Revenue IFRS®15 handbook June 2019 home.kpmg/ifrs Contents Facing new challenges 1 7.3 Amortisation 187 Overview 2 7.4 Impairment 192 1 Step 1 – Identify the contract with a customer 3 8 Contract modifications 194 1.1 Criteria to determine whether a contract 8.1 Identifying a contract modification 194 exists 3 8.2 Accounting for a contract modification 198 1.2 Contract term 14 9 Licensing 206 1.3 Consideration received before a contract 9.1 Licences of intellectual property 207 exists 17 9.2 Determining whether a licence is distinct 209 1.4 Combination of contracts 19 9.3 Determining the nature of a distinct licence 214 2 Step 2 – Identify the performance obligations 9.4 Timing and pattern of revenue recognition 220 in the contract 23 9.5 Contractual restrictions and attributes of 2.1 Distinct goods or services 24 licences 223 2.2 Implied promises and administrative tasks 35 9.6 Sales- or usage-based royalties 225 2.3 Series of distinct goods or services 39 10 Other application issues 234 3 Step 3 – Determine the transaction price 46 10.1 Sale with a right of return 234 3.1 Variable consideration (and the constraint) 47 10.2 Warranties 239 3.2 Significant financing component 63 10.3 Principal vs agent considerations 244 3.3 Non-cash consideration 78 10.4 Customer options for additional goods 3.4 Consideration payable to a customer 81 or services 263 3.5 Sales taxes 88 10.5 Customers’ unexercised rights (breakage) 285 10.6 Non-refundable up-front fees 289 4 Step 4 – Allocate the transaction price to the 10.7 Sales outside ordinary activities 295 performance obligations in the contract 90 4.1 Determine stand-alone selling prices 91 11 Presentation 299 4.2 Allocate the transaction price 98 11.1 Statement of financial position 299 4.3 Changes in the transaction price 111 11.2 Statements of profit or loss and cash flows 312 5 Step 5 – Recognise revenue when or as the 12 Disclosure 316 entity satisfies a performance obligation 113 12.1 Annual disclosure 316 5.1 Transfer of control 114 12.2 Interim disclosures 325 5.2 Performance obligations satisfied over time 115 13 Effective date and transition 326 5.3 Measuring progress towards complete 13.1 Transition 326 satisfaction of a performance obligation 131 13.2 Retrospective method 328 5.4 Performance obligations satisfied at a point 13.3 Cumulative effect method 337 in time 148 13.4 Consequential amendments to other IFRS 5.5 Repurchase agreements 151 requirements 341 5.6 Consignment arrangements 156 13.5 First-time adoption 342 5.7 Bill-and-hold arrangements 159 Guidance referenced 344 5.8 Customer acceptance 161 Detailed contents 345 6 Scope 162 6.1 In scope 162 Index of examples 348 6.2 Out of scope 163 Index of KPMG insights 355 6.3 Partially in scope 165 About this publication 363 6.4 Portfolio approach 171 Keeping in touch 364 7 Contract costs 173 7.1 Costs of obtaining a contract 173 Acknowledgments 366 7.2 Costs of fulfilling a contract 179 Facing new challenges Reporting revenue under IFRS 15 is now one of the ordinary activities of companies in the 100+ countries that use IFRS Standards. So this feels like the right time to take stock – to pull together, in one place, what we have learned about this new world of revenue recognition. Over the past five years, we – like you – have wrestled with the many challenges of implementing IFRS 15. In doing so, we have gained extensive insight and hands- on experience across different industries and geographies. And we are delighted to share our experience with you in our IFRS 15 handbook: Revenue. It provides detailed guidance, illustrative examples and extensive discussion of the areas that companies have found most complex. Looking forward, as your business grows and evolves – whether by developing new products and services, embedding technological innovations or buying new businesses – we hope this handbook will be your go-to resource as you apply IFRS 15 to new facts and circumstances. Prabhakar Kalavacherla (PK) Brian O’Donovan Anne Schurbohm Kim Heng KPMG Global Revenue Recognition Leadership Team © 2019 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 2 | Revenue – IFRS 15 handbook Overview This handbook provides a detailed analysis of the revenue standard, IFRS 15 Revenue from Contracts with Customers, including insights and examples to help entities to navigate the revenue recognition requirements. In many cases, further analysis and interpretation may be needed for an entity to apply the requirements to its own facts, circumstances and individual transactions. Furthermore, some of our insights may change and new insights will be developed as issues from the implementation of the revenue standard arise and as practice evolves. Organisation of the text The following diagram highlights the layout of the revenue standard and the corresponding sections in this handbook. Each section provides an overview, the requirements of the standard, examples illustrating basic scenarios and our insights. Some sections also have additional application examples illustrating more complex scenarios or sector-specific issues. 5-step model (1) (2) (3) (4) (5) Step 1– Step 2– Step 3– Step 4– Step 5– Identify the Identify Determine Allocate the Recognise contract performance the transaction transaction revenue obligations price price (6) Scope Other recognition and measurement guidance (7) (8) (9) (10) Contract Contract Licensing Other application costs modifications issues Presentation and implementation (11) (12) (13) Presentation Disclosure Effective date and transition © 2019 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 1 Step 1 – Identify the contract with a customer | 3 1.1 Criteria to determine whether a contract exists | 1 Step 1 – Identify the contract with a customer Overview A contract with a customer is in the scope of the standard when the contract is legally enforceable and certain criteria are met. If the criteria are not met, then the contract does not exist for the purpose of applying the general model of the standard, and any consideration received from the customer is generally recognised as a deposit (liability). Contracts entered into at or near the same time with the same customer (or a related party of the customer) are combined and treated as a single contract when certain criteria are met. 1.1 Criteria to determine whether a contract exists IFRS 15.10 The standard defines a ‘contract’ as an agreement between two or more parties that creates enforceable rights and obligations and specifies that enforceability is a matter of law. Contracts can be written, oral or implied by an entity’s customary business practices. IFRS 15.12 A contract does not exist when each party has the unilateral right to terminate a wholly unperformed contract without compensation. IFRS 15.9 A contract with a customer is in the scope of the standard when it is legally enforceable and meets all of the following criteria. ... collection of ... rights to goods consideration is or services and probable payment terms can be identified A contract exists if... ... it is approved and the parties are ... it has commercial committed to substance their obligations © 2019 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 4 | Revenue – IFRS 15 handbook IFRS 15.9(e) In making the collectability assessment, an entity considers the customer’s ability and intention (which includes assessing its credit-worthiness) to pay the amount of consideration when it is due. This assessment is made after taking into account any price concessions that the entity may offer to the customer (see Section 3.1). IFRS 15.14 If the criteria are not initially met, then an entity continually reassesses the contract against them and applies the requirements of the standard to the contract from the date on which the criteria are met. Any consideration received for a contract that does not meet the criteria is accounted for under the requirements in Section 1.3. IFRS 15.13 If a contract meets all of the criteria at contract inception, then an entity does not reassess the criteria unless there is an indication of a significant change in the facts and circumstances. If on reassessment an entity determines that the criteria are no longer met, then it ceases to apply the standard to the contract from that date, but does not reverse any revenue previously recognised. Example 1 – Assessing the existence of a contract: Sale of real estate In an agreement to sell real estate, Seller X assesses the existence of a contract. In making this assessment, X considers factors such as: – the buyer’s available financial resources; – the buyer’s commitment to the contract, which may be determined based on the importance of the property to the buyer’s operations; – X’s prior experience with similar contracts and buyers under similar circumstances; – X’s intention to enforce its contractual rights; – the payment terms of the arrangement; and – whether X’s receivable is subject to future subordination. If X concludes that it is not probable that it will collect the amount to which it expects to be entitled, then a contract to transfer control of the real estate does not exist. Instead, X applies the guidance on consideration received before concluding that a contract exists (see Section 1.3), and initially accounts for any cash collected as a deposit (liability). © 2019 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 1 Step 1 – Identify the contract with a customer | 5 1.1 Criteria to determine whether a contract exists | Example 2 – Assessing the existence of a contract: No written sales agreement Shoe Manufacturer S holds products available to ship to customers before the end of its current fiscal year.