Revenue Recognition

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IFRS 15 Revenue from contracts with customersJune This presentation is a summary of IFRS 15 and does not discuss all matters that might need to be considered to implement this standard. Please see for further details including the standard itself.1IFRS 15 - Project objective

2Clear principlesRobust frameworkComparability across industriesSimplified guidanceOne ModelA single, joint revenue standard to be applied across all industries and capital marketsEnhanced disclosuresEffective for annual periods beginning on or after 1 January 2017PwCIFRS 15 Revenue from contracts with customers, is the culmination of a long running joint project between the IASB and the FASB to create a single revenue standard. It applies to all contracts with customers except those that are financial instruments, leases or insurance contracts. It is effective for annual periods beginning on or after 1 January 2017, but entities that use IFRS are allowed to early-adopt the guidance. There is a choice of transition methods full retrospective application or a practical expedient that permits prospective application, however requires additional disclosures. Under the old guidance revenue recognition was measured and presented inconsistently. The current revenue guidance in IFRS was limited and not sufficient for very complex transactions. There was a significant amount of industry specific literature in US GAAP that could result in different answers for similar transactions and, at times, outcomes that did not represent the economic substance of the transaction.The guidance replaces all existing IFRS (and US GAAP) revenue recognition literature.The objective of the revenue project is to clarify the principles for recognising revenue and to develop a common revenue standard for IFRSs and US GAAP that would:(a) remove inconsistencies and weaknesses in previous revenue requirements;(b) provide a more robust framework for addressing revenue issues;(c) improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets;(d) provide more useful information to users of financial statements through improved disclosure requirements; and(e) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. (IFRS 15, IN5).

2A change in mindsetReassessment of contracts will be time consuming Greatest impact for those that use industry based modelsTransaction price allocated on a relative selling price basisChange to model for variable considerationFull retrospective application may require running dual systems and gathering of historic dataMore extensive disclosure requirements Potential impact on compensation arrangements

Awareness is essential!

PwCIFRS 15 could significantly change how many entities recognise revenue, especially those that currently apply industry-specific guidance. The standard will also result in a significant increase in the volume of disclosures related to revenue.

All entities will likely have to consider changes to information technology systems, processes, and internal controls as a result of the increased disclosure requirements, among other aspects of the model.

Management will need to perform a comprehensive review of existing contracts, business models, company practices, accounting policies, information technology systems, and internal processes and controls to assess the extent of changes needed as a result of IFRS 15. This may be the case even if the entitys revenue recognition model has not significantly changed.34IFRS 15 Revenue recognition model IAS 18 /11Separate models for:Construction contractsGoodsServicesFocus on risk and rewardsLimited guidance on:Multiple element arrangementsVariable considerationLicencesIFRS 15Single model for performance obligations:Satisfied over timeSatisfied at a point in timeFocus on controlMore guidance:Separating elements, allocating the transaction price, variable consideration, licences, options, repurchase arrangements and so on.PwCSo whats changed? IFRS 15 will replace IAS 18 and IAS 11 which currently provide separate revenue recognition models for goods and services and for construction contracts. IFRS 15 is based on a single model that distinguishes between promises to a customer that are satisfied at a point in time and those that are satisfied over time. IFRS 15 does not distinguish between sales of goods, services or construction contracts. It defines transactions based on performance obligations satisfied over time versus point in time.

Revenue is recognised when control of a good or service transfers to a customer. The notion of control replaces the notion of risks and rewards in the existing guidance. The focus on IAS 18 and 11 is on risk and rewards with control (that is, managerial control) as an aspect of risk and rewards. IFRS 15 focuses on control although risk and rewards is still an indicator of control.

One of the more significant changes is that IFRS 15 provides a lot more guidance than the existing standards. For example, it has more detail on multiple element arrangements and variable consideration and provides specific guidance on the accounting for licences, customer options and repurchase arrangements. This is likely to affect existing practice, especially in complex arrangements where existing guidance is limited. IAS 18 provides very limited guidance and the new standard provides significant guidance on key practice issues. This was one of the key objectives of the project from an IFRS perspective.

4ScopeScope exclusionsLeases, insurance, financial instruments, certain guarantee contracts and certain nonmonetary exchangesContracts with elements in multiple standards Evaluate under other standards firstRevenue is income from ordinary activities. A contract has rights and obligations between two or more parties.A customer receives a good or service.5PwCThe proposed standard applies to all contracts with customers.

The customer is defined as a party that has contracted with an entity to obtain goods or services that are an output of the entitys ordinary activities in exchange for consideration.

Defining the customer is a new concept. The definition of the customer might not significantly change the nature of transactions previously considered in scope of revenue guidance, but transactions with partners in collaborative arrangements may need to be considered further. Management will need to evaluate arrangements with collaborators and partners carefully to identify whether such arrangements or portions thereof are in the scope of IFRS 15.

A transaction that might be outside the scope is one with a collaborator or partner that shares risk in developing a product and that is not for the sale of goods or services that are an output of the entity's ordinary activities, and therefore not a contract with a customer.

Example - a biotechnology entity that has an agreement with a pharmaceutical entity to share risks in the development of a specific drug candidate likely will not be in the scope of the standard if the parties share the risk in developing the drug. If, however, the substance of the arrangement is that the biotechnology entity is selling its compound to the pharmaceutical entity and/or providing research and development services, it will likely be in scope.

The proposed standard provides a number of scope exceptions. They are very similar in practice to those in todays guidance. No industries are scoped out of the standard, only transactions. Leases Lease transactions are out of the scope of the revenue standard. However, intangibles have been scoped out of the leasing standard and are captured in the revenue standard. Financial instruments Financial institutions will need to look to IAS 39 / IFRS 9 to determine whether transactions are financial instruments or services under the revenue standard.Insurance Insurance contracts are within the scope of IFRS 4. Guarantee contracts in the scope of other standards are outside the scope of IFRS 15. Product guarantees, however, are in scope. Non-monetary transactions IFRS 15 excludes non-monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers. For example, IFRS 15 would not apply to a contract between two oil companies that agree to an exchange of oil to fulfil demand from their customers in different specified locations on a timely basis.

For contract with elements in multiple standards, entities should apply separation and measurement guidance in other standards. If not, entities should apply revenue guidance on separation and allocation of the transaction price.

EXAMPLE - A contract that includes a lease as well as a service element would be bifurcated based on the guidance in the leasing project. Thereafter, the lease element will be accounted for in accordance with the lease standard and the non-lease (service element) would be accounted for under the revenue standard. 5Revenue the five step approach

6Step 1 - Identify the contract with the customerStep 2 - Identify the performance obligations in the contractStep 3 - Determine the transaction priceStep 4 - Allocate the transaction price Step 5 - Recognise revenue when (or as) a performance obligation is satisfiedCore principleRevenue recognised to depict transfer of goods or services PwCThe core principle of IFRS 15 is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

The five steps might appear simple, but significant judgement will be needed to apply the underlying principles, and most entities should e