(Continued)

Step 3 – Determine transaction price

An entity shall consider the contract terms and customary business practices to determine transaction price. The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring of goods and services to customer, excluding amount collected on behalf of third parties (for example, sale taxes). The consideration promised in a contract with customer might include fixed amounts, variable amounts or both.

When determining transaction price, the entity should consider effects of following factors to the transaction price:

- Variable consideration

- Constraining estimates of variable consideration

- Significant financing component

- Non-cash consideration

- Consideration payable to customer

1. Variable consideration

How to determine and account for variable consideration?

Amount of consideration can vary because of discount, rebates, refunds, credit, price concession, incentives, performance bonus, penalties or other similar items; or it is varied belong to occurrence or non-occurrence of future event.

Method to measure for variable for consideration:

- Expected value which is sum of probability-weighted amounts of a range of possible outcomes. This method is applied when the entity has a large number of contracts with similar characteristics.

- The most likely outcome which is applied for the case when there is only 02 possible outcomes.

[ Note: the entity must apply either method consistently throughout the contract until contract is fully completed. It can not be changed in the middle.]

Illustrative Examples:

Refund liabilities

In some contracts, an entity transfers control of goods to customer and also grants the customer the rights to return the products for various reasons.

In this case, the entity only recognizes revenue to extent of goods which were transferred (PO satisfied) and the entity entitled to corresponding consideration. Revenue would not be recognized for goods expected to be returned. For goods with rights to return, the entity records the received consideration as refund liabilities and at the same time record an asset (and corresponding adjustment to COGS) to reflect value of goods to be returned.

A right to exchange defective goods for a new one is not a refund liability.

Reassessment of variable consideration at the end of each reporting period:

At the end of each reporting period, an entity is required to update the estimated transaction price (variable consideration factors) and assess whether variable consideration is constrained to reflect actual circumstance of the contract at the reporting date.

2. Constraining estimates of variable consideration

An entity shall include in transaction price some or all of amount of variable consideration only to extent that it is highly probable a significant reversal in the amount of cumulative revenue recognized will not occur when uncertainty associated with the variable consideration is subsequently solved.

Otherwise, variable consideration should not be included in transaction price.

3. Significant financing factors

Similar to previous guidance, purpose of separating factor of financing from sale of goods/services is to present financial income separately from sale of goods/services.

As a practical expedient, an entity is not required to recognize impact of significant financing factor if at the inception of the contract it expects that length time from date of transferring goods/services to customer to date of consideration receipt is one year or less. [IFRS 15.63].

4. Non-cash consideration

If consideration of a contract consists of non-cash items promised by customer, the entity shall measure non-cash consideration at its fair value.

5. Consideration payable to customer

Consideration payables to customer might be in form of payable to the customer itself or another party that purchases the entity’s goods/services from the customer. An entity shall account for consideration payable to a customer as reduction of transaction price and therefore reduction of revenue unless the payment to customer is to exchange for a distinct goods/services.

In case payment to customer is exchange for other distinct goods/services, it is recorded as a normal purchase.

(To be continued)

References

- IFRS 15 Revenue from Contracts with Customers

- Training documents prepared by ACCA Vietnam (2017)