Mr Hans Hoogervorst Chairman IFRS Foundation 30 Cannon Street London EC4M 6XH United Kingdom (By online submission)

A S C ACCOUNTING STANDARDS COUNCIL SINGAPORE 30 October 2015 Mr Hans Hoogervorst Chairman IFRS Foundation 30 Cannon Street London EC4M 6XH United Kingdom (By online submission) Dear Hans RESPONSE TO EXPOSURE DRAFT ON CLARIFICATIONS TO IFRS 15 The Singapore Accounting Standards Council appreciates the opportunity to comment on the Exposure Draft on Clarifications to IFRS 15 (the ED) issued by the International Accounting Standards Board (the IASB) in July 2015. General We welcome the IASB s efforts in supporting the implementation of IFRS 15 Revenue from Contracts with Customers, an extremely important standard for many entities, and in providing clarifications to address potential diversity in practice that may arise from the adoption of IFRS 15. We support the IASB s decision and rationale to apply a high hurdle when considering whether to amend IFRS 15. In this regard, we agree that amendments should be made only if (a) they are essential to clarifying the IASB s intentions when developing the IFRS 15 requirements; or (b) the benefits of retaining converged requirements between IFRS 15 and its US equivalent (i.e. Topic 606) issued by the US Financial Accounting Standards Board (the FASB) exceed any potential costs of amending the requirements. Following from the above, we welcome the proposed clarifications, but have some reservations about whether they would provide the needed clarity as intended by the IASB. Furthermore, we are concerned that the IASB has proposed to subsume certain principles that are essential to clarifying the requirements of IFRS 15 within the non-mandatory Illustrative Examples, instead of the mandatory guidance in IFRS 15. As with our comments on the Exposure Draft on Effective Date of IFRS 15, we reiterate our view that the effective date of the proposed amendments should be aligned with the revised effective date of IFRS 15 to avoid implementation uncertainty and/or phase implementation. Page 1 of 10

Accordingly, we consider it important that the IASB finalises the proposed amendments expeditiously to prevent further deferral of the effective date of IFRS 15. Convergence with US GAAP In order to preserve the comparability of reported revenue, we reiterate the need for the IASB to continue working closely with the FASB to maintain convergence of IFRS 15 and Topic 606, both in principles and application, within the boundaries of a principle-based standard and the IASB s criterion of high hurdle. Beyond the implementation period, it is conceivable that requests for additional specific guidance would continue to surface from stakeholders in the US environment, and that the IFRS constituents would, in practice, rely on guidance in Topic 606 in circumstances where similar guidance is not available in IFRS 15. We consider it critical that the IASB should establish, as a matter of policy, how convergence of both principles and guidance should be maintained on an on-going basis, which should address the following issues at a minimum: (a) In cases when only the FASB decides to provide additional guidance, we are concerned about its implications for the continuing convergence of underlying principles and the potentially different outcomes under certain circumstances. In order to provide clarity to the IFRS constituents, the IASB should at least deliberate and conclude at public meetings on whether the additional guidance in Topic 606 is consistent with the principles in IFRS 15 and would result in the same outcome as IFRS 15. (b) If the IASB concludes that a specific guidance in Topic 606 does not always achieve consistency with or same outcome as IFRS 15, the resulting implications should be effectively communicated to the IFRS constituents. Otherwise, there is a risk that the IFRS constituents would, in the absence of specific guidance in IFRS 15, continue to rely on the guidance in Topic 606, thereby leading to an inappropriate application of IFRS 15. (c) Even if the IASB concludes positively on (a) above, the IASB should consider whether such guidance should be incorporated into IFRS 15, given that the IASB and the FASB have made conscious efforts to achieve convergence to the extent possible. The IASB should assess whether the guidance is necessarily at odds with a principle-based standard and whether potential consequences, such as the risk of being misconceived as industryspecific rules, could be sufficiently overcome. Our comments on the specific questions in the ED are as follows: Question 1 Identifying performance obligations IFRS 15 requires an entity to assess the goods or services promised in a contract to identify the performance obligations in that contract. An entity is required to identify performance obligations on the basis of promised goods or services that are distinct. To clarify the application of the concept of distinct, the IASB is proposing to amend the Illustrative Examples accompanying IFRS 15. In order to achieve the same objective of clarifying when promised goods or services are distinct, the FASB has proposed to clarify the requirements of the new revenue Standard and add illustrations regarding the Page 2 of 10

identification of performance obligations. The FASB s proposals include amendments relating to promised goods or services that are immaterial in the context of a contract, and an accounting policy election relating to shipping and handling activities that the IASB is not proposing to address. The reasons for the IASB s decisions are explained in paragraphs BC7 BC25. Do you agree with the proposed amendments to the Illustrative Examples accompanying IFRS 15 relating to identifying performance obligations? Why or why not? If not, what alternative clarification, if any, would you propose and why? Determining when a good or service is separately identifiable We welcome the IASB s proposal to clarify separately identifiable promises, and more specifically, whether the goods or services promised are highly dependent or interrelated. However, we have some reservations about whether the proposed (amendments to) examples are sufficient to provide the intended clarity. Firstly, we consider that the clarifying principles should be made explicit in IFRS 15 consistently with principle-based standards, and not subsumed within examples in the nonmandatory Illustration Examples, which could be seen as prescriptive based on the specifics of each example. In this regard: (a) We support the FASB s approach of including an objective for assessing separately identifiable promises. We suggest that the IASB could consider the FASB s proposed objective, which is to determine whether the nature of the entity s overall promise is to transfer each of the goods or services or a combined item to which the goods or services are inputs. (b) Subject to our comments on interdependency below, we support the concepts underlying the clarifying descriptions of whether a promise is highly dependent on, or interrelated with, other promises in the contract, namely (i) whether the promise would be significantly affected by other promises; or (ii) whether the entity could fulfil the promise independently of other promises. We consider them to be important concepts, and hence, recommend that these descriptions (as modified within the context of interdependency) should be incorporated into paragraph 29(c) of IFRS 15 instead of being embedded within the examples. Secondly, the proposed guidance might not provide sufficient clarity on when a promised good or service is highly dependent on, or interrelated with, other promised goods or services. For instance: (a) Example 55 suggests that two promises are highly dependent or interrelated when the functionality of goods or services under both promises is interdependent on each other. In other words, interdependency is necessary to conclude that the promises are highly dependent on or interrelated with each other. On the other hand, it is arguable that oneway dependency is sufficient to conclude that promised goods or services are highly dependent on or interrelated with each other. Specifically, when one promise is dependent on the other promise, the first promise is significantly affected by the second Page 3 of 10

promise, and the entity could not have fulfilled its overall promise independently of the second promise. (b) Example 55 concludes that a 3-year licence for new designs or production processes and related essential updates are not separately identifiable. This is because the licence and updates are, in effect, a subscription of the entity s intellectual property (IP) for a period of time, and the customer would generally not separately acquire the initial licence as the updates are integral to its ability to use the entity s constantly evolving technology. On the contrary, Example 11 (Case E) concludes that an equipment and related 3-year supply of specialised consumables are separately identifiable, even though it could be similarly argued that the customer would generally not separately acquire the equipment, which is non-functional without the specialised consumables. (c) It is explicitly or implicitly suggested in Example 11 (Cases A and C) and Example 56 (Case B), together with the FASB s proposed examples illustrating converged principles, that this assessment is affected by whether or not the goods or services are sold separately by another entity. It is unclear from the proposed amendments why this factor should have a bearing on whether goods or services are highly dependent on or interrelated with each other, beyond whether such goods or services are capable of being distinct. In our view, it would also be necessary to consider the nature of the entity s overall promise in the contract, and not just the individual promises, in determining whether the promised goods or services are separately identifiable. For example, a promise to provide 3-year access to an evolving technology or supply of underlying outputs is arguably different from a promise to supply both equipment and related consumables, from which the customer is getting something more than a supply of underlying outputs. We agree with the IASB s thinking that goods or services promised in a contract are highly dependent or interrelated only when the promises are interdependent on each other. In other words, each of the goods or services is significantly affected by other goods or services, or the entity could not fulfil each of the goods or services independently of other goods or services. In addition, we view the fact of a good or service being sold separately by another entity as merely an attribute of typical goods or services that are separately identifiable, but does not in itself lead to the conclusion that the promise is separately identifiable. In order to prevent potential confusion, we recommend that the IASB should amend paragraph 29(c) of IFRS 15 and refine the drafting of the examples accordingly. Other than the above, we observe that it is unclear why the IASB has concluded in Example 46 that promises to develop specifications and manufacture equipment with unique specifications constitute a single performance obligation (PO), but not so in Example 10 (Case B) for promises to design and produce highly complex, specialised devices. We consider there is a need to provide specifics that would justify the different conclusions to avoid perpetuating the existing confusion over the determination of separately identifiable promises. In particular, we suggest that the IASB could consider incorporating into Example 10 (Case B) the specifics of the FASB s corresponding example, in that the design is capable of being completed independently of the production (i.e. the design would not have to be modified as the devices are produced). Page 4 of 10

Effects of contractual restrictions on the identification of POs We agree with the principles underlying the IASB s proposals, in that contractual restrictions merely define the scope but not the nature of the promises, and hence, should not affect the assessment of promises in a contract. However, we note that confusion could arise from the drafting of contractual restrictions in the context of identifying separate promises in licences vis-a-vis other goods or services. Specifically, the IASB appears to consider attributes to be different from characteristics of the promised goods or services, which we think is non-intuitive, by concluding that contractual restrictions define the attributes of the asset obtained by the customer in the case of a licence (in paragraph B62 of IFRS 15 and paragraph BC411 of the Basis for Conclusions on IFRS 15 (the IFRS 15 BC)), but do not change the characteristics of the asset itself in the case of other promised goods or services (in paragraph IE58G of the ED). The above drafting issue is further complicated by the somewhat conflictingly articulation of the IASB s thinking in paragraph BC411 of the IFRS 15 BC that contractual restrictions do not define the nature of the rights provided by a licence, but they do determine the nature of the asset (conveyed in a licence) obtained by the customer. We recommend that the IASB should refine the various descriptions of contractual restrictions to prevent potential confusion. Question 2 Principal versus agent considerations When another party is involved in providing goods or services to a customer, IFRS 15 requires an entity to determine whether it is the principal in the transaction or the agent. To do so, an entity assesses whether it controls the specified goods or services before they are transferred to the customer. To clarify the application of the control principle, the IASB is proposing to amend paragraphs B34 B38 of IFRS 15, amend Examples 45 48 accompanying IFRS 15 and add Examples 46A and 48A. The FASB has reached the same decisions as the IASB regarding the application of the control principle when assessing whether an entity is a principal or an agent, and is expected to propose amendments to Topic 606 that are the same as (or similar to) those included in this Exposure Draft in this respect. The reasons for the Boards decisions are explained in paragraphs BC26 BC56. Do you agree with the proposed amendments to IFRS 15 regarding principal versus agent considerations? In particular, do you agree that the proposed amendments to each of the indicators in paragraph B37 are helpful and do not raise new implementation questions? Why or why not? If not, what alternative clarification, if any, would you propose and why? We support the IASB s proposals to clarify the relationship between the control principle and the indicators in paragraph B37 of IFRS15. Page 5 of 10

We also broadly agree with the IASB s proposals to clarify the principal-agent assessment for intangible goods or services, subject to our comments on drafting below. Nevertheless, potential unintended consequences could result from the concept of a right being the promised good or service, if the underlying goods or services are provided by another party. In particular, it is not always clear whether the promised good or service in a contract is the right to an underlying good or service, or the underlying good or service itself. For instance, in the case of Example 48, it is not obvious why the promised good or service is the right to a meal (and not the underlying meal itself) at a specified restaurant, when it does not appear that the entity has arranged for something more than the underlying meal to be provided to the customer. Besides, it could be inferred from the example that, whenever another party is involved in providing goods or services to the customer, the promised good or service could be argued as being the right instead of the underlying goods or services, which may not reflect the IASB s intention. Further confusion could result when read in conjunction with the existing examples illustrating when goods or services are not separate promises, but rather are part of an entity s overall promise as in the case of a licence. Please refer to our comments under the section entitled Determining the nature of an entity s promise in granting a licence of IP in Question 3 for further details. Furthermore, uncertain or inconsistent accounting outcomes could result from the application of the concept. For instance, in the case of Example 47, if the entity is a principal to the promise to provide a right to fly on a specified flight, it follows that the airline would have a promise to provide that right to the entity and a separate promise to provide the underlying flight service to the end customer. It is not obvious which of the promises in respect of the same flight service should revenue be recognised by the airline. Although faithful representation would result if the airline recognises revenue when it provides the underlying flight service to the end customer, instead of the right to the entity, it may not align well with the conceptual argument that the entity has obtained control of the right from the airline because the latter does not recognise revenue on that transfer. There is a similar lack of clarity when the entity is an agent to a right, as in Example 48, in which the restaurant would be a principal for both the right to the underlying meal as well as the underlying meal itself. Therefore, we recommend that the IASB should clarify, for inclusion in IFRS 15, the nature of a right being the promised good or service and the principles underlying such a concept. In addition, we suggest that the IASB should rectify the following drafting issues: (a) Paragraph B35 of IFRS 15 states that a principal in a contract may satisfy a PO by itself or through another party on its behalf. We consider the unit of account to be the specified good or service in the contract, rather than the contract as a whole. This is more aligned with the proposed guidance in paragraph B34, which states that, in a contract, an entity could be a principal for some specified goods or services and an agent for others. (b) The proposed guidance in paragraph B35A(c) of IFRS 15 states that an entity would have obtained control of a good or service from another party before it is transferred to the customer, if the entity provides a significant service of integrating that good or service into the specified good or service for which the customer has contracted. We note from paragraph BC50(b) of the Basis for Conclusions on the ED (the ED BC) that this Page 6 of 10

guidance is intended to address cases whereby the entity directs the use of goods or services provided by another party to create the combined item for which the customer has contracted. We do not see any apparent reason why the guidance should not be applicable to such goods or services that are not separately identifiable under paragraph 29 of IFRS 15, including those goods or services that significantly modify or customise another good or service in the contract, or are themselves significantly modified or customised. Question 3 Licensing When an entity grants a licence to a customer that is distinct from other promised goods or services, IFRS 15 requires the entity to determine whether the licence transfers to a customer either at a point in time (providing the right to use the entity s intellectual property) or over time (providing the right to access the entity s intellectual property). That determination largely depends on whether the contract requires, or the customer reasonably expects, the entity to undertake activities that significantly affect the intellectual property to which the customer has rights. IFRS 15 also includes requirements relating to sales-based or usage-based royalties promised in exchange for a licence (the royalties constraint). To clarify when an entity s activities significantly affect the intellectual property to which the customer has rights, the IASB is proposing to add paragraph B59A and delete paragraph B57 of IFRS 15, and amend Examples 54 and 56 61 accompanying IFRS 15. The IASB is also proposing to add paragraphs B63A and B63B to clarify the application of the royalties constraint. The reasons for the IASB s decisions are explained in paragraphs BC57 BC86. The FASB has proposed more extensive amendments to the licensing guidance and the accompanying Illustrations, including proposing an alternative approach for determining the nature of an entity s promise in granting a licence. Do you agree with the proposed amendments to IFRS 15 regarding licensing? Why or why not? If not, what alternative clarification, if any, would you propose and why? Determining the nature of an entity s promise in granting a licence of IP We support the IASB s proposal to clarify existing requirements on, instead of changing the approach to, determining whether a licence constitutes a right to access or a right to use. In our view, the existing approach in IFRS 15 is conceptually superior to the FASB s proposed approach, from which inappropriate conclusions could result, albeit in relatively few cases. There is little conceptual merit in treating an IP that does not have significant stand-alone functionality as being a right to access that is transferred to the customer over time, if there is no expectation that the entity will undertake activities after making the IP available to the customer. The criterion of stand-alone functionality also appears to lack conceptual robustness when an exception is required for IP of which functionality is expected to change substantively during the licence period as a result of the entity s activities. However, we note that the existing and proposed guidance, collectively, might not be as clear as the IASB had intended to guide the determination of goods or services promised in a Page 7 of 10

contract. Further to our comments under Question 2, it is unclear when goods or services produced by an entity s activities are considered separate promises or when they are merely part of the entity s promise. For instance, it is not obvious as to the differentiating factors that distinguish the activities in Examples 57 and 58 (considered as part of the promise to grant a license) from those undertaken for the production of highly complex, specialised devices or the software updates in Examples 10 (Case B) and 11 (Case A) (considered as separate promised goods or services). The application of paragraph 25 of IFRS 15, in itself, might not consistently lead to the conclusions articulated in those examples. In the absence of clearly developed principles and guidance, entities would have to rely on broad fact patterns in the Illustrative Examples to guide their application of IFRS 15, which would run contrary to principle-based IFRS and potentially lead to inappropriate conclusions due to a lack of consideration for the specifics of the circumstance. Therefore, we recommend that the IASB should consider providing additional clarifying guidance in IFRS 15 on when goods or services produced by an entity s activities are separate promises or are merely part of the entity s promise. In addition, we believe that the guidance on the nature of promise should be applied not just to a licence that is distinct, but also to a licence that is a predominant item of a PO that includes the promised licence. It has the potential to address possible tension between the requirement to apply the general revenue recognition model to licences that are not distinct and the IASB s thinking as articulated in paragraph BC85 of the ED BC and paragraph BC407 of the IFRS 15 BC. Besides, the premise for specifying additional criteria in the guidance on the nature of promise, instead of strictly relying on the general control requirements, is arguably as applicable to a licence that is a predominant item of a PO as it would be for a licence that is distinct. This view is also consistent with our comments on the IASB s proposal on the royalties constraint as elaborated below. Therefore, we recommend that the IASB should consider incorporating, as mandatory guidance in IFRS 15, the requirement to consider the nature of a promise to grant a licence when it is a predominant item of a PO that includes the licence, in addition to when it is distinct. Applying the royalties constraint We agree with the IASB s proposal that the royalties constraint should similarly apply when the royalty relates predominantly, but not solely, to a licence of IP. However, we consider there is a need for the IASB to clarify whether the royalties constraint should apply when the royalty relates predominantly to a licence that is not distinct. On one hand, Example 60 suggests that the royalties constraint would apply, regardless of whether the licence to which the royalty relates predominantly is distinct from other promised goods or services in the contract. On the other hand, the flow of the guidance on the nature of promise to the guidance on the royalties constraint in IFRS 15 could lead to the interpretation that the royalties constraint should likewise apply only to a licence that is distinct. We support the principle in Example 60 and recommend that the mandatory guidance in IFRS 15 should be clarified accordingly. We also agree with the IASB s proposal and rationale on splitting a sales-based or usagebased royalty. We can particularly appreciate that splitting such royalties into a portion subject to the royalties constraint and a portion subject to the variable consideration requirement would unlikely result in useful information. This is because the royalties would Page 8 of 10

be recognised at an amount that reflects neither the amount an entity expects to be entitled based on its performance nor the amount to which the entity has become legally entitled during the period. Question 4 Practical expedients on transition The IASB is proposing the following two additional practical expedients on transition to IFRS 15: (a) to permit an entity to use hindsight in (i) identifying the satisfied and unsatisfied performance obligations in a contract that has been modified before the beginning of the earliest period presented; and (ii) determining the transaction price. (b) to permit an entity electing to use the full retrospective method not to apply IFRS 15 retrospectively to completed contracts (as defined in paragraph C2) at the beginning of the earliest period presented. The reasons for the IASB s decisions are explained in paragraphs BC109 BC115. The FASB is also expected to propose a practical expedient on transition for modified contracts. Do you agree with the proposed amendments to the transition requirements of IFRS 15? Why or why not? If not, what alternative, if any, would you propose and why? We support the IASB s proposals on the additional practical expedients for the transition requirements of IFRS 15. We can appreciate that these expedients potentially provide considerable transition relief, without corresponding loss of useful information. We further appreciate that first-time adopters of IFRS could also avail themselves of the proposed expedient for contract modifications. The potential challenges with contract modifications on transition to IFRS 15 would be as relevant to first-time adopters as they are to existing IFRS preparers. Question 5 Other topics The FASB is expected to propose amendments to the new revenue Standard with respect to collectability, measuring non-cash consideration and the presentation of sales taxes. The IASB decided not to propose amendments to IFRS 15 with respect to those topics. The reasons for the IASB s decisions are explained in paragraphs BC87 BC108. Do you agree that amendments to IFRS 15 are not required on those topics? Why or why not? If not, what amendment would you propose and why? If you would propose to amend IFRS 15, please provide information to explain why the requirements of IFRS 15 are not clear. We are concerned with the IASB s proposal to remain silent on the measurement date for non-cash consideration when it is possible that the IFRS constituents may rely on the FASB s Page 9 of 10

proposal of measuring non-cash consideration at contract inception in the absence of guidance in IFRS 15, which we disagree for the following reasons. Firstly, the FASB s proposal does not appear to be consistent with Example 31 and to align well with the notion of entitlement in exchange for goods or services transferred to the customer, the core principle of IFRS 15. Secondly, it could have unintended consequences on its interactions with other IFRS such as IAS 21 The Effects of Changes in Foreign Exchange Rates. We therefore recommend that the IASB should consider, at the minimum, eliminating the option of measuring non-cash consideration at contract inception in the Basis for Conclusions on the final Amendments. In terms of the application of the variable consideration requirement to non-cash consideration, we suggest that the IASB should consider refining the drafting of paragraph BC252 of the IFRS 15 BC to eliminate its tension with paragraph 68 of IFRS 15. In particular, the former appears to suggest that the requirement would apply only to the portion of the non-cash consideration that varies for reasons other than form of consideration, while the latter appears to suggest that it would apply to the entire non-cash consideration that varies due to both form and reasons other than form. In addition, while we agree with the IASB s proposal not to provide additional guidance on contract termination, we note that the drafting of when a contract is terminated in paragraph BC96 of the ED BC could be subjective. In reality, the timing of contract termination would depend on the specifics of the circumstance, and in particular, when the entity ceases to have further obligation to transfer goods or services to the customer in accordance with the termination clauses in the contract, rather than when an entity stops providing goods or services to the customer as articulated in paragraph BC96. We therefore suggest that the IASB should consider refining the drafting of the said paragraph accordingly. We hope that our comments will contribute to the IASB s deliberation on the ED. Should you require any further clarification, please contact our project managers Siok Mun Leong at Leong_Siok_Mun@asc.gov.sg and Iris Chung at Iris_CHUNG@asc.gov.sg. Yours faithfully Suat Cheng Goh Technical Director Singapore Accounting Standards Council Page 10 of 10