IFRS 15 Examples: How IFRS 15 Affects Your Company
IFRS 15 Contracts with Customers introduced a huge change and a very difficult challenge for almost every single company.
After I wrote a couple of articles about IFRS 15 here and here, and after I discussed with some of my friends CFOs or auditors, there are two types of reactions:
- Either people feel that this is A CHALLENGE and they ask me how IFRS 15 can possibly affect them; OR
- People even don’t realize this is a challenge and as a result, they do literally nothing in order to prepare themselves. As we say – sweet ignorance. Or as English says: ignorance is a bliss.
Please, be the exception and stand out from the crowd.
Be aware of what IFRS 15 and its implementation can mean for your company and prepare early enough.
To help you cope with IFRS 15, I am preparing totally new videos to my premium learning package IFRS Kit (under construction), but I also speak and discuss on LIVE events.
I also wrote this article for you to give you a few IFRS 15 examples and hints – all with the purpose to warn you.
This is probably the longest article I have ever published (about 5 000 words and it took me about 30 hours to write it), but you don’t have to read it all, although I do recommend it as you will find a lot of analogy for your own situation.
Believe me, here, we are just skimming the surface and there’s a lot more to analyze, assess, plan and implement.
Now let’s start.
What industries will be the most affected?
For some companies, the impact of the new rules for revenue recognition will be minimal and they will simply continue recognizing revenue just as before. No headaches.
However, some companies might face difficult challenges in order to apply the new rules. The biggest challenges will be mainly in the areas that are not very precisely arranged by IAS 18 and other related standards.
As opposed to existing guidance, IFRS 15 gives you much less room for your own accounting decisions and specifies a lot more things.
The biggest areas of impact are probably:
- Is the revenue recognized over time (spread between the periods during contract duration) or at the point of time (upon completion)?
- If the revenue is to be recognized over time, how should the company measure the progress towards completion (previously “stage of completion”)?
- How shall companies account for revenue from bundled offers (with multiple deliverables)? Should they split the contract into several components?
- How shall companies deal with contract modifications?
- How shall companies treat the contract costs, including cost of obtaining the contract? Shall they expense these costs in profit or loss, or capitalize and defer?
- Are there any financing components in the contract? If yes, how to deal with the time value of money?
- What disclosures do companies need to make? Do they have all the appropriate and relevant information?
Different sectors or industries are affected in many different ways along the 5-step model. Here, I selected 4 important industries that will face probably the biggest challenges:
- Telecommunications (with link to example: Identifying individual performance obligations and allocating transaction price)
- Manufacturers (example included below: Contract modifications)
- Real estate and property development (example included below: Revenue over time/at the point of time)
- Software development and technology (example included below: Splitting the contract into 2 separate obligations)
Little disclaimer: It is really impossible to write about everything here as that would be enough to write a book. Analyzed sectors can face different challenges too. And if you don’t find your sector here, just go through these 4 as there’s a lot of analogy.
#1 Telecommunications
Therefore, the main challenge will be to split bundled offers into individual performance obligations and allocate the transaction price.
Also, the revenue for the individual performance obligations might be recognized over time (e.g. 2 years subscription plan), or at the point of time (e.g. delivery of handset).
Short example of a similar situation:
Under IAS 18, many telecom operators provided free handsets to customers and treated them as “marketing costs”, or costs to obtain a client.
Under IFRS 15, this is not permitted, as IFRS 15 requires allocating the transaction price to individual performance obligations.
In this case, telecom operators must allocate total contract price between the revenue from the sale of handset and sale of monthly plan.
As a result, the timing of revenue recognition changes, because under IFRS 15, the revenue is recognized earlier than under IAS 18. I have already written an article with the specific example of this situation, so please refer here.
Another implication of this treatment is that the revenue recognition does not correspond with monthly billing to customers, as there will be some deferral accounts involved.
This is really challenging because implementation will require significant changes in the IT systems, so that IT systems can automatically calculate and book the amount of revenue recognized each month.
Further challenges in telecom industry are:
- Contract modifications:
what happens when customers modify their contracts with operators, for example – change the amount of prepaid minutes or add new services?Here, it will be necessary to assess whether such a change shall be accounted for retrospectively (one-off adjustment) or prospectively (as a “catch-up” adjustment to future revenues), or even as for a separate contract. As IFRS 15 contains more precise rules than IAS 18, it can trigger the change in the accounting systems.
- Time value of money and discounting:
IFRS 15 strictly defines the “financing component” and requires accounting for such a component separately from revenue.As a result, maybe you would need to carefully incorporate time value of money into some long-term advances received or paid, or contracts settled after more than 12 months.
- Costs related to obtaining a customer:
Any industry, not only telecom industry, pays so-called “success fees” or commissions for obtaining a client. Before, these costs were normally expensed and recognized in profit or loss.However, IFRS 15 requires capitalizing them and recognizing them in profit or loss in line with revenue recognition. How are telecom operators going to do that? What will be the pattern of expensing these costs in P/L?
Example: Telecom and individual performance obligations: please refer here.
#2 Manufacturer Companies
There’s a broad range of what can be manufactured and what contracts manufacturers enter into.
If you manufacture similar items in large amounts that are basically typified and not too specific, then you can still be affected by IFRS 15 – just look to example below.
However, manufacturers of specific equipment or goods in general with long period of a production can be affected painfully.
What you should watch out:
- Should you recognize revenue over time or at the point of time? If over time, how are you going to measure the progress towards completion?
- How should you account for contract modifications, e.g. for delivering additional items of goods?
- Do you provide post-delivery rebates? Volume discounts? Year-end bonuses to customers based on total volume ordered during the year? Then you are probably affected by IFRS 15.
- Should you split your contract into more performance obligations? This could be the case when you provide some warranty period for your products – should the warranty be accounted for separately? Are you providing any other services for your products?
- Do you incur certain costs for obtaining the contract, like bonuses to sales team? Maybe you should capitalize them, and not expense them immediately as before.
To illustrate the potential impact of IFRS 15, let me give you one example dealing with contract modification. In this case, we’ll take a look at subsequent order for the same goods with the same customer.
Example: Manufacturers and contract modifications
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).
How should Ball PC account for the revenue from this contract for the year ended 31 December 20X1 if:
- Scenario 1: The price for additional 200 computers was agreed at CU 388 000, being CU 1 940 per computer. Ball PC provided a volume discount of 3% for additional delivery which reflects the normal volume discounts provided in similar contracts with other customers.
- Scenario 2: The price for additional 200 computers was agreed at CU 280 000, being CU 1 400 per computer. Ball PC provided a discount of 30% for additional delivery because it hopes for the future cooperation with Forward University (nothing even discussed yet).
As of 31 December 20X1, Ball PC delivered 400 computers (300 as agreed initially and 100 under the contract amendment).
Revenue under previous rules (IAS 18)
Well, here, nothing much to say. By definition of revenue in line with IAS 18, the revenue for the delivery is simply accounted at the time of delivery, in the fair value of consideration received for the computers – which is whatever amount under 2 above scenarios.
You are not required by IAS 18 to examine whether this additional delivery reflects stand-alone selling prices or not. Also, let’s not complicate the things with issues such as “commercial substance”, “transfer pricing”, “dumping prices” – this is just an example.
The revenue for the year ended 31 December 20X1:
- Scenario 1: CU 600 000 (the first 300 computers) + CU 194 000 (additional 100 computers delivered) = CU 794 000 (for all 400 computers already delivered).
- Scenario 2: CU 600 000 (the first 300 computers) + CU 140 000 (additional 100 computers) = CU 740 000 (for all 400 computers already delivered)
Is it the same under IFRS 15?
You bet it is NOT!
Revenue under IFRS 15
Here, the additional contract represents typical contract modification, as the amount of computers changes and the total transaction price changes, too.
IFRS 15 precisely specifies how to account for contract modifications, based on the terms of modification. There are 2 basic types of contract modification:
- Contract modification is a separate contract
Contract modification is accounted for as for a separate contract (meaning that the original contract is left as it is), when 2 criteria are fulfilled:
- Additional goods and services in the modification must be distinct from the goods or services in the original contract.
In both scenarios, this is met, as additional computers are quite distinct from the original computers.
- Amount of consideration expected for the additional goods/services must reflect the stand-alone selling price of these goods/services.
- Additional goods and services in the modification must be distinct from the goods or services in the original contract.
- Contract modification is not a separate contract
If the above criteria are not fulfilled (or one of them is not met), then the contract modification is not a separate contract and the accounting depends on further analysis.
Let’s take a look at our situation. Here, as we concluded that additional goods are distinct, the main question is whether the additional consideration reflects their stand-alone selling prices.
Scenario 1: 3% discount agreed on additional delivery
The price for additional computers indeed reflects their stand-alone selling prices, because Ball PC normally provides 3% volume discount.
Therefore, this contract modification is accounted for as a separate contract and revenue for the year 20X1 (400 computers delivered) is:
- CU 600 000 from the original contract for 300 computers;
CU 194 000 from the contract modification for additional 100 computers delivered.
Total revenue in the year 20X1 is therefore CU 794 000 – exactly as under IAS 18.
Scenario 2: 30% discount agreed on additional delivery
Here, it’s clear that the price for additional computers does not reflect their stand-alone selling prices, because 30% discount is exceptional and tied to the overall contract with the Forward University.
It means that the second criterion is not met.
As a result, the contract modification is NOT a separate contract, but it is bundled with the original contract.
How?
In this case, as additional goods are distinct, you need to account as you would terminate the original contract and start the new one.
Still unclear?
You simply recognize the revenue from the delivery already made before contract modification under the original contract.
For the remaining goods from the original contract and additional goods, you recognize total revenue amounting to:
- That part of consideration in the original contract that hasn’t been recognized as revenue yet (in other words, price for goods yet to be delivered); PLUS
- The consideration agreed in the contract modification.
You need to allocate this amount to individual performance obligations, or individual computers in this case.
In the scenario 2, contract modification was made after the first delivery, so Ball PC needs to recognize revenue for the first 100 computers in line with the original contract:
100 computers x CU 2 000 per computer = CU 200 000
Total transaction price to allocate after the contract modification is:
- CU 400 000, being the part of original consideration related to undelivered 200 computers (300 per contract less 100 delivered; times 2 000 per unit);
- CU 280 000, being total consideration for additional 200 computers;
- Total: CU 680 000
We need to allocate CU 680 000 to 400 computers in total (200 undelivered before contract modification + 200 additional computers), which means that Ball PC allocates CU 1 700 to one computer (680 000/400).
So what’s the total revenue recognized in 20X1 during which 400 computers were delivered? Let’s calculate:
- Revenue for 100 computers delivered before contract modification: CU 200 000 (CU 2 000/computer)
- Revenue for 300 computers delivered after contract modification: CU 510 000 (CU 1 700/computer);
- Total: CU 710 000.
Here you can clearly see that in this second scenario (additional delivery with 30% discount):
- Under IAS 18, revenue for the year 20X1 is CU 740 000.
The revenue to be recognized in the next period is remaining 100 computers at CU 1 400 = 140 000; that gives us total CU 880 000 per contract. - Under IFRS 15, revenue for the year 20X1 is CU 710 000.
The revenue to be recognized in the next period is remaining 100 computers at CU 1 700 = 170 000; that gives us total CU 880 000 per contract.
Hmm, but the totals are the same!
Yes, sure. But the timing of revenue is different. And exactly this timing can impact your taxes, dividends, financial rations and everything. Just think it out carefully!
#3 Real Estate – Construction Companies and Property Developers
The biggest challenge is to decide whether the company should recognize revenue over time (spread during individual years of construction) or at the point of time (one-time at the completion of a contract).
IFRS 15 lists 3 situations when an entity needs to recognize revenue over time:
For property developers and construction companies, especially one situation is crucial:
When the entity’s performance does not create an asset with alternative use to the entity and the entity has an enforceable right to payment for performance completed to date, then the revenue is recognized over time.
For example, when a company constructs or develops an asset so specific for the customer that it would be very costly or impracticable to transfer to other customer (e.g. building with highly customized specification). At the same time, customer is obliged to pay for work completed to date in the reasonable amount.
Alternatively, “no alternative use” can be achieved contractually, meaning that the contract prevents directing the asset to another customer.
For real estate companies it will be crucial to assess whether the property developer has an enforceable right to payment for performance completed to date or not.
This is not the only criterion to decide, but it is prevailing for real estate.
If the specific contract does not meet this criterion (and also the other two), then the revenue is recognized at the point of time; that is, when an asset is delivered to customer.
Only slight change in the provisions of the specific contract may trigger the necessity to recognize revenue at the point of time rather than over time – or vice versa.
Let’s take a look at the example illustrating exactly this point.
Example: Property developer and revenue over time/at the point of time
RE Construct, property developer, builds a residential complex consisting of 50 apartments. Apartments have a similar size and proportions – however, they can be customized to clients’ needs.
RE Construct enters into 2 contracts with 2 different clients (A and B). Both clients want to buy almost identical apartments and agree with total price of CU 100 000 per apartment. The payment schedule is as follows:
- Upon the signature of a contract, clients pay deposit of CU 10 000 each.
- Milestone: 1 year prior planned completion, RE Construct will deliver progress reports to clients and clients need to pay CU 50 000 each.
- Completion: Upon the completion of the construction, the legal ownership to apartments is transferred to clients and they pay the remaining amount of CU 40 000 each.
Assumed period of construction is 2 years from the date of contract. RE Construct has the right to retain the payments from any client in the situation when that client defaults on the contract before its completion.
The contracts with clients A and B are NOT identical. Further contractual terms specify that:
- No other specific terms in the contract with client A.
- The contract with client B specifies that RE Construct cannot transfer or direct the apartment to another client and in return, the client B cannot terminate the contract.
If the client B defaults on the contract before its completion (in other words, does not make payments in line with the schedule), RE Construct has the right for all contractual price if RE Construct decides to complete the contract.
What’s the difference here?
In the case of client A, the revenue would be recognized at the point of time and revenue from contract B over time.
Why?
We need to assess 3 criteria for recognizing revenue over time. As I have mentioned above, we will not deal with the first 2 here (let’s say they are not met), but let’s focus on the third criterion (no alternative use and enforceable right to payments).
Revenue from contract with client A – at the point of time
The contract with client A does NOT meet the third criterion.
The reason is that RE Construct builds an apartment that can be easily sold or transferred to another client in case of default.
Even when this would be prevented (by writing specifically in the contract), RE Construct has NO enforceable right to payment for performance completed to date.
RE Construct will keep ONLY the progress payments in the case of client’s default and they may not cover entity’s cost for work completed to date.
As a result, RE Construct would recognize revenue at the point of time – that is when the apartment is transferred to the client A (upon the completion in the year 2).
Revenue from contract with client B – over time
The contract with client B MEETS the third criterion.
The reason is that RE Construct cannot direct the constructed asset for the alternative use, because the contract with client B does not permit transfer of the apartment to another client.
Also, RE Construct has enforceable right to payment for performance completed to date.
Therefore in this case, RE Construct recognizes revenue over time – that is, over 2 years of construction of apartment based on some output or input method.
Let’s not go into any details of output or input methods right now. To make it simple, let’s say that 1 year prior completion, RE Construct incurred 45% of total cost for building an apartment and another 55% is incurred in the second year of construction.
As a result, RE Construct recognizes the revenue:
- In the year 1: CU 45 000 (45% of CU 100 000)
- In the year 2: CU 55 000 (55% of CU 100 000)
This example illustrates how the change in the contractual terms can drastically affect the company’s revenues.
The comparison of the revenue profiles for contract A and contract B under IFRS 15 is in the following table:
| When | Revenue for Contract A | Revenue for Contract B |
| Year 1 | 0 | 45 000 |
| Year 2 | 100 000 | 55 000 |
| Total | 100 000 | 100 000 |
Why does it matter?
Timing of revenues matters due to your tax payments, dividends, financial rations, etc. Also note, that under IAS 11, you would probably account for both contracts in the same way (as for contract B), but NOT under IFRS 15.
Maybe you should revise your contracts now and see whether you need to make some changes in order to prevent this situation.
#4 Technology and Software development
The main challenges are therefore:
- Identification of the individual performance obligations (e.g. sale of license + customization + post-delivery support) and allocating transaction price to them
- Assessment of the progress towards meeting the contract
- Assessment of the licenses for the products sold by software vendors or developers.
IFRS 15 recognizes 2 types of licenses: license to use and license to access. The accounting treatment is different for both of them and you should be able to identify which license is in question.
Other difficulties arise in areas common for every industry: dealing with contract modifications, how to account for contract costs (e.g. commissions for getting the client), etc.
Let’s take a look at example in which software company needs to split the contract and treat performance obligations separately.
Example: Software development and Splitting the contract into 2 separate obligations
ManyBits is a software company who entered into contract with a client C on 1 July 20X1. Under the contract, ManyBits is obliged to:
- Provide professional services consisting of implementation, customization and testing of software. Client C has bought software license from the third party.
- Provide post-implementation support for 1 after the customized software is delivered.
Total contract price is CU 55 000.
ManyBits assessed its total cost for fulfilling the contract as follows:
- Cost of developers and consultants for implementing and testing the existing software: CU 43 000;
- Cost of consultants for post-delivery support: CU 2 000;
- Total estimated cost of fulfilling the contract: CU 45 000.
As of 31 December 20X1, ManyBits incurred the following costs of fulfilling the contract:
- Cost of developers and consultants for development, implementation and testing the customized modules: CU 13 000.
How should ManyBits recognize revenue from this contract under IAS 18 and IFRS 15?
Revenue under previous rules (IAS 18)
Here, ManyBits clearly provides professional services and the related revenue falls under the scope of IAS 18. IAS 18 requires recognizing revenue from similar services using the stage of completion including post-delivery services.
It means that ManyBits treats software development and post-delivery services as one big service for the purpose of accounting the revenue.
Let’s say that ManyBits calculates the stage of completion based on costs incurred for fulfilling the contract.
At the end of 20X1, total incurred cost was CU 13 000, which is 29% of total estimated cost of CU 45 000.
Therefore, under IAS 18, ManyBits’ revenue from this particular contract in the year 20X1 is 29% (stage of completion) x CU 55 000 (total contract price) = CU 15 950. Sure, I used some rounding, but you get the picture.
Is it the same under IFRS 15?
Revenue under the new rules (IFRS 15)
IFRS 15 states very precise and detailed guidance on whether the goods or services promised under the contract are distinct and whether they can be considered separate performance obligations or not.
Of course, you need to perform your analysis and I tell you – your conclusion might be pretty different from this example, based on specifics in the contract.
But here, let’s say that software customization services and post-delivery support meet the definition of distinct performance obligations and as a result, they need to be treated separately.
How?
We need to look at them as at separate components, and allocate total transaction price of CU 55 000 to them based on their relative stand-alone selling prices.
Note: contract price is not necessarily the same as transaction price, but let’s not complicate it now.
Let’s say that ManyBits’ normal charge for the support services is 10% of the package price, no matter what the “package” is – whether some ready-made license or customized software.
That would imply that the relative split between customization service and post-delivery service is 100:10, which is:
- CU 50 000 (CU 55 000/(100+10)*100) for software development or customization service, and
- CU 5 000 (CU 5 000/(100+10)*10) for post-delivery support.
Again, this is just an example and some different approach might fit your own situation better.
In the year 20X1, ManyBits measures the progress towards the completion of the performance obligation separately, based on inputs for the fulfilling the contract (costs in this case).
Internal cost estimations show that ManyBits estimated total cost for the contract of CU 45 000, thereof CU 43 000 for the salaries of software developers and CU 2 000 for the salaries of consultants providing post-delivery support (based on man-days).
Let’s measure the progress towards the completion of both individual performance obligations as of 31 December 20X1:
- Software development services: CU 13 000 (incurred cost)/CU 43 000 (total estimated cost) = 30%
- Post-delivery services: CU 0 (incurred cost)/CU 2 000 (total estimated cost) = 0%
As a result, revenue recognized from this contract in the year 20X1 is:
- Software development services: 30% (progress %) * CU 50 000 (revenue allocated to software development) = CU 15 000;
- Post-delivery services: 0% (progress %) * CU 5 000 (revenue allocated to post-delivery service) = CU 0.
Total revenue from the same contract under IFRS 15: CU 15 000.
For the simplicity, you can revise the calculations in the following table:
| Performance obligation | Estimated total cost (A) | Incurred cost to 31-Dec-X1 (B) | Progress % (C)=(B)/(A) | Allocated transaction price (D) | Revenue recognized in 20X1 (D)*(C) |
| Professional services | 43 000 | 13 000 | 30% | 50 000 | 15 000 |
| Post-delivery support | 2 000 | 0 | 0% | 5 000 | 0 |
| Total | 45 000 | 13 000 | n/a | 55 000 | 15 000 |
Again, this is just one way of how new IFRS 15 can influence software developers, but also other companies performing long-term contracts.
Also, the specific calculation will strongly depend on what you have in your own contracts and how your own calculations, systems and estimates work. There is no one solution applicable for all.
Final Warning
No, there’s no mistake – I wrote WARNING intentionally.
As you can see from the above examples, new IFRS 15 can mess up with many things in your organization.
But – it’s up to YOU to analyze, make a plan and implement carefully.
My goal here was NOT to give you the full solution, because it is simply impossible without knowing your specific information.
Instead, I wanted you to be aware that you might need in fact much more time for making all the preparatory work and implementing IFRS 15 than you imagined.
I can tell you – this strongly reminds me similar situation a couple of years ago when companies needed to implement IFRS. Everybody seemed to have time when it was about 1-2 years to go before the initial date.
But when they finally started, it was painful. Then many accountants and CFOs realized that they would need much more time for making transition and they should have started months before they actually did.
Don’t make the same mistake and start NOW.
Please share this article with your friends and make them aware of what’s coming. Thank you!
JOIN OUR FREE NEWSLETTER AND GET
report "Top 7 IFRS Mistakes" + free IFRS mini-course
Please check your inbox to confirm your subscription.
100 Comments
Leave a Reply
Hi,
I have a confusion could you please explain me the difference between fair value and stand-alone price in context with customer loyalty programmes?
Thanks in advance!
I have a scenario where I must post the invoice now but the control will be transferred after a week.
1. What would be my accouting entry for this invoice?
2. What entry to pass when control is transferred?
Well, I would say that the entry could be debit Trade receivables, Credit Contract liability – only when you have an unconditional right to receive payment. And, when control passes, then Debit Contract Liability Credit Revenue. S.
Hi silviya, For construction company accounting, under IFRS15, Will the Percentage of Completion sheet change.
We are a cleaning company to charge monthly service to customer for contract of one year. According to the contract, customer is required to do full advance payment before we start work. If the revenue is recognised over time according to IFRS15. How to account for the advance payment of contract? Currenlty, we put it in account name “Recipt in advance” and amortise to income staterment monlty. Is the account name under IFRS15 still use “Receipt in advance” or “Contract liability”?
Hello Silvia,
We are Pump manufactured co.We will supply and do supervision services if there are any problem arises.For service based contracts How do we have to recognize the revenue,could you please advise.Project duration will be between 3-9 months
dear madam,
we run a restaurants business, in our business sometimes we offer buy one and get one free as discount ( Such as one dish price is Cu 100 and we offer another dish Cu 100 as a discount or free) What WILL be the accounting treatment as IFRS 15 , Please give your answer with journal entry.
Rashed, if you deliver the 2 dishes at the same time, then the accounting treatment is just as you wrote. It would be different if you offer one dish today and one voucher for free dish in the future time.
A/R or bank – DR-100
Discount-DR-100
sales-CR-200
is it right treatment for above mentioned case?
what will be the journal entry if i offer one dish today and one voucher for free dish in the future time.
Hi Silvia,
May I know how IFRS 15 affect the general revenue reporting in freight forwarding and logistics industry ?
Is it essential review all the different type of contracts?
Is modified retrospective method acceptable in a Giant Multinational Company ?
Thanks
Hi Silvia,
We are also preparing the start of IFRS15 and we as machine builders are now splitting the machine from the installation. Currently we take the revenu of the machine the INCO term is fulfilled and the installation revenu, mostly done by our own engineers, after the machine is in production. Can we do revenu recognition in the same way under IFRS15?
Hi Henk,
well, I can’t say that from this short description. I have no idea if the installation is the long-term process (hence this would probably be revenue recognized over time based on the progress to completion), whether machine and installation are separate performance obligations or one obligation, etc. Each contract needs to be considered separately and it can happen that 2 companies doing the same thing will account for the same thing slightly differently just due to slight differences in their contractual terms with customers. Best, S.
Hi Silvia,
I am working for a health Insurance company could you please explain me as to how wilsl it apply to insurance industry. Please could you illustrate with an example.
Best Regards,
Sydel Paul
Hi Silvia,
Just a quick question on determining whether a PO is a contract modification or a new contract. Take the example, that you have a software developing company. The software is sold to the client (selling the DVD a data carrier or providing a download link for the content of the software programme). In addition, the company provides a license. Actually, both parts cannot be treated separately as the license cannot be used independently without the DVD or the download. That means, the “delivery” of the DVD and the license are treated as one PO. However, what about an automatic extension of the license after one year without buying a new DVD. Is this a contract modification or a new contract?
Can you give me advice?
Best regards
Mareike (From Germany 🙂 )
Your article made it so clear and so helpful. but I feel there are some of similarity in IFRS 15 and Liabilities standards (IAS 37) in term of some points . for example, guarantee of the selling goods should be under IFRS 15.
HI Silva!
Kindly let me know the solution of below scenario.
Let say an entity sell the goods of Rs 100,000 in an financial year on credit and based on past performance 5% of goods return subsequently. So what revenue will be recognized as per IFRS 15. If revenue will recognized from 95,000 then please mention complete entry.
Hi
What will be the impact on rent to own scheme accounting
Thank you very much for having all this explanations for IRFS 15
Hi Silvia,
thank you very much for this article, it helps a lot in understanding.
I was searching for examples from the IT Industry, e.g. DC-Outsourcing, SD, IaaS, etc. would you have a hint where to find such examples (books, articles…)? Thank you!
Hi Silvia – brilliant article!
Made my life easier.
Just wanted to confirm on the example provided, specially these two paragraphs:
A. “After the first delivery is made, Forward University and Ball PC amend the contract. Ball PC will supply 200 additional computers (500 in total).”
B. “As of 31 December 20X1, Ball PC delivered 400 computers (300 as agreed initially and 100 under the contract amendment).”
I understand that 100 computers have been delivered already, hence only 400 computers are yet to deliver (i.e. including the additional contract).
However, per “B” above, it says that of the 400 computers, 100 computers are under contract amendments while i am expecting that 200 computers are under the additional contract as per “A” above.
Please enlighten me. thank you in advance:)
Hello,
Thank you for explaining, I am still unclear for few things as I would like to give an example of manufacturing company where I work,
So we manufacture plastics and for that we have a tool,
the customer pays us for the tool itself and also the products made from the tool
how to recognize the piece price where there is no guarantee for the product we are going to get paid or not ?
Secondly, Do we capitalize the tool asset ? and amortize it in our books > and the products that will be manufactured using that tool,
Highlighting your ideas with IFRS 15 will be helpful
Thank you
My company facing same issue with you, do you find out a solution/ answers?
Hi Silvia,
I wonder if IFRS 15 will be applicable for my company. We sell transport services (road haulage which may take 1 to 2 weeks). So traditionally we book revenue once the loads for the clients are uploaded and debit a receivable pool. So once loads are done with proof of documents sent to the client we raise Debtors (Debit Debtor and Credit the receivable pool). Question is whether we should not record revenue at stage of raising debtors since performance obligation is met at this time? Or it is not the case since the assets are legally not ours but for the clients and hence they have claim for this from initial loading into the trucks. In which case IFRS 15 is not applicable to us? Many thanks to clear us on this.
Khush
Great!… high quality
Can you post the same article with and Oil & Gas example/guide?
Madam
In certain construction contracts while paying for progressive billings, customer retains (generally 5%) as retention money which is refunded to contractors upon completion of contract. Assuming that contractor fulfills one of the three conditions for recognizing revenue progressively over a period of time, whether such retention money should be recognized as revenue at the end of the contract or at the time of billing?
Madam Silvia
Can you please clarify which IFRS standard will be applicable to account for revenue from sources other than customers from 2018 onward – For example – Refund of taxes excess paid (for which govt. has yet to confirm the refund amount). Will guidance be taken from Framework to IFRS or is there any specific standard?
Thank you.
Dear Juhi,
it depends on what it is. Refund of taxes paid is governed by IAS 12, for example (depending on what the refund is). And yes, in some cases, you would apply the Framework. S.
Thank you madam for prompt responses to my this query and the other post in the section related to difference between fair value hedge and cash flow hedge accounting.
hello mam your example is very good for learning for ifrs .that is a big gun to learn anything in the ifrs.thanks
Hi Silvia,
After reading this article I am very comfortable in IFRS 15. Thanks for efforts really useful.
Hi Silvia,
Great article with clear illustrative examples.
Can you help me out with clients within hotel industry as I have to advise them on same.
The current products are Clients rooms with half board and full board service and entertainment bookings – either paid upfront on bookings or deposit when booked and balance upon check out.
Often the bookings is bundled with other entertainment services ( e.g massage , sports activities etc)
How do we account for breakage ( account cancellation etc)
It would be great if you could also have an illustrative examples .
Thank you
Rama
Hi Rama,
as I understand, breakage refers to prepaid, but unused services, is that right?
In this case, if your clients can make reliable estimate about the breakage, they can recognize revenues from breakage straight when these prepaid services are bought. If these reliable estimates cannot be made, then the revenue from breakage is recognized upon expiry of prepaid services. S.
Hi
Please assist to advise on revenue recognition on internet based company where visitors are the Source of Income?
Thank you.
Hi Silvia,
Always enjoy reading your articles, they help me as I have to educate staff at my company on IFRS. I just have a quick question:
For contract modifications: if the modification adds distinct goods and services at the stand-alone selling price, it is accounted for as a new separate contract. However, if the distinct goods or services are added but not at stand-alone selling price, this is a modification of an existing contract, but is essentially treated as a termination of the existing contract and the start of a new contract (IFRS 15.21(a)) as it is treated prospectively. To my mind, this treatment is exactly the same, or are there any reasons you can think of that they would identify them as different?
Thanks in advance
David
Hi Silvia,
For the telecomm example, I am not clear. Why is the revenue for handset is recognised over time (based on progress) while the revenue for network services is recognised at a point in time (upon completion). Shouldn’t it be the other way round? Actually I’m a bit confused on this “over time” and “at a point in time” thingy. Appreciate your kind advice. The more I read the standard and articles the more confused I become. =(
Thanks in advance!
Miss Fairuz,
it IS the other way round and I wrote that in all the examples, too. Revenue from handset = at the point of time; revenue from network service = over time. S,
Thanks a lot Silvia! But I noticed this paragraph in this article, under the Telecommunication sector:
“Also, the revenue for the individual performance obligations might be recognized over time (e.g. delivery of handset), or at the point of time (e.g. 2 years subscription plan).”
Kindly assist to advise. Really nice to discuss this with you. Thanks in advance ya!=)
Dear Miss Fairuz,
aaaa, that’s a mistake 🙂 It happens 🙂 Even my reviewer did not notice. Thank you for the correction, of course, it should have been vice versa and I’ll correct it.
S.
Hi Sylvia
How would IFRS 15 impact freight transactions (transport logistics) if there is a rebate of n% depending on tonnage, post delivery? I watched your videos in IFRS 15 but I am still confused on this matter.
Im in the Construction industry. I read all your articles. Very helpful.Thanks
Dear Sylvia,
in your opinion, should the television company recognize the licence fee income (total of licence fees collected invoiced every month) in the amount that has been collected, or in the amount of the licence fee invoiced via accounts? There is a great uncertainty about the possibility to collect the licence fee income.
Thank You!
Jane, you should recognize it at the expected amount to receive. Having that said – there must be some evidence or a good reason for “great uncertainty”.
Thank you, Sylvia.
I have one question related to machine sales and progress invoicing based on the following milestones:
20% upon order (say in month 1);
70% upon shipment (say in month 2); and finally
10% upon commissioning/assembly on client’s site (say in month 4)
Currently we recognize the revenue upon shipment according to the relevant inco terms. Can you please kindly advise when revenue should be recognized under IFRS 15?
Hi Nicolas,
you need to identify the performance obligations first. It seems that you have 2: 1) delivery of a machine 2) its assembly. You need to decide whether these 2 obligations are distinct or not.
If yes, then you need to split the revenue based on their relative stand-alone selling prices and recognize revenue for a machine when you deliver it and the revenue for the installation when you install the machine.
If they are not distinct, then you need to decide whether the customer takes control over time or at the point of time. Not so simple.S.
Hi Silvia,
In case of long term construction contracts, what is cost incurred? If there are goods bought specific to the contract and they are in transit or in the warehouse not delivered to site, is this considered as cost incurred?
Hello Silvia, if an advance payment is received from customer & d transfer of the goods & services wil b due after one year, definitely Cash is debited, what are the other entries? Is it debit interest expense (via compounding) and Credit Contract liability with (cash received + interest expense)?
Great article Silvia. Thank you
Have a couple of queries in connection to cost of acquiring a customer (lets say, direct sales commissions).
1) it is clear than under ifrs 15 these must be capitalised but cannot it be understood the same under ias 18?
2) in your first ifrs 15 article you mention some telecom companies treated headset free within a bundle as a cost of acquiring a customer and therefore no revenue attached to this po in the bundle. If considered cost of acq a customer maybe this could be capitalised under ias 18 instead of being expensed.
What are your thoughts? Thanks for your atention Silvia
Dear Silvia,
Thank you so much for your article. Its informative and useful. Im fully agree with your statement that better start early than the actual date. However how do you think this FRS 15 will effect to industry Oil & Gas and Shipping?
Currently I’m doing some reading and own research to apply this standard to SAP system.
Your advice and inputs are really welcome and valuable.
Regards,
Eva
Good day. If a deposit is paid for a school when a child is born already, how will that be accounted under IFRS15 and how is it different from IAS 18. Will it be seen as advance payment with financing and you should calc interest for up to 7 years?
Hi Anna,
if the school accepts such a long term deposit, then yes, it is an advance payment, and no revenue should be recognized until actual services are delivered. The reason is that the school has not delivered any performance obligations yet (or I guess so). As a result, this shall be treated as a long-term payable, at its fair value. S.
My Company uses IAS 18 and IAS 11 extensively as almost all contracts are long-term aerospace & defence projects. It is fair to say most (aircraft, missiles, etc) are rather unique to the Customer and payment is largely upfront with advance & progress payments.
However, does this hold true for other long-term contracts with Oil & Gas? Is it fair to say that Oil & Gas products could be sold to other Customers if they are homogeneous? Or could they be argued as being unique due to them being ordered in advance and paid for with advance & progress payments?
Hi Lee,
I don’t know why you try to determine whether the contracts are “unique”, but let me remind you that the contract or product cannot have “alternative use” or cannot be offered to other customers not only due to its “physical uniqueness” but also due to contractual restrictions. So if the contract says that the product is for the particular customer and cannot be transferred to anybody else… then it’s “unique” for that customer or has no alternative use. S.
Hi Silvia … Plz I need to knowv the effect of this new standard on the quality of financial statement while this standard still non applicable I find difficulty in measuring the quality of F/S, can u recommend for me how to do that 🙂
Well, currently, it’s kind of difficult to do the study on real companies, because really, no one has accepted it so far (or maybe just few of them). Moreover, the applicable date of this standard will be postponed by 1 year. So I’m sorry, you can just compare the quality and the amount of disclosures and quantitative information and do it theoretically.
Hi, can you explain how you conclude the software company contract can be interpreted as revenue over time as opposed to revenue at the point of time? Which of the 3 criteria were a “yes”? I would argue that as the product is under development and there appears to be no contractual obligations for the client to pay work in progress fees that none of the 3 apply and revenue would only be recognised at the point of final delivery?
Dear Rick,
I focused on some other aspects in this particular example, but OK, let’s take a look here.
What if the second criterion is met instead of the third one? I.e. the IT company may develop the system on the client’s computers in the client’s premises and in this case, the client has control over the asset created. The example does not say that, but you need to examine it. If this is the case, the revenue is recognised over time even when there’s no enforceable right to payment for the performance up to date.
See, there’s a lot more to assess and even when 2 contracts appear the same, they might not be the same.
Also, you need to look at the individual POs, not at the contract as a whole. Maybe some POs are satisfied at the point of time (e.g. delivery of license) and some of them over time (e.g. post implementation support).
Hope it helps
S.
Thanks Silvia!
Could you tell me the advantages of IFRS 15 in comparison with IAS 18 and IAS 11. In another word, why they change?
Hi Silvia,
Is there any calculation error in the above example as in the question you mentioned the Cost Breakup as CU 38000 and CU 7000, however you took in workings the Cost Break up as CU 43000 and CU 2000.
Thanks
You are right, Punit, thank you! That was an error at uploading the post, I made a correction. Have a nice day!
Hi Silvia,
Thank you for your great work. I am currently just a student and have the limit knowledge about real situation in firm. I have some questions and I hope that you can help me to understand IFRS 15 more clearly in order to have a good course!
1. How do accountants in commercial firms deal with IFRS 15? Their business activity is performing contract with customers in which they promise to sell goods (ex medical devices for hospitals, internet devices for companies…) in addition to assembly service in order to make sure that these devices run well. They will recognize the revenue when they finish the contract. Can you give me an exam to illustrate for this?
2. In conclusion, why we need to use IFRS 15 instead of IAS 18 and IAS 11?
Thanks again!
Hi Nguyen,
in relation to your questions:
1) Please, browse the website for the newest article about IFRS 15. I brought about 3 new examples on IFRS 15 there, but basically, you need to assess whether device and installation service are distinct obligations (can be separated, etc.). If you assess these services are distinct, you would do similarly as with the above telecom example (separately for mobile at its delivery, separately for network services as they are provided).
2) It will be mandatory from 1 January 2017 and IAS 18 /11 will no longer be valid. You simply cannot report under invalid rules, that’s why. However, there are discussions that the mandatory date will be postponed to 2018, but it hasn’t been approved yet.
S.
You are simply wonderful. well done. It baffles me how you retain all these into the small brain space. You simply a computer. once again, well done prof..
hi silvia please send me article about disadvantages about ifrs 15 thanks
Hi Sarah, I am sorry, currently I do not have any article on this. S.
Hi Silvia,
Thanks for the writing and detailing IFRS 15.
Kindly share the IFRIC related to this?
Thanks & Regards
Rajesh Thakur
Hi Rajesh,
as far as I know, there’s no IFRIC related to IFRS 15 yet. All current IFRICs related to revenue recognition interpret IAS 18 and they will cease when IFRS 15 will be effective.
Please I have some questions ,,
first one ,,, in example of property developer ..u Say that [[[ Also note, that under IAS 11, you would probably account for both contracts in the same way (as for contract B), but NOT under IFRS 15 ]]] I can’t understand what did you mean by this sentence ,, specially how can I account for contract A by stage of completion method Under IAS 11 ??
Second one ..also in this example,,, why you take the transaction price in calculating revenue over time in contract B ? What I understood that we calculate revenue based on the 45% of total cost not transaction price ..
Dalia,
1) you would apply stage of completion, because IAS 11 does not have such a strict rules for recognizing revenue over time than IFRS 15. The contract A would make it that way under IAS 11, but not under IFRS 15 as it does not meet all criteria.
2) No, you do not. You calculate % of completion based on costs (input method selected), and revenue as % on total revenues = transaction price.
S.
Very informative . your efforts are commendable
Dear Silvia
Excellent however I can t see a single software can fulfill all type of commercial contract s as each of them has is own carachteristics.
On the other hand I love to attend such conference however it s to far for me living in the Middle East if you have any intention to re do such conference in the Middle East please keep me posted
Amr
Hi Amr,
thank you for the comments. You have said it very precisely: each contract has its own characteristics and this was just an example. Software companies will simply HAVE to go through their own contracts and assess how IFRS 15 impacts them. It is simply impossible to catch everything in the article 🙂
Have a nice day!
S.
Hi Silvia, thanks a lot for this article whiwh indeed clarifies a lot of the compexity IFRS 15 is bringing along. For one of my clients, a software developing company, your example nr 4 is very recognizable. You’re abolutely right in respect of starting soon enough not be unhappily surprised at the first year-end of implementation.
Paul
Thank you, Paul 🙂 Good luck with your clients – IFRS 15 is a great consulting scope, I believe. All the best! S.
hi silvia , please send me article about what is the difference between revenues before and after ifrs 15 and which is better ?
thanks
Sarah, please browse my website and you’ll find the full article with the difference. Also this article writes about all the differences with the numbers.
FAILING TO UNDERSTAND IFRS 15
Pls provide your website
You are right on it 🙂
Hi Sylvia,
I read your article about IFRS 15 and I would like to know how it can be applied to a taxi company where customers pay by credit card. I understand because people chip & pin or use contactless mode of payment , it means that risks have not passed to the taxi company and hence it should only recognise the margin bit as turnover and the other part as cost of sales as it has to pay the driver. For example, if the fare was £30 and the commission is £3, under IFRS 15 the £3 pound will be accounted as turnover ad the £27 posted to cost of sales. Would really appreciate your kind response as usual.