Amendments to HKFRS 15 Clarifications to HKFRS 15 Revenue from Contracts with Customers

Transcription

1 Amendments to HKFRS 15 Clarifications to HKFRS 15 Revenue from Contracts with Customers Newsletter Issue No. 02/2016 MAIN FEATURES The amendments are issued with the aim to: clarify when a promised good or service is separately identifiable from other promises in a contract (i.e. distinct within the context of the contract); clarify how to apply the principal versus agent application; clarify for a licence of intellectual property ( IP ) when an entity s activities significantly affect the IP to which the customer has rights; clarify the scope of exception for sale-based and usage-based royalties related to licences of IP; and add two practical expedients to the transition requirements of HKFRS 15. The amendments are to be applied retrospectively. Effective for annual periods beginning on or after 1 January 2018, with earlier application permitted. Background After the issuance of International Financial Reporting Standard ( IFRS ) 15 Revenue from Contracts with Customers in May 2014, the International Accounting Standards Board ( IASB ) and Financial Accounting Standards Board (the national standard-setter of The United States of America) jointly formed a Transitional Resources Group for Revenue Recognition ( TRG ) to provide support on the implementation of IFRS 15. TRG has received queries from stakeholders in relation to certain topics on implementation of IFRS 15, including: i) Identification of performance obligations; ii) Principal versus agent considerations; iii) Licensing; iv) Scope of the exception for sales-based and usage-based royalties; and v) Practical expedients to the transition requirements of IFRS SHINEWING (HK) CPA Limited - Newsletter July 2016

2 In order to tackle these issues, IASB has issued the amendments to IFRS 15 to clarify those implementation issues in April Subsequently in June 2016, the Hong Kong Institute of Certified Public Accountants also issued the same amendments, Amendments to Hong Kong Financial Reporting Standard ( HKFRS ) 15 Clarifications to HKFRS 15 Revenue from Contracts with Customers, so as to maintain the convergence with IFRSs. What are the major content of the amendments? The following summarised the major amendments in Amendments to HKFRS 15: Identification of of performance obligations The The amendments clarified clarified when when a a promised promised good good or or service service is separately is separately identifiable identifiable from from other other promises promises in a contract in a contract (i.e. the (i.e. promise the promise to transfer to the transfer good or the service good is or distinct service the is context distinct of the context contract), of the which contract), is part which of an is entity s part of assessment an entity s of assessment whether a of promised whether good a promised or service good is or a service performance is a performance obligation. obligation. In In assessing whether an an entity s promises to transfer to transfer goods goods or services or services to the customer the customer are separately are separately identifiable, identifiable, the objective the is objective to determine is to whether determine the nature whether of the the promise, nature within of the the promise, context within of the the contract, context is of to the transfer contract, each of is to those transfer goods each or services of those individually goods or services or, instead, individually to transfer or, a combined instead, to item transfer or items a combined to which the item promised or items goods to which or services the promised are inputs. goods or services are inputs. The The amendments provide three indicators (including level of of integration, modification or customisation, or interdependence among promises to transfer to transfer goods goods or services) or services) in paragraph in paragraph 29 of 29 HKFRS of HKFRS 15 for 15 for clarifying clarifying two two or more more promises promises to transfer to transfer goods goods or services or services to a customer a customer are not are separately not separately identifiable. identifiable. 2 SHINEWING (HK) CPA Limited - Newsletter July 2016

3 Principal versus agent agent considerations The The amendments clarified clarified how how to to apply apply the the principal principal versus versus agent agent application application guidance guidance to determine to determine whether the whether nature of the an nature entity s of promise an entity s is to provide promise promised to provide good or promised service itself good (i.e. or the service entity itself is a principal) (i.e. the entity or to is arrange a principal) for goods or to or arrange services for to be goods provided or services by another to be party provided (i.e. the by entity another is party agent). (i.e. the entity is an agent). Paragraph Paragraph B34A B34A of of HKFRS is is newly added added to to clarify clarify that that to determine to determine the nature the of nature its promise, of its promise, the entity the should: entity should: (a) (a) identify the the specified goods goods or services or services to be provided to be provided to the customer; the customer; and and (b) (b) assess whether it controls it controls each each specified specified good good or service or service before that before good that or good service or is service transferred is to transferred the customer. to the customer. An An entity is is a principal a if it if controls it the the specified good or or service before that good or service is transferred to a customer while an an entity is is an an agent agent if it if does it does not not control control the specified the specified good or good service or service provided provided by another by another party before party that before good or that service good is or transferred service is to transferred the customer. to the customer. An An entity should determine whether it is it is a a principal or an or agent an agent for each for each specified specified good or good service or service promised promised to the customer. the customer. If a contract If a with contract a customer with includes a customer more includes than one specified more than good one or specified service, an good entity or service, could be an a principal entity could for some be a specified principal goods for some or services specified and goods an agent or for services others. and an agent for others. The The amendments provides further indicators in in paragraph B37 B37 of of HKFRS HKFRS for for clarifying when when an an entity controls the the specified specified good good or service or service before before it is transferred it is transferred to the customer. the customer. Licensing The The amendments clarified when do do an an entity s entity s activities activities significantly significantly affect affect the intellectual the intellectual property property ( IP ) to ( IP ) which to the which customers the customers has rights. has This rights. is one This of the is three one of criteria the three that must criteria be met that to must recognise be met revenue to recognise for a licence revenue of IP for over a licence time. of IP over time. Paragraph Paragraph B59A B59A of of HKFRS HKFRS is is newly newly added added to to clarify clarify that that an an entity s entity s activities activities significantly significantly affect affect the IP the to IP which to which the customer the customer has rights has when rights either: when either: (a) (a) those activities are are expected expected to significantly to significantly change change the form the or form functionality or functionality of the IP; of or the IP; or (b) (b) the the ability of of the the customer obtain to obtain benefit benefit from the from IP is the substantially IP is substantially derived from, derived or dependent from, or upon, dependent those activities. upon, those activities. 3 SHINEWING (HK) CPA Limited - Newsletter July 2016

4 Scope of the of the exception for sales-based for sales-based and usage-based and usage-based royalties royalties The The amendments clarified the scope of of the the exception for for sales-based and usage-based and usage-based royalties royalties related related to licences to licences of IP when of IP there when are there other are promised other goods promised or services goods in or the services contract. in the contract. Paragraph B63 B63 of of HKFRS HKFRS 15 requires 15 requires that that an an entity entity should should recognise revenue for a a sales-based or usage-based royalty promised in in exchange for for a a licence of intellectual of IP only when property (or only as) the when later (or of as) the following later of the events following occurs: events occurs: (a) (a) the the subsequent sale sale or usage or usage occurs; occurs; and and (b) (b) the the performance performance obligation obligation to which to which some or some all of or the all sales-based of the sales-based or usage-based or usage-based royalty has been royalty has been allocated has been satisfied (or partially satisfied). allocated has been satisfied (or partially satisfied). Paragraphs B63A and B63B of of HKFRS are are newly added to to clarify that that when when a royalty a royalty relates relates only only to a to licence a licence of IP of or IP when or when a licence a licence of IP is the of IP predominant is the predominant items to which items the royalty to which relates, the royalty revenue relates, from a revenue sales-based from or usage-based a sales-based royalty or usage-based should be recognised royalty wholly should in be accordance recognised with wholly paragraph in accordance B63. If not, with the requirements paragraph on B63. variable If not, consideration the requirements in paragraphs on variable of HKFRS consideration 15 apply to the in paragraphs sales-based or usage-based of HKFRS royalty. 15 apply to the sales-based or usage-based royalty. 4 SHINEWING (HK) CPA Limited - Newsletter July 2016

5 Practical expedients to the to transition the transition requirements requirements of HKFRS of HKFRS The The amendments added two two practical practical expedients expedients to the to transition the transition requirements requirements of HKFRS of HKFRS 15 for: 15 for: (a) (a) completed contracts contracts under under the full the retrospective full retrospective transition transition approach; approach; and and (b) (b) contract modifications transition. at transition. Paragraph C5(a) of of HKFRS explicitly explicitly stated stated that that when applying HKFRS retrospectively, an entity need not restate contract that are are completed contracts at the at beginning the beginning of the of earliest the earliest period period presented. presented. Paragraph C5(c) of HKFRS 15 is newly added to allow entities exempted from retrospective restating Paragraph C5(c) of HKFRS 15 is newly added to allow entities exempted from retrospective restating the contracts the contracts that were that modified were modified before the before beginning the beginning of the earliest of the period earliest presented period for presented contract for modification contract modification in accordance in with accordance paragraphs with 20 paragraphs and 21 of HKFRS 20 and of Instead, HKFRS an 15. entity Instead, should an entity reflect should the aggregate reflect the effect aggregate of all of effect the modifications of all of the that modifications occur before that the occur beginning before of the earliest beginning period of the presented earliest when: period presented when: (i) (i) identifying the the satisfied and unsatisfied performance obligations; obligations; (ii) determining the transaction price; and (ii) determining the transaction price; and (iii) allocating the transaction price to the satisfied and unsatisfied performance obligation. (iii) allocating the transaction price to the satisfied and unsatisfied performance obligation. Paragraph Paragraph C3(b) of of HKFRS allows allows entities entities to apply to apply HKFRS HKFRS 15 retrospectively 15 retrospectively with the with cumulative the cumulative effect of initial effect application of initial application of HKFRS of 15 HKFRS to be recognised 15 to be recognised at the date at of the initial date application of initial in application accordance in with accordance paragraphs with C7 paragraphs and C8 of HKFRS C7 and 15. C8 C7 of of HKFRS C7 is of revised HKFRS to 15 allow is revised entities to to allow choose entities to apply to HKFRS choose 15 to retrospectively apply HKFRS only 15 retrospectively to contracts that only are not to contracts completed that contracts are not at the completed date of initial contracts application. at the date of initial application. Paragraph Paragraph C7A C7A of of HKFRS HKFRS is newly is newly added added to to allow allow entities entities which which apply HKFRS retrospectively in in accordance with paragraph C3(b) C3(b) of HKFRS of HKFRS 15 to 15 use to the use practical the practical expedient expedient stated in stated paragraph in paragraph C5(c) of HKFRS C5(c) of 15, HKFRS either: 15, either: (a) (a) for for all all contract contract modification that that occur occur before before the beginning the beginning of the earliest of the period earliest presented; period or (b) for presented; all contract or modification that occur before the date of initial application. (b) for all contract modification that occur before the date of initial application. If an entity uses this practical expedient, the expedient should be applied consistently to all contracts. If an entity uses this practical expedient, the expedient should be applied consistently to all contracts. The objective of these amendments is to clarify the standard setter s intention when developing the requirements in HKFRS 15 but not to change the underlying principles of HKFRS SHINEWING (HK) CPA Limited - Newsletter July 2016

6 When will these amendments become effective? The Amendments to HKFRS 15 will become effective for financial statements with annual periods beginning on or after 1 January Earlier application is permitted. If an entity applies these amendments for an earlier period, it should disclose that fact. The Amendments to HKFRS 15 should be applied retrospectively in accordance with Hong Kong Accounting Standard 8 Accounting Policies, Changes in Accounting Estimates and Errors. 6 SHINEWING (HK) CPA Limited - Newsletter July 2016

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