Advanced Financial Accounting

AQ054-3-2

IFRS 15 Revenue from Contracts

with Customers
 Learning outcomes

After you have studied this chapter, you should be able to:
• explain the five-step model
• apply the principles of recognition of revenue, and
specifically account for the following types of transaction:
i. principal versus agent
ii. bundle sales
iii. bill-and-hold
iv. consignments
• explain principle of substance over form - repurchase
agreements

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 The five-step model
Under IFRS 15, revenue is recognised and measured using a five-
step model
Step 1:
Identify the contract(s) with a customer
Step 2:
Identify the performance obligations in the contract
Step 3:
Determine the transaction price
Step 4:
Allocate the transaction price to the performance obligations in the
contract
Step 5:
Recognise revenue when (or as) the entity satisfies a performance
obligation

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 The five-step model

Showtime!!!!!!!

Instruction:
Watch the video and try to understand the
five-step model by identifying the important
points that mentioned in the video.

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 Application of The five-steps

On 1 December 20X1, Wade receives an

order from a customer for a computer as
well as 12 months of technical support.
Wade delivers the computer (and transfers
its legal title) to the customer on the same
day. The customer paid $420 on 1
December 20X1. The computer normally
sells for $300 and the technical support for
$120.
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 Application of The five-steps

The 5 steps would be applied to this

transaction as follows:

Step 1 – Identify the contract

There is an agreement between Wade and
its customer for the provision of goods (the
computer) and services (the technical
support).

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 Application of The five-steps

Step 2 – Identify the separate performance

obligations within a contract
There are two performance obligations within the
contract:
1. The supply of a computer
2. The supply of technical support

Step 3 – Determine the transaction price

The total transaction price is $420.

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 Application of The five-steps

Step 4 – Allocate the transaction price to

the performance obligations in the
contract
Based on standalone sales prices, $300
should be allocated to the sale of the
computer and $120 should be allocated to
the sale of technical support.

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 Application of The five-steps

Step 5 – Recognise revenue when (or as) a

performance obligation is satisfied
Control over the computer has been passed to the
customer so the full goods revenue of $300 should
be recognised on 1 December 20X1. The technical
support is provided over time, so revenue from this
should be recognised over time. In the year ended
31 December 20X1, revenue of $10 (1/12 × $120)
should be recognised from the provision of
technical support.

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 Identifying the separate performance
obligations within a contract (Agency
sales)

Rosemary Co's revenue includes $2 million

for goods it sold acting as an agent for
Elaine. Rosemary Co earned a commission
of 20% on these sales and remitted the
difference of $1.6 million (included in cost of
sales) to Elaine.

How should the agency sale be treated in

Rosemary's statement of profit or loss?
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 Identifying the separate performance
obligations within a contract (Agency
sales)
Rosemary should not have included $2 million
in its revenue, as it is acting as the agent and
not the principal. Only the commission element
of $400,000 ($2 million × 20%) can be recorded
in revenue.
The following adjustment is therefore required:
Dr Revenue $1,600,000
Cr Cost of sales $1,600,000

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 Illustration 1: Determining the
transaction price
Rudd Co enters into a contract with a customer to
sell equipment on 31 December 20X1. Control of
the equipment transfers to the customer on that
date. The price stated in the contract is $1m and is
due on 31 December 20X3. Market rates of interest
available to this particular customer are 10%.
Required:
Explain how this transaction should be accounted
for in the financial statements of Rudd Co for the
year ended 31 December 20X1.

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 Solution 1
• Due to the length of time between the transfer of
control of the asset and the payment date, this
contract includes a significant financing component.
• The consideration must be adjusted for the impact
of the financing transaction.
• A discount rate should be used that reflects the rate
available to the customer i.e. 10%. Revenue should
be recognised when the performance obligation is
satisfied.
• As such revenue, and a corresponding receivable,
should be recognised at $826,446 ($1 m × 1/1.102)
on 31 December 20X1.
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 Illustration 2: Allocate the
transaction price
Shred Co sells a machine and one year’s free
technical support for $100,000. It usually sells the
machine for $95,000 but does not sell technical
support for this machine as a stand-alone product.
Other support services offered by Shred Co attract
a mark-up of 50%. It is expected that the technical
support will cost Shred Co $20,000.
Required:
How should the transaction price be allocated
between the machine and the technical support?

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 Solution 2
• The selling price of the machine is $95,000 based on
observable evidence. There is no observable selling
price for the technical support. Therefore, the stand-
alone selling price needs to be estimated.
• One approach for this is to use the expected costs
plus a margin. Based on this, the selling price of the
service would be $30,000 ($20,000 × 150%). The total
standalone selling prices of the machine and support
are $125,000 ($95,000 + $30,000).
• However, total consideration receivable is only
$100,000. This means that the customer is receiving a
discount for purchasing a bundle of goods and
services of 20% ($25,000/$125,000).
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 Solution 2
• IFRS 15 says that an entity must consider whether the
discount relates to the whole bundle or to a particular
performance obligation.
• In the absence of additional information, it is assumed
here that it relates to the whole bundle.
• The transaction price allocated to the machine is
$76,000 ($95,000 × 80%). The transaction price
allocated to the technical support is $24,000 ($30,000
× 80%). The revenue will be recognised as and when
the performance obligations are satisfied.

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 Bill-and-hold arrangements

• A bill-and-hold arrangement is a contract under

which an entity bills a customer for a product but
the entity retains physical possession of the
product until it is transferred to the customer at a
point of time in the future.
• For this to be recognised within revenue, the
customer must have obtained control of the
product, despite it physically remaining with the
entity.

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 Bill-and-hold arrangements

• There may be a fee for custodial services,

where the entity recognises a fee for
holding the goods on behalf of the
customer. This performance obligation
would be satisfied over time, so any
revenue would be recognised on this
basis.

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 Bill-and-hold arrangements

• For a bill-and-hold arrangement to exist:

a) The customer must have requested the
arrangement
b) The product must be identified as belonging
to the customer
c) The product must be ready for physical
transfer to the customer
d) The entity cannot have the ability to use the
product or sell it to someone else.

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 Substance over form

• The principle that transactions and other events

are accounted for and presented in accordance
with their substance and economic reality and
not merely their legal form.
• To account for an item according to its legal form
but not its economic substance would not be a
faithful representation.

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 Substance over form

• This is a very important concept. It is used to

determine accounting treatment in financial
statements through accounting standards and
so prevent off-balance sheet transactions.
• In practice, most off-balance sheet finance
transactions are intended to keep debt off the
statement of financial position. In order to
achieve this, the related asset is also kept off the
statement of financial position.

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 Determining the substance of a
transaction
Common features of transactions whose substance is not
readily apparent are:
a) the legal title to an asset may be separated from the
principal benefits and risks associated with the asset
(such as is the case with leases)
b) a transaction may be linked with other transactions
which means that the commercial effect of an individual
transaction cannot be understood without an
understanding of all of the transactions involved
c) options may be included in a transaction where the
terms of the option make it highly likely that the option
will be exercised.
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 Repurchase agreements
• A repurchase agreement is where an entity sells an
asset but retains a right to repurchase the asset. This is
often not recognised as a sale, but as a secured loan
against the asset.
• Indications that this should not be recognised as a sale
may include:
1. Sale is below fair value
2. Option to repurchase is below the expected fair
value
3. Entity continues to use the asset
4. Entity continues to hold the majority of risks and
rewards associated with ownership of the asset
5. Sale is to a bank or financing company
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 References

• The Board, 2017. IFRS 15 Revenue from

Contracts with Customers. London: IFRS
Foundation.
• KPMG, 2019. Revenue IFRS 15
Handbook. US: KPMG IFRG Limited.

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