Special Edition on Revenue IFRS News IFRS News Special Edition June 2014 1 A shift in the top line – the new global revenue standard is here at last The IASB has published IFRS 15 ‘Revenue from Contracts with Customers’. IFRS 15: • replaces IAS 18 ‘Revenue’, IAS 11 ‘Construction Contracts’ and some revenue-related Interpretations • establishes a new control-based revenue recognition model • changes the basis for deciding whether revenue is recognised at a point in time or over time • provides new and more detailed guidance on specific topics • expands and improves disclosures about revenue. This special edition of IFRS News explains the key features of the new Standard and provides practical insights into its application and impact. “After more than five years in development the IASB and FASB have at last published their new, converged Standard on revenue recognition – IFRS 15 ‘Revenue from Contracts with Customers’. IFRS 15 replaces IAS 18 and IAS 11 and will affect almost every revenue-generating entity that applies IFRSs. We applaud the two Boards for delivering a converged Standard in this critical area. Convergence has been challenging and sometimes controversial. Against that background, we see this Standard as a landmark achievement that will provide a major boost for investors looking to compare company performance across borders. IFRS 15 will apply to most revenue contracts, including construction contracts. Among other things, it changes the criteria for determining whether revenue is recognised at a point in time or over time. IFRS 15 also has more guidance in areas where current IFRSs are lacking – such as multiple element arrangements, variable pricing, rights of return, warranties and licensing. The actual impact on each company’s top line will depend on their specific customer contracts and how they have applied existing Standards. For some it will be a significant shift, and systems changes will be required, while others may see only minor changes. Although IFRS 15 only takes effect in 2017, management should begin their impact assessment much sooner.” Andrew Watchman Global Head – IFRS
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Special on Revenue IFRS News - Grant Thornton …...revenue standard is here at last The IASB has published IFRS 15 ‘Revenue from Contracts with Customers’. IFRS 15: • replaces
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Special
Edition
on Revenue
IFRS News
IFRS News Special Edition June 2014 1
A shift in the top line – the new global revenue standard is here at last
The IASB has published IFRS 15 ‘Revenue from Contracts with Customers’. IFRS 15:• replacesIAS18‘Revenue’,IAS11‘Construction
Contracts’ and some revenue-related Interpretations• establishesanewcontrol-basedrevenuerecognitionmodel• changesthebasisfordecidingwhetherrevenueisrecognised
at a point in time or over time• providesnewandmoredetailedguidanceonspecifictopics• expandsandimprovesdisclosuresaboutrevenue.
ThisspecialeditionofIFRSNewsexplainsthekeyfeatures ofthenewStandardandprovidespracticalinsightsinto its application and impact.
“AftermorethanfiveyearsindevelopmenttheIASBandFASBhaveatlastpublishedtheirnew,convergedStandardonrevenuerecognition–IFRS15‘RevenuefromContractswithCustomers’.IFRS15replacesIAS18andIAS11andwillaffectalmosteveryrevenue-generatingentitythatappliesIFRSs.WeapplaudthetwoBoardsfordeliveringaconvergedStandardinthiscriticalarea.Convergencehasbeenchallengingandsometimescontroversial.Againstthatbackground,weseethisStandardasalandmarkachievementthatwillprovideamajorboostforinvestorslookingtocomparecompanyperformanceacrossborders. IFRS15willapplytomostrevenuecontracts,includingconstructioncontracts.Amongotherthings,itchangesthecriteriafordeterminingwhetherrevenueisrecognisedatapointintimeorovertime.IFRS15alsohasmoreguidanceinareaswherecurrentIFRSsarelacking–suchasmultipleelementarrangements,variablepricing,rightsofreturn,warrantiesandlicensing. Theactualimpactoneachcompany’stoplinewilldependontheirspecificcustomercontractsandhowtheyhaveappliedexistingStandards.Forsomeitwillbeasignificantshift,andsystemschangeswillberequired,whileothersmayseeonlyminorchanges.AlthoughIFRS15onlytakeseffectin2017,managementshouldbegintheirimpactassessment much sooner.”
A“customer”isdefinedas“apartythathascontractedwithanentitytoobtaingoodsorservicesthatareanoutputoftheentity’sordinaryactivities.”Applying this core principle involvesthefivestepsshownatright:
Practical insight – some industries will be affected more than othersSomeoftheindustriesthatwillbemostaffectedbyrevenuerecognition changesinclude:• telecoms and IT–wheremultipledeliverablesarecommonplaceandcurrent
• real estate–whentotakerevenuefor“offplan”apartmentsaleshasbeenadifficultissueandthenewmodelwillshifttheboundarybetweenpercentage-of-completionandon-completionrevenuerecognition
• asset management, legal and professional services and other sectors where performance-based or contingent fees are commonplace – underthenewmodelvariablepaymentsareaccountedforonabestestimatebasissubjecttoaconstraint
onlywhenorif:• thecontracthascommercialsubstance• the parties have approved the contract• theentitycanidentify − eachparty’srights − thepaymenttermsforthegoodsandservices
to be transferred• itisprobabletheentitywillcollectthe
Treat as separate contract, account for pre-modification contract as before
Allocate remaining transaction price not yet recognised to outstanding POs (treat as termination and new contract)
Update transaction price and measure of progress for effects of modification (cumulative catch-up method)
IFRS News Special Edition June 2014 5
Contract modifications
Doesthemodificationmeetthecriteriafor
treatmentasaseparatecontract?
Areremaininggoods/servicesnotyet
transferreddistinctfromthosealready
transferred?
N
N
Y
Y
Contract modificationsA contract modification arises when the parties approveachangeinthescopeand/orthepriceofacontract(egachangeorder).Theaccountingfora contract modification depends on whether the modification is deemed to be a separate contract or not. Anentityaccountsforamodificationasaseparatecontract,ifboth:• thescopechangesduetotheadditionof‘distinct’goodsorservices(seebelow)
• thepricechangereflectsthegoods’orservices’stand-alonesellingpricesunderthecircumstances of the modified contract.
Inthiscase,onlyfuturerevenueisimpactedastheentitywillcontinuetoaccountforthepre-modification contract as before. Theaccountingforacontractmodificationthat is not a separate contract depends on whether theremaininggoodsandservicestobedeliveredunder the modified contract are ‘distinct’ from thosealreadytransferredtothecustomeratthemodification date:• iftheremaininggoodsorservicesaredistinct,thenthemodificationistreatedasaterminationoftheoriginalcontractandthecreation of a new contract. The transaction pricetobeallocatedtotheremainingseparateperformanceobligationsisthe(modified)totalconsiderationpromisedbythecustomerlesstheamountalreadyrecognisedasrevenue.
Noadjustmentsaremadetotheamountofrevenuerecognisedforseparateperformanceobligationssatisfiedonorbeforethemodificationdate.Ifachangetoanamountofvariableconsiderationarisessubsequentlyand relates to performance prior to the modificationtheentityappliestheguidanceon variable consideration
• iftheremaininggoodsorservicesarenotdistinctandarepartofasingleperformanceobligationthatispartiallysatisfiedasofthemodificationdate,theentityadjustsboththetransactionpriceandthemeasureofprogresstoward completion of the performance obligation.Revenuerecognisedtodateisadjustedforthecontractmodificationona‘cumulative catch-up’ basis
• iftheremaininggoodsorservicesareacombinationofthesescenariostheentityaccounts for the effects of the modification onunsatisfiedorpartiallysatisfiedobligationsconsistentlywiththeguidanceabove.Noadjustmentsaremadetotheamountofrevenuerecognisedforseparateperformanceobligationssatisfiedonorbeforethemodification date.
Havingidentifiedacontract,theentitynextidentifiestheperformanceobligationswithinthatcontract.Aperformanceobligationisapromiseinacontractwithacustomertotransfereither(1)agoodorservice,orabundleofgoodsorservices,thatis‘distinct’(seebelow);or(2)aseriesofdistinctgoodsorservicesthataresubstantiallythesame and meet certain criteria. Performanceobligationsarenormally
specified in the contract but could also include promisesimpliedbyanentity’scustomarybusinesspractices,publishedpoliciesorspecificstatementsthatcreateavalidcustomerexpectationthatgoodsorserviceswillbetransferredunderthe contract. Performanceobligationsdonotinclude
or service either on its own or with other resourcesreadilyavailabletothem.A readilyavailableresourceisagoodorservicethatissoldseparately(bytheentityorbyanotherentity)orthatthecustomerhasalreadyobtained
• itisseparatelyidentifiablefromotherpromises in the contract. Indicators of separate identifiabilityinclude:
− significantintegrationservicesarenotprovided(ietheentityisnotusingthegoodorservicemerelyasaninputtoproduce the specific output called for in thecontract)
− thegoodorservicedoesnotsignificantlymodifyorcustomiseotherpromisedgoodsor services in the contract
Variable considerationThe amount of consideration received under a contractmightvaryduetodiscounts,rebates,refunds,credits,priceconcessions,incentives,performancebonuses,penaltiesandsimilaritems.IFRS15’sguidanceonvariableconsiderationalsoapplies if:
• theamountofconsiderationreceivedunderacontractiscontingentontheoccurrenceornon-occurrenceofafutureevent(egafixed-price contract would be variable if the contract includedareturnright)
• thefactsandcircumstancesatcontractinceptionindicatethattheentityintendstooffer a price concession.
To estimate the transaction price in a contract thatincludesvariableconsideration,anentitydetermines either:• theexpectedvalue(thesumofprobability-weightedamounts)or
• themostlikelyamount
ofconsiderationtobereceived,whicheverbetterpredicts the amount of consideration to which the entitywillbeentitled. Theexpectedvaluemightbetheappropriateamountinsituationswhereanentityhasalargenumberofsimilarcontracts.Themostlikelyamountmightbeappropriateinsituationswhereacontracthasonlytwopossibleoutcomes(forexample,abonusforearlydeliverythateitherwouldbefullyreceivedornotatall).Anentityshouldusethesamemethodto
estimatethetransactionpricethroughoutthelifeof a contract.
Anentitythatexpectstorefundaportionof the consideration to the customer would recognisealiabilityfortheamountofconsiderationitreasonablyexpectstorefund. Theentitywouldupdatetherefundliability eachreportingperiodbasedoncurrentfacts and circumstances.
Limited to the extent that it is ‘highly probable’ that there will not be a significant revenue reversal
IFRS News Special Edition June 2014 8
Practical insight – uncertainty in the transaction priceUnderIASs18and11,uncertaintyinthetransactionpriceispartlyarecognitionissue.Iftherevenueamountcannotbemeasuredreliablythennorevenuecanberecognised(orrevenueislimitedtothecostsincurredwhentheirrecoveryisprobable).Ifareliableestimateisavailablethentheuncertainconsiderationwouldtypicallybemeasuredatfairvalue.Assessingreliabilitymayinvolveconsiderablejudgement. IFRS15hasmorespecificanddetailedguidanceandwillchangesomecurrentpractices.Thatsaid,inhighlyuncertainsituations(egsomesuccessfee-typearrangementswhentheoutcomeoftherelevantcontingencyisunpredictable)thepracticaleffectislikelytobethesame–ierevenueisrecognisedonlywhentheuncertaintyisresolved.Insituationsinvolvingmultiplesimilartransactions,suchthattheentityhasrelevant,predictiveexperience,webelievethatIFRS15couldleadtoearlierrecognitioninsomecases.
Constraint on variable consideration If the amount of consideration from a customer contractisvariable,anentityisrequiredtoevaluate whether the cumulative amount of revenuerecognisedshouldbeconstrained.Theobjectiveoftheconstraintisforanentitytorecogniserevenueonlytotheextentthatitishighlyprobablethattherewillnotbeasignificantreversal(iesignificantdownwardadjustment)whentheuncertaintyaboutthevariableconsideration resolves. Factorsthatcouldincreasethelikelihoodorthemagnitudeofarevenuereversalinclude,butarenotlimitedto,thefollowing:• theamountofconsiderationishighlysusceptibletofactorsoutsidetheentity’sinfluence
• therearealargenumberandwiderangeofpossible consideration amounts in the contract.
Sales-based or usage-based royaltiesAnexceptiontothegeneralprinciplesonvariableconsideration applies to revenue for a sales-based orusage-basedroyaltypromisedinexchangeforalicenceofintellectualproperty.Revenueisrecognisedonlyonthelaterof:• whenthecustomermakesthesubsequent salesorusethattriggerstheroyalty
Time value of moneyUnderIFRS15,anentitymustreflectthetimevalueofmoneyinitsestimateofthetransactionpriceifthecontractincludesasignificantfinancingcomponent.Theobjectiveinadjustingthetransactionpriceforthetimevalueofmoneyistoreflectanamountforthesellingpriceasthoughthecustomerhadpaidcashforthegoodsorserviceswhentheyweretransferred.Todeterminewhetherafinancingcomponent
• theconsiderationisvariablebasedonfactorsoutside the vendor’s and customer’s control (egasales-basedroyalty)
• adifferencebetweenthepromisedconsideration and the cash price relates to somethingotherthanfinancingsuchasprotectingoneofthepartiesfromnon-performancebytheother.
Variable consideration and the revenue constraint
1. Estimatevariableconsiderationand
includeintransactionprice
2. Applyconstraint
Or
Account for the purchase of distinct good or service similarly to purchases from suppliers• if consideration owed to the
customer > fair value of goods/services: reduce transaction price by that excess
• ifentitycannotestimatefair value of goods/services received from customer: reduce transaction price by total consideration owed to the customer
Reduce the transaction price by the amount owed to the customer at later of:• relatedrevenueisrecognised• considerationispaidor
thetimevalueofmoney,anentityappliesthediscount rate that would be used in a separate financingtransactionbetweentheentityandthecustomer at contract inception. That rate reflects thecreditriskofwhicheverpartyisreceivingcredit(iethecustomerifpaymentisdeferred andthevendorifpaymentisinadvance)and anycollateralorsecurityprovidedbythecustomer or theentity,includingassets transferred under the contract.Anentitypresentstheeffectsoffinancing
separatelyfromrevenueasinterestexpense or interest income in the statement of comprehensive income.
Non-cash considerationIf a customer promises consideration in a form otherthancash,anentitymeasuresthenon-cashconsiderationatfairvalueindeterminingthetransactionprice.Thisincludesarrangementsinwhichthecustomertransferscontrolofgoodsorservices(egmaterials,equipment,labour)tofacilitatetheentity’sfulfilmentofthecontract.Ifanentityisunabletoreasonablymeasurethe
fairvalueofnon-cashconsideration,itindirectlymeasurestheconsiderationbyreferringtothestand-alonesellingpriceofthegoodsorservicespromised under the contract.
Consideration payable to a customerConsiderationpayabletoacustomerincludesamountsthatanentitypaysorexpectstopayto a customer in the form of cash or non-cash items. This includes credit or other items that the customercanapplyagainstamountsowedtotheentity.Anentityreducesthetransactionpricebytheamountitowestothecustomer,unlesstheconsiderationowedisinexchangefordistinctgoodsorservicestransferredfromthecustomer totheentity.Ifthecustomertransfersdistinctgoodsor
servicestoanentityinexchangeforpayment,theentityaccountsforthepurchaseofthesegoodsorservicessimilarlytootherpurchasesfromsuppliers. If the amount of consideration owed to thecustomerexceedsthefairvalueofthosegoodsorservices,theentityreducesthe transaction price bytheamountoftheexcess.Iftheentitycannotestimatethefairvalueofthegoodsorservicesitreceivesfromthecustomer,itreducesthetransactionpricebythetotalconsiderationowedtothe customer. Anentityrecognisesanyreductioninrevenue
UnderIFRS15,anentityallocatesacontract’stransaction price to each separate performance obligationwithinthatcontractonarelativestand-alonesellingpricebasisatcontractinception.IFRS15definesastand-alonesellingpriceas“thepriceatwhichanentitywouldsellapromisedgoodorserviceseparatelytoacustomer.”Thebestevidenceofthestand-alonesellingpriceistheobservablesellingpricechargedbytheentitytosimilarcustomersandinsimilarcircumstances,ifavailable.Ifnot,thestand-alonesellingpriceisestimatedusingallreasonablyavailableinformation(includingmarketconditions,entity-specificfactors,and information about the customer or class of customer),maximisingtheuseofobservableinputs.Whilenotrequiringtheiruse,IFRS15
Allocating discounts and variable considerationIfthesumofthestand-alonesellingpricesforthepromisedgoodsorservicesexceedsthecontract’stotalconsideration,anentitytreatstheexcessasadiscounttobeallocatedtotheseparateperformanceobligationsonarelativestand-alonesellingpricebasis.However,anentitywouldallocateadiscounttoonlysomeoftheperformanceobligationsonlyifithasobservableevidenceoftheobligationstowhichtheentirediscountbelongs.IFRS15setsoutcriteriathatmustbemettosatisfythisrequirement.
• theresultoftheallocationisconsistentwiththe amount of consideration to which the entityexpectstobeentitledinexchangeforthepromisedgoodsorservices.
Changes in estimated transaction priceIftheestimatedtransactionpricechanges,anentityallocatesthechangetotheperformanceobligationsonthesamebasisasatcontractinception(subjecttothespecificguidanceoncontractmodifications).Amountsallocatedtoasatisfiedperformanceobligationarerecognisedeither as revenue or as a reduction in revenue in theperiodthechangeoccurs.
Changesinthetransactionpriceareallocatedentirelytooneperformanceobligation(oronlysomeofthetotalperformanceobligations)usingthe same criteria applied to allocation of variable considerationtoasingleperformanceobligation.
UnderIFRS15,anentityrecognisesrevenuewhenorasittransferspromisedgoodsorservicesto a customer. A “transfer” occurs when the customerobtainscontrolofthegoodorservice.Acustomerobtainscontrolofanasset(good
orservice)whenitcandirecttheuseofandobtainsubstantiallyalltheremainingbenefitsfromit.Controlincludestheabilitytopreventotherentitiesfromdirectingtheuseofandobtainingthe benefits from an asset. The benefits of an asset are the potential cash flows that can be obtained directlyorindirectlyfromtheassetinmanyways.Akeypartofthemodelistheconceptthat
forsomeperformanceobligationscontrolistransferred over time while for others control transfers at a point in time.
Control transferred over timeAnentitydeterminesatcontractinceptionwhethereachperformanceobligationwillbesatisfied(thatis,controlwillbetransferred)overtime or at a specific point in time.
Control is considered to be transferred over timeifoneofthefollowingconditionsexists:• thecustomercontrolstheassetasitiscreatedorenhancedbytheentity’sperformanceunder the contract
• theentity’sperformancecreatesorenhancesan asset that has no alternative use to the entity,andtheentityhastherighttoreceivepaymentforworkperformedtodate.Anentityevaluateswhetherapromisedassethasan alternative use to it at contract inception byconsideringwhetheritcanreadilyredirectthepartiallycompletedassettoanothercustomerthroughouttheproductionprocess.Inaddition,therighttopaymentshouldbeenforceable,andavendorconsidersthecontractualterms,aswellasanylegislationorlegalprecedentthatcouldoverridethoseterms,inassessingtheenforceabilityof thatright.
IFRS 15 discusses two classes of methods that areappropriateformeasuringanentity’sprogresstowardcompletionofaperformanceobligation:• outputmethodsand• inputmethods.
Methods for measuring an entity’s progress toward completion:
Ability to reasonably measure progress Anentityrecognisesrevenueforaperformanceobligationsatisfiedovertimeonlyifitcanreasonablymeasureitsprogresstowardcompletionofthatperformanceobligation.Anentityisnotabletoreasonablymeasureitsprogresstowardcompletionifitlacksreliableinformationthatisrequiredtoapplyanappropriatemethod of measurement. Insomecases,suchasduringtheearlystagesofacontract,anentitymightnotbeabletoreasonablymeasureitsprogresstowardcompletion,butmaystillexpecttorecoveritscostsincurredinsatisfyingtheperformanceobligation.Anentityisthenpermittedtorecogniserevenuetotheextentofcostsincurreduntilitcanreasonablymeasureitsprogress.
Control transferred at a point in timeInsituationswherecontroloveranasset(goodsorservices)istransferredatasinglepointintime,anentityrecognisesrevenuebyevaluating when the customer obtains control of the asset.
the asset• thecustomerhasassumedthesignificantrisksandrewardsofowningtheasset
• thecustomerhasacceptedtheasset.
Control indicators
IFRS News Special Edition June 2014 14
Other topics
Contract costsCosts to fulfil a contractIfcostsincurredinfulfillingacontractwithacustomer are covered under another Standard (suchasIAS2‘Inventory’andIAS16‘Property,Plant,andEquipment’),anentityaccountsforthose costs in accordance with those Standards. Ifnot,anentityrecognisesanassetforsuchcosts,providedallofthecriteriaintheadjacenttable are met.
Incremental costs of obtaining a contractUnderIFRS15,anentitycapitalisestheincrementalcostsofobtainingacontractifitexpectstorecoverthosecosts.Incrementalcostsofobtainingacontractarecoststhatanentitywould not have incurred if it had not obtained the contract(forexample,somesalescommissions).Coststhatanentityincursregardlessofwhetheritobtainsacontractareexpensedasincurred,unlessthecostsareexplicitlychargeabletothecustomerregardlessofwhethertheentityobtainsthe contract. Asapracticalexpedient,IFRS15allows
Amortisation and impairmentUnderIFRS15,anentityamortisescapitalisedcontractcostsonasystematicbasisconsistentwiththepatternoftransferringthegoodsorservicesrelatedtothosecosts.Ifanentityidentifiesasignificantchangetotheexpectedpatternoftransfer,itupdatesitsamortisationtoreflectthatchangeinestimateinaccordancewithIAS8. Anentityrecognisesanimpairmentlossinearningsifthecarryingamountofanassetexceedstheremainingamountofconsiderationthattheentityexpectstoreceiveinconnectionwiththerelatedgoodsorserviceslessanydirectlyrelatedcontractcostsyettoberecognised.Whendeterminingtheamountofconsiderationitexpectstoreceive,anentityignorestheconstraintonvariableconsiderationpreviouslydiscussed,andadjustsfortheeffectsofthecustomer’screditrisk. Beforerecognisinganimpairmentlossundertherevenuerecognitionguidance,anentityrecognisesimpairmentlossesassociatedwithassetsrelatedtothecontractthatareaccountedforunderotherguidance,suchasIAS2.Anentitywouldreverseapreviouslyrecognisedimpairmentlosswhentheimpairmentconditionsnolongerexistorhaveimproved.
Term of the warranty Thelongerthecoverageperiod,themorelikelyawarrantyisa
coverage period performanceobligation
Nature of the tasks the Ifanentitymustperformcertaintaskstoprovideassurancetothe
entity promises to perform customerthattheproductcomplieswithagreed-uponspecifications,
under the warranty thoseservicesdonotlikelyconstituteaseparateperformanceobligation.
License is distinct and is accounted for
separately from other promises
License is not distinct and is accounted for together with other promises as a single performance obligation. Entity assesses whether control transfers over time or at a point in time
Control is transferred at a point in time Control is transferred over time
Account for the warranty as a performance obligation
Account for the service as a separate performance obligation
Account for the warranty using the cost accrual guidance in IAS 37
Sale with a right of return Insomecontracts,anentitytransferscontrolofaproducttoacustomerandalsograntsthecustomertherighttoreturntheproductforvariousreasons(suchasdissatisfactionwiththeproduct)andreceiveanycombinationofthefollowing:• fullorpartialrefundofanyconsiderationpaid• acreditthatcanbeappliedagainstamountsowed,orthatwillbeowed,totheentity
Contract is accounted for as a sale with a right of return
Entity’s obligation to repurchase the asset at the customer’s request (a put option)
Entity’s right or obligation to repurchase the asset
(a forward or call)
IFRS News Special Edition June 2014 18
Repurchase agreementsSometimesanentitywillenterintoacontracttosellanassetand also promises or has the option to repurchase the asset (oranassetthatissubstantiallythesameoranotherassetofwhichtheassetthatwasoriginallysoldisacomponent).Anentitywillneedtoevaluatetheformofthepromise
repurchase)oracalloption(entityrighttorepurchase),anentityaccountsforthecontract(1)asaleaseifitcanormust repurchase the asset for an amount that is less than the originalsellingprice;or(2)asafinancingarrangementifitcanormustrepurchasetheassetforanamountthatisequaltoormorethantheoriginalsellingprice.Ifacustomerisgrantedarighttorequireanentityto
Ifacontractgrantsthecustomeraputoptionandtherepurchasepriceoftheassetisequaltoorgreaterthantheoriginalsellingpriceandismorethantheexpectedmarketvalueoftheasset,thecontractisconsideredtobeafinancingarrangement.Theentitycontinuestorecognisetheassetandrecognisesaliabilityinitiallymeasuredattheoriginalsellingprice of the asset.
Sale-leaseback transactionsAsale-leasebacktransactionwithaputoptionthathasanexercisepricelessthantheoriginalsalespriceisaccountedforasafinancingtransactionrather than as a lease if the holder of the putoptionhasasignificanteconomicincentivetoexercisetheoption.
Customer options for additional goods or services Anentitymaysellgoodsorservicesandalso provide customers with options toacquireadditionalgoodsorservicesfreeoratadiscount–forexamplesalesincentives,awardcreditsorpoints,renewal options or other discounts. Such optionsareaperformanceobligationforthepurposeofIFRS15if,andonlyif,theyrepresenta‘materialright’.Thefollowingarenotconsideredtobematerialrights:• adiscountorotherrightthatthe
customer could receive without enteringintothecontract
• adiscountthatisnomorethantherangeofdiscountstypicallygivenforthosegoodsorservicesto that class of customer in that geographicalareaormarket
If a customer option is a material rightthentheentityshouldallocatepart of the transaction price to that performanceobligationonarelativestandalonesellingpricebasis.Ifthestandalonesellingpriceisnotdirectlyobservable,asisoftenthecase,itmustbe estimated. The estimate should reflect the discount the customer wouldobtainwhenexercisingtheoption,adjustedfor:• anydiscountthatthecustomercouldreceivewithoutexercisingthe option
• thelikelihoodthattheoptionwillbeexercised.
Revenue allocated to customer options isrecognisedwhentheoptionsareexercisedorexpire.
IFRS 15 also provides a practical expedientthatappliestosomecustomerrightstorenewacontractonpre-agreedterms.Insuchcasestheentityispermittedtoallocatethetransactionpricetotheoptionalgoodsorservicesbyreferencetothegoodsorservicesexpectedtobeprovidedandthecorrespondingexpectedconsideration.
liabilityifthecustomerhaspaidconsideration,orifpaymentisdueasofthereportingdatebuttheentityhasnotyetsatisfiedaperformanceobligationbytransferringagoodorservice.Conversely,iftheentityhastransferredgoodsorservicesasofthereportingdatebutthecustomerhasnotyetpaid,theentityrecogniseseither a contract asset or a receivable. An entityrecognisesacontractassetifitsrighttoconsiderationisconditionedonsomethingotherthanthepassageoftime;otherwise,anentityrecognisesareceivable.