7: REVENUE

Contract

An agreement between two or more parties that creates enforceable rights and obligations

Contract Asset

An entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer when the right is conditioned on something other than the passage of time

Contract Liability

An entity’s obligation to transfer goods or services to a customer for which the entity has received consideration from the customer

Control of an Assets

It refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset.

Control of an Assets

The benefits of an asset are the potential cash flows (inflows or savings in outflows) that can be obtain by:

• using the asset to produce goods or services or provide services;

• using the asset to enhance the value of other assets;

• using the asset to settle liabilities or reduce expenses;

• selling or loan; and

• holding the asset

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

Income

Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in an increase in equity

Performance Obligation

A promise in a contract with customer to transfer to the customer either:

• A good or service (or bundle of goods or services) that is distinct; or

• A series of distinct goods or services that are substantially the same and that have the same pattern of transfer to customer

Revenue

Income arising in the course of an entity’s ordinary activities

Stand-alone selling price

The price at which an entity would sell a promised good or service separately to a customer

Transaction price

The amount of considerarion to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties

IFRS 15

is applied to all contracts with customers who has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration

Lease contracts, insurance contracts, financial instruments, and certain non-monetary exchanges

Exclusions from IFRS 15

Five-Step Model

1. Identify the contract(s) with a customer

2. Identify the performance obligations in the contract

3. Determine the transaction price

4. Allocate the transaction price to performance obligations

5. Recognize revenue when (or as) performance obligations are saatisfied

Identify the contract(s) with a customer

The parties to the contract have approved the contract (in writing, orally or in accordance with other customary business practices) and are committed to perform their respective obligations

Identify the performance obligations in the contract

The entity can identify each party’s rights regarding the goods or services being transferred

Determine the transaction price

The entity can identify the payment terms for the goods or services to be transferred

Allocate the transaction price to performance obligations

The contract has commercial substance (the risk, timing or amount of the entity’s future cash flows is expected to change as a result of the contract)

Recognize revenue when (or as) performance obligations are satisfied

It is probable that th entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer

Satisfied over time

One of the following criteria is met:

• The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs

• The customer controls the asset as it is created or enhanced

• The entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date

Satisfied at a point in time

When the indicators of a transfer of control is present which include:

• Right for payment for the asset

• The customer has legal title to the asset

• The entity has transferred physical possession of the asset

• The customer has the significant risks and rewards of ownership of the asset

• The customer has accepted the asset

Goods and Services are distinct

• The customer can benefit from the good or service either on its own together with other resources that are readily available to the customer; and

• The entity’s promise to transfer good or service to the customer is separately identifiable from other promises in the contract

Costs to obtain a contract, Costs to fulfill a contract

Types of costs related to the contract

Costs to obtain a contract

• These are the incremental costs to obtain a contract

• These costs are not expensed in profit or loss, but instead, they are recognized as an asset if they are expected to be recovered (except those related to contracts for less than 12 months_

Costs to fulfill a contract

• If these costs are within the scope of IAS 2, IAS 16, IAS 38, then you should treat them in line with the appropriate standard

• If not, then you should capitalize them only if certain criteria are met

Performance Obligation

is defined as a promise to transfer goods or services

Explicitly stated, implied

A performance obligation can be _______ in the contract or it can be __________

Contract modification

• is a change in the scope or price (or both) of a contract that is approved by the parties to the contract

• this may mean change order, a variation or an amendment

Contract modification

It exists when the parties to a contract approve a modification that either creates new or changes existing enforceable rights and obligations of the parties to the contract

Contract modification

It shall be accounted as ________ if both of the following conditions are met:

• The scope of the contract increases because of the addition of promised goods or services that are distinct

• The price of the contract increases by an amount of consideration that reflects the entity’s stand-alone selling price of the promised goods or services

Variable Consideration

• The consideration promised in a contract may vary because of discounts, rebates, refunds, credits, price concessions, incentives performance bonuses, penalties and other similar items

• It may also vary if the promised is contingent on the occurence or non-occurence of a future event

Performance bonus

The amount of consideration would be variable if either a product was sold with a right of return or a fixed amount is promised as _________

Variability

The ___________ may be explicitly stated in the contract and the entity may accept amounts less than the consideration stated in the contract

PAS 18

The revenue shall be measured at the fair value of the consideration received or receivable

Sale of Goods

Revenue shall be recognized when all the following condition have been satisfied:

• The entity has transferred to the buyer the significant risks and rewards of ownership of the goods;

• The entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold

• The amount of revenue can be measured reliably;

• It is probable that the economic benefits associated with the transactions will flow to the entity; and

• The costs incurred or to be incurred in the respect of the transaction can be measured reliably

License

establishes a customer’s rights to the intellectual property on an entity

Franchise

contractual agreement under which the franchisor grants the franchisee the right to sell certain products or services, to use certain trademarks or trade names, or to perform certain functions, usually within a designated geographical area

Contractual arrangements between two private entities or individuals, Contractual arrangements between a private entity or an individual and the government

Types of Franchises

Contractual arrangements between two private entities or individuals

Franchise acquires the right to exploit the franchisor’s idea or product by signing a franchise agreement

Contractual arrangements between a private entity or an individual and the government

Governmental body allows private entities to use public property in performing its services

Licensing

The contract to grant a license may include other promises to provide additional goods or services to the customer, whether explicitly stated in the contract or implied by the entity’s customary business practices

Promise to grant license is not distinct

All promises must be accounted for as a single performance obligation

• A license that forms a component of a tangible good and that is integral to the functionality of the good

• A license that the customer can benefit from only in conjunction with a related service

Promise to grant license is distinct

The promise to grant license must be treated as a separate performance obligation

• The entity determines whether the promise is satisfied over time or at a point in time

  • Right to access - over time

  • Right to use - at a point in time

Right to Access

The customer cannot directly use of and obtain substantially all of the remaining benefits from, the license at the point in time at which the license is granted

Right to Use

The customer can directly use of and obtain substantially all of the remaining benefits from, the license at the point in time at which the license is granted

Right to Access

Intellectual property changes throughout the license period

• The entity continues to be involved with the IP; and

• The entity undertakes activities that significantly affect the IP