Revenue – IFRS 15 handbook - KPMG

Revenue

IFRS?15 handbook

June 2019 home.kpmg/ifrs

Contents

Facing new challenges

1

Overview

2

1 Step 1 ? Identify the contract with a customer 3

1.1 Criteria to determine whether a contract

exists

3

1.2 Contract term

14

1.3 Consideration received before a contract

exists

17

1.4 Combination of contracts

19

2 Step 2 ? Identify the performance obligations

in the contract

23

2.1 Distinct goods or services

24

2.2 Implied promises and administrative tasks 35

2.3 Series of distinct goods or services

39

3 Step 3 ? Determine the transaction price

46

3.1 Variable consideration (and the constraint) 47

3.2 Significant financing component

63

3.3 Non-cash consideration

78

3.4 Consideration payable to a customer

81

3.5 Sales taxes

88

4 Step 4 ? Allocate the transaction price to the

performance obligations in the contract

90

4.1 Determine stand-alone selling prices

91

4.2 Allocate the transaction price

98

4.3 Changes in the transaction price

111

5 Step 5 ? Recognise revenue when or as the

entity satisfies a performance obligation

113

5.1 Transfer of control

114

5.2 Performance obligations satisfied over time 115

5.3 Measuring progress towards complete

satisfaction of a performance obligation

131

5.4 Performance obligations satisfied at a point

in time

148

5.5 Repurchase agreements

151

5.6 Consignment arrangements

156

5.7 Bill-and-hold arrangements

159

5.8 Customer acceptance

161

6 Scope

162

6.1 In scope

162

6.2 Out of scope

163

6.3 Partially in scope

165

6.4 Portfolio approach

171

7 Contract costs

173

7.1 Costs of obtaining a contract

173

7.2 Costs of fulfilling a contract

179

7.3 Amortisation

187

7.4 Impairment

192

8 Contract modifications

194

8.1 Identifying a contract modification

194

8.2 Accounting for a contract modification

198

9 Licensing

206

9.1 Licences of intellectual property

207

9.2 Determining whether a licence is distinct 209

9.3 Determining the nature of a distinct licence 214

9.4 Timing and pattern of revenue recognition 220

9.5 Contractual restrictions and attributes of

licences

223

9.6 Sales- or usage-based royalties

225

10 Other application issues

234

10.1 Sale with a right of return

234

10.2 Warranties

239

10.3 Principal vs agent considerations

244

10.4 Customer options for additional goods

or services

263

10.5 Customers' unexercised rights (breakage) 285

10.6 Non-refundable up-front fees

289

10.7 Sales outside ordinary activities

295

11 Presentation

299

11.1 Statement of financial position

299

11.2 Statements of profit or loss and cash flows 312

12 Disclosure

316

12.1 Annual disclosure

316

12.2 Interim disclosures

325

13 Effective date and transition

326

13.1 Transition

326

13.2 Retrospective method

328

13.3 Cumulative effect method

337

13.4 Consequential amendments to other IFRS

requirements

341

13.5 First-time adoption

342

Guidance referenced

344

Detailed contents

345

Index of examples

348

Index of KPMG insights

355

About this publication

363

Keeping in touch

364

Acknowledgments

366

Facing new chalenges

Reporting revenue under IFRS 15 is now one of the ordinary activities of companies in the 100+ countries that use IFRS Standards. So this feels like the right time to take stock ? to pull together, in one place, what we have learned about this new world of revenue recognition. Over the past five years, we ? like you ? have wrestled with the many challenges of implementing IFRS 15. In doing so, we have gained extensive insight and handson experience across different industries and geographies. And we are delighted to share our experience with you in our IFRS 15 handbook: Revenue. It provides detailed guidance, illustrative examples and extensive discussion of the areas that companies have found most complex. Looking forward, as your business grows and evolves ? whether by developing new products and services, embedding technological innovations or buying new businesses ? we hope this handbook will be your go-to resource as you apply IFRS 15 to new facts and circumstances.

Prabhakar Kalavacherla (PK) Brian O'Donovan Anne Schurbohm Kim Heng KPMG Global Revenue Recognition Leadership Team

? 2019 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.

2 | Revenue ? IFRS 15 handbook

Overview

This handbook provides a detailed analysis of the revenue standard, IFRS 15 Revenue from Contracts with Customers, including insights and examples to help entities to navigate the revenue recognition requirements. In many cases, further analysis and interpretation may be needed for an entity to apply the requirements to its own facts, circumstances and individual transactions. Furthermore, some of our insights may change and new insights will be developed as issues from the implementation of the revenue standard arise and as practice evolves.

Organisation of the text

The following diagram highlights the layout of the revenue standard and the corresponding sections in this handbook. Each section provides an overview, the requirements of the standard, examples illustrating basic scenarios and our insights. Some sections also have additional application examples illustrating more complex scenarios or sector-specific issues.

(1) Step 1 ? Identify the contract

(2) Step 2 ? Identify performance obligations

5-step model

(3) Step 3 ? Determine the transaction

price

(4) Step 4 ? Allocate the transaction

price

(5) Step 5 ? Recognise revenue

(6) Scope

(7) Contract

costs

Other recognition and measurement guidance

(8) Contract modifications

(9) Licensing

(10) Other application

issues

(11) Presentation

Presentation and implementation

(12) Disclosure

(13) Effective date and transition

? 2019 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.

1

1.1

IFRS 15.10 IFRS 15.12 IFRS 15.9

1 Step 1 ? Identify the contract with a customer | 3 1.1 Criteria to determine whether a contract exists |

Step 1 ? Identify the contract with a customer

Overview

A contract with a customer is in the scope of the standard when the contract is legally enforceable and certain criteria are met. If the criteria are not met, then the contract does not exist for the purpose of applying the general model of the standard, and any consideration received from the customer is generally recognised as a deposit (liability). Contracts entered into at or near the same time with the same customer (or a related party of the customer) are combined and treated as a single contract when certain criteria are met.

Criteria to determine whether a contract exists

The standard defines a `contract' as an agreement between two or more parties that creates enforceable rights and obligations and specifies that enforceability is a matter of law. Contracts can be written, oral or implied by an entity's customary business practices.

A contract does not exist when each party has the unilateral right to terminate a wholly unperformed contract without compensation.

A contract with a customer is in the scope of the standard when it is legally enforceable and meets all of the following criteria.

... collection of consideration is probable

... it has commercial substance

A contract exists if...

... rights to goods or services and

payment terms can be identified

... it is approved and the parties are

committed to their obligations

? 2019 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.

4 | Revenue ? IFRS 15 handbook

IFRS 15.9(e) IFRS 15.14 IFRS 15.13

In making the collectability assessment, an entity considers the customer's ability and intention (which includes assessing its credit-worthiness) to pay the amount of consideration when it is due. This assessment is made after taking into account any price concessions that the entity may offer to the customer (see Section 3.1).

If the criteria are not initially met, then an entity continually reassesses the contract against them and applies the requirements of the standard to the contract from the date on which the criteria are met. Any consideration received for a contract that does not meet the criteria is accounted for under the requirements in Section 1.3.

If a contract meets all of the criteria at contract inception, then an entity does not reassess the criteria unless there is an indication of a significant change in the facts and circumstances. If on reassessment an entity determines that the criteria are no longer met, then it ceases to apply the standard to the contract from that date, but does not reverse any revenue previously recognised.

Example 1 ? Assessing the existence of a contract: Sale of real estate

In an agreement to sell real estate, Seller X assesses the existence of a contract. In making this assessment, X considers factors such as:

? the buyer's available financial resources;

? the buyer's commitment to the contract, which may be determined based on the importance of the property to the buyer's operations;

? X's prior experience with similar contracts and buyers under similar circumstances;

? X's intention to enforce its contractual rights;

? the payment terms of the arrangement; and

? whether X's receivable is subject to future subordination.

If X concludes that it is not probable that it will collect the amount to which it expects to be entitled, then a contract to transfer control of the real estate does not exist. Instead, X applies the guidance on consideration received before concluding that a contract exists (see Section 1.3), and initially accounts for any cash collected as a deposit (liability).

? 2019 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.

1 Step 1 ? Identify the contract with a customer | 5 1.1 Criteria to determine whether a contract exists |

Example 2 ? Assessing the existence of a contract: No written sales agreement

Shoe Manufacturer S holds products available to ship to customers before the end of its current fiscal year. Shoe Shop T places an order for the product, and S delivers the product before the end of its current fiscal year. S generally enters into written sales agreements with this class of customer that require the signatures of the authorised representatives of both parties. S prepares a written sales agreement and its authorised representative signs the agreement before the end of the year. T does not sign the agreement before the end of S's fiscal year. However, T's purchasing department has orally agreed to the purchase and stated that it is highly likely that the contract will be signed in the first week of S's next fiscal year. After consulting its legal counsel and obtaining a legal opinion, S determines that based on local laws and legal precedent in T's jurisdiction, T is legally obliged to pay for the products shipped to it under the agreement, even though T has not yet signed the agreement. Therefore, S concludes that a contract exists and applies the general requirements of the standard to sales made under the agreement up to the year end.

Example 3 ? Collectability threshold: Assessment based on goods or services to be transferred

Company C contracts with Customer D to sell 1,000 units for a fixed price of 1 million. D has a poor payment history and often seeks price adjustments after receiving orders and so C assesses that it is probable that it will collect only 70% of the amounts due under the contract. Based on its assessment of the facts and circumstances, C expects to provide an implicit price concession and accept 70% of the fixed price from D. When assessing whether collectability is probable, C assesses whether it expects to receive 700,000, which is the amount after the expected implicit price concession. On subsequent reassessment, if C expects to collect more than 700,000, then it recognises the excess as revenue. If C subsequently assesses that it will collect less than 700,000, then C recognises the shortfall as a bad debt expense, which is measured using the guidance on impairment of receivables. However, if C determined that it had granted an additional price concession, then the shortfall would be a reduction in transaction price and revenue.

? 2019 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.

6 | Revenue ? IFRS 15 handbook

IFRS 15.BC32 IFRS 15.9

Assessment focuses on enforceability, not form of the contract

The assessment of whether a contract exists for the purpose of applying the standard focuses on the enforceability of rights and obligations based on the relevant laws, legal precedent and regulations, rather than the form of the contract (oral, implied or written). This may require significant judgement in some jurisdictions or for some arrangements, and may result in different assessments for similar contracts in different jurisdictions. In cases of significant uncertainty about enforceability, a written contract and legal interpretation by qualified counsel may be required to support a conclusion that the parties to the contract have approved and are committed to performing under the contract.

However, although the contract has to create enforceable rights and obligations, some of the promises in the contract to deliver a good or service to the customer may be considered performance obligations even though they are not legally enforceable (see Chapter 2).

Collectability is only a gating question

Under the revenue standard, the collectability criterion is included as a gating question designed to prevent entities from applying the revenue model to problematic contracts and recognising revenue and a large impairment loss at the same time. The collectability criteria are likely to be met for many routine customer contracts.

Collectability is assessed based on the amount that the entity expects to receive in exchange for goods or services

The collectability threshold is applied to the amount to which the entity expects to be entitled in exchange for the goods and services that will be transferred to the customer, which may not be the stated contract price. The assessment considers:

? the entity's legal rights;

? past practice;

? how the entity intends to manage its exposure to credit risk throughout the contract; and

? the customer's ability and intention to pay.

The collectability assessment is limited to the consideration attributable to the goods or services to be transferred to the customer for the non-cancellable term of the contract. For example, if a contract has a two-year term but either party can terminate it after one year without penalty, then an entity assesses the collectability of the consideration promised in the first year of the contract (i.e. the non-cancellable term of the contract).

? 2019 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.

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