REVENUE FROM CONTRACTS

WITH CUSTOMERS IFRS15

Nkuhlu Department of Accounting
Learning outcomes

After studying this topic you should be able to:

 discuss the objectives and scope of IFRS15
 understand the 5 step process to recognition
and measurement
 present and disclose revenue from customer
contracts
 integrate revenue to a limited degree with
other IFRS standards.

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REFERENCE MATERIAL

International Financial Reporting Standard:

IFRS 15 Revenue from contracts with
customers

Gripping GAAP – 2022/23 edition

Chapter 4 Revenue from contracts with
customers
(See next slides for detail)

3
REFERENCE MATERIAL Cont.

Chapter 4:
1 Introduction
2 Scope
3 Income vs Revenue
4 IFRS 15 in a nutshell
5 Identifying the contract (Step 1)
Ignore 5.4,5.5, 5.6 & 5.7
6 Identifying the performance obligation (Step
2)

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 REFERENCE MATERIAL Cont.

7 Determining the transaction price (Step 3)

Ignore 7.2.3 - 7.2.8, 7.3 to 7.5
8 Allocating the transaction price to the performance
obligation (Step 4)
Ignore 8.3.4, 8.4 & 8.5
9 Satisfying performance obligations (Step 5)
Ignore 9.5.4, 9.5.5, 9.6
Only focus on PO satisfied over time ( criterion 1)
10 Contract cost
Ignore 10.5

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REFERENCE MATERIAL Cont.

11 Specific revenue transactions

Ignore 11.3-11.7
Focus on warranty
12 Presentation
13 Disclosure
Only do 13.2.6
Ignore 13.3 – 13.4

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REFERENCE MATERIAL Cont.

GAAP Graded questions – 2022/23 and 2020 EDITION

4.1
4.2
4.3
4.4
4.5
4.8
4.10
4.11
4.12
4.16

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 IFRS15 VS IAS18

IFRS 15 is a new standard that replaces IAS18.

The biggest change is that revenue is no longer

recognised when risks and rewards are
transferred to the customer. It is now
recognised when control passes to the
customer.

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Scope of IFRS 15
Applicable to all contracts with customers,
except the following:
Lease contracts (IFRS16)
Insurance contracts (IFRS17
Financial instruments (IFRS7,9 & IAS32)
Exchange of non-monetary items between
entities in the same line of business to facilitate
sales to customers or potential customers
Outline
 Recognition of Revenue ( Step 1 ,2 & 5)
 Measurement of Revenue ( Step 3 & 4)
 Specific transactions
 Presentation and Disclosure
Definitions
Contract is an agreement between two or more
parties that creates enforceable rights and
obligations.o liability = obligation to transfer G / S to
customer
Customer = party that has contracted with entity to
obtain G/S that are an output of entity’s ordinary
activities in exchange for consideration
Income = increases in economic benefits during accounting
period in form of inflows or enhancements of assets or decreases
of liabilities that result in an increase in equity, other than those
relating to contributions from equity participants
Definitions
Performance obligation = promise in a contract with customer to
transfer either:
 good or service (or bundle of G / S) that is distinct; or
 series of distinct goods or services that are substantially the
same and that have same pattern of transfer to a customer.

Transaction price = amount of consideration to which entity expects

to be entitled in exchange for transferring promised goods or services
to a customer, excluding amounts collected on behalf of third parties

Revenue = income arising in course of entity’s ordinary

activities
5-Step Revenue Model
Step 1: Identify a contract Contract

Step 2:Identify a
performance obligation
PO 1 PO 2
Step 3: Determine a
transaction price
Contract transaction price
Step 4: Allocate the
transaction price to the
performance obligation to PO 1- portion PO 2 –
the contracts of TP portion of TP

Step 5: Recognise revenue

when/ as the entity satisfies
Revenue on Revenue
PO
PO 1 PO2
Step 1: Identify a contract with a
customer
Account for a contract if all 5 criteria are met:
• Contract must be Approved by all parties who are committed to fulfil
obligations;
• All rights to goods and/or services are identifiable;
• Payments terms are identifiable;
• Contract has commercial substance;
• It’s probable that consideration will be collected.

Contract does not exist Contract does exist

• All the 5 criteria are not met • If rights and obligations in the
• If all parties are equally entitled to contract are enforceable by law
terminate the contract that is wholly Recognise receipts as revenue
unperformed [no transfer of any
promised goods/service] without
providing any compensation to the other
Recognise receipts as liability
Step 2: Identify performance
obligations
 A performance obligation is a promise in a contract
to transfer to the customer either:
 a good or service (or a bundle of goods or services)
that is distinct; or
 a series of distinct goods or services that are
substantially the same and that have the same
pattern of transfer to the customer.
 Performance obligation could be explicitly stated or
be implicit
 Explicit: stated in contract
 Implicit: Entity’s normal business practice that
when entering into a contract results in valid
expectation of transfer of good/service.
 KEY STEP
The promised transfer must be distinct
Both criteria must be met for a good/service to be distinct:
The good or service is
capable of being Entity’s promise to
distinct when it can transfer the good or
generate economic AND service to the
benefits for the customer is
customer on it’s own separately
or with other identifiable from
resources that are other promises in the
readily available. contract

YES: Separate NO : Combine with

performance obligation other distinct PO
Separately identifiable
 The promise must be separately identifiable from
other promises in the contract.
Factors indicating that G/S is not distinct in the context
of the contract:
 The entity is using the G/S as an input to produce or
deliver the combined output specified by the
customer.
 The G/S significantly modifies or customises another
G/S or significantly modifies the promised G/S.
 The G/S is highly dependent or highly interrelated
with other G/S in the contract.
 Example 5 p141: Explicit and implicit
promises
 A car dealership signed a contract with a customer agreeing to the
sale of a car for R100 000. The dealership has been in business
for 5 years.
Consider the following scenarios and explain whether the additional
term is explicit or implicit and whether this fact will affect how the
transaction price is allocated:
A. The contract specifically mentions that a 3-year maintenance plan
will be “thrown in for free”. This maintenance plan is currently
valued at R10 000.
B. During the past 5 years, all customers concluding sale
agreements have been given a maintenance plan for free. This is
not stated in the contract. Similar maintenance plans are
currently valued at R10 000.
C. After signing the contract with the customer, and in order to
encourage the customer to purchase a second car for her son,
the dealership phoned the customer to announce that it would be
giving her a free maintenance plan with her car. The maintenance
plan is valued at R10 000.
Example 6 P143: Distinct goods and
services
Rad Building has signed a contract to construct an additional bathroom for
a customer and promises to provide all building materials, sanitary ware,
electric supplies and labour.
Required:
a. Explain whether the goods and services contained in the contract are
capable of being distinct.
b. Explain whether the goods and services promise are distinct in the
context of the contract.
c. Explain whether the contract contains one or more performance
obligations.
d. Explain whether the goods and services contained in the contract would
be considered distinct (and thus whether the contract contains more
than one performance obligation) if the contract also includes a promise
to repair the existing gutters of the customer’s house.

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Step 3: Determining the transaction
Price
Transaction Price: amount an entity
expects to be entitled in exchange for
transferring promised G/S to a customer,
excluding amounts collected on behalf
of 3rd parties.

TP = fixed amounts + variable amounts

Variable considerations
 Consideration may be considered variable
due to:
 Contractual terms (explicit)
 The customer’s valid expectation of a price
concession (implicit)
 Other facts and circumstances suggesting
the entity’s intention to give a price
concession e.g. risk of customer default on
payment (implicit)
 Includes: Discounts, rebates, refunds,
credits, price concessions, incentives,
penalties, and any other contingent amounts.
Question 4.1k GAAP GRADED QUESTIONS

An entity signs a contract that stipulates

a price of R80 000. However the entity
expects that, based on the customer’s
credit history at contract inception, R25
000 of the contract price will not be
recovered.

Calculate the transaction price and briefly

explain your answer.

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Examples 7 P144: transaction price
We sign a contract with a customer on 1 June 20X1. The contract
price is R100 000. Collectability is probable but, based on an
assessment of the credit risk of similar customers, we expect to
incur a loss of R10 000 (i.e. we expect to receive 90%). We satisfy
our performance obligation on 20 June 20X1. At 31 December
20X1, reporting date, the expected credit loss is reassessed at R15
000.
Required: Show the journal entries:
A. For 20X1 to account for the information provided above.
B. For 20X2 if the customer pays, on 15 January 20X2, an amount
of R85 000, in full and final settlement.
C. For 20X2 if the customer pays, on 15 January 20X2, an amount
of R100 000, in full and final settlement.
D. For 20X2 if the customer pays, on 15 January 20X2, an amount
of R80 000, in full and final settlement.
 At
Step 4: Allocate the transaction price inception
of the
contract
Allocate the transaction price on performance
obligation based on relative stand alone prices.
A stand alone price is an observable price the
G/S is sold for under similar circumstances.
Except for: Allocation of discounts and
considerations with variable amounts.
Identify a discount: A discount exists if the
promised consideration is less than the sum of
the stand alone prices.
Allocate discount to the performance obligation
(s).
Examples 24 P171: Allocating a transaction
price
 Bright Blue Ltd signed a contract with a
customer, Deep Purple Ltd, to supply and install
a manufacturing plant and to provide
maintenance over this plant for a two year
period. The total contract price is R200 000.
 The installation is not considered to be a service
that is distinct from the supply of the plant, and
thus the entity concludes that the contract
contains two performance obligations, for which
the stand alone selling prices are as follows:
 Supply and installation of plant R180 000
 Maintenance over 2 years R40 000
Required: Briefly explain, together with
calculations, how the transaction price is to be
allocated.
Step 5: Recognise revenue as POs are
satisfied
 Recognise revenue as and when the performance
obligations are satisfied.
 Performance obligation can be satisfied over time or at a
point in time.
Classifying overtime or point in time
Does the customer simultaneously
receives & consumes benefits as NO Point in time
entity performs?

YES

Performance obligation is
satisfied overtime e.g. recurring
services
Assessing when the performance
obligation is satisfied
 Performance obligation is satisfied when G/S are
transferred & control passes to the customer.
 Control includes ability to prevent other entities from
directing use of, and obtaining benefits from asset.
Control is passed when:

Ability to Obtain
direct the substantially
use of all remaining
the asset benefits
Assessing when the performance
obligation is satisfied
At a point in time (if not over time)
Assess whether the customer obtained
control:
 Customer having a present obligation to pay
 Physical possession
 Legal title
 Risk & rewards of ownership
 Customer has accepted the asset
Measuring the performance
obligation satisfied over time
Input method
 Calculating the progress based on entity’s
efforts/inputs towards completing the
performance obligation.
 Efforts/ inputs: resources consumed, labour
hours expended, costs incurred, time
elapsed or machine hours used. Exclude
inputs that don’t contribute to progress.
Could be straight line if effort evenly spread.
Example 35-37
Ignore outputs methods (ACG2)
Student reading
What is a contract liability?
When to recognise the contract liability?
Difference between a contract asset and a
receivable.
Specific revenue transaction: Warranty
Sale with a warranty
Two kinds of warranties:
 Assurance-type warranty: assures the
customer that the product will function as
intended or it meets the agreed-upon
specifications [IAS 37 Contingent Liability]
e.g. buying an iron at shoprite
 Service-type warranty: offers the customer a
service in addition to the mere assurance that
the product will function as intended [IFRS 15
Separate Performance Obligation] e.g. buying
a VW car
Presentation
As an asset:
 Contract asset – An entity’s right to
consideration in exchange for goods
or services that the entity has
transferred to a customer when that
right is conditioned on something
other than the passage of time.
 Receivable – unconditional right (only
the passage of time before
consideration is due)
Presentation
As a liability:
 Contract liability - An entity’s
obligation to transfer goods or
services to a customer for which the
entity has received consideration (or
the amount due) from the customer.
 Refund liability - if the entity receives
consideration from a customer and
expects to refund some or all of that
consideration to the customer.
Disclosure
Entity must provide users of financial
statements with comprehensive information
about the nature, amount, timing and
uncertainty of revenue and cash flows arising
from contracts with customers.
Disclose qualitative and quantitative factors
regarding
 Contracts with customers
 Significant judgements relating to IFRS 15
 Assets recognised relating to costs to obtain
and fulfil the contracts
See section 13.2
QUESTIONS
Practice the questions on GAAP
Graded Questions as indicated in
the Reference material slide and
the additional questions on
Revenue as uploaded on BB