L) 4 110
Loyalty points redeemed  Though, SS accepts the return of sneakers by customers, Kotini is ultimately
responsible for the refunds.
End of year two
J3 Contract liability (SFP) 3 493
Revenue (P/L) 3 493 Therefore, Kotini concludes that control of the sneakers only takes place when the sneakers
Loyalty points redeemed are sold to a customer. Upon sale, SS has an obligation to pay Kotini and the sneakers cannot
be transferred to another retailer. On this date, Kotini will recognise revenue.
Customers’ unexercised rights (B44-B47)
Bill-and-hold arrangements (B79-B82)
For guidance on how to account for the unexercised rights, refer to IFRS 15.B44-B47.
Refer to guidance provided in IFRS 15.B79-82 to assess whether a contract is a bill and hold
Non-refundable upfront fees (and some related costs) (B48-B51) arrangement. This assessment will also provide guidance on the timing of the recognition of
the revenue.

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 After familiarising yourself with the above sections attempt the following example to evaluate
After familiarising yourself with the above sections attempt the following example to evaluate your understanding:
your understanding:
Example 32: Costs that give rise to an asset (Example 37)
Example 31: Bill and hold arrangement (Example 63)
Disclosure
Contract costs
The objective of the disclosure requirements is for an entity to disclose sufficient information
Incremental costs of obtaining a contract
to enable users of financial statements to understand the nature, amount, timing and
Refer to IFRS 15.91-94 for guidance on how to identify and account for incremental costs uncertainty of revenue and cash flows arising from contracts with customers. To achieve
incurred as a result of a contract (think of relevant costs in MAF). that objective, an entity shall disclose qualitative and quantitative information about all of the
following:
Practical expedient
(a) its contracts with customers (IFRS 15.113–122);
As a practical expedient, an entity may recognise the incremental costs of obtaining a contract
as an expense when incurred if the amortisation period of the asset that the entity otherwise (b) the significant judgements, and changes in the judgements, made in applying this
would have recognised is one year or less. Standard to those contracts (IFRS 15.123–126); and
(c) any assets recognised from the costs to obtain or fulfil a contract with a customer in
Cost of fulfilling a contract (.95-96)
accordance with paragraph 91 or 95 (IFRS 15.127–128).
Refer to IFRS 15.95-97 for guidance on how to account for costs incurred to fulfil a contract.

Costs incurred to fulfil a contract

Costs incurred are within the Costs incurred are not within the scope of
scope of another IFRS e.g. IAS 16 another IFRS .
PPE, IAS 38 Intangible assets or IAS
2 Inventory.

Do the costs incurred meet all the following criteria?

Account for the costs in (a) the costs are directly related to the a contract or
accordance with the relevant anticipated contract that the entity can specifically
IFRS. identify ?
(b) the costs generate or enhance resources of the
entity that will be used in satisfying (or continuing to
satisfy) performance obligations?
(c) the costs are expected to be recovered.

Only recognise a contract asset if all the 3

requirements above are met, otherwise expense the
costs.

Amortisation and impairment (recognition/reversal)

Refer to IFRS 15.99-104 for guidance on how to subsequently measure the assets resulting
from costs to fulfil a contract and incremental costs of a contract.

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