International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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Example 28.87:
Incremental and non-incremental costs for same contract ...... 2262
Example 28.88:
Incremental costs of obtaining a contract .................................... 2262
Example 28.89:
Timing of commission payments ................................................... 2263
Example 28.90:
Commission payments subject to a threshold ............................. 2264
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Example 28.91:
Costs that give rise to an asset ........................................................ 2268
Example 28.92:
Amortisation period .......................................................................... 2274
Example 28.93:
Allocation of capitalised contract costs ........................................ 2276
Example 28.94:
Amortisation of capitalised commission payments subject
to a threshold ....................................................................................... 2277
Example 28.95:
Amortisation of a capitalised contract costs ................................ 2278
Example 28.96:
Contract liability and receivable .................................................... 2284
Example 28.97:
Contract asset recognised for the entity's performance ............ 2285
Example 28.98:
Disaggregation of revenue – quantitative disclosure ................. 2296
Example 28.99:
Contract asset and liability disclosures .......................................... 2301
Example 28.100: Disclosure of the transaction price allocated to the
remaining performance obligations ................................................ 2312
Example 28.101: Disclosure of the transaction price allocated to the
remaining performance obligations – qualitative
disclosure ............................................................................................. 2314
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Chapter 28
Revenue
1
INTRODUCTION
Revenue is, arguably, one of most important indicators of an entity’s performance. It
may be perceived as an indicator of the desirability of an entity’s products and
services, and the growth or decline over time of a business. However, revenue does
not represent all income for an entity. As discussed at 1.1 below, revenue is a subset of
income, it is derived from the ordinary activities of an entity and may be referred to
by a variety of different names, including sales, fees, interest, dividends, royalties and
rent. [CF(2010) 4.29].
Identifying what is revenue and specifying how and when to measure and report it is
critical to any accounting framework. Within IFRS, several standards deal with the
recognition of revenue, for example IFRS 16 – Leases (or IAS 17 – Leases) covers lease
revenue and IFRS 9 – Financial Instruments – covers dividends and interest, which
would represent revenue if part of an entity’s ordinary activities.
This chapter primarily covers IFRS 15 – Revenue from Contracts with Customers. As
discussed further at 1.1 below, IFRS 15 only covers a subset of revenue – specifically,
revenue that arises from a contract when the counterparty to that contract is a
customer (as defined, see 3.2 below) and the contract is not specifically excluded
from the standard (e.g. lease contracts within the scope of IFRS 16 (or IAS 17) or
financial instruments within the scope of IFRS 9, see 3 below for a complete list of
scope exclusions).
The requirements in IFRS 15 are summarised at 2-11 below. Other revenue items that
are not within the scope of IFRS 15, but arise in the course of the ordinary activities of
an entity, as well as the disposal of non-financial assets that are not part of the ordinary
activities of the entity, for which IFRS 15’s requirements are relevant, are addressed
at 12 below.
1.1
The distinction between income, revenue and gains
Income is defined in the International Accounting Standards Board’s (IASB or the
Board) The Conceptual Framework for Financial Reporting (issued in 2010) and
IFRS 15 as ‘increases in economic benefits during the accounting period in the form
of inflows or enhancements of assets or decreases of liabilities that result in
increases in equity, other than those relating to contributions from equity
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participants’. [CF(2010) 4.25(a), IFRS 15 Appendix A]. This definition encompasses both,
‘revenue’ and ‘gains’. IFRS 15 defines revenue as income that arises in the course of
the ordinary activities of an entity. [IFRS 15 Appendix A]. As discussed at 1 above, it can
include sales, fees, interest, dividends, royalties and rent. [CF(2010) 4.29]. Gains
represent other items that meet the definition of income and may, or may not, arise
in the course of the ordinary activities of an entity. Gains include, for example, those
arising on the disposal of non-current assets. The definition of income also includes
unrealised gains; for example, those arising on the revaluation of marketable
securities and those resulting from increases in the carrying amount of long-term
assets. [CF(2010) 4.31].
The rules on offset in IAS 1 – Presentation of Financial Statements – distinguish
between revenue and gains. That standard states that an entity undertakes, in the
course of its ordinary activities, other transactions that do not generate revenue
but are incidental to the main revenue-generating activities. When this
presentation reflects the substance of the transaction or other event, the results of
such transactions are presented by netting any income with related expenses
arising on the same transaction. For example, gains and losses on the disposal of
non-current assets, including investments and operating assets, are reported by
deducting from the proceeds on disposal the carrying amount of the asset and
related selling expenses. [IAS 1.34]. IAS 16 – Property, Plant and Equipment – has a
general rule that ‘gains shall not be classified as revenue’. [IAS 16.68]. The only
exception to this rule is where an entity routinely sells property, plant and
equipment (PP&E) that it has held for rental to others, which is discussed further
at 12.3.1 below.
2
IFRS 15 – OBJECTIVE, EFFECTIVE DATE AND TRANSITION
Many entities have recently adopted the largely converged revenue standards,
IFRS 15 and Accounting Standards Codification (ASC) 606 – Revenue from Contracts
with Customers (together with IFRS 15, the standards), that were issued in 2014 by
the IASB and the US Financial Accounting Standards Board (FASB) (collectively, the
Boards). These standards supersede virtually all legacy revenue recognition
requirements in IFRS and US GAAP, respectively. Throughout this chapter, when we
refer to the FASB’s standard, we mean ASC 606 (including any amendments), unless
otherwise noted.
The standards provide accounting requirements for all revenue arising from contracts
with customers. They affect all entities that enter into contracts to provide goods or
services to their customers, unless the contracts are in the scope of other IFRSs or
US GAAP requirements, such as
the leasing standards. The standards also specify the
accounting for costs an entity incurs to obtain and fulfil a contract to provide goods or
services to customers (see 10.3 below) and provide a model for the measurement and
recognition of gains and losses on the sale of certain non-financial assets, such as
property, plant or equipment (see 12.3 below).
As a result, entities that adopted the standards often found implementation to be a
significant undertaking. This is because the standards affected entities’ financial statements,
Revenue
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business processes and internal controls over financial reporting. For entities that have not
yet adopted the standards, successful implementation will require an assessment and a plan
for managing the change.
Following issuance of the standards, the Boards created the Joint Transition Resource
Group for Revenue Recognition (TRG) to help them determine whether more
application guidance was needed on the standards. TRG members include financial
statement preparers, auditors and users from a variety of industries, countries, as well
as public and private entities. Members of the TRG met six times in 2014 and 2015. In
January 2016, the IASB announced that it did not plan to schedule further meetings of
the IFRS constituents of the TRG, but said it would monitor any discussions of the FASB
TRG, which met in April and November 2016. The November 2016 meeting was the last
scheduled FASB TRG meeting.
TRG members’ views are non-authoritative, but entities should consider them as they
implement the standards. In its July 2016 public statement, the European Securities and
Markets Authority (ESMA) encouraged issuers to consider the TRG discussions when
implementing IFRS 15. Furthermore, the Chief Accountant of the US Securities and
Exchange Commission (SEC) has encouraged SEC registrants, including foreign private
issuers (that may report under IFRS), to consult with his office if they are considering
applying the standard in a manner that differs from the discussions in which TRG
members reached general agreement.1
We have incorporated our summaries of topics on which TRG members generally
agreed at joint meetings in 2014, 2015 and at FASB-only TRG meetings in 2016
throughout this chapter. Unless otherwise specified, these summaries represent the
discussions of the joint TRG. The TRG members representing IFRS constituents did not
participate in the April 2016 and November 2016 meetings. However, certain members
of the IASB and its staff observed the meetings and, during subsequent Board meetings,
the IASB received oral updates. Where possible, we indicate if members of the IASB or
its staff commented on the FASB TRG discussions.
This chapter, at 2-11 below, summarises the IASB’s standard (including all
amendments) and highlights significant differences from the FASB’s standard. It also
addresses topics on which the members of the TRG reached general agreement and
our views on certain topics.
While many entities have adopted the standards, implementation issues may continue
to arise. Accordingly, the views we express in this chapter may evolve as
implementation continues and additional issues are identified. The conclusions we
describe in our illustrations are also subject to change as views evolve. Conclusions in
seemingly similar situations may differ from those reached in the illustrations due to
differences in the underlying facts and circumstances.
2.1
Overview of the standard
The revenue standards the Boards issued in May 2014 were largely converged. IFRS 15
and the FASB’s standard will supersede virtually all revenue recognition requirements
in IFRS and US GAAP, respectively. Noting several concerns with legacy requirements
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for revenue recognition under both IFRS and US GAAP, the Boards’ goal in the joint
deliberations was to develop new revenue standards that:
• remove inconsistencies and weaknesses in the current revenue recognition literature;
• provide a more robust framework for addressing revenue recognition issues;
• improve comparability of revenue recognition practices across industries, entities
within those industries, jurisdictions and capital markets;
• reduce the complexity of applying revenue recognition requirements by reducing
the volume of the relevant standards and interpretations; and
• provide more useful information to users through expanded disclosure requirements.
[IFRS 15.IN5].
The standards provide accounting requirements for all revenue arising from contracts
with customers. They affect all entities that enter into contracts to provide goods or
services to their customers, unless the contracts are in the scope of other IFRSs or US
GAAP requirements, such as the leasing standards. The standards also specify the
accounting for costs an entity incurs to obtain and fulfil a contract to provide goods or
services to customers (see 10.3 below) and provide a model for the measurement and
recognition of gains and losses on the sale of certain non-financial assets, such as
property, plant or equipment (see 12.3 below). IFRS 15 replaces all of the legacy revenue
standards and interpretations in IFRS, including IAS 11 – Construction Contracts, IAS 18
– Revenue, IFRIC 13 – Customer Loyalty Programmes, IFRIC 15 – Agreements for the
Construction of Real Estate, IFRIC 18 – Transfers of Assets from Customers – and
SIC-31 – Revenue – Barter Transactions Involving Advertising Services. [IFRS 15.IN3, C10].
When they were issued in 2014, the standards were converged, except for a handful of
differences.2 Since then, the Boards have issued some converged amendments to their
standards, but they have also issued different amendments to the same topics (see 2.1.2
below for a discussion of the changes to the standards since issuance). The FASB has
also issued several amendments that the IASB has not issued. We highlight the
significant differences between the IASB’s final standard and the FASB’s final standard
throughout this chapter. However, the primary purpose of this chapter is to highlight
the IASB’s standard, including all amendments to date, and focuses on the effects for
IFRS preparers. As such, we generally refer to the singular ‘standard’ in this chapter.
2.1.1
Core principle of the standard
The standard describes the principles an entity must apply to measure and recognise
revenue and the related cash flows. [IFRS 15.1]. The core principle is that an entity recognises
revenue at an amount that reflects the consideration to which the entity expects to be
entitled in exchange for transferring goods or services to a customer. [IFRS 15.2].
The principles in IFRS 15 are applied using the following five steps:
1.
Identify the contract(s) with a customer;
2.
Identify the performance obligations in the contract;
3.
Determine the transaction price;
4.
Allocate the transaction price to the performance obligations in the contract;
5.
Recognise revenue when (or as) the entity satisfies a performance obligation.
Revenue
1979
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Entities need to exercise judgement when considering the terms of the contract(s) and
all of the facts and circumstances, including implied contract terms. Entities also have
to apply the requirements of the standard consistently to contracts with similar
characteristics and in similar circumstances. [IFRS 15.3]. To assist entities, IFRS 15
includes detailed application guidance. The IASB also included more than 60 illustrative
examples in IFRS 15.
2.1.2
Changes to the standard since issuance
Since the issuance of the standards, the Boards have issued various amendments to their
respective standards, as summarised below. The Boards did not agree on the nature and
breadth of all of the changes to their respective revenue standards. However, the Boards
have said they expect the amendments to result in similar outcomes in many
circumstances. No further changes to the standard are currently expected.
In September 2015, the IASB deferred the effective date of IFRS 15 by one year to give
entities more time to implement it.3 In addition, in April 2016, the IASB issued
Clarifications to IFRS 15 – Revenue from Contracts with Customers (the IASB’s
amendments) that addressed several implementation issues (many of which were
discussed by the TRG) on key aspects of the standard.
The IASB’s amendments:
• clarified when a promised good or service is separately identifiable from other
promises in a contract (i.e. distinct within the context of the contract), which is part
of an entity’s assessment of whether a promised good or service is a performance
obligation (see 5.2 below);
• clarified how to apply the principal versus agent application guidance to determine
whether the nature of an entity’s promise is to provide a promised good or service
itself (i.e. the entity is a principal) or to arrange for goods or services to be provided
by another party (i.e. the entity is an agent) (see 5.4 below);
• clarified for a licence of intellectual property when an entity’s activities
significantly affect the intellectual property to which the customer has rights,
which is a factor in determining whether the entity recognises revenue over time
or at a point in time (see 9 below);
• clarified the scope of the exception for sales-based and usage-based royalties