Revenue from Contracts with Customers A guide to IFRS 15 March 2018 This guide contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the “Deloitte Network”) is, by means of this guide, rendering professional advice or services. Before making any decision or taking any action that might affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this guide. © 2018. For information, contact Deloitte Touche Tohmatsu Limited. Extracts from International Financial Reporting Standards and other International Accounting Standards Board material are reproduced with the permission of the IFRS Foundation. Revenue from Contracts with Customers | A guide to IFRS 15 Foreword Foreword The IASB’s Standard IFRS 15 Revenue from Contracts with Customers is now effective (for periods beginning on or after 1 January 2018 with earlier adoption permitted). It is imperative that entities take time to consider the impact of the new Standard. In some cases, IFRS 15 will require significant changes to systems and may significantly affect other aspects of operations. (e.g. internal controls and processes, KPIs, compensation and bonus plans, bank covenants, tax etc.). This guide is intended to assist preparers and users of financial statements to understand the impact of IFRS 15. We begin with a high-level executive summary of the new requirements, followed by a specific focus on the important issues and choices available for entities on transition to the new Standard. Our detailed guide covers all of the requirements of IFRS 15, supplemented by interpretations and examples to give clarity to those requirements, and pointers regarding practical issues that are likely to arise. In the appendices, we provide: a. Illustrative disclosures for entities that have adopted IFRS 15; and b. a comparison with US Generally Accepted Accounting Principles (US GAAP). We trust that you will find this guide informative and a useful reference source. Within the detailed guide, paragraphs that represent the authors’ interpretations, material drawn from the IASB’s Basis of Conclusions on IFRS 15, and examples other than those cited in IFRSs are highlighted by green shading. 03 Contents Executive summary 05 Dealing with transition 07 Detailed guide 11 Appendices 235 Appendix 1 IFRS 15 illustrative disclosures 236 Appendix 2 Comparison with US GAAP 244 Key Contacts 250 Revenue from Contracts with Customers | A guide to IFRS 15 Executive summary Executive summary • recognition of revenue arising from IFRS 15 is applicable for entities reporting Whereas IAS 18 provides separate revenue licences; and in accordance with International Financial recognition criteria for goods and services, Reporting Standards (IFRSs) for periods this distinction is removed under IFRS 15. • presentation and disclosure of revenue beginning on or after 1 January 2018, with The new Standard focuses instead on the from contracts with customers, and other earlier application permitted. The new identification of performance obligations balances related to revenue. Standard is the result of a joint project by and distinguishes between performance the International Accounting Standards obligations that are satisfied ‘at a point Other changes include: Board (IASB) and the Financial Accounting in time’ and those that are satisfied ‘over • the scope of IFRS 15 has been expanded Standards Board (FASB) to develop a time’, which is determined by the manner in to cover costs relating to contracts; converged set of accounting principles to which control of goods or services passes be applied under both IFRSs and US GAAP. to the customer. The new revenue model • the recognition of interest revenue and It is relevant across all industries and for under IFRS 15 means that revenue may be dividend revenue are not within the most types of revenue transaction. recognised over time for some deliverables scope of IFRS 15. These matters are IFRS 15 outlines a single comprehensive accounted for under IAS 18 as goods (e.g. now dealt with under IFRS 9 Financial model of accounting for revenue arising some contract manufacturing); it also Instruments (or, for entities that have from contracts with customers. means that revenue may be recognised not yet adopted IFRS 9, IAS 39 Financial at a point in time for some deliverables Instruments: Recognition and Measurement); What has changed? accounted for under IAS 18 as services and IFRS 15 is a complex Standard, introducing (e.g. some construction contracts). far more prescriptive requirements than • specifically excluded from the scope of were previously included in the IFRSs IFRS 15 are non-monetary exchanges Specific topics on which more prescriptive that it replaces (IAS 18 Revenue, IAS 11 between entities in the same line of requirements have been introduced Construction Contracts and a number of business to facilitate sales to customers include: Interpretations related to those Standards) or potential customers. This scope and, therefore, it may result in substantial • the identification of a contract with exclusion is different from the related changes to revenue recognition policies for a customer; guidance under IAS 18:12 which refers some entities. It requires the application of to exchange transactions that are not • the identification of distinct performance significant judgement in some areas, but regarded as transactions that generate obligations and the allocation of the in other areas it is relatively prescriptive, revenue – these are transactions in which transaction price between those allowing little room for judgement. goods or services are “exchanged or obligations; swapped for goods or services which are • accounting for variable consideration and of a similar nature and value”. significant financing components; At a glance Current requirements New requirements Revenue recognition Revenue from contracts with customers IAS 11 Construction contracts IFRS 15 Point in time or over time IAS 18 Sales of goods IAS 18 Sales of services IFRIC 15 Real estate sales IAS 18 Royalties New guidance on royalty revenue IFRIC 13 Customer loyalty programmes New guidance on options for additional goods and services and breakage Transfers of assets from customers IFRIC 18 Advertising barter transactions Guidance on non-cash consideration SIC 31 Previously little guidance on costs of obtaining and New guidance on costs of obtaining and fulfilling a fulfilling a contract contract Other revenue Other revenue IAS 18 Interest IAS 39 or Interest IAS 18 Dividends IFRS 9 Dividends 05 Revenue from Contracts with Customers | A guide to IFRS 15 Executive summary Scope IFRS 15 applies to all contracts with customers, except for those that are within the scope of other IFRSs. Contracts that are outside the scope of IFRS 15 include leases (IFRS 16 Leases or, for entities that have not yet adopted IFRS 16, IAS 17 Leases), insurance contracts (IFRS 17 Insurance Contracts, or for entities that have not yet adopted IFRS 17, IFRS 4 Insurance Contracts), financial instruments (IFRS 9 Financial Instruments or, for entities that have not yet adopted IFRS 9, IAS 39 Financial Instruments: Recognition and Measurement) and certain non-monetary exchanges. It is possible that a contract with a customer may be partially within the scope of IFRS 15 and partially within the scope of another standard. Core principle The core principle underlying the new model is that an entity should recognise revenue in a manner that depicts the pattern of transfer of goods and services to customers. The amount recognised should reflect the amount to which the entity expects to be entitled in exchange for those goods and services. In order to meet the core principle, IFRS 15 adopts a five-step model. Scope, core principle and key terms 1 2 3 4 5 Identify the Identify the Determine the Allocate the Recognise revenue contract(s) with performance transaction price transaction price when (or as) a customer obligations in to performance performance the contract obligations obligations are satisfied Five-step model Requirement of the Standard Detailed discussion Step 1 requires an entity to identify the contract with the customer. A contract does not Section 5 have to be written in order for it to meet the criteria for revenue recognition; however, it does need to create enforceable rights and obligations. IFRS 15 provides detailed guidance on how to identify a contract. This step also considers when it is appropriate to combine contracts (see 5.5) and the implications for revenue recognition of modifying a contract (see section 10). Step 2 requires an entity to identify the distinct goods or services promised within the Section 6 contract. Distinct goods and services should be accounted for as separate deliverables (this process is sometimes known as 'unbundling'). These distinct goods and services are referred to as 'performance obligations'. Specific guidance should be considered to determine whether a good or service is distinct. Further guidance is also provided in IFRS 15 to identify distinct performance obligations in particular scenarios: • warranties (see 6.3.4); • customer options to purchase additional goods and services at a discount (or for free) (see 6.3.5); and • non-refundable upfront fees (see 6.3.6). Step 3 requires an entity to determine the transaction price for the contract.