This is a detailed summary of everything you need to know about IFRS 15 in order to easily pass any question on it in tests/exams. Included in this summary is tips on the answering structure for questions in this section, as well as general journal entries that you need to be aware of.
Ensure that...
Background
o Revenue: income arising in the course of an entity’s ordinary activities
o Income: increases in economic benefits during the accounting period in the form of
inflows / enhancements of assets / decrease of liabilities resulting in an increase of equity,
other than those relating to contributions from equity participants
o Exclusions from IFRS 15:
§ Lease contract (IFRS 16)
§ Insurance contract (IFRS 17)
§ Financial instruments (IFRS 9)
§ Non-monetary exchanges between entities in the same line of business (trade)
o Contract: agreement between 2/more parties that creates enforceable rights &
obligations
o Customer: a party that has contracted with an entity to obtain goods/services that are
an output of entity’s ordinary activities in exchange for consideration
1 Identify contract with customer
Must already be legally enforceable
o For a contract with a customer to exist, all of the criteria has to be met
a) the parties to the contract have approved the contract & must be committed to their
obligations
Þ approval = written, oral, implied by customary business practices
b) entity can identify each party’s rights regarding goods & services to be transferred
Þ normally specified in contract
Þ must apply IFRS 15 during contractual period for which parties have
enforceable rights & obligations
Þ if contract is automatically renewable, there will be a new contract upon
renewal if contract continues indefinitely, entity can identify & enforce its
rights & obligations for each period until the contract is terminated
c) entity can identify payment terms for goods/services to be transferred
Þ to be able to determine amount at which to measure revenue
d) contract must have commercial substance
= risk, timing & amount of entity’s future cashflows will change as a result of
the contract
e) it’s probable that the entity will collect consideration to which it’s entitled
Þ consider customer’s ability & intention to pay consideration when it’s due
Þ assess customer’s credit risk
, o if criteria isn’t met, any consideration received must be recognized as a liability
Dr Bank (SFP)
Cr Income received in advance
o amount received can only be recognized as revenue when
§ entity has no remaining obligation & all/most of the consideration promised by
the customer has been received (amount is non-refundable) or
§ contract has been terminated & amount is non-refundable
Dr Income received in advance (SFP)
Cr Revenue (p/l)
2 Identify the Performance Obligations
o Performance Obligation: a promise in a contract with a customer to transfer to the
customer
(a) A distinct good/service (or a bundle of goods/services)
(b) A series of distinct goods/services that are substantially the same & have the same
pattern of transfer to the customer
o Must identify @ inception of contract
o Performance obligations don’t have to be limited to what’s explicitly stated in contract -
à can be implied by entity’s customary business practices & published policies if they
create valid expectations in the customer
o Criteria to be Distinct: both must be met
(a) Customer can benefit from good/service on its own / together with resources that
are readily available to customer
- Benefit = use, consumer, sell for amount > scrap value
- Readily available good/service = sold separately
= already obtained from entity
= already obtained elsewhere
The fact that the entity regularly sells good/service separately indicates that the customer can
obtain benefit from good/service on its own/in combo with other readily available resources
(b) Entity’s promise to transfer good/service is separately identifiable from other promises
in contract
- Separately identifiable
= promise to transfer each good/service promised individually or
= promise to transfer combined item/s
- Not separately identifiable
= entity provides significant service of integrating into combined output
= 1/more goods/services significantly modifies/customizes 1/more of the other
goods/services promised
= goods/services are highly interdependent/interrelated
à entity would not meet its promise by transferring each separately
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