IFRS 15 – Revenue from contracts with customer is effective and applies for accounting period begins on or after 01 January 2018.

Promulgation of IFRS 15 supersedes application of IAS 11 Construction contract, IAS 18 Revenue and guiding interpretations previously published by IASB.

Scopes of IFRS 15

IFRS 15 applies to all contracts with customer, except for following:

- Lease contract under IFRS 16 (IAS 17)

- Insurance contract IFRS 4

- Financial instruments and other contractual rights and obligations within IAS 39, IFRS 9, IFRS 10, IFRS 11, IAS 27 and IAS 28

- Non-monetary exchanges between companies in a same line of business to facilitate sales to customers

Five steps to recognize revenue under IFRS 15

In this article, we will explore details of contracts under scopes of IFRS 15 (Step 1). Other steps will be addressed in later articles.

Step 1: Identify contract with customer

Contract under scope of IFRS 15

An entity shall apply IFRS 15 to a contract only when the counter party of the contract is a CUSTOMER. A customer is a party who transacts with an entity to obtain goods/services generated by operation activities of the entity in exchange for consideration (sale). A counterparty of a contract would not be a customer for example a party entered into contract to participate in an activity or process in which parties of the contract share risks and benefits resulting from the activity/process rather than to obtain output of the entity’s ordinary activities.

-> Therefore, if the contracting party is not a customer, the contract must be accounted for in accordance with other standards rather than IFRS 15.

A contract with a customer may be partially within scopes of IFRS 15 and partially within scopes of other standards.

A contract is an agreement between two or more parties that creates enforceable rights and obligations.

Criteria for a contract

An entity shall accounts for a contract within scopes of IFRS 15 only when all of following criteria are met: [Par. IFRS 15.9]

- Parties approved contracts and committed to perform obligations

- Can identify each party’s rights

- Can identify payment terms

- Contract has commercial substance; and

- It is probable to collect consideration. In considering probability of collect, the entity shall evaluate only the customer’s ability and intention to pay.

Contract can be written, oral or implied by an entity’s customary business practices.

For purpose of applying this standard, a contract does not exist if each party of the contract has unilateral enforceable right to terminate a wholly unperformed contract without compensating the other parties.

Reassessment of contract criteria

If a contract meets all requirements in [Par. IFRS 15.9] as said above, the company shall not reassess those criteria unless there is indicator of significant change in facts and circumstances.

If a contract does not meet criteria in [Par. IFRS 15.9], an entity shall continue to assess the contract to determine whether criteria in paragraph 9 are subsequently met.

Recognition of contract does not meet contract criteria

When a contract does not meet criteria in paragraph 9, the company shall recognize revenue only when either of following conditions met:

(i) The entity has no remaining obligation to deliver goods/service to customer and all or substantially all of the consideration promised by customer were received and non-refundable. -> it means, contract rights and obligations fully completed.

(ii) The contract is terminated and consideration received from customer is non-refundable.

The company shall record consideration from customer as a liability until one of the events listed above occurs or until contract criteria are subsequently met.

Contract combination

Two or more contracts which are signed at the same or near the same time with a same customer (or related parties of the customer) can be combined to account for as a single contract if one or more conditions below met:

(i) Those contracts are negotiated as a package with a single commercial purposes

(ii) Consideration of one contract is depended on price or performance of the other contract

(iii) Goods and services promised in those contracts are belonged to a single performance obligation

Contract modification

A contract modification is a change in scope or price (or both) of a contract that is approved by parties of the contract. If the parties approved to change in scope of the contract but not yet determine changes in price, the company shall estimate changes in price arising from contract modification.

A contract modification is accounted for as a separate contract if both of following conditions are met:

- Additional goods/services are distinct; and

- Price of the contract increased by an amount of consideration that reflects stand-alone price of the additional goods/services and any appropriate price adjustment to reflect circumstance of the contract. It means price of the newly added goods/services can be adjusted to reflect actual circumstance of that contract.

If a contract modification is not accounted for as a separate contract, it is accounted for as either of following whichever is applicable:

(i) If remaining goods/services are distinct from transferred goods, the company shall account for the contract modification as termination of existing contract and create a new one.

(ii) If they are not distinct, the company shall account for contract modification as a part of existing contract and performance obligation (PO) is unsatisfied. Revenue is then recognized only when PO is satisfied at the revised price due to contract modification.

(To be continued)

Reference

- IFRS 15 Revenue from Contracts with Customers