FRS 115 Revenue from Contracts with Customers Irene Lau Director, Professional Standards & Assurance 17 Aug 2017
FRS 115 Revenue from Contracts with Customers Background New Revenue Model Practical examples Other Guidance Presentation and disclosure Transition Industry insights Next Steps
How FRS 115 improves accounting The old... The new. guidance scattered across many Standards various recognition criteria depending upon transaction type guidance lacking in many areas (including disclosures) 21 paragraphs in illustrative examples in FRS 18 applies to all contracts with customers provides a single model for all contracts within its scope fills in many 'gaps' in existing guidance today (eg multiple element arrangements', enhanced disclosures) 63 illustrative examples in FRS 115
FRS 115 replaces FRS 18 Revenue Sale of goods Rendering of services Interest, royalties and dividends FRS 11 INT FRS 31 INT FRS 113 INT FRS 115 INT FRS 118 Construction Contracts Revenue Barter Transactions Involving Advertising Services Customer Loyalty Programmes Agreements for the Construction of Real Estate Transfers of Assets from Customers
Scope in scope Revenue from contracts with customers sales of goods rendering of services (including construction contracts) licensing of intellectual property Exchanges of non-monetary assets other than those scoped-out exchanges (see below) out of scope Non-contractual income Contracts within the scope of FRS 17, FRS 104, FRS 39 & FRS 109, FRS 110,FRS 111, FRS 27 and FRS 28 Contracts that are not with customers Non-monetary exchanges between entities in the same line of business to facilitate sales to customers
FRS 115 Revenue from Contracts with Customers Background New Revenue Model Practical examples Other Guidance Presentation and disclosure Transition Industry insights Next Steps
Basic Principle An entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration expected to be entitled in exchange for those goods and services "Control - based", Not "Activity-based)
One model, two approaches, five steps
Step 1: Identify the Contract with the customer Does the contract have commercial substance? Y Have the parties approved the contract and are committed to perform? Y Can the entity identify the payment terms and each party's rights and obligations Y Is it probable that the entity will collect the consideration to which it will be entitled? N N N N Do not proceed to Step 2 Revenue is recognised only when either: (i) (i) the entity's performance is complete, substantially all of the consideration has been collected and is non refundables the contract has been terminated and the consideration received is non-refundable Proceed to Stage 2
Criteria to determine whether a contract arises
Step 1: Identify the Contract with the customer (Cont'd) Contract defined as an agreement between two or more parties that creates enforceable rights and obligations Arrangement must meet certain criteria, including that collection is probable, to be within the scope of the standard Clarifications: 1. Assess the probability of collecting substantially all of the consideration for goods and services that will be transferred 2. Consider ability to manage exposure to credit risk (but ignore ability to repossess asset transferred 3. Recognise non refundable consideration received as revenue when a contract does not exist under the standard only in certain situations.
Step 1: Identify the Contract with the customer (Cont'd) Implementation considerations - Selected TRG items of general agreement Assessing and reassessing collectability If transaction price is probable of collection for a portfolio of contracts, record revenue in full and separately evaluate the corresponding contract asset or receivable for impairment. Example: Assume an entity expects to be entitled to $100 for providing services to a customer but expects to collect 98% of amounts billed on a portfolio basis. If the entity provides the service and invoices $100, record revenue for $100 and bad debt expense of $2 when the receivable is impaired. Exercise judgment to determine whether changes in the facts and circumstances are significant enough to indicate that a contract no longer exists.
Step 1: Identify the Contract with the customer (Cont'd) Implementation considerations - Selected TRG items of general agreement (Cont'd) Determining the duration of a contract (i.e., the contractual period to be accounted for under the standard) Substantive termination penalties indicate that the stated contractual term is the duration Examples: A customer has the right to cancel at the end of each year in a four-year service contract However, substantive termination penalty is required Contractual period is four years If any party can cancel without penalty, the contract is treated as month-tomonth.
Contract modification
Contract modification (Cont d)
Contract modification (Cont d)
Contract modification Additional goods or services
Contract modifications An unpriced change order
Contract modifications An unpriced change order (Cont d)
Contract modification Partially satisfied performance obligation and additional distinct goods or services
Contract modification Partially satisfied performance obligation and additional distinct goods or services (Cont d)
Contract modification Partially satisfied performance obligation and additional distinct goods or services (Cont d)
5-Step Model: Step 2
Step 2: Identify the performance obligations in the contract Performance obligations a promise in a contract with a customer to transfer either: a good or service that is 'distinct' or a series of distinct goods or services Customer can benefit from goods or services Separately identifiable from other contracts promise Distinct Separately Identifiable significant integration services not provided the good/service does not significantly modify/customise other promised goods/services not highly dependent on, or interrelated with, other promised goods or services in the contract
Step 2: Identify the performance obligations in the contract (Cont'd) Identify all promised goods and services in the contract Are there multiple goods or services promised in the contract? No Treat as a single transaction Yes No Can customer benefit from good or service on its own? Combine performance obligations until two or more goods and services are distinct Or together with other readily available resources Yes Is the good or service separable from other promises in the contract? No Yes Account for the separate performance obligation Consider: Whether existing contracts have been divided into different deliverables
Step 2: Identify the performance obligations in the contract (Cont'd) A performance obligation is a promise (explicit or implicit) to transfer to a customer either: A distinct good or service A series of distinct goods or services that are substantially the same and have the same pattern of transfer Performance obligations are identified at contract inception and are determined based on: Contractual terms and customary business practice Clarifications: Entities can disregard promises deemed to be immaterial in the context of a contract
Example of Step 2: Seller S contracts with customer C for: 100 widgets and 1 custom valve (function independently) complex installation of the custom valve 1-year standard warranty for the custom valve (not sold separately) Complimentary 2-year training on the custom valve an option to purchase a 2 nd custom valve for 40% off (normally sold at full list price) What are the performance obligations in the contract?
Example of Step 2 (cont'd): customer can benefit from goods/ services separately identifiable from other contract promises distinct separately identifiable the good/service does not significantly modify/customise other promised goods/services not highly dependent on, or interrelated with, other promised goods or services in the contract 100 widgets custom valve installation training option
Step 2: Identify the performance obligations in the contract (Cont'd) Two-step process to identify which goods or services are distinct Step 1 - Capable of being distinct Step 2 - Distinct in the context of the contract Evaluate whether multiple promised goods or services work together to deliver a combined output(s) Significant Integration Significant modification or customisation High interdependence or interrelation
Example of Step 2 (cont'd): Warranties Does the customer have the option to separately purchase a warranty? Y Account for the warranty as a performance obligation Does all or part of the warranty provide the customer with an additional service beyond the assurance that the product will comply with agreed-upon specifications? N Account for the warranty using the cost accrual guidance in FRS 37 Y Account for the service as a separate performance obligation
Example of Step 2 (cont'd): Customer options Could the customer receive the discount or right without entering into the contract? Is the discount typical for the goods/services? Does the option approximate the standalone selling price for the good/service? No to all Option/discount may represent a material right If so, recognise as a separate PO Is the standalone selling price of the option directly observable? Yes to any Option/discount does not represent a material right Do not recognise as a separate PO Yes Allocate part of the transaction price of the performance obligation on a relative standalone selling price basis No Eliminate the discount the customer would obtain when exercising the option
Step 2: Identify the performance obligations in the contract (Cont'd) Incidental obligations or marketing incentives (e.g. loyalty programs) may be performance obligations Does not include activities to satisfy an obligation (e.g., set-up activities) unless a good or service is transferred to the customer Clarifications: 1. Entities can elect to account for shipping and handling performed after control has transferred as a fulfilment cost 2. Guidance was added on when to accrue fulfilment costs if a promised good or service is immaterial or the entity has made the shipping and handling election
Step 2: Identify the performance obligations in the contract (Cont'd) Implementation considerations - Selected TRG items of general agreement Series of distinct goods and services Evaluating whether services are substantially the same involves determining the nature of the promise. Examples: Daily hotel management service including employee management, training and accounting services Activities may vary but each day of service is distinct and substantially the same Good or service does not need to be transferred consecutively
Step 2: Identify the performance obligations in the contract (Cont'd) Implementation considerations - Selected TRG items of general agreement (Cont'd) Customer options Consider past and future transactions with the same customer when determining whether an option represents a material right Distinguish optional purchases from variable consideration by determining the nature of the promise and the rights and obligations of the parties Examples: A 5-year exclusive master supply agreement where the supplier will produce parts at the customer s request Each part is distinct and customer is not obligated but highly likely to purchase parts Each purchase order is a new performance obligation (i.e., an optional purchase)
Step 2: Identify the performance obligations in the contract (Cont'd) Principal vs. agent Principal (gross) Controls the good or service before transferring it to the customer Agent (net) Arranges for another entity to provide the good or service Clarifications: 1. Guidance was added on how to identify the unit of accounting and how the control principle applies to transactions 2. Indicators were reframed to focus on the principal; credit risk and commission indicators were removed 3. Existing examples were revised, and new ones were added
5-Step Model: Step 3
How to determine the transaction price? measured at fair value consideration payable to customer noncash consideration time value of money transaction price - difference between promised consideration and cash selling price - combined effect of time between payment and transfer of good/service & market interest rates variable consideration constraint on variable consideration
Variable Consideration limited to extent that it is 'highly probable' that there will not be a significant revenue reversal apply constraint Reassess variable consideration at the end of each reporting period expected value or most likely amount consider all information reasonably available (historical, current and forecast)
Step 3: Determine the transaction price (Cont'd) Transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer Clarification: Entities can elect to exclude amounts collected from customers for all sales taxes and other similar taxes from the transaction price
Example of Step 3: Seller S contracts with Customer C on 1 January 20X5: 100 widgets by 31 March 30X5 (S$100,000) and payment due on delivery 1 custom valve by 31 December 20X6 (S$ 2M) and payment not due until 30 June 20X6 performance bonus for early completion of custom valve by 30 June 20X5 (S$ 250,000)* an option to purchase a 2 nd custom valve for 40% off (normally sold at full list price) *management estimates the likelihood it will receive the bonus to be 80%. What is the transaction price?
Example of Step 3 (Cont'd): Estimate variable consideration Entity concludes that it is highly probable that a significant revenue reversal will not occur so amount is not constrained apply constraint Reassess variable consideration at the end of each reporting period Most likely amount (S$250,000) Entity will reassess at each period end
Example of Step 3 (Cont'd): Item Assessment S$ Estimate for transaction price S$ Widgets 100,000 100,000 Custom Valve 2,000,000 1,900,000* Bonus See previous slide 250,000 Total transaction price 2,250,000 * entity estimates a financing component of S$100,000 by applying a discount rate that would be used in a separate financing transaction between the entity and the customer at contract inception, reflecting the credit risk of Customer C (the party receiving the credit)
Step 3: Determine the transaction price Industry insights - variable consideration price concessions (healthcare) sales - based bonuses and refunds (retail) volume - based discounts (wholesalers) contingent fees (attorneys) performance - based fees (investment managers)
Step 3: Determine the transaction price (Cont'd) Transaction price includes the effects of the following: Variable consideration (including application of the constraint) The time value of money (if financing component is significant) Consideration paid or payable to a customer Non-cash consideration Clarifications: 1. Measurement date for non-cash consideration is contract inception 2. For non-cash consideration, variable consideration guidance applies only to variability resulting from reasons other than the form of the consideration
Step 3: Determine the transaction price (Cont'd) Implementation considerations - Selected TRG items of general agreement Variable consideration Consideration is variable if the quantity is undefined but the contractual rate per unit is fixed Apply the constraint at the contract level Consideration payable to a customer Assess whether payments that are not in the normal course of business are at market prices Prevalence of concessions, contract penalties, incentive bonuses in your industry Apply the guidance to all payments in the distribution chain Significant advance payments / deferred payment arrangements? Include variable consideration payable to a customer in the transaction price when there is a history/intent of providing such amounts (even if the entity hasn t promised it yet)
Variation consideration illustrative example Question: How does entity estimate for each element of the VC it is entitled to?
Variation consideration illustrative example (Cont'd) Consider: Whether timing of recognizing the VCs may be accelerated
5-Step Model: Step 4
Step 4: Allocate the transaction price to the performance obligations Objective allocate the transaction price to each performance obligation in an amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for transferring the promised goods or services to the customer Mechanics allocate transaction price to each performance obligation identified in the contract on a relative stand-alone selling price basis Stand-alone selling price the price at which an entity would sell a promised good or service separately to a customer best evidence is the observable selling price if not available, estimated maximising use of observable inputs
Step 4: Allocate the transaction price to the performance obligations (Cont'd) Allocate revenue between elements based on standalone selling price of each separate performance obligation Standalone selling price Observable price at which entity would sell a promised good /. service separately to a customer adjusted market assessment approach expected cost plus margin residual approach approach*
Example of Step 4: Allocate the transaction price to the performance obligations Performance obligations identified in Step 2 Basis for estimating stand-alone selling price if not observable (Estimated) stand-alone selling price S$ Calculation Widgets N/A - observable 130,000 (130,000/ 3,005,000)* 2,000,000 Custom valve and installation Expected cost plus margin approach 2,300,000 (2,300,000/ 3,005,000)* 2,000,000 + 250,000 S$ 2,250,000 transaction price determined in Step 3 less S$250,000 bonus directly attributable to the custom valve Allocation 86,522 1,780,782 Training Expected cost plus margin approach 50,000 (50,000/ 3,005,000)* 2,000,000 33,278 Option IFRS 15.B42 525,000 (525,000/ 3,005,000)* 349,418 2,000,000 Total custom valve purchase price X % 3,005,000 2,250,000 incremental discount X % likelihood of exercising the option
Step 5: Recognise revenue when / as performance obligations are satisfied (Cont'd) Revenue is recognised upon satisfaction of a performance obligation by transferring control of a promised good or service to a customer Control transfers over time if one of three criteria is met; otherwise control transfers at a point in time For point-in-time control transfer, certain indicators should be considered Revenue is recognised over time by measuring progress toward completion of performance obligations
Step 5: Recognise revenue when / as performance obligations are satisfied Control is transferred over time Does customer control the asset as it is created or enhanced? (building on customer's land) N Does customer receive and consume the benefits as the entity performs? (cleaning services) N Does asset have an alternative use to the entity? (penthouse in residential complex) Y Y Y Control is transferred over time Y Does entity have the enforceable right to receive payment for work to date and expect to fulfil contract as promised? (cost plus reasonable margin) N N Control is transferred at a point in time
Step 5: Recognise revenue when / as performance obligations are satisfied Control is transferred over time entity has present right to payment customer has significant risks and rewards customer has accepted the asset Indicator of control transfer customer has legal title customer has physical possession
Step 5: Recognise revenue when / as performance obligations are satisfied (Cont'd) Implementation considerations - Selected TRG items of general agreement Measuring progress when multiple (non-distinct) goods or services are combined in a single performance obligation A single measure of progress should be used Evaluating how control transfers for performance obligations satisfied over time When a performance obligation is satisfied over time, control cannot be transferred at discrete points in time Example: Entities should not use output methods based on milestones reached that do not correlate to entity s performance to date
Step 5: Recognise revenue when / as performance obligations are satisfied (Cont'd) Implementation considerations - Selected TRG items of general agreement Right to invoice practical expedient for measuring progress toward satisfaction of a performance obligation Can apply the expedient in contracts with changing rates if the rates correspond directly with changes in value Amount invoiced may not correspond directly with the value provided to the customer if there are upfront payments or retroactive adjustments Example: A 10-year IT outsourcing contract has decreasing rates to reflect decreasing costs and level of effort Contract requires periodic benchmarking to market rates The rates reflect the value to the customer; apply the practical expedient if sufficient evidence exists.
Example - Step 5: Recognise revenue when / as performance obligations are satisfied Performed obligations identified in Step 2 Does the entity meet the criteria to recognise revenue over time? Approach Widgets No At a point in time Custom valve and installation Training Yes (the customer controls the asset as it is created or enhanced as the valve is being built and customized to an existing machine on the client's property Yes (the customer receives and consumes the benefits as the entity performs) Over time (maybe based on labour hours expended or costs incurred) Over time (maybe based on labour hours expended or time lapsed) Option No At a point in time
FRS 115 Understanding the Core Approach Recap 1. Identify the contract 2. Identify Performance obligation Deliver equipment Provide training slides 3. Determine transaction price 4. Allocate transaction price S$100 S$5 5. Recognise revenue when / as performan ce obligation is satisfied When delivered When performed Provide ongoing services Provide additional warranty S$4 S$1 When provided When provided
FRS 115 Revenue from Contracts with Customers Background New Revenue Model Practical examples Other Guidance Presentation and disclosure Transition Industry insights Next Steps
Industries affected by the introduction of FRS 115 Revenue from Contracts with Customers Step 1 2 3 4 5 Aerospace and defence Asset managers Building and construction Contract manufacturers Health care (US) Licensors (media, life sciences, * franchisors) Real estate Software Telecommunications (mobile networks, cable) * In particular life sciences
Applying FRS 115 to Incoterms The interpretation of this change could lead to entirely different result for the revenue recognition cut-off on goods in transit. Risks and rewards can be defined in contracts, which often refer to Incoterms 2010, whereas control is more closely associated with and bound by physical reality. When can revenue be recognised according to IFRS?
Applying FRS 115 to Incoterms (Cont d) FRS 18.14 states: "...when the entity has transferred to the buyer the significant risks and rewards of ownership of the goods", plus other conditions FRS 115.31 states: "...when the customer obtains control of that assets". FRS 115.33 defines: "control of an asset" as "the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. Control includes the ability to prevent other entities from directing the use of, and obtaining the benefits from, an asset".
Applying FRS 115 to Incoterms (Cont d) Allocation of Risks based on Incoterms 2010
Example 1 Entity A has an order to deliver goods to a customer overseas. These goods could be shipped on any of the four categories of Incoterms below: E -term (EXW): Entity A only makes goods available to the customer at Entity A s factory. F -term (FOB): Entity A is required to deliver the goods to a carrier appointed by the customer. C -term (CIF): Entity A contracts for carriage, but without assuming the risk of loss or damage to the goods or additional cost due to events occurring after shipment. D -term (DAF): Entity A bears all costs and risks needed to bring the goods to their destination. In all of the above cases, the point at which risk and rewards pass to the customer is the same point at which the customer obtains the ability to direct the use of the goods and therefore the point at which control passes to the customer. This is shown in the diagram below:.
Example 2 Distributor Z sells and distributes DVD movies to retailers These DVD s are manufactured and delivered to the retailers prior to the movie coming off circuit. The retailers are prohibited by the movie companies from selling these DVD s in their shops until the movie has come off circuit.
Industry Insights Manufacturers (contract manufacturers
Step 1 : Industry Insights - Telecom Revenue under FRS 18 Under FRS 18, many telecom operators provided free handsets to customers and treated them as marketing costs, or costs to obtain a client. Let s assume that ABC recognises no revenue from the sale of handset, because ABC gives it away for free. The cost of handset is recognised to profit or loss and effectively, ABC treats that as a cost of acquiring new customer. Revenue from monthly plan is recognised on a monthly basis. The journal entry is to debit receivables or cash and credit revenues with CU 100. Revenue under FRS 115 Under FRS 115, this is not permitted, as FRS 115 requires allocating the transaction price to individual performance obligations. Under new rules in FRS 115, ABC needs to identify the contract first (step 1), which is obvious here as there s a clear 12-month plan with Johnny.
Step 2 : Industry Insights - Telecom Revenue under FRS 115 Then, ABC needs to identify all performance obligations from the contract with Johnny (step 2 in a 5- step model): 1. Obligation to deliver a handset 2. Obligation to deliver network services over 1 year
Step 3 : Industry Insights - Telecom Revenue under FRS 115 The transaction price (step 3) is CU 1 200, calculated as monthly fee of CU 100 times 12 months.
Step 4 : Industry Insights - Telecom Now, ABC needs to allocate that transaction price of CU 1 200 to individual performance obligations under the contract based on their relative stand-alone selling prices (or their estimates) this is step 4. Performance obligation Stand-alone selling price % of total Revenue (=relative selling price = 1 200%) Handset 23.8% 23.8% 285.60 Network services 960.00 (=80*12) 76.2% 914.40 Total 1 260.00 100.0% 1 200.00
Step 5 : Industry Insights - Telecom Step 5 is to recognise the revenue when ABC satisfies the performance obligations. Therefore: When ABC gives a handset to Johnny, it needs to recognise the revenue of CU 285.60; When ABC provides network services to Johnny, it needs to recognise the total revenue of CU 914.40. It s practical to do it once per month as the billing happens.
Step 5 : Industry Insights Telecom (cont'd) Description Amount Debit Credit When? Sale of handset 285.60 FP Unbilled revenue P/L Revenue from sale of goods When handset is given to Johnny Network services 100.00 (= monthly billing to Johnny) FP Receivable to Johnny 76.20 (=914.40/12) P/L Revenue from network services 23.80 (=285.60/12) FP Unbilled revenue When network services are provided; on a monthly basis according to contract with Johnny
Industry Insights Manufacturers (contract manufacturers
Step 1 : Industry Insights Real Estate
Step 1 : Industry Insights Real Estate (Cont'd)
Step 5 : Industry Insights Real Estate When to recognise revenue?
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 customised 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
Property developer and revenue over time/at the point of time??? (cont'd) 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. 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.
Property developer and revenue over time/at the point of time??? (cont'd) 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.
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 recognise 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 recognises revenue over time that is, over 2 years of construction of apartment based on some output or input method. 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 recognises 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)
Revenue from contract with clients A and B 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
Real Estate old rules (FRS 18 & INT FRS 115)
Real Estate FRS 115
Industry Insights Manufacturers (contract manufacturers
Industry insights Software development Techbits is a software company who entered into contract with a client C on 1 July 20X1. Under the contract, Techbits is obliged to: Provideprofessional services consisting of implementation, customisation and testing of software. Client C has bought software license from the third party. Providepost-implementation support for 1 after the customised software is delivered. Total contract price is CU 55 000.
Industry insights Software development (cont'd) Techbits 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
Industry insights Software development Imply that the relative split between customisation service and postdelivery 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. In the year 20X1, Techbits 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 Techbits 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 postdelivery support (based on man-days).
Industry insights Software development As of 31 December 20X1, Techbits incurred the following costs of fulfilling the contract: Cost of developers and consultants for development, implementation and testing the customised modules: CU 13 000. How should Techbits recognise revenue from this contract under FRS 18 and FRS 115?
Revenue under previous rules (FRS 18) Let s say that TechBits 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 FRS 18, TechBits revenue from this particular contract in the year 20X1 is 29% (stage of completion) x CU 55 000 (total contract price) = CU 15 950.
Industry insights Software development Let s say that Techbits normal charge for the support services is 10% of the package price, no matter what the package is whether some ready-made license or customised software. That would imply that the relative split between customisation service and post-delivery service is 100:10, which is: CU 50 000 (CU 55 000/(100+10)*100) for software development or customisation service, and CU 5 000 (CU 5 000/(100+10)*10) for postdelivery support.
Industry insights Software development (cont'd) 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%
Industry insights Software development (cont'd) Revenue recognised 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 FRS 115: CU 15 000.
Industry insights Software development Performance obligation Estimated total cost (A) Incurred cost to 31-Dec-X1 (B) Progress % (C)=(B)/(A) Allocated transaction price (D) Revenue recognize d 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
Industry Insights Manufacturers (contract manufacturers
Industry insights manufacturers (contract modification) 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).
Industry insights manufacturers (contract modification) (cont'd) 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).
Industry insights manufacturers (contract modification) (cont'd) Revenue under previous rules (FRS 18) 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). Revenue under FRS 115 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 FRS 18.
Industry insights manufacturers (contract modification) (cont'd) Revenue under previous rules (FRS 18) The revenue for the year ended 31 December 20X1: Scenario 2: CU 600 000 (the first 300 computers) + CU 140 000 (additional 100 computers) = CU 740 000 (for all 400 computers already delivered) Revenue under FRS 115 Scenario 2: 30% discount agreed on additional delivery 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
Industry insights manufacturers (contract modification) (cont'd) Revenue under FRS 115 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 recognised 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.
Industry insights manufacturers (contract modification) (cont'd) Revenue under previous rules (FRS 18) Under FRS 18, revenue for the year 20X1 is CU 740 000. The revenue to be recognised in the next period is remaining 100 computers at CU 1 400 = 140 000; that gives us total CU 880 000 per contract. Revenue under FRS 115 Under FRS 115, revenue for the year 20X1 is CU 710 000. The revenue to be recognised in the next period is remaining 100 computers at CU 1 700 = 170 000; that gives us total CU 880 000 per contract.
FRS 115 Revenue from Contracts with Customers Background New Revenue Model Practical examples Other Guidance Presentation and disclosure Transition Industry insights Next Steps
Other Guidance Contract Costs Incremental costs to obtain a contract Capitalised if they are incremental and expected to be recovered. Practical expedient Allowed to expense off for contracts with expected amortization period of one year or less. Example: Sales commissions directly related to obtaining new contracts capitalise Bonuses based on other metrics (e.g., profitability, EPS) do not capitalise Assets are amortised over the period the goods or services are transferred and are subject to impairment review. Selected TRG items of general agreement Refer to the applicable liability standard to determine when costs should be accrued - when accrued, evaluate whether costs meet criteria to be capitalised.
Other Guidance Contract Costs Illustrative Examples Expense Asset
Other Guidance Licensing Licenses of intellectual property (IP) A license establishes a customer s rights to IP of the entity Clarifications: (1) IP is either functional or symbolic Functional IP has significant standalone functionality Licensor does not support or maintain IP Examples: completed media content (film, TV show), software Recognised revenue at a point in time Symbolic IP does not have significant standalone functionality Utility is derived from licensor's past or ongoing activities Examples: brands, logos, trade names Recognised revenue over time
Amendments to FRS 115
FRS 115 Revenue from Contracts with Customers Background New Revenue Model Practical examples Other guidance Presentation and disclosure Transition Industry insights Next Steps
Presentation Does the entity have a right to consideration for good or service that it has transferred toacustomer Y Is the entity's right to consideration unconditional Does the entity have an obligation to transfer good or service to a customer for which the entity has received consideration (for an amount is due)? Y N Y Receivable Contract Cost Contract Liability
Disclosure Objective: to help users of the financial statements understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers Adobe Acrobat Document
FRS 115 Revenue from Contracts with Customers Background New Revenue Model Other Guidance Presentation and disclosure Practical examples Industry insights Transition Next Steps
Transition Method FY 2015 FY 2016 FY 2018 Retrospective * Cumulative catch - up Contracts under FRS 115 (2016 & 2017 contracts restated) Cumulative effect at date of application *** Contracts not restated Cumulative catch-up Existing** and new contracts under new Standard * with optional practical expedients (FRS 115.C4-C5) ** only apply FRS 115 retrospectively to contracts not completed at the date of initial application *** only apply FRS 115 retrospectively to contracts not completed at the date of initial application
Transition (Cont'd) Practical expedients upon transition Completed contracts The amendments give entities the option to apply another practical expedient when using the full retrospective transition approach. Under this expedient, entities are permitted to exclude the evaluation of any contract that was completed at the beginning of the earliest period presented. The purpose of this practical expedient is to reduce the population of contracts to which an entity will need to apply IFRS 15, in order to reduce the effort and cost of initial application. Contracts modifications In addition, an entity will not be required to apply the requirements for contracts modifications retrospectively for those contracts that were modified before the beginning of the earliest period presented. Instead, an entity is required to reflect the aggregate effect of those modifications when: (i) identifying the satisfied and unsatisfied performance obligations (ii) determining the transaction price; and (iii) allocating the transaction price to the satisfied and unsatisfied performance obligations..
FRS 115 Revenue from Contracts with Customers Background New Revenue Model Application guidance Presentation and disclosure Practical examples Industry insights Transition Next Steps
Next Steps
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