Download - Revenue Recognition

Transcript
Page 1: Revenue Recognition

IFRS 15 – Revenue from contracts with customersJune 2014

www.pwc.com

Page 2: Revenue Recognition

PwC

IFRS 15 - Project objective

2

Clear principles

Robust framework

Comparability across

industries

Simplified guidance

One ModelA single, joint revenue standard

to be applied across all industries and capital markets

Enhanced disclosures

Effective for annual periods beginning on or after 1 January 2017

Page 3: Revenue Recognition

PwC

A change in mindset

• Reassessment of contracts will be time consuming

• Greatest impact for those that use industry based models

• Transaction price allocated on a relative selling price basis

• Change to model for variable consideration

• Full retrospective application may require running dual systems and gathering of historic data

• More extensive disclosure requirements

• Potential impact on compensation arrangements

Awareness is essential!

Page 4: Revenue Recognition

PwC 4

IFRS 15 – Revenue recognition model

IAS 18 /11

Separate models for:

• Construction contracts• Goods• Services

Focus on risk and rewards

Limited guidance on:

• Multiple element arrangements

• Variable consideration• Licences

IFRS 15

Single model for performance obligations:

• Satisfied over time• Satisfied at a point in

time

Focus on control

More guidance:Separating elements, allocating the transaction price, variable

consideration, licences, options, repurchase arrangements

and so on….

Page 5: Revenue Recognition

PwC

Scope

• Scope exclusions

- Leases, insurance, financial instruments, certain guarantee contracts and certain nonmonetary exchanges

• Contracts with elements in multiple standards - Evaluate under other standards first

Revenue is income from ‘ordinary activities’. A contract has rights and obligations between two or more

parties.

A customer receives a good or service.

5

Page 6: Revenue Recognition

PwC 6

Revenue – the five step approach

Step 1 - Identify the contract with the customer

Step 2 - Identify the performance obligations in the contract

Step 3 - Determine the transaction price

Step 4 - Allocate the transaction price

Step 5 - Recognise revenue when (or as) a performance obligation is satisfied

Core principleRevenue recognised to depict transfer of goods or services

Page 7: Revenue Recognition

PwC 7

Step 1 – Identify the contract

• Agreement between two or more parties that creates enforceable rights and obligations

• No contract unless customer committed, criteria include:

it is probable that the entity will collect the consideration to which it will be entitled

• Combine two or more contracts with the same customer when:

- negotiated as a package with a single commercial objective;

- amount of consideration to be paid in one contract depends on the price or performance of the other contract; or

- goods or services promised in the contracts are a single performance obligation (see step 2)

Page 8: Revenue Recognition

PwC 8

Contract modifications

• Modification accounted for when it creates or changes enforceable rights and obligations

• Accounting depends on whether distinct goods or services added

Distinct goods/services added at price that reflects stand-alone selling price

New separate contract: Prospective accounting only

Remaining goods or services distinct from existing contract, but not at stand-alone selling price

Treated as new contract: Prospective accounting but ‘carry forward’ existing position (e.g. contract liabilities)

Goods / services not distinct from existing contract

Continuation of contract: Cumulative catch up

If combination of above Apply the ‘principles’ above

Page 9: Revenue Recognition

PwC 9

Unit of account

• IFRS 15 is applied to each individual ‘contract’- specific guidance on contract combination- ‘step 2’ covers separation of contract into different

promises

• Portfolio approach allowed as practical expedient only if- the entity reasonably expects that the effects of applying

the model to portfolio versus individual contracts would not differ materially

• Judgment required to select size and composition of portfolio

Page 10: Revenue Recognition

PwC 10

Step 2 – Identify the performance obligations

Performance obligations are promises to transfer goods or services to a customer that are:

• explicit,

• implicit, or

• arise from customary business practices

Identifying performance obligations is critical to measurement and timing of recognition

Page 11: Revenue Recognition

PwC 11

Separate performance obligations

Separate performance obligation if:

• Distinct good or service:

- customer benefits from good/service on its own or with other resources; and

- not dependent on/interrelated with other items in the contract

E.g., consumer goodsE.g., a building, not the individual ‘bricks’

• Series of goods/services that are substantially the same, if consistent pattern of transfer to customer over time

E.g., a daily cleaning service

Page 12: Revenue Recognition

PwC 12

Step 3 – Estimating the transaction price

• Probability weighted or best estimate

• More specific guidance covering:

- time value of money

- constraint on variable consideration

- non-cash consideration

- consideration payable to customers: reduction to transaction price unless for a distinct good or service.

Page 13: Revenue Recognition

PwC 13

Time value of money

• Adjust consideration, if there is a significant financing component:

- optional if period between payment and performance less than year

- captures advanced payments

• Consider:

- difference between consideration and the cash selling price, and

- Then combined effect of both:◦ time between transfer of goods/services and customer

payment◦ the prevailing interest rates in the relevant market

• Specific examples of when there is no significant financing component

- e.g. transfer at customers’ discretion (customer loyalty programmes)

Page 14: Revenue Recognition

PwC 14

Variable consideration

Included in the transaction price only if it is highly probable that there will not be a significant revenue reversal

Uncertainty over long

period of time

Limited experience with similar contracts

Susceptible to factors outside control

Broad range of outcomes

Key effects

• Must recognise ‘minimum amount’ that is highly probable of not reversing

• Reassessed at the end of each reporting period

Page 15: Revenue Recognition

PwC 15

Sales and usage-based royalties exception

For licences of intellectual property with a sales or usage based royalty, revenue recognised only when sales/usage

occurs

• ‘highly probable’ constraint does not apply

• not meant to be applied by analogy

The challenges?

• What is a licence?

• What is a sales based or usage based royalty?

• What is intellectual property?

Page 16: Revenue Recognition

PwC 16

Step 4 – Allocating the transaction price

• Allocate transaction price to separate performance obligations based on relative standalone selling price:

- Actual or estimated

- Residual ‘approach’ if selling price is highly variable or uncertain (change from current practice)

• Initial allocation and changes to variable consideration might be allocated to a single performance obligation if:

- Contingent payment relates only to satisfaction of that performance obligation, and

- Allocation is consistent with the amount the entity expects to be entitled to for that performance obligation

Page 17: Revenue Recognition

PwC 17

Step 5 – Recognition of revenue

Key question: Point in time or over time

• Guidance applies to each separate performance obligation

• First, evaluate if performance obligation satisfied ‘over time’

- recognise revenue based on the pattern of transfer to the customer

• If not point in time

- recognise revenue when control transfers

Page 18: Revenue Recognition

PwC 18

When does control transfer over time?

Customer receive benefits as performed/ another would not need

to re-performe.g. cleaning service, shipping

Create/enhance an asset customer controls

e.g. house on customer land

Does not create asset w/alternative use AND

Right to payment for work to datee.g. an ‘audit’ report

No

NoOve

r ti

me

Poin

t in tim

e

Yes

Yes

Yes No

Page 19: Revenue Recognition

PwC

Indicators of control transfer – point in time

If not over time, then point in time….

Recognise revenue when control transfers

Indicators that customer has obtained control of a good or service:

19

Right to payment for asset

Legal title to asset

Physical possession of asset

Customer has significant risk and

rewards

Customer has accepted the asset

Page 20: Revenue Recognition

PwC 20

Licences intellectual property – two types

Right to access if following criteria met:

Right to use

• Right to use IP as it exists at a point in time

• Revenue recognised at a point in time

Right to access

• Right to access to IP as it exists through out the licence period

• Revenue recognised over time

Judgment required

Licensor performs activities that

significantly affect the IP

Rights expose customer to effects of

those activities

Activities are not a separate good /

service

Page 21: Revenue Recognition

PwC

Contract costs

• Incremental costs of obtaining a contract required to be capitalised if expected to be recovered (e.g. sales commissions)

- May be expensed if expected contract period less than 1 year

• Contract fulfilment costs

- Look to other guidance first (inventory, PPE)

- If out of scope of other standards, required to be capitalised if:

◦ Relate directly to a contract and

◦ Relate to future performance and

◦ Expected to be recovered

• Amortise capitalised costs as control transfers

• Impairment reversals required 21

Page 22: Revenue Recognition

PwC

Disclosure

Both qualitative and quantitative information including;

• Disaggregated information

• Contract balances and a description of significant changes

• Amount of revenue related to remaining performance obligations and an explanation of when revenue is expected to be recognised

• Significant judgments and changes in judgments

More disclosures

Page 23: Revenue Recognition

PwC 23

Transition

2016 2017

Effective date = 1 Jan 2017

Option 1 – Full

retrospective

(Apply IAS 8)

NEW IFRS 15

NEW IFRS 15

Cumulative effect at 1 Jan 2016

Reliefs

For completed contracts:• No adjustment for interims• Hindsight allowed for

variable consideration

Option 2– Prospective

OLD GAAPNEW

IFRS 15

Cumulative effect at 1 Jan 2017

No reliefs

Disclose OLD GAAP

It depends.

Page 24: Revenue Recognition

PwC 24

What else haven’t we covered?

• Customer options

• Warranties

• Breakage

• Non-cash consideration

• Consideration payable to the customer

• Returns

• Repurchase options

• Principal or agent

Significantly more implementation guidance than existing IFRS!

Page 25: Revenue Recognition

Thank you!

https://inform.pwc.com

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

© 2014 PricewaterhouseCoopers LLP. All rights reserved. In this document, "PwC" refers to the UK member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.