Applying International Financial Reporting Standards
Summary of the book Applying IFRS Standards (Ruth Picker, Kerry Clark, John Dunn, David Kolitz, Gilad Livne, Janice Loftnus and Leo van der Tas). This summary includes all relevant chapters for the exam.
Chapters included:
Chapter 4: Revenue from contracts with customers.
Chapter 5: Provisions, co...
Summary Financial Accounting and Reporting 2021/2022
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Maastricht University (UM)
Master Accounting and Control
Financial accounting (EBC4074)
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Meeting 1: Revenue recognition and provisions, contingent liabilities and
contingent assets.
Chapter 4: Revenue from contracts with customers.
IFRS 15 is a new standard specifying the accounting treatment for all revenue arising
from contracts with customers. It applies to all entities that enter into contracts to
provide goods or services to their customers, unless the contracts are within the scope of
other IFRS standards. For example:
Lease contracts accounted for under IAS 17.
Insurance contracts accounted for under IFRS 4.
Financial instruments and other contractual rights or obligations accounted for
under IFRS 9.
Non-monetary exchanges between entities in the same line of business to
facilitate sales to customers or potential customers.
An entity applies the fie step model to recognize revenue at an amount that reflects the
consideration to which the entity expects to be entitled in exchange for transferring
goods or services to customers. The five-step model:
Step 1: Identify the contract(s) with a customer.
Any contracts that create enforceable rights and obligations fall within the scope of the
standard. Five criteria must be met at the commencement of the arrangement:
1. The contract is approved by all parties.
2. The entity can identify the rights of each party regarding the goods or services
that are to be transferred under the contract.
3. The entity can identify the payment terms for the goods or services to be
transferred.
4. The contract has commercial substance.
5. Collectability of the amount of consideration that an entity will be entitled to in
exchange for the goods and services that will be transferred to the customer is
probable.
When a contract with a customer does not meet the criteria for a revenue contract and an
entity receives consideration from the customer, the entity can only recognise the
consideration received as revenue when such amounts are non-refundable and either of
the following events has occurred:
a) The entity has completed performing all its obligations under the contract and has
received all, or substantially all of the consideration promised by the customer.
b) The contract has been terminated.
An entity shall combine two or more contracts entered at or near the same time with the
same customer (or related parties of the customer) and account for the contracts as a
single contract if one or more of the following criteria are met:
The contracts are negotiated as a package with the intent of meeting a
singular business purpose.
Example: a contract would be loss making without taking into
account the consideration received under another contract.
The amount of consideration that a customer must pay in one contract is
impacted by the price or performance of the other contract.
Some or all the goods or services promised in the individual contracts form a
single performance obligation.
Entities are required to continue assessing the criteria throughout the term to determine
if they are subsequently met.
,Step 2: Identify the performance obligations.
The entity has to determine which of the promised goods or services will be treaded as
separate performance obligations. Promised goods or services are accounted for as
separate performance obligations if they are distinct or if they are part of a series of
distinct goods and services that are substantially the same and have the same pattern of
transfer to the customer. It has to meet both criteria below:
The goods or services are capable of being distinct.
o A good or service is capable of being distinct if the customer can benefit
from it.
o In assessing this an entity considers the individual characteristics of the
good or service rather than how a customer may use the good or service.
The goods or services are distinct when considered in the context of the entire
contract.
o The entity is not using the good or service as an input into a single process
or project that is the output of the contract. (entity is not providing a
significant integration service).
o The good or service does not significantly modify or customise other
promised goods and services in the contract.
o The good or service is not highly dependent on, or highly interrelated with,
other promised goods or services in the contract.
Even if a good or service is determined to be distinct, if it’s part of a series of goods or
services that are substantially the same and have the same pattern of transfer, it must be
treated as a single performance obligation, when:
Each distinct good or service in the series is a performance obligation that would
be satisfied over time if it were accounted for separately.
The measure used to assess the entity’s progress toward satisfaction of the
performance obligation is the same for each distinct good or service in the series.
A customer option to purchase additional goods or services is a separate performance
obligation only if it provides the customer with a material right that the customer would
not have received without entering the contract.
Step 3: Determine the transaction price.
An entity shall adjust the promised amount of consideration for the effects of the time
value of money if the timing of payments agreed to by the parties to the contract
provides the customer or the entity with a significant benefit of financing the transfer of
goods or services to the customer (Significant financing component).
Only considered when the period between payment and transfer of goods is
greater than 1 year.
If an entity cannot reasonably estimate the fair value of non-cash consideration, it
measures the consideration indirectly by reference to the estimated stand-alone selling
price of the promised goods or services.
Step 4: Allocate the transaction price to the performance obligations in the contract.
There are two exceptions to using the relative stand-alone selling price method:
1. An entity will allocate variable consideration to one or more performance
obligations, or one or more distinct goods or services promised in a series of
distinct goods or services that forms part of a single performance obligation, in a
contract in some situations.
, 2. An entity will allocate a discount in an arrangement to one or more performance
obligations in a contract if specified criteria are met.
The stand-alone selling price is the price at which an entity would sell a promised
good or service separately to a customer. If there is no observable price, the entity can
use one of the following methods:
Adjusted market assessment approach
This approach considers the amount that the market is willing to pay for a
good or service and focuses primarily on external factors rather than entity
specific factors.
Expected cost plus margin approach
This approach is based primarily on internal factors. However, it factors in a
margin that the entity believes the market would be willing to pay, not the
margin that an entity would like to get.
Residual approach
This approach allows an entity that can estimate the stand alone selling
prices for one or more, but not all promised goods or service to allocate the
remaining transaction price to the goods or services for which it could not
reasonably make an estimate, provided certain criteria are met.
Step 5: satisfaction of performance obligations
Under IFRS 15 revenue can only be recognised when an entity satisfies an identified
performance obligation by transferring a promised god or service to a customer. A good
or service is considered transferred when the customer obtains control over the promised
good or service. An entity has to meet the following criteria in order to recognise revenue
over time:
a) The benefits provided by the entity’s performance are simultaneously received
and consumed by the customer.
b) The customer controls an asset that is being created or enhanced by entity’s
performance; or
c) The asset created has no alternative use to the entity and there is an enforceable
right to payment the work performed to date.
There are two methods for recognising revenue on arrangements involving the transfer of
goods and services over time:
1. Output methods
Measure the value of goods or services transferred to date relative to the
remaining goods or services promised under the arrangement.
2. Input methods
Measure the inputs/ efforts put in by the entity relative to the total
expected inputs needed to transfer the promised goods or services to the
customer.
To help entities determine the point in time when a customer obtains control of a
particular good or service the standard provides a non-exhaustive list of indicators of the
transfer of control as follows:
The entity has a present right to payment for the asset.
The asset’s legal title is held by the customer.
Physical possession of the asset has been transferred by the entity.
The significant risks and rewards of ownership of the asset reside with the
customer.
There is customer acceptance of the asset.
Contract costs
, An entity is required to capitalize as an asset two types of costs relating to a contract with
a customer:
1. Any incremental costs to obtain the contract that would otherwise not have been
incurred, if the entity expects to recover them.
2. Costs incurred to fulfil a contract with the customer if certain criteria are met.
Costs to fulfil a contract are capitalized only if they meet all of the following
criteria:
i. They are directly related to a specific contract or to a specific
anticipated contract
Direct labour
Direct materials
ii. They generate or enhance resources of the entity that will be used
in satisfying performance obligations in the future.
iii. They are expected to be recovered.
An entity has to amortise any capitalised contract costs and recognise the expense in the
statement of profit or loss. An impairment loss is recorded in the statement of profit or
loss for the difference between:
The carrying amount of the capitalised contract costs; and
The remaining amount of consideration that an entity expects to receive in
exchange for providing the associated goods and services, less the remaining
costs that relate directly to providing those goods and services.
Any capitalized contract costs are then amortized on a systematic basis that reflects the
pattern of transfer of the related promised goods or services to the customer. Entities will
also have to assess any capitalised contract costs for impairment at the end of each
reporting period.
Contract modifications
A contract modification is a change in the scope or price (or both) of a contract that is
approved by the parties to the contract. An entity shall account for a contract
modification as a separate contract if both of the following conditions are present:
a) The scope of the contract increases because of the addition of promised goods or
services that are distinct; and
b) The price of the contract increases by an amount of consideration that reflects the
entity’s stand-alone selling prices of the additional promised goods or services and
any appropriate adjustments to that price to reflect the circumstances of the
particular contract.
If a contract modification does not meet the two criteria, it will be accounted for as a
change to the original contract. Such types of contract modifications may be accounted
for in any of the following three ways depending on the specific facts and circumstances:
1. Termination of the old contract and the creation of a new contract
2. Continuation of the original contract
3. Modification of the existing contract and the creation of a new contract.
Licenses of intellectual property
For distinct licences, an entity must determine whether the license is a ‘right to access’ or
a ‘right to use’. If the customer has right to access recognise revenue over time. The
revenue for right to use is recognised as a point in time. Requirements for right to access
(all must be met):
a) The entity is required to perform activities that significantly affect the intellectual
property to which the license relates.
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