ACC5036- IFRS 15 Revenue Recognition Lecture Notes
Page 1: Introduction to IFRS 15
IFRS 15 governs revenue recognition from contracts with customers.
Page 3: Definition of Revenue
Revenue is considered income from an entity's ordinary activities.
IFRS 15 excludes the following contracts:
Leases under IFRS 16.
Insurance contracts under IFRS 4.
Financial instruments.
Non-monetary exchanges.
Page 4: Recognition Criteria
The core principle of IFRS 15:
Recognize revenue to reflect the transfer of goods or services to customers.
Valuation based on the consideration expected to be received.
Revenue recognition is based on control rather than risks and rewards:
Control means the ability to:
Direct the asset's use.
Obtain most benefits from the asset.
Page 5: Five-Step Framework
The revenue recognition process is structured into five steps:
Identify the contract with the customer.
Identify performance obligations in the contract.
Determine the transaction price.
Allocate the transaction price to performance obligations.
Recognize revenue as performance obligations are satisfied.
Revenue is recognized when control passes, either over time or at a specific point.
Page 6: Example 1 - Revenue Recognition Process
Scenario:
Apple receives an order for a MacBook Pro and AppleCare on 1 December 2019.
Customer payment: £1,939 (MacBook Pro: £1,699, AppleCare: £240).
Apply the IFRS 15 five-step process for revenue recognition at year-end 31 December 2019.
Page 7: Presentation in Financial Statements - Cash Received
When cash is received but performance obligation is uncompleted:
Present as contract liability, asset, or receivable based on performance vs. payment received.
Contract liability arises when cash is received before goods/services are delivered.
Page 8: Example 2 - Journal Entries for Upfront Payment
Scenario: A student pays £9,250 in advance for a course at BCU.
Requirement: Identify initial journal entries upon payment and subsequent entries when the performance obligation is fulfilled.
Page 9: Presentation - Performance Obligation Complete
When goods/services are delivered but cash not collected:
Classify as contract asset or receivable, depending on the conditions.
Contract asset recognized when rights to payment are conditional on future performance.
Receivable recognized when rights to payment are unconditional.
Page 10: Example 3 - Accounting for Sales on Credit
Scenario: Poppy sells goods on 30 days credit; customer receives goods immediately.
Scenario: Aston College sells a course with no upfront payment from the student.
Page 11: Agency Sales
For agents, revenue is recognized based on the fees or commissions entitled.
Page 12: Example 4 - Commission Accounting
Scenario: Obinna Ltd records £310,000 in revenue, which includes £8,000 as an agent for Amar PLC.
Requirement: Explain how to account for this in Obinna Ltd's financial statements for the year ended 31 December 2018.
Page 13: Financing Considerations
When determining the transaction price:
Evaluate if timing of payments offers a financing benefit.
Indicators of significant financing:
Difference between promised consideration and cash selling price.
Length of time from goods/services transfer to payment date.
Page 14: Example 5 - Accounting for Significant Financing
Scenario: Rudd contracts to supply equipment, with payment due two years later.
Requirement: How to account for this in Rudd's financial statements for year ended 31 December 2021?
Page 15: Performance Obligation Over Time
Construction contracts often recognize revenue over time.
Page 16: Revenue Recognition Over Time Criteria
Revenue recognized over time if:
Asset cannot be used by the builder; and
Builder has right to payment for work completed.
Revenue measured based on performance obligation satisfaction.
Page 17: Measuring Progress Towards Completion
Approaches include:
Output methods: Work certified compared to total contract price.
Input methods: Costs incurred compared to total contract costs.
Page 18: Contract Revenue Breakdown
Contract revenue includes:
Initial contract amount.
Variations and claims.
Incentive payments for performance.
Revenue recognized based on progress towards completion.
Page 21: Costs to Capitalize Under IFRS 15
Costs that must be capitalized:
Incremental contract acquisition costs.
Fulfillment costs not under other standards.
Amortized as revenue is recognized.
Page 23: Expected Outcomes
For contracts recognized over time:
Profit-making:
Revenue and costs recognized based on contract progress.
Loss-making:
Full loss recognized immediately as an onerous contract.
Page 24: Financial Statement Presentation
Recognize contract assets or liabilities based on cash and costs compared to recorded amounts.
Follow a 4-step approach for recognizing performance obligation satisfaction in financial statements.
Page 25: Step 1 - Calculate Overall Profit or Loss
Formula:
Contract Price - (Costs to date + Costs to complete) = Overall Profit/Loss.
Page 26: Step 2 - Determine Progress of the Contract
Use either output or input method to express progress as a percentage.
Page 27: Step 3 - Profit or Loss Statement
If profitable:
Revenue = Total contract price x progress percentage.
Cost of Sales = Total contract cost x progress percentage.
Page 28: Step 4 - Statement of Financial Position Result
Determine Contract Asset or Liability.
Calculate using costs to date and profit/loss to date versus amounts billed.
Page 31: Overall Approach - Summary
Forecast contract outcome (profit/loss).
Calculate completion percentage.
Prepare statement extracts.
Complete balance sheet accounts.