IFRS 15 (adopted in Australia as AASB 15) is the result of the IASB’s and the FASB’s joint project to harmonise the financial reporting of revenue under IFRS and US GAAP. Further guidance is included within IFRS 15 regarding how entities should account for: For one of my clients, a software developing company, your example nr 4 is very recognizable. However, under the latest FASB/IASB proposed model, the signed contract rule is no longer applicable. Hi Silvia, Have a nice day! Here, as we concluded that additional goods are distinct, the main question is whether the additional consideration reflects their stand-alone selling prices. S. Very informative . I was searching for examples from the IT Industry, e.g. 0000047941 00000 n S. Dear Silvia, It was adopted in 2014 and became effective in January 2018. You have mentioned in your example “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).” 0000060427 00000 n The payment schedule is as follows: Assumed period of construction is 2 years from the date of contract. Jane, you should recognize it at the expected amount to receive. Dear Silvia The contracts with clients A and B are NOT identical. CU 5 000 (CU 5 000/(100+10)*10) for post-delivery support. Hi Amr, 0000014770 00000 n As a result, maybe you would need to carefully incorporate time value of money into some long-term advances received or paid, or contracts settled after more than 12 months. Let’s take a look at our situation. Please enlighten me. hi silvia please send me article about disadvantages about ifrs 15 thanks. Hi Silvia, thank you for the great sharing, When I first read the standards/guides, it really causing me headache, I have no clue what is it talking. However, what about an automatic extension of the license after one year without buying a new DVD. Ball PC will supply 200 additional computers (500 in total).”, B. Can we do revenu recognition in the same way under IFRS15? I have one question related to machine sales and progress invoicing based on the following milestones: once again, well done prof.. Hi Silvia, Can you please kindly advise when revenue should be recognized under IFRS 15? To illustrate the potential impact of IFRS 15, let me give you one example dealing with contract modification. The contributions received, Financing income and perhapsa third rental income from owned properties. 0000037507 00000 n E.g. I understand because people chip & pin or use contactless mode of payment , it means that risks have not passed to the taxi company and hence it should only recognise the margin bit as turnover and the other part as cost of sales as it has to pay the driver. If revenue will recognized from 95,000 then please mention complete entry. The consideration agreed in the contract modification. Maybe you should revise your contracts now and see whether you need to make some changes in order to prevent this situation. as I understand, breakage refers to prepaid, but unused services, is that right? Also, the revenue for the individual performance obligations might be recognized over time (e.g. As opposed to existing guidance, IFRS 15 gives you much less room for your own accounting decisions and specifies a lot more things. And if you don’t find your sector here, just go through these 4 as there’s a lot of analogy. Secondly, Do we capitalize the tool asset ? Could you please clarify the above? Is it essential review all the different type of contracts? Of course, you need to perform your analysis and I tell you – your conclusion might be pretty different from this example, based on specifics in the contract. IFRS 15 states very precise and detailed guidance on whether the goods or services promised under the contract are distinct and whether they can be considered separate performance obligations or not. And yes, in some cases, you would apply the Framework. When should revenue be recognised when: The software is sold to the client (selling the DVD a data carrier or providing a download link for the content of the software programme). As a result, the contract modification is NOT a separate contract, but it is bundled with the original contract. Sarah, please browse my website and you’ll find the full article with the difference. Payments against this delivery will be on agreed payment terms. As a result, maybe you would need to carefully incorporate time value of money into some long-term advances received or paid, or contracts settled after more than 12 months. However, IFRS 15 requires capitalizing them and recognizing them in profit or loss in line with revenue recognition. 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). So, basically allocating total price to two different types of products. Paul. However, if the distinct goods or services are added but not at stand-alone selling price, this is a modification of an existing contract, but is essentially treated as a termination of the existing contract and the start of a new contract (IFRS 15.21(a)) as it is treated prospectively. The contract with client B specifies that. If yes, then you need to split the revenue based on their relative stand-alone selling prices and recognize revenue for a machine when you deliver it and the revenue for the installation when you install the machine. Excellent however I can t see a single software can fulfill all type of commercial contract s as each of them has is own carachteristics. However, some companies might face difficult challenges in order to apply the new rules. IFRS 15 is an International Financial Reporting Standard (IFRS) promulgated by the International Accounting Standards Board (IASB) providing guidance on accounting for revenue from contracts with customers. As we say – sweet ignorance. H��W]o� ���b�����h���C 0000031992 00000 n Hi Nicolas, @5 If the revenue is to be recognized over time, how should the company, Do you incur certain costs for obtaining the contract, like, Additional goods and services in the modification must be, Amount of consideration expected for the additional goods/services must. Should we consider the transfer of control point to be when the goods are handed over to the courier company or when the goods are actually delivered to the end user. The easy way to get a grip on International Reporting Standards. Let’s take a look at example in which software company needs to split the contract and treat performance obligations separately. Objectives of today 24 April 2019 3 # 1 Increase awareness and encourage engagement 2 Understand key elements of the IFRS 17 exposure draft 4 Highlight areas of uncertainty, difficulty and areas of focus 3 Create a common language to enable discussions 5 Encourage discussions around potential challenges for you Step 1 – Identify the contract 6 Step 2 – Identify the performance obligations 8 Step 3 – Determine the transaction price 10 Step 4 – Allocate the transaction price 14 Step 5 – Recognise revenue when (or as) the entity - this article compares the accounting under IAS 18 and IFRS 15 on a simple example. you need to identify the performance obligations first. 0000036416 00000 n S. Thanks a lot Silvia! The reason is that RE Construct builds an apartment that can be easily sold or transferred to another client in case of default. IFRS 15 lists 3 situations when an entity needs to recognize revenue over time: For property developers and construction companies, especially one situation is crucial: When the entity’s performance does not create an asset with alternative use to the entity and the entity has an enforceable right to payment for performance completed to date, then the revenue is recognized over time. After I wrote a couple of articles about IFRS 15 here and here, and after I discussed with some of my friends CFOs or auditors, there are two types of reactions: Please, be the exception and stand out from the crowd. Hi Sarah, I am sorry, currently I do not have any article on this. The reason is that the school has not delivered any performance obligations yet (or I guess so). Sure, I used some rounding, but you get the picture. Please check your inbox to confirm your subscription. 0000062929 00000 n Thank you! In the case of client A, the revenue would be recognized at the point of time and revenue from contract B over time. I am working for a health Insurance company could you please explain me as to how wilsl it apply to insurance industry. So we manufacture plastics and for that we have a tool, Technology sector, especially companies involved in a development of software, selling software licenses and providing various related services is famous for the diversity of its operations and long-term contracts. That would imply that the relative split between customization service and post-delivery service is 100:10, which is: Again, this is just an example and some different approach might fit your own situation better. Our company is doing the convergence to IFRS, as required by regulator from 1-1-2017.We didn’t apply IFRS 15 and therefore for lease we will adopt the old standard. IFRS For Dummies Cheat Sheet (UK Edition) By Steven Collings . Thank you, Paul Good luck with your clients – IFRS 15 is a great consulting scope, I believe. Well, I would say that the entry could be debit Trade receivables, Credit Contract liability – only when you have an unconditional right to receive payment. Appreciate your kind advice. I am currently just a student and have the limit knowledge about real situation in firm. Not so simple.S. What are your views? According to the contract, customer is required to do full advance payment before we start work. your efforts are commendable. To help you cope with IFRS 15, I am preparing totally new videos to my premium learning package IFRS Kit (under construction), but I also speak and discuss on LIVE events. Hi Heather, thank you! Please Keep it up. IFRS For Dummies Cheat Sheet (UK Edition) - dummies IFRS For Dummies is your complete introduction to IFRS and international accounting and balancing standards. 0000035920 00000 n The current products are Clients rooms with half board and full board service and entertainment bookings – either paid upfront on bookings or deposit when booked and balance upon check out. IFRS For Dummies provides all the facts you need to understand the complex world of international financial reporting, along with plenty of practical, real-world examples. Kindly let me know the solution of below scenario. Is this a contract modification or a new contract? However, per “B” above, it says that of the 400 computers, 100 computers are under contract amendments while i am expecting that 200 computers are under the additional contract as per “A” above. People even don’t realize this is a challenge and as a result, they do literally nothing in order to prepare themselves. Hi Silvia, hello mam your example is very good for learning for ifrs .that is a big gun to learn anything in the ifrs.thanks. Please could you illustrate with an example. report “Top 7 IFRS Mistakes” Is it fair to say that Oil & Gas products could be sold to other Customers if they are homogeneous? I.e. 0000042547 00000 n Miss Fairuz, However, there are discussions that the mandatory date will be postponed to 2018, but it hasn’t been approved yet. Hi Silvia, And, when control passes, then Debit Contract Liability Credit Revenue. It means that the second criterion is not met. There’s a broad range of what can be manufactured and what contracts manufacturers enter into. 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. Under IAS 18, many telecom operators provided free handsets to customers and treated them as “marketing costs”, or costs to obtain a client. for companies using IFRS to apply the new revenue standard was for reporting periods beginning on or after 1 January 2017, while public companies using US GAAP would be required to apply it to annual reporting periods beginning after 15 December 2016. New IFRS 15 How will the new IFRS 15 standard affect your company? Under the contract, ManyBits is obliged to: ManyBits assessed its total cost for fulfilling the contract as follows: As of 31 December 20X1, ManyBits incurred the following costs of fulfilling the contract: How should ManyBits recognize revenue from this contract under IAS 18 and IFRS 15? Combining all the facts needed to understand this complex subject with useful examples, this easy-to-read guide will have you on top of IFRS in no time. Let’s calculate: Here you can clearly see that in this second scenario (additional delivery with 30% discount): Yes, sure. You simply recognize the revenue from the delivery already made before contract modification under the original contract. You’re abolutely right in respect of starting soon enough not be unhappily surprised at the first year-end of implementation. All current IFRICs related to revenue recognition interpret IAS 18 and they will cease when IFRS 15 will be effective. =�TY��%����f9�n���G���� ��ȿ>�dq���/�����>8q�;( The accounting model summary and presentation are part of our wider effort to help insurers and others understand the requirements of IFRS 17. The biggest areas of impact are probably: Different sectors or industries are affected in many different ways along the 5-step model. Hi Henk, Hello, I would think the performance obligation is done when the advertisement in the magazine is distributed in the market, but the consumption of the advertiser will be across Apr to June 2019. If the period of construction is five years, the entity need not wait until the fifth year to recognize revenue, and instead revenue may be recognized based on the level of work completed for each year, provided that IFRS 15 criteria are met. Here, I selected 4 important industries that will face probably the biggest challenges: Little disclaimer: It is really impossible to write about everything here as that would be enough to write a book. Have a nice day! Question is whether we should not record revenue at stage of raising debtors since performance obligation is met at this time? Best, S. Hi Silvia, May I know how IFRS 15 affect the general revenue reporting in freight forwarding and logistics industry ? This is not the only criterion to decide, but it is prevailing for real estate. Milestone: 1 year prior planned completion, RE Construct will deliver progress reports to clients and clients need to pay CU 50 000 each. thank you very much for this article, it helps a lot in understanding. Forward University takes control over the computers at delivery. 0000043901 00000 n They help me develop my response to challenges my students face.keep it up! In addition, the company provides a license. How do accountants in commercial firms deal with IFRS 15? IFRS 15 for the software industry At a glance It has long been understood that the software industry would be one of the industries more significantly affected by the adoption of IFRS 15. Take the example, that you have a software developing company. 2. Have a couple of queries in connection to cost of acquiring a customer (lets say, direct sales commissions). commissions for getting the client), etc. thanks. Therefore, under IAS 18, ManyBits’ revenue from this particular contract in the year 20X1 is 29% (stage of completion) x CU 55 000 (total contract price) = CU 15 950. The goods once ordered and paid for are handed over a third party courier company for onward delivery to the customer. Which of the 3 criteria were a “yes”? What will be the pattern of expensing these costs in P/L? What I understood that we calculate revenue based on the 45% of total cost not transaction price .. Dalia, Revenue could not be recognized until both parties had signed the terms and conditions of the contract. “After the first delivery is made, Forward University and Ball PC amend the contract. Hi Sylvia S. I have a question regarding recognising revenue for online or website sales for consumer goods. Many thanks to clear us on this. CU 600 000 from the original contract for 300 computers; That part of consideration in the original contract that hasn’t been recognized as revenue yet (in other words, price for goods yet to be delivered); PLUS. Hi silvia, Could you tell me the advantages of IFRS 15 in comparison with IAS 18 and IAS 11. If the revenue is recognised over time according to IFRS15. The core principle of IFRS 15 is that an entity will recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. 0000014962 00000 n 1. And exactly this timing can impact your taxes, dividends, financial rations and everything. Currently I’m doing some reading and own research to apply this standard to SAP system. 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. Note: contract price is not necessarily the same as transaction price, but let’s not complicate it now. Thank You! Mareike (From Germany ). After reading this article I am very comfortable in IFRS 15. Im fully agree with your statement that better start early than the actual date. Thanks in advance! 0000032106 00000 n Hi Silvia you are making IFRS easy, Thank you very much indeed. Made my life easier. Fall in love with your materials. At the end of 20X1, total incurred cost was CU 13 000, which is 29% of total estimated cost of CU 45 000. 0000041949 00000 n If they are not distinct, then you need to decide whether the customer takes control over time or at the point of time. I have questions regarding incoterm CIF. I am not sure I follow the second scenario under the manufacturing contract modification case. it IS the other way round and I wrote that in all the examples, too. Another implication of this treatment is that the revenue recognition does not correspond with monthly billing to customers, as there will be some deferral accounts involved. 1) Well, you do not recognize revenue until you satisfy a performance obligation (whatever that is). Other difficulties arise in areas common for every industry: dealing with contract modifications, how to account for contract costs (e.g. You simply cannot report under invalid rules, that’s why. 0000001076 00000 n What if the second criterion is met instead of the third one? Customer– A party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration. in your opinion, should the television company recognize the licence fee income (total of licence fees collected invoiced every month) in the amount that has been collected, or in the amount of the licence fee invoiced via accounts? Every company must follow the five-step model in order to comply with IFRS 15. Hence the Cost Of sales is not charged for the expired gift vouchers? thank you for your amazing and clear articles, may I ask you if there is an article explain the transportation costs issue, I experienced that some companies put this expenses as a deduction from sales and some others deal with it as S&D expenses, and also the fixed rebate to customer that not related to variable sales(Target) its absolute number per year whether sales is 1 dollar or million dollar. Both clients want to buy almost identical apartments and agree with total price of CU 100 000 per apartment. In certain construction contracts while paying for progressive billings, customer retains (generally 5%) as retention money which is refunded to contractors upon completion of contract. 0000061014 00000 n Published on: 21 Mar 2018 The IASB’s Standard IFRS 15 Revenue from Contracts with Customers is now effective (for periods beginning on or after 1 January 2018 with earlier adoption permitted). 1. S. Always enjoy reading your articles, they help me as I have to educate staff at my company on IFRS. I read all your articles. It would be great if you could also have an illustrative examples . 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: Cost of developers and consultants for development, implementation and testing the customized modules: CU 13 000. 3. Therefore in this case, RE Construct recognizes revenue over time – that is, over 2 years of construction of apartment based on some output or input method. 2) You may if this is material. 70% upon shipment (say in month 2); and finally Alternatively, “no alternative use” can be achieved contractually, meaning that the contract prevents directing the asset to another customer. Allocating the transaction price the Percentage of completion based on costs incurred for fulfilling the contract with a client on... Distinct or not article I am not clear 2 obligations are distinct or not will the! To 2 weeks ). ”, kindly assist to advise them on same = at the same with. 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In P/L software companies will simply have to educate staff at my company on.! We sell transport services ( road haulage which may take 1 to 2 weeks ). ” B. As a result, this is not met recognized upon expiry of prepaid services companies will simply to! Will recognized from 95,000 then please mention complete entry, what about an automatic extension of the license are as., selling materials against customer purchase orders 000 ( CU 5 000/ ( )! Watched your videos in IFRS 15 37 ) in term of some points impact are probably: different or.