The Navigator AASB 15 Revenue from contract with customers - Deloitte
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The Navigator
AASB 15 Revenue from
contract with customers
1
2
Index
About this guide 4
Overview 5
Step 1: Identify the contract with a customer 8
Step 2: Identify the performance obligation 11
Step 3: Determine the transaction price 15
Step 4: Allocate the transaction price 18
Step 5: Recognise revenue when (or as) the performance obligation is satisfied 20
Contract costs 23
Disclosures 26
Transition 28
3
About this guide
This publication sets out an overview
AASB 15 Revenue from Contracts with Application of AASB 15 is expected to
of AASB 15. It summarises the key
Customers (‘AASB 15’ or ‘the standard’ have varying levels of impact across
concepts underpinning the framework for
or ‘the new standard’) was issued by the organisations and industries. In some
recognition and measurement of revenue
Australian Accounting Standards Board circumstances, the degree of complexity,
and identifies areas where significant
(‘AASB’) in December 2014 based on IFRS judgement and disclosure requirements
judgement may be required. This guide
15 Revenue from contracts with will require substantial changes to an
is neither intended to be exhaustive nor
customers (‘IFRS 15’) issued by the organisation’s financial reporting systems
provide solutions to all the issues relating
International Accounting Standards and processes, while possibly resulting in
to AASB 15, but rather aims to highlight the
Board (‘IASB’) in May 2014. the disclosure of commercially sensitive
key requirements under the new standard
information.
and provide reference to the paragraphs
A number of implementation issues have
and illustrative examples contained
emerged since the standard was published For successful implementation, it is critical
within AASB 15.
that are subject to ongoing discussion that organisations do not focus only on
at the Joint Transition Resource Group apparent differences between current
We hope you will find this guide helpful
(‘TRG’), a panel formed by the IASB and accounting standards and AASB 15. The
and encourage you to consult where
the Financial Accounting Standards Board full impact of AASB 15 can only be
appropriate should you find yourself facing
(‘FASB’). As a result of these discussions, it understood when contracts are assessed
issues when interpreting and implementing
is expected that additional guidance will be using the new guidance in its entirety.
AASB 15. See www.iasplus.com for further
issued to provide clarity on certain parts of Early assessment and planning will ensure
insights into IFRS 15.
the standard. implementation risks and exposures are
appropriately managed.
For successful implementation, it is critical
that organisations do not focus only on
apparent differences between current
accounting standards and AASB 15. The full
impact of AASB 15 can only be understood
when contracts are assessed using the new
guidance in its entirety.
4
Overview
A new accounting standard on from 1 July 2018. It is noted that, at the Implementation of AASB 15:
revenue recognition: time of this publication, the IASB and where to start?
• AASB 15 provides a new framework AASB have issued an Exposure Draft The core principles of the revenue
for revenue recognition (when to seeking comments in respect of the model as described in the new Standard
recognise revenue) and measurement deferral of the effective date of IFRS15/ are as follows:
(at what amount) following a five-step AASB 15 to annual reporting periods
approach. The new standard replaces commencing on or after 1 January 2018, When is revenue recognised?
the existing accounting literature for with early adoption still permitted When or as the entity satisfies a
revenue recognition which is currently • AASB 15 will apply to contracts of performance obligation by transferring
spread across various standards and not-for-profit (‘NFP’) entities that are a good or service to a customer.
Interpretations, both under IFRS and exchange transactions. AASB 1004
US GAAP Contributions will continue to apply to How much revenue is recognised?
• The mandatory effective date is for non-exchange transactions until the The amount that represents the
reporting periods beginning on or after income from transactions of not-for- consideration to which the entity expects
1 January 2018 with early adoption profit entities project is completed by to be entitled.
permitted. For Australian entities with the AASB. An exposure draft on this
June year-ends, AASB 15 will be effective project was issued in May 2015.
The core principles are supported by the following five steps and disclosure requirements,
as discussed in this document:
Step 1: Step 2: Step 3: Step 4: Step 5:
Identify the Identify separate Determine the Allocate the Recognise revenue
contract(s) with performance transaction price transaction price when(or as) each
the customer obligations in the [AASB 15.47–72; to separate performance
[AASB 15.9–21] contract 87–90] performance obligation is
[AASB 15.22–30] obligations satisfied
[AASB 15.73–86] [AASB 15.31–46]
Contract Costs Disclosures
[AASB 15.91–104] [AASB 15.110–129]
5
AASB 15 is not merely a financial reporting issue:
The requirements of the standard are such that they may have a widespread impact on an organisation. Apart from preparing
the market and educating analysts and shareholders on theimpact of the new standard, entities will need to consider wider
implications. Amongst others, these may include:
Management and Commercial Financial
information systems compliance
System Contract Bank loans
changes management
Assessing data capture and reporting Factoring the impact of AASB 15 into Assessing the likely impact of AASB 15
capabilities to identify gaps in the current the entity’s assessment of new contracts on the entity’s revenue and profit profile
systems and upgrading IT systems, internal that are currently being negotiated to when entering into new banking facilities
processes and controls where required. manage exposure. and negotiating covenants.
Forecasts Employees Taxation
Factoring the impact of the new Understanding remuneration schemes, Assessing the potential impact on
standard on both the timing and amount the impact of the standard on the timing taxable income and deferred taxes to
of revenue recognised into any profit of targets being achieved and the likelihood identify changes to the profile of tax
forecasts that the entity prepares. of targets being met. This may prompt a cash payments, if any.
revision to KPIs. Entities need to identify
appropriate communications and training
needs of employees to maintain employee
engagement and effectively project manage
the implementation of AASB 15.
6• Revenue recognition under AASB
15 will primarily be based on a
set of principles that will require
the determination of numerous
estimates and extensive use of
judgement, while certain parts of
the standard are rules based and The
journey
starts
prescriptive in nature. In some here
cases irreversible elections will
need to be made
• AASB 15 introduces new
complexities both for the timing
of revenue recognition and
the quantum of revenue to be
recorded. For a complete and
effective implementation, entities Plan the implementation process:
will need to embrace the new The extent of impact will differ from entity to entity. Early assessment and planning will
model in this standard rather ensure implementation risks and exposures are appropriately managed. Some of the key
than assessing the changes from activities to be considered in developing a tailored project plan are set out below:
the existing guidance only. The
impact of AASB 15 can only be
fully understood when material Assess the impact Design the solution
contracts and transactions are
assessed using the new guidance • Establish project management team • Draft the implementation plan
in its entirety • Identify stakeholders and assess • Design and develop accounting, systems
• There are significant additional their needs and process solutions
disclosure requirements. This • Evaluate significant revenue streams • Pilot testing of solution design.
will have a pervasive impact and their components
and entities will need to assess Implement the plan
• Identify, evaluate and summarise
whether appropriate systems and
key contracts • Deployment of accounting systems and
processes are in place to collate
• Capture and define key accounting process solutions across organisation
the required information and to
issues and new policy requirements • Training of employees.
assess where disclosures may
contain sensitive information • Determine additional disclosure needs
Review the results
• Entities will need to maintain dual • Analyse data capture requirements,
systems and accounting records capabilities and identify gaps
• Post implementation review, verification
to comply with the transition • Assess other potential process and and monitoring.
requirements of the standard business impacts, e.g. KPI, bonus
• Early planning is critical to structures, forecasting,
ensure implementation risks and loan covenants, etc.
exposures are managed.
7Step 1: Identify the
contract with a customer
AASB 15 only applies where a contract The standard may be applied Has the transaction been approved
exists and where that contract is with a and have the parties committed to
customer [AASB 15.6].
on a portfolio basis if (a) it is their respective obligations?
applied to a group of contracts
A customer is a party that (or performance obligations) Can the entity identify each party’s
has contracted with an entity with ‘similar characteristics’ rights regarding goods/services to
to obtain goods or services and (b) the entity ‘reasonably
be transferred?
that are an output of the expects’ that the effects on Can the entity identify the payment
entity’s ordinary activities in financial statements are not terms for the goods/services to
exchange for consideration. be transferred?
‘materially different’ to the
The new standard specifically scopes effects of applying the standard Is there commercial substance?
out lease contracts, financial instruments, on a contract by contract basis. Is the collection of consideration
insurance contracts and non-monetary
probable based on the customer’s
exchanges between entities in the same Demonstrating that there is no material ability and intention to pay?
trade [AASB 15.5]. However the sale of difference in applying the standard on a
certain non-financial assets that are not portfolio basis vis-a-vis on a contract by
an output of an entity’s ordinary activities, contract basis can be very complex.
e.g. sale or transfer of property, plant
Once within scope, the requirements
and equipment, will be scoped into
relating to modifications of contracts and
this standard.
contract combination must be considered.
Although a gain or loss on this type of
sale generally does not meet the In-scope contracts:
definition of revenue, an entity should When does a contract exist?
apply the guidance in AASB 15 relating to An entity should account for a contract with
the transfer of control and measurement a customer that is in the scope of AASB 15
of the transaction price, including the when all of the following criteria are met
constraint on variable consideration, to [AASB 15.9]:
evaluate the timing and amount of the
gain or loss to be recognised. A contract is an agreement
The standard is to be applied and between two or more parties
assessment made on a contract by
contract basis, except where an entity
that creates enforceable rights
elects and meets the criteria to apply a and obligations.
‘portfolio approach’ [AASB 15.4].
8Further considerations: • Contract does not exist: If the criteria
It is important to consider the following for determining whether a contract
additional guidance when making exists are not met, the entity should
this assessment: continue to assess the contract to
• Contract approvals: Agreements determine whether those criteria are
can be verbal, written or implied. The subsequently met [AASB 15.14].
focus is on whether there are ‘legally Any consideration received in the
enforceable rights and obligations’ absence of a contract is recorded as
[AASB 15.10] a liability until (a) all the obligations
are fulfilled and the amount is
• Contract combination: Contracts
non-refundable or (b) the agreement is
entered into at (or near) the same
terminated and the amount received is
time with the same (or related)
non-refundable [AASB 15.15–16].
customer should be combined if any
one of the following criteria is met:
Modifications:
– Contracts have a single A modification is a change to an existing
commercial objective contract which changes the scope of the
– Consideration or performance under contract and/or the price of the contract.
the contracts is interdependent A contract modification exists when the
– Promised goods or services are a parties to the contract have approved
single performance obligation the modification either in writing, orally
[AASB 15.15–17] or based on their customary business
practices [AASB 15.18–19].
Account for modification
Does the modification add No through a cumulative ‘catch-up
distinct* goods/services? adjustment’ on the existing
contract
Yes
Account for modification as
Does the contract price the termination of the existing
No
increase by an amount that contract and creation of a
reflects the standalone new contract (prospective
selling price** of the adjustment)
additional distinct goods/
services?
Yes
Account for modification as
a separate contract to the
existing contract
* The concept of 'distinct' is discussed in Step 2 Identify the performance obligation.
** The concept of ‘standalone selling price’ is discussed in Step 4 Allocate the transaction price.
9To consider: • In some circumstances, the determination of whether a contract falls within
the scope of AASB 15 or another standard requires significant judgement.
Entities will need to factor in the possibility that a contract may only be
• Is there a contract?
partially in scope of AASB 15; e.g. a contract for the lease of equipment and
• Is the contract scoped out of the provision of services may need to be assessed separately under the
the standard? accounting standard for leases and this standard
• Will the Standard be applied to a • When applying the standard to account for the gain or loss arising on the sale
portfolio of contracts or on a of non-financial assets, e.g. the sale of buildings, an entity needs to take note
contract-by-contract basis? of any repurchase clauses included in the agreement. If any such clause exists,
• Are there any side agreements/multiple entities will be required to apply the AASB 15 guidance relating to repurchase
agreements which need assessment agreements, which is discussed further in Step 5
for contract combination? • An entity needs to exercise significant judgement to evaluate whether
• Have any of the contractual contracts have ‘similar characteristics’ and to establish a ‘reasonable
terms changed? expectation’ that the effects of using a portfolio approach would not differ
• Do factors exist which can lead to a materially from those of applying the guidance at a contract or performance
modified contract, e.g. change in obligation level. There is a need for documented support of such assessment
scope and/or price? • An entity should first determine whether it expects to accept a lower amount
of consideration from the customer than what the customer is obligated to
pay, i.e. offer a price concession to the customer, before assessing whether
collectability is ‘probable’. Collectability will then be based on the lower
amount of consideration
• Legal enforceability depends on the interpretation of the law and could vary
across legal jurisdictions
• Robust systems are required to identify and significant judgement is required
to ascertain how to account for contract modifications
• When accounting for contract modifications where a scope change has been
agreed without a corresponding approval of price, entities need to consider
the guidance on estimating variable consideration. Consideration should
be given to all facts and circumstances, including, but not limited to, prior
experience with similar modifications, in determining whether the price
change will be approved by the customer.
AASB 15 reference:
AASB 15.5–21; Appendix A
Illustrative Examples: for identifying a contract Example 8 – Modification resulting in
Example 5 – Modification of a a cumulative catch-up adjustment
Example 1 – Collectability of contract for goods to revenue
the consideration Example 6 – Change in the Example 9 – Unapproved change in
Example 2 – Consideration is not the transaction price after a contract scope and price
stated price – implicit price concession modification
Example 3 – Implicit price concession Example 7 – Modification of a Basis for Conclusions: BC28–BC83
Example 4 – Reassessing the criteria services contract
10Step 2: Identify the
performance obligation
A performance obligation is the level Criteria for a good/service
at which an entity needs to ascertain being ‘distinct’:
the timing and quantum of revenue Entities will need to identify all promised
to be recognised. goods/services in the contract and assess
whether these goods/services
How is a performance are distinct on their own or in combination
obligation identified? with other goods/services. The following
A performance obligation can be either guidance should be used when making
(a) a good/service that is distinct or (b) a this assessment [AASB 15.26–30]:
series of distinct goods/services that are
substantially the same and have the same
pattern of transfer to the customer [AASB
15.22]. Identification and determination
of performance obligations takes place
at contract inception and will not change
unless there is a contract modification.
Are there Can the Is the good/service separable from other promises in the
multiple customer contract; i.e. is it distinct within the context of the contract?
goods/ benefit from Satisfying one of the following factors is indicative that the
services the good/ good/service is separable from other promises in the contract
promised in service on [AASB 15.29]:
the contract? its own or
• There is no significant service of integrating the good/service
with readily
Yes Yes with other goods/services promised in the contract
available
resources; • The good/service does not significantly modify or customise
i.e. is it another good/service promised in the contract
capable • The good/service is not highly dependent on, or highly
of being interrelated with, other goods/services promised in
distinct? the contract.
No No
No
Treat the Combine Yes
identified goods/
good/service services
as a single until two or
performance more goods/
obligation as services are Account for the good/service as a separate performance
it is ‘distinct’. distinct. obligation as it is ‘distinct’.
11Example of goods/services that However, the goods/services are not Further considerations:
are not distinct distinct within the context of the contract Warranties:
An entity (contractor) enters into a as the entity’s promise to transfer Entities often provide customers with
contract to build a hospital for a customer. individual goods/services in the contract a warranty in connection with the sale
The entity is responsible for the overall are not separately identifiable from other of goods/services, which can take many
management of the project and identifies promises in the contract. This is evidenced different forms varying across industries
various goods/services to be provided, by the fact that the entity provides a and jurisdictions, whether explicitly
including engineering, site clearance, significant service of integrating the contained within the contract or implicit as
foundation, procurement, construction of goods/services (the inputs) into the hospital a result of customary business practice or
the structure, piping and wiring, installation (the combined output) for which the legal requirements [AASB15.B28].
of equipment and finishing. customer has contracted.
An entity should assess the nature of the
The promised goods/services are capable Since both criteria are not met, the warranty to determine the appropriate
of being distinct since the customer can goods/services are not distinct. The entity accounting [AASB 15.B29 – B33].
benefit from them either on their own will account for all of the goods/services
or together with other readily available in the contract as a single performance
resources. This is evidenced by the fact obligation. A careful assessment of specific
that the entity, or competitors of the facts and circumstances will be required
entity, regularly sells many of these goods/ to determine the appropriate accounting
services separately to other customers. treatment in these scenarios.
Does the customer have No Does the warranty provide the No Assurance warranty to
the option to purchase the customer with a service in addition be accounted for as a cost
warranty separately? to the statutory product warranty? accrual under AASB 137*.
Yes Yes
Service-type warranty to be accounted for as a separate performance obligation
under AASB 15. A portion of the transaction price is allocated to the warranty
and revenue will be recognised as and when the warranty service is performed.
* AASB 137 Provisions, Contingent Liabilities and Contingent Assets.
12Example Set-up activities:
A television is sold to a customer with a Activities that an entity undertakes
statutory warranty period of two years to fulfil a contract that do not transfer
and allowing the customer an option to goods/services to the customer, e.g.
purchase an additional two year warranty. administrative tasks to set up a contract,
The statutory warranty will be accounted are not performance obligations. In some
for as a cost accrual under AASB 137 while circumstances, a careful analysis will be
the additional warranty will be accounted required to determine if set-up activities
for as a separate performance obligation have transferred a distinct good/service to
under AASB 15. the customer [AASB 15.25]. Entities may be
able to capitalise costs incurred on these
Option to acquire additional set-up activities if certain criteria are met.
goods/services: For further discussion on capitalisation
Contracts with customers may contain of contract costs, refer to the section on
rights that provide the customer with Contract costs in this guide.
an option to purchase additional goods/
services for free or at a discount, e.g. Implicit promises in a contract:
sales incentives, customer award credits A contract with a customer may contain
or points, contract renewal options, and promises which are implied by the entity’s
discounts on future goods/services customary business practices, published
[AASB 15.B39]. An entity is required to policies or statements, e.g. an entity
account for the customer option to acquire advertises to provide free maintenance
additional goods/services as a separate services in a marketing campaign. If at
performance obligation if the option the time of entering into the contract,
provides the customer with a material such promises create a valid expectation
right [AASB 15.B40]. of the customer that additional goods/
services will be delivered and the goods/
services are ‘distinct’, then the entity should
not recognise revenue until such goods/
services are delivered [AASB 15.24].
Does the option give the
Could the customer obtain
No customer the right to acquire
the right to acquire additional
additional goods/services at a
goods/services without entering
price that reflects the
into the sale agreement?
stand-alone selling price for
those goods/services?
Yes
Yes No
The option does not give rise The option is a material right
to a separate performance that gives rise to a separate
obligation. performance obligation.
13To consider: • Assessment of performance obligations must be made at contract inception
• Significant judgement is required when assessing the ‘distinct’ criteria for a
promised good/service, especially in relation to determining whether the good/
• Are there multiple deliverables in
service is ‘distinct within the context of the contract’. The assessment of when
the contract?
to separately identify and account for a performance obligation in accordance
• For contracts with several deliverables, with this guidance has posed significant challenges to date and has been subject
can the customer benefit from any of to debate at the Joint Transition Resource Group. The IASB may issue additional
the deliverables independently or using guidance to clarify
a readily available resource? this criterion
• What happens if the entity never sells • Only those activities performed by an entity that result in the transfer of a good
the goods/services separately? or service to a customer can give rise to a separate performance obligation.
• Does the entity provide an integrated In some circumstances a careful analysis of activities is required to determine
good/service? whether a separate performance obligation exists or whether the activity is
• Is there is a significant modification or part of delivering a performance obligation, e.g. set up activities, mobilisation of
customisation involved for the good/ resources
service to be delivered? • An entity needs to carefully assess whether there are any implied promises in
• Would a customer buy one good/service the contract as implied promises can lead to revenue deferral until the implied
without the other in the bundle? promise to transfer the good/service is met.
• Does the activity performed by the entity
result in the transfer of a good/service
to the customer?
AASB 15 reference:
AASB 15.22–30; B28–B33; B39–B43; B52–B56
Illustrative Examples:
Example 10 – Goods and services are not distinct
Example 11 – Determining whether goods or
services are distinct
Example 12 – Explicit and implicit promises in a
contract
Basis for Conclusions: BC84–BC116
14Step 3: Determine the
transaction price
As and when a performance obligation Variable consideration: Conditions which enhance the risk of
is satisfied an entity should recognise Variable consideration includes discounts, cumulative revenue recognised being
revenue to the extent of the transaction rebates, refunds, credits, incentives, reversed include:
price allocated to that performance performance bonuses/penalties,
• Amount is highly susceptible to factors
obligation taking into account the impact contingencies, price concessions, or similar
outside the entity’s influence
of constraints arising from variable items. Variability in consideration can arise
consideration [AASB 15.46]. from either the amount being: • Uncertainty is not expected to be
resolved for a long period of time
The transaction price is the • Variable as explicitly stated in the
• The entity has limited experience with
contract or arising from customary
amount of consideration to business practice of the entity or
similar contracts or does not have
adequate data to predict value
which the entity is expected • Fixed but its receipt is contingent on the
• The entity has a practice of offering price
to be entitled in exchange for occurrence of a future event.
concessions or changing payment terms
transferring a promised good/ An entity needs to estimate the amount of
• The contract has a large number and
variable consideration to which it will be
service to a customer. entitled, taking into account the recognition
broad range of possible price variations.
threshold described below [AASB 15.50,
The transaction price is estimated by the Variable consideration is measured using
56]. The recognition threshold limits rather
entity at contract inception. The estimate one of the following methods:
than precludes revenue recognition.
is updated at each reporting date for any
• Expected value – sum of probability-
changes in circumstances which will include
reassessment of any variable component
Recognition threshold weighted amounts in a range of possible
outcomes
identified and relevant modifications Variable consideration is
• Most likely amount – single most likely
to the contract. included in the transaction amount, if outcome is binary in nature.
What impacts the amount of revenue?
price to the extent it is highly
The nature, timing and amount of probable that a significant
consideration promised by a customer reversal in the amount of
affects the estimate of the transaction
price. When determining the transaction
cumulative revenue recognised
price an entity should consider all will not occur when the
of the following: uncertainty is subsequently
resolved.
15Significant financing component: A contract with a customer will not have a A careful assessment of specific facts
An entity is required to consider all facts significant financing component if any of and circumstances will be required to
and circumstances to ascertain if a contract the following factors exist: determine the appropriate accounting
contains a significant financing component. treatment in these scenarios.
• The amount is paid by the customer
If a significant financing component
in advance but the timing of receipt
exists consideration is allocated between Right of return:
of goods/services is at the
revenue and interest expense or interest Many entities offer their customers a
customer’s discretion
income depending on whether the entity right to return purchased products. This
• A substantial amount of consideration is
has received financing from its customer right of return can take different forms,
variable and based on occurrence of
(advance payments) or provided financing e.g. entitling a customer to a full or partial
a future event
to its customer (deferred payments) refund of the amount paid, a credit against
• The timing difference in delivery of
[AASB 15.61]. As a practical expedient, if the value of previous or future purchases,
goods/services and payment occurs for
the time gap between delivery of goods/ or an exchange of one product for another
reasons other than financing,
services and payment is one year or less, [AASB 15.B20]. Understanding the rights
e.g. the customer retains payments
an entity does not need to adjust the and obligations of both parties in an
(retentions) as a protective mechanism
consideration for the effects of financing arrangement when return rights exist
for the performance of an appropriate
[AASB 15.63]. is critical to determining the accounting
quality of work by the entity.
In determining whether a significant [AASB 15.B21].
financing component exists, consider:
Non-cash consideration:
• The difference in the amount of Example
Any non-cash consideration received from
consideration and the cash selling An entity sells 100 units for $50 each.
price – a significant difference indicates a customer needs to be included when
Each unit has a cost of $10 and the entity
the existence of an implicit financing determining the transaction price and
expects that 15 units will be returned. As
arrangement should be measured at its fair value. If the
the entity expects to refund the sales price
• The combined effect of: form of consideration, e.g. shares of the
when the customer returns the goods,
– Expected time lag between delivery customer, makes its fair value variable,
the following should be recognised by the
of goods/services and payment. The then it is reflected in the assessment of the
entity:
longer the time gap, the greater transaction price and is not subject to the
the possibility that a financing • Revenue, but only to the extent of the
constraint on variable consideration
component exists entity’s expectation that the customer
[AASB 15.66–69].
– Prevailing interest rates in will not return the goods; i.e. 85 units
the market. at $50 each
Consideration payable to customer:
• A refund liability for the portion
Consideration paid to a customer is
If a significant financing accounted for as a reduction of revenue
expected to be returned, i.e. 15 units
at $50 each
component exists, the entity unless the payment relates to the customer
• An asset with a corresponding
providing distinct goods/services to the
should measure the interest adjustment to cost of sales for the right
entity in which case it is recorded as a
income or expense using a separate transaction with the customer
to recover products from customers on
settling the refund liability, i.e. 15 units
discount rate that reflects the [AASB 15.70–72].
at $10 each.
rate that would be used in a
Example
separate financing transac- If the customer provides advertising
tion between the entity and services for the entity’s products and
is paid fair value by the entity, then
its customer. This rate should
the amount paid to the customer will
reflect the credit risk of the be viewed as a cost of advertising for
party obtaining financing in the the entity; while an amount paid to the
customer to place the products in a
arrangement which could be
favourable location (‘slotting’) in the retail
the entity (if receiving advance store may not result in a separate service
payments) or the customer being provided by the customer to the
entity, thus resulting in the entity recording
(if making deferred payments).
the amount as a reduction of revenue.
16To consider: • When an entity is considering whether a contract contains a significant financing
component or is assessing the highly probable threshold for recognition of
variable consideration, it needs to exercise significant judgement which will
• Does the entity offer variable pricing require additional documentation and disclosure
to its customers, either through
• Entities will need to assess different types of variable consideration in
customary business practice or
their business
as per the contract; e.g. discounts,
rebates, performance bonuses, • In some cases the entity may be subject to liquidated damages or penalties that
refunds, penalties? may result in the entity not recognising revenue or recognising a net expense
• Are there any contingent events, • Entities need to be aware of the different thresholds to be applied for assessing
the occurrence of which will trigger ‘collectability’ in Step 1 and the ‘variable consideration constraint’ in Step
consideration from the customer? 3. Assessment of ‘collectability’ is based on a ‘probability’ threshold while
constraining the amount of variable consideration to be recognised is based on
• Does the entity have adequate data to
a ‘highly probable of no significant reversal’ threshold. Once revenue has been
estimate the variable consideration?
recognised any bad debt provision is assessed on the gross amount of revenue
• Have there been any changes in the recognised and the bad debt is recognised as an expense
transaction price since inception of
• If an entity receives upfront payments or cash advances from a customer it
the contract?
will need to assess the existence of an implicit financing transaction, in which
• Is there a time lag between collection of case the amount of revenue recognised will be adjusted with a corresponding
money and delivery of goods/provision interest expense recognised in the income statement
of services?
• There are now specific requirements in the standard in relation to the
• Does the entity have any ‘buy now, pay measurement of non-cash consideration and how to account for any amounts
later’ offers? that an entity may pay to its customers
• Are there any provisions for the • If the contract contains a significant financing component, the discount rate
customer to pay by a means other used for measuring the interest income or expense is not the implicit rate in
than cash or credit, e.g. shares of the the contract, rather it is the market interest rate reflecting the credit risk of the
customer or other goods/services party obtaining the finance. Accordingly if multiple customers make deferred
provided by the customer? payments, an entity may recognise different revenue amounts for contracts with
• Does the entity pay any amount similar terms if the credit profiles of the customers differ.
to the customer? If so, what is the
reason for such a payment?
AASB 15 reference:
AASB 15.46–72; B20–B27
Illustrative Examples: Example 24–Volume discount Example 27 – Withheld payments non-cash consideration
incentive on a long-term contract Example 32 – Consideration payable
Example 20–Penalty gives rise to Example 25–Management fees Example 28 – Determining the to a customer
variable consideration subject to the constraint discount rate
Example 21–Estimating variable Example 12 – Explicit and implicit Example 29 – Advance payment and Basis for Conclusions:
consideration promises in a contract assessment of the discount rate BC181–BC265
Example 22–Right of return Example 26 – Significant financing Example 30 – Advance payment
Example 23–Price concessions component and right of return Example 31– Entitlement to
17Step 4: Allocate the
transaction price
After determining the transaction price In some circumstances stand-alone selling Example
at Step 3, Step 4 specifies how an entity prices are not observable and therefore Entity X enters a contract with a customer
should allocate that transaction an entity may need to estimate the stand- to sell goods/services A, B and C for $100.
price between the various performance alone selling price of a performance
obligations identified in Step 2. This is obligation using one of the following A B C
particularly relevant when the timing of approaches [AASB 15.79]:
revenue recognition varies for each of the
1. Adjusted market assessment
performance obligations.
approach: based on the current market,
What is the basis of allocation? estimate the price that customers would
Stand-alone selling price: be willing to pay for the good/service
The stand-alone selling prices are
The transaction price should be allocated 2. Expected cost plus margin approach: estimated as follows:
to each performance obligation based on determine the expected cost to satisfy
the relative stand-alone selling prices of the the performance obligation and Item A –
goods and services being provided to the add an appropriate margin Directly observable price $50
customer [AASB 15.76]. 3. Residual approach: deduct all stand- Item B –
The best evidence of a stand-alone selling alone selling prices of the other goods/ Adjusted market assessment approach $25
price is the price the entity charges for services from the total transaction
Item C –
each good/service when selling them price and allocate the residual to the
Expected cost + margin approach $75
separately to similar customers and under remaining good/service.
similar circumstances [AASB 15.77]. The customer receives a discount for
The existence of variable
purchasing the bundle of goods and
At inception of the contract consideration [AASB 15.84–86], services, because the sum of the stand-
the stand-alone selling price discounts [AASB 15.81–83] or alone selling prices ($150) exceeds the
should be determined together changes to the transaction promised consideration ($100).
with the allocation of the price after inception of the The discount is allocated proportionally to
all performance obligations unless there
transaction price to various contract [AASB 15.87–90] is observable evidence that the entire
performance obligations. will require a careful analysis discount relates to one or more specific
The basis of the allocation to determine whether performance obligation(s) in the contract.
cannot change at a later any of these items should Allocation of transaction price $100:
date [AASB 15.88]. be allocated to a specific A $33 = $50 / $150 x $100
performance obligation or on a B $17 = $25 / $150 x $100
C $50 = $75 / $150 x $100
pro-rata basis across multiple
performance obligations.
18To consider: • AASB 15 contains reasonably prescriptive guidance on recognition and
measurement of revenue arising from contracts containing bundled goods/
services while the existing accounting standards contain very little in terms of
• Does the entity regularly offer bundled this requirement. Accordingly this could be an area of significant change for
pricing on products it sells separately? some entities and entities will need to consider whether their existing systems
• Does the entity provide discounts on and processes are capable of allocating the transaction price in accordance with
bundled goods/services which need to the new standard
be allocated? • The transaction price must be allocated to goods/services irrespective of
• Has the entity offered a discount for whether an observable price exists. There is no exception available due to a ‘lack
only one good/service within a bundle? of reliable information
• Is there variable consideration which • The relative stand-alone selling price of each performance obligation is
requires allocation? determined at contract inception and is not reallocated to reflect subsequent
• Are stand-alone selling prices changes in stand-alone selling prices.
observable?
• Is there a need to allocate changes
in the transaction price to individual
performance obligations?
AASB 15 reference:
AASB 15: 73–90
Illustrative Examples:
Example 33 – Allocation methodology
Example 34 – Allocating a discount
Example 35 – Allocation of variable consideration
Basis for Conclusions: BC266–286
19Step 5: Recognise revenue when (or as)
the performance obligation is satisfied
The final step is to determine, for each Satisfaction of performance obligations: • An entity’s selection of an input method
performance obligation, when revenue At contract inception an entity needs to (e.g. percentage cost completion
should be recognised. determine whether control of a good/ method) or an output method
service transfers to the customer over (e.g. assessing value transferred) for
When to recognise revenue? time or at a point in time using the criteria this purpose is not an accounting policy
An entity recognises revenue as and when below [AASB 15.35–37]. This determination choice, rather the method selected
each performance obligation is satisfied by is not expected to change over the life of must be able to best depict the pattern
transferring control of a promised good/ the contract. For all other performance of transfer of goods/services to the
service to the customer [AASB 15.31]. obligations, revenue is recognised at a customer [AASB 15.41–45].
point in time.
Control is the ability to Measurement of progress:
direct the use of and obtain • For revenue recognised over time, an
entity needs to measure the progress
substantially all of the benefits towards complete satisfaction of
from the goods/services and/ the performance obligation with the
or the ability to prevent others objective of recognising revenue that
depicts the entity’s performance in
from obtaining benefits from transferring control of the goods/
the use of the goods. services to the customer [AASB 15.39]
Customer Seller’s performance Seller’s performance does
simultaneously creates or enhances an not create an asset with
receives and consumes asset controlled by or an alternative use to the
or
benefits of a the customer. seller AND the seller has an
good/service. enforceable right to payment.
Revenue recognised
over time.
20For performance obligations satisfied at a
point in time, an entity is required to assess
when control has been transferred to the
customer by considering the following
indicators [AASB 15.38].
Customer has Customer Customer has Customer has Entity has
legal title has physical significant risks accepted the present right
possession and rewards of goods/services to payment
ownership
Not all of the above indicators need to be
present for an entity to conclude that it has
transferred control to a customer.
When evaluating whether a customer has
obtained control of the goods/services, an
entity should consider the existence of any
repurchase agreements [AASB 15.34].
Application guidance in specific circumstances
Repurchase agreements: Repurchase rights are an obligation or right to repurchase a good after it is sold to a
customer, which can take the form of a put option, a call option or a forward contract. The
existence of these clauses can have a significant impact on the accounting for the contract.
Depending on the facts and circumstances, the arrangement may be recorded as a sale, a
lease contract or as a financing agreement [AASB 15.B64–B76].
Customers’ unexercised When an entity receives a non-refundable prepayment from the customer, e.g. sale of gift
contractual cards, gift certificates or lay-by sales, the customer has an unexercised right to receive
rights: goods/services in the future, which some customers may not use (typically termed as
‘breakage’). An entity is required to consider whether or not the customer will eventually
exercise their rights which will impact the entity’s pattern of revenue recognition
[AASB 15.B44–B47].
Consignment arrangements, An entity must consider the existence of these arrangements when determining the point
bill-and-hold arrangements: in time that it transfers control to the customer as this could impact the timing of revenue
recognition [AASB 15.B77–B82].
Non-refundable upfront fees: If contracts include non-refundable upfront fees from customers, revenue recognition
should be delayed if the fees relate to future goods/services to be transferred to the
customer [AASB 15.B48–B51].
License: If the licence of intellectual property is considered a separate performance obligation, an
entity is required to assess the nature of the licence to determine whether to recognise
revenue at a point in time or over time [AASB 15.B52–B62]. An entity should recognise a
sales-based or usage-based royalty only on the occurrence of the subsequent sale or
usage [AASB 15.B63].
21To consider: • Revenue recognition over time is not limited to only service arrangements.
Depending on the terms of the agreement revenue may be recognised over
time when the entity constructs customised goods or complex assets for the
• Is the entity selling a customised good? customer depending on whether the entity has payment rights over the period
• What are the payment terms? • Not all the indicators for transfer of control need to be present for an entity to
Does it create an enforceable right conclude that it has transferred control to its customer. Similarly the standard
forthe entity? does not provide any guidance on whether more weight is to be placed on
• Are there clauses in the agreement that one indicator over the others. Significant judgment is required to determine if
are in the nature of forward sale control has been transferred
or purchase, put and/or call options? • For any licensing arrangements an entity needs to exercise significant
• When does the customer gain control judgement when determining whether the licence is a separate performance
over the good/service? obligation within the contract and the appropriate timing of revenue recognition
• Is usage of the percentage of from such licences. This is an area that has undergone significant debate by the
completion method still appropriate IASB and is still subject to discussion at the Joint Transition Resource Group. The
to measure revenue? IASB is expected to issue additional guidance on license arrangements
• Does the entity receive any • The timing of revenue recognition will be subject to significant judgement,
non-refundable upfront fees? especially when there are repurchase clauses (puts, calls and/or forwards)
What rights does the customer have within an agreement or when the entity receives non-refundable upfront fees.
as a result of the upfront fee?
• Does the entity have licensing
arrangements?
AASB 15 reference:
AASB 15.31–38; B2–B19; B44–B51; B57–B86
Illustrative Examples: Example 17 –Assessing whether a Example 54 – Right to use intellectual Example 61 – Access to intellectual
performance obligation is satisfied property property – Brand
Example 13 – Customer at a point in time or over time Example 55 – Licence of intellectual Example 62 – Repurchase
simultaneously receives and – Construction property agreements
consumes the benefits – Services Example 18 – Measuring progress Example 57 – Franchise rights Example 63 – Bill-and-hold
Example 14 –Assessing alternative when making goods or services Example 58 – Access to intellectual arrangement
use and right to payment – Services available – Health Clubs property – Images
Example 15 –Asset has no alternative Example 19 – Uninstalled materials Example 59 – Right to use intellectual Basis for Conclusions:
use to the entity – Construction – Construction property – Music BC117–BC157;BC396–BC431
Example 16 –Enforceable right to Example 53 – Non-refundable upfront Example 60 – Access to intellectual
payment for performance completed fees – Services property – Movies
to date – Construction
22Contract costs
The new standard introduces guidance on What costs can be capitalised?
how to account for costs associated with When assessing whether contract costs are
a customer contract when they do not eligible for capitalisation it is important to
fall within the scope of another standard, distinguish between the costs of obtaining
e.g. AASB 102 Inventories or AASB 116 a contract and the costs of fulfilling it. Both
Property Plant and Equipment. The of these categories of cost may be eligible
guidance addresses costs of obtaining a for capitalisation in accordance with the
contract, costs of fulfilling a contract and the standard. However, the rules for each
amortisation and impairment of contract category are different and care must be
costs capitalised. taken to apply the correct guidance.
Incremental costs of obtaining a contract [AASB 15.91-94]:
Incremental costs relate to No
winning the contract, e.g. sales
commission?
Expense
(Unless explicitly chargeable to the
Yes customer)
Entity expects to recover No
these costs?
Yes
Yes
Amortisation period of the asset Accounting policy choice: Expense or
is less than 1 year? recognise an asset and amortise on a
systematic basis.
Yes
No
Recognise an asset and amortise on a
systematic basis.
Costs to fulfil a contract [AASB 15.95-98]:
Are the costs incurred Are all of the following conditions met:
to fulfil the contract No • Costs relate directly to the contract?
in the scope of other
• Costs generate or enhance the resource?
accounting standards?
• Costs are recoverable?
Yes Yes No
Account for in Recognise an asset Expense costs as they
accordance with the and amortise on a are incurred.
specific accounting systematic basis.
standard.
23Costs directly attributable to a contract Contract duration [AASB 15.11–12]:
include [AASB 15.97]: Contract duration is an important
• Direct labour assessment for the purpose of determining
• Direct materials the appropriate amortisation of costs,
as well as deferred revenue. Some of
• Allocations of costs directly related to
the factors to consider in assessing the
the contract
duration of a contract are:
• Costs explicitly chargeable to the
customer under the contract • Whether there are ‘legally enforceable
rights and obligations’
• Other costs directly incurred as result of
entering into the contract, e.g. payments • Whether there is a reference to a fixed
to subcontractors. period in the contract
• Clauses in the contract or past practice
Costs required to be expensed when relating to termination and auto-renewal
incurred [AASB 15.98]: of contracts.
• General and administrative costs, unless Impairment of capitalised contract costs
explicitly chargeable under the contract [AASB 15.101–104]:
• Costs that relate to satisfied Costs that are recognised as assets are
performance obligations periodically tested for impairment. The
• Costs of wasted materials, labour or recoverability of capitalised contract costs
other contract costs. should be assessed on a contract-by-
contract basis by comparing the remaining
Amortisation of capitalised contract
consideration to the unamortised contract
costs [AASB 15.99–100]:
costs. Prior to recognising an impairment
Costs that are recognised as assets are
loss on the capitalised contract costs, the
amortised over the period that the related
entity should first evaluate recovery of the
goods/services are to be transferred to
carrying value of other assets related to
the customer. An entity should update
the contract according to the guidance in
the amortisation if there is a significant
other accounting standards, such as AASB
change in the expected timing of transfer
102 Inventories and AASB 136 Impairment
of the remaining goods/services under the
of Assets. After recording any asset
contract which will be accounted for as
impairment from applying other standards,
a change in estimate in accordance with
an entity should apply the impairment
AASB 108 Accounting Policies, Changes in
guidance in this Standard to the contract
Accounting Estimates and Errors.
cost asset.
24• The standard prohibits capitalisation of costs that are to be incurred by the
To consider:
entity regardless of whether a contract is won, e.g. legal, travel and other
costs associated with bidding, proposal and marketing. These costs should be
• Are the costs incurred directly expensed. Costs which are incurred only due to the entity winning a contract,
attributable to the contract? e.g. sales commission paid to employees, will be eligible for capitalisation if they
• Does the entity incur design costs prior are recoverable
to obtaining a contract?
• Contract costs expensed cannot be capitalised later
• What is the duration of the contract?
• Are there options to extend the contract • For the purpose of assessing the recoverability of contract costs, an entity is
beyond its initial terms? required to determine the remaining consideration under the contract. In order
• Can the entity recover set-up or to do so, an entity should use the transaction price determined in Step 3 without
mobilisation costs incurred that are applying the constraint on variable consideration. However, an entity is required
not considered separate performance to adjust the remaining consideration for the customer’s credit risk (expected
obligations? Are these costs charged to provision for doubtful debts)
the customer separately?
• The standard contemplates that an entity can capitalise costs that are directly
• How does the entity assess whether a
contract is ‘anticipated’ for the purpose attributable to fulfilling an ‘anticipated’ contract.
of capitalising directly attributable costs?
AASB 15 reference:
AASB 15: 91–104
Illustrative Examples:
Example 36 – Incremental costs of
obtaining a contract
Example 37 – Costs that give rise to
an asset
Basis for Conclusions: BC297–BC311
25Disclosures
The presentation requirements of the For example:
new standard include disclosure intended • Effective date and expected date of
to enable users to understand the amount, initial application
timing and judgements related to revenue
• Expected impacts
recognition and the related cash flows.
The requirements include, where • Nature of changes in accounting policy
applicable, qualitative and quantitative as a result of applying the new standard.
information that will extend disclosures
beyond current practice. Significant level of enhanced and
detailed disclosure:
How will the financial The new disclosure requirements
statements change? encompass both quantitative and
From now until effective date qualitative disclosures [AASB 15.110-129].
of application:
Entities should consider what Objective:
disclosures are required to comply Enable users to understand nature, amount, timing and
with AASB 108.30–31.
uncertainty of revenue and cash-flow
Contracts with customers Assets from contract costs Significant judgements applied
• Disaggregation of revenue • Judgements used to ascertain costs to • Judgements applied or changes in
into categories that show obtain or fulfill a contract judgement regarding the:
how economic factors affect • Method(s) used for amortisation – Timing of satisfaction of
the nature, amount, timing performance obligations
• Closing balance by main category (set-up
and uncertainty of revenue and
costs, pre-contract costs, costs to – Transaction price allocated to
cash flows, reconciled to the
obtain contracts) performance obligations
Segment Note
• Amount of amortisation during • Performance obligations satisfied
• Reconciliation of contract balances:
the period over time – methods used to measure
– Opening and closing balances and progress and the reasoning
• Amount of impairment loss during
revenue recognised during the period
the period. • Methods, inputs and assumptions for
from changes in
determining the transaction price;
contract balances
constraining variable consideration;
– Qualitative and quantitative allocation of the transaction price;
information about the significant obligations for refunds and returns
changes in contract balances
• Performance obligations satisfied at
• Descriptive information about an entity’s a point in time – evaluation of when a
performance obligations customer obtains control
• Information about the transaction price of goods/services.
allocated to remaining performance
obligations and when revenue will be
recognised
• Impairment losses on receivables.
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