Applying IFRS: A closer look at IFRS 15, the revenue ...

Applying IFRS

A closer look at IFRS 15, the revenue recognition standard

IFRS 15 Revenue from Contracts with Customers

(Updated September 2019)

Overview

The largely converged revenue standards, IFRS 15 Revenue from Contracts with Customers and Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers1 (together with IFRS 15, the standards), that were issued in 2014 by the International Accounting Standards Board (IASB or the Board) and the US Financial Accounting Standards Board (FASB) (collectively, the Boards) 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 those for leases. The standards, which superseded virtually all legacy revenue requirements in IFRS and US GAAP, also specify the accounting for costs an entity incurs to obtain and fulfil a contract to provide goods or services to customers (see section 9.3) 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 section 2.2.1).

As a result, entities that adopted the standards often found implementation to be a significant undertaking. This is because the standards require entities to make more judgements and estimates and they affect entities' financial statements, business processes and internal controls over financial reporting.

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 other users from a variety of industries, countries, as well as public and private entities. Members of the joint TRG met six times in 2014 and 2015, and members of the FASB TRG met twice in 2016.

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 15.2 Furthermore, the former Chief Accountant of the US Securities and Exchange Commission (SEC) 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.3

We have incorporated our summaries of topics on which TRG members generally agreed throughout this publication. Unless otherwise specified, these summaries represent the discussions of the joint TRG. Where possible, we indicate if members of the IASB or its staff commented on the FASB TRG discussions.

This publication 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 discusses our views on certain topics.

1 Throughout this publication, when we refer to the FASB's standard, we mean ASC 606 (including the recent amendments), unless otherwise noted.

2 ESMA Public Statement: Issues for consideration in implementing IFRS 15: Revenue from Contracts with Customers, issued 20 July 2016, available on ESMA's website.

3 Speech by Wesley R. Bricker, 5 May 2016. Available on the SEC's website.

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A closer look at IFRS 15, the revenue recognition standard

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While entities have adopted the standards, application issues may continue to arise. Accordingly, the views we express in this publication may evolve as 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. Please see IFRS for our most recent revenue publications.

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A closer look at IFRS 15, the revenue recognition standard

Contents

Overview ................................................................................................................... 2 1. Objective, effective date and transition.................................................................. 7

1.1 Overview of the standard ......................................................................... 7 1.2 Effective date ......................................................................................... 8 1.3 Transition methods ................................................................................. 8 2. Scope .................................................................................................................. 37 2.1 Scope of IFRS 15................................................................................... 37 2.2 Other scope considerations .................................................................... 39 2.3 Definition of a customer......................................................................... 41 2.4 Collaborative arrangements ................................................................... 42 2.5 Interaction with other standards ............................................................. 43 3. Identify the contract with the customer ............................................................... 54 3.1 Attributes of a contract ......................................................................... 55 3.2 Contract enforceability and termination clauses....................................... 64 3.3 Combining contracts.............................................................................. 71 3.4 Contract modifications .......................................................................... 73 3.5 Arrangements that do not meet the definition of a contract under the standard .................................................................................................... 86 4. Identify the performance obligations in the contract.......................................... 89 4.1 Identifying the promised goods or services in the contract ........................ 89 4.2 Determining when promises are performance obligations........................ 101 4.3 Promised goods or services that are not distinct .................................... 128 4.4 Principal versus agent considerations ................................................... 129 4.5 Consignment arrangements ................................................................. 149 4.6 Customer options for additional goods or services.................................. 149 4.7 Sale of products with a right of return ................................................... 164 5. Determine the transaction price ........................................................................ 166 5.1 Presentation of sales (and other similar) taxes ....................................... 168 5.2 Variable consideration ......................................................................... 169 5.3 Refund liabilities ................................................................................. 191 5.4 Rights of return .................................................................................. 192 5.5 Significant financing component ........................................................... 197 5.6 Non-cash consideration ....................................................................... 213 5.7 Consideration paid or payable to a customer.......................................... 217 5.8 Non-refundable upfront fees ................................................................ 226 5.9 Changes in the transaction price........................................................... 230 6. Allocate the transaction price to the performance obligations ............................ 231 6.1 Determining stand-alone selling prices .................................................. 231 6.2 Applying the relative stand-alone selling price method ............................ 248 6.3 Allocating variable consideration .......................................................... 251

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6.4 Allocating a discount ........................................................................... 256 6.5 Changes in transaction price after contract inception ............................. 260 6.6 Allocation of transaction price to components outside the scope of IFRS 15.................................................................................................... 263 7. Satisfaction of performance obligations ............................................................. 265 7.1 Performance obligations satisfied over time .......................................... 266 7.2 Control transferred at a point in time .................................................... 304 7.3 Repurchase agreements ...................................................................... 312 7.4 Consignment arrangements ................................................................. 319 7.5 Bill-and-hold arrangements .................................................................. 320 7.6 Recognising revenue for licences of intellectual property ........................ 324 7.7 Recognising revenue when a right of return exists.................................. 324 7.8 Recognising revenue for customer options for additional goods or services ................................................................................................... 324 7.9 Breakage and prepayments for future goods or services ......................... 325 8. Licences of intellectual property ........................................................................ 329 8.1 Identifying performance obligations in a licensing arrangement ............... 330 8.2 Determining the nature of the entity's promise in granting a licence ........ 337 8.3 Transfer of control of licensed intellectual property................................ 343 8.4 Licence renewals................................................................................. 348 8.5 Sales-based or usage-based royalties on licences of intellectual property . 349 9. Other measurement and recognition topics........................................................ 362 9.1 Warranties.......................................................................................... 362 9.2 Onerous contracts............................................................................... 370 9.3 Contract costs .................................................................................... 372 10. Presentation and disclosure............................................................................. 401 10.1 Presentation requirements for contract assets and contract liabilities .... 402 10.2 Presentation requirements for revenue from contracts with customers .. 411 10.3 Other presentation considerations ...................................................... 413 10.4 Disclosure objective and general requirements..................................... 414 10.5 Specific disclosure requirements ........................................................ 415 10.6 Transition disclosure requirements ..................................................... 432 10.7 Disclosures in interim financial statements .......................................... 432 Appendix A: Extract from EY's IFRS Disclosure Checklist ....................................... 433 Appendix B: Illustrative examples included in the standard and references in this publication ............................................................................................................ 442 Appendix C: TRG discussions and references in this publication ............................. 446 Appendix D: IFRS IC discussions and references in this publication......................... 449 Appendix E: Defined terms..................................................................................... 451 Appendix F: Changes to the standard since issuance.............................................. 452 Appendix G: Summary of important changes to this publication ............................. 453 Appendix H: Summary of differences from US GAAP.............................................. 456

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A closer look at IFRS 15, the revenue recognition standard

What you need to know

? IFRS 15 provides a single source of revenue requirements for all entities in all industries. It represents a significant change from legacy IFRS.

? IFRS 15 applies to revenue from contracts with customers and replaced 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 Transaction involving Advertising Services.

? IFRS 15 is principles-based, consistent with legacy revenue requirements, but provides more application guidance. The lack of bright lines requires increased judgement.

? The standard may have had little effect on some entities, but may have required significant changes for others, especially those entities for which legacy IFRS provided little application guidance.

? IFRS 15 also specifies the accounting treatment for certain items not typically thought of as revenue, such as certain costs associated with obtaining and fulfilling a contract and the sale of certain non-financial assets.

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1. Objective, effective date and transition

1.1 Overview of the standard

The revenue standards the Boards issued in May 2014 were largely converged and superseded virtually all legacy revenue recognition requirements in IFRS and US GAAP, respectively. The Boards' goal in joint deliberations was to develop revenue standards that:4

? Remove inconsistencies and weaknesses in the legacy 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

? Provide more useful information to users through expanded disclosure requirements

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 those for leases. 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 section 9.3) 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 section 2.2.1).

IFRS 15 replaced 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.5

After issuing the standards, the Boards have issued converged amendments on certain topics (e.g., principal versus agent considerations) and different amendments on other topics (e.g., licences of intellectual property). The FASB has also issued several amendments that the IASB has not issued (e.g., noncash consideration, consideration payable). See Appendix F for a discussion of the changes to the standards since issuance.

While we address the significant differences between the IASB's final standard and the FASB's final standard throughout this publication, the primary purpose of this publication is to describe the IASB's standard, including all amendments to date, and focus on the effects for IFRS preparers.6 As such, we generally refer to the `standard' in the singular.

1.1.1 Core principle of the standard The standard describes the principles an entity must apply to measure and recognise revenue and the related cash flows. The core principle is that an

4 IFRS 15 (2016).IN5. 5 IFRS 15.C10. 6 For more information on the effect of the new revenue standard for US GAAP preparers,

refer to our Financial Reporting Developments: Revenue from contracts with customers (ASC 606), Revised September 2019, available on EY AccountingLink.

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A closer look at IFRS 15, the revenue recognition standard

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.7

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

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.8 To assist entities, IFRS 15 includes detailed application guidance. The IASB also published more than 60 illustrative examples that accompany IFRS 15. We list these examples in Appendix B to this publication and provide references to where certain examples are included in this publication.

1.2 Effective date

IFRS 15 became effective for annual reporting periods beginning on or after 1 January 2018. Early adoption was permitted, provided that fact was disclosed.

FASB differences

The FASB's standard became effective for public entities, as defined, for fiscal years beginning after 15 December 2017 and for interim periods therein.9 Non-public entities (i.e., an entity that does not meet the definition of a public entity in the FASB's standard) are required to adopt the standard for fiscal years beginning after 15 December 2018 and for interim periods within fiscal years beginning after 15 December 2019. That is, non-public entities are not required to apply the standard in interim periods in the year of adoption.

US GAAP public and non-public entities were permitted to adopt the standard as early as the original public entity effective date (i.e., fiscal years beginning after 15 December 2016, including interim periods therein).

1.3 Transition methods (updated October 2018)

IFRS 15 requires retrospective application. However, it allows either a 'full retrospective' adoption (in which the standard is applied to all of the periods

7 IFRS 15.2. 8 IFRS 15.3. 9 The FASB's standard defines a public entity as one of the following: A public business

entity (as defined); A not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed or quoted on an exchange or an over-the-counter market; An employee benefit plan that files or furnishes financial statements with the US SEC. An entity may meet the definition of a public business entity solely because its financial statements or financial information is included in another entity's filing with the SEC. The SEC staff said it would not object if these entities adopt the new revenue standard using the effective date for non-public entities rather than the effective date for public entities.

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A closer look at IFRS 15, the revenue recognition standard

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