IFRS 15 – Revenue from Contracts with Customers (Video notes)

Vocabulary flashcards covering key IFRS 15 concepts from the lecture notes.

IFRS 15 core principle

An entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services.

Five-step model (IFRS 15)

Step 1 Identify the contract; Step 2 Identify performance obligations; Step 3 Determine the transaction price; Step 4 Allocate the transaction price; Step 5 Recognise revenue when a performance obligation is satisfied.

Contract (definition)

An agreement between two or more parties that creates enforceable rights and obligations; can be written, oral, or implied by customary business practices.

Five contract criteria

Commercial substance; contract approved and parties committed to perform; rights and obligations identified; payment terms identified; collectability of the transaction price is probable.

Customer

The party that has contracted with an entity to obtain goods or services in exchange for consideration.

Contract combination

Contracts entered into at or near the same time with the same customer that should be combined if certain criteria are met.

Contract modification

A change that creates new enforceable rights and obligations or changes the enforceable rights and obligations of the parties; deemed to be a modification when approved.

Distinct goods or services

A good or service is distinct if it can be used on its own (or with readily available goods/services) and is not highly interdependent with other promised goods/services.

Series guidance

A series of distinct goods or services is a single performance obligation if each is satisfied over time and a common method would be used to measure progress.

Material right

A right that a customer would not receive without entering into the contract (e.g., options or rebates); may create a separate performance obligation.

Stand-alone selling price (SSP)

The price at which the good or service would be sold separately to a customer.

Variable consideration

Consideration whose amount depends on future events; estimated using methods (expected value or most likely amount) and constrained by the likelihood of reversal.

Expected value

Probability-weighted average of possible consideration amounts.

Most likely amount

The single most likely amount in a range of possible consideration amounts.

Significant financing component

A financing benefit exists when the timing of cash payments differs significantly from transfer of goods/services; the transaction price is adjusted for financing.

Retainage

Retention: a portion of consideration kept back to secure performance; not always indicative of a financing benefit.

Allocation of transaction price

Allocate the transaction price to each performance obligation based on relative SSP; use observable price, or estimate if not observable.

Relative stand-alone selling price method

Allocation method using each PO’s SSP as the basis for distributing the transaction price.

Residual approach

An SSP method used when some SSPs are not observable; the remainder of the transaction price is allocated to the remaining obligations.

Allocation to multiple performance obligations

Distribute the transaction price across several POs; variable consideration may be allocated to a single PO if criteria are met.

Point in time versus over time

Revenue recognition timing: over time when customer controls the asset or creates an asset with no alternative use; otherwise at a single point in time.

Indicators of transfer of control (over time vs point in time)

Right to payment, legal title, physical possession, significant risks/rewards of ownership, and acceptance by the customer.

Over time measurement: input vs output

Measuring progress to recognize revenue: input methods (cost-to-cost, labor hours) or output methods (milestones, units delivered).

Uninstalled materials

Materials not yet installed; may be excluded from progress if the entity is providing procurement services only.

Principal vs agent indicators

Assess whether the entity controls the good/service before transfer; indicators include inventory risk, pricing latitude, and ability to direct the activities of others.

Licensing

Rights to IP; types include right to use (recognised at a point in time) and right to access (recognised over time); royalties constraint may apply.

Royalties constraint

For licenses with sales/usage-based royalties, revenue is recognised only when sales/usage occurs.

Slotting fees

Payments to retailers to secure shelf space; accounted for as a reduction of revenue when they are dependent on purchase of goods.

Price protection (markdown compensations)

Compensation to retailers for markdowns; revenue is reduced by estimated price protection when revenue is recognised.

Waste disposal payments

Costs to dispose of packaging can create a separate performance obligation; recognize as service expense or reduce revenue if not at fair value.

Costs to obtain a contract

Incremental costs of obtaining a contract are assets if recoverable; practical expedient allows expensing for contracts ≤1 year.

Fulfillment costs

Direct costs to fulfill a contract; if not within scope of other standards, recognized as an asset and amortized as revenue is recognized.