When evaluating financial condition the organization's revenue, along with net profit, is the most important item in the financial statements. At the same time, net profit cannot be determined without an estimate of revenue, which, as a rule, is the most significant item in the statement of comprehensive income.

Investors and other users of financial statements, when analyzing the financial condition of an organization, first of all assess the amount and composition of revenue recognized in the current reporting period, including compared with the previous reporting period, as well as with the revenue of other comparable organizations.
May 28, 2014 the IASB as a result of joint work with the Standards Board financial accounting The USA, which lasted for about six years, issued a new revenue standard - IFRS 15 “Revenue from Contracts with Customers” (hereinafter - IFRS 15). Let's consider the main provisions of the new standard.

1. What caused the adoption of the new revenue standard?

The previous standard on revenue, which was originally issued in 1982 and significantly revised in 1993, did not meet the needs of preparers and users of statements, as it did not cover all the variety of situations that arise in practice, and did not give an unambiguous answer to the question of when and in how much to recognize revenue.
Its provisions differed from those of a similar standard in US GAAP.
The new standard is expected to provide more detailed guidance on the practical aspects of revenue accounting, improve the comparability of revenue recognition across organizations, industries, jurisdictions and capital markets globally, and create the preconditions for providing users with more useful information by improving disclosures on revenue matters.

2. What is the key principle of the new standard?
What is a contractual asset and a contractual obligation?

Key principle of the new standard: an entity (which, in the context of IAS 15, is a seller of goods or services) recognizes revenue by reflecting the transfer of goods and services promised to a customer in accordance with the terms of the contract in an amount corresponding to the consideration to which it is entitled and expected to receive in exchange for these goods and services.
Compared to previous IFRSs regulating revenue recognition, there has been a change in approach: the concept of performance reporting has been replaced by the concept of positional reporting.
The seller of a good or service may have a contractual asset after concluding a contract with a buyer.

REFERENCE
A contractual asset is an entity's right to a consideration in exchange for goods or services transferred to a customer for a reason other than the passage of time (for example, the entity's future performance of its obligations under the contract).

Example 1
The organization enters into a contract for the supply of goods (goods 1 and 2) in the amount of 5000. Selling price of goods 1 - 2000, goods 2 - 3000. The unconditional right to receive remuneration from the seller arises only after the transfer of control over goods 1 and 2 in aggregate. Payment by the buyer of the remuneration under the contract is carried out after the transfer of goods 1 and 2.
On March 15, item 1 is transferred to the buyer, the transaction is reflected by posting:

Dt"Contractual asset" - 2000
CT"Revenue" - 2000

On April 3, item 2 is transferred to the buyer and an unconditional right to receive remuneration under the contract arises:

Dt
CT"Contractual asset" - 2000
CT"Revenue" - 3000

Dt"Settlement account of the organization - the seller of the goods" - 5000
CT"Accounts receivable" - 5000

REFERENCE
A contractual obligation is a commitment by an entity to deliver goods or services for which the entity has received consideration (or the entity is owed a consideration) from a customer.

If the advance payment is received, the seller has a contractual obligation to deliver the goods, which ends at the time of delivery, simultaneously with the recognition of revenue.

Example 2
On February 1, the organization enters into an agreement for the supply of goods on March 30 in the amount of 100, providing for an advance payment on February 15. This agreement can be terminated by agreement of the parties.
On February 15, an advance payment was received:

Dt"Settlement account of the organization - the seller of the goods" - 100
CT"Contractual obligation (for the supply of goods)" - 100

Dt"Contractual commitment" - 100
CT"Revenue" - 100

Thus, the new standard uses a contract-based approach, according to which the recognition of revenue from contracts with customers is based on the changes in assets and liabilities that arise when the entity becomes a party to the contract and begins to fulfill its obligations under it. In other words, most (if not all) revenue-generating agreements are contractual relationships in one form or another. Revenue is earned and recognized when the reporting entity fulfills its obligations under the contract.

3. What is revenue?

Revenue is income arising from the ordinary activities of an organization.
Income represents increases in economic benefits during the reporting period in the form of receipts or improvements in asset quality or decreases in liabilities that result in increases in equity that are not attributable to contributions by equity participants.
It should be noted that at present, IFRS does not contain a definition of the term "ordinary activities", although it previously existed and included any type of activity that the organization is entitled to carry out. It can be assumed that in most cases the term “ordinary activities” should be understood in this context when applying IFRS 15.

For example, proceeds from the sale of an entity's headquarters building would qualify as revenue.

4. What is a performance obligation in the context of IFRS 15?

A satisfiable obligation is an entity's promise, in a contract with a customer, to transfer to the customer:
product or service;
a set (package) of goods or services that are separable (see question 11);
a series of separable goods or services that are substantially the same and that have the same pattern of transmission to the customer (see question 11).

Example 3
The organization, the software developer, transfers to the buyer:
1) a license for software,
2) installation services,
3) software updates,
4) technical support for two years.

First of all, the software is transferred. Similar installation services are provided to other customers and do not substantially change the software. The software remains functional even without updates and technical support.
The contract contains four obligations to be fulfilled, each of which is allocated the transaction price on a separate selling price basis (see question 5) and each of which is recognized as revenue when transferred to the customer.

5. What is the stand-alone selling price?

A stand-alone selling price is the price at which an entity sells a good or service to a customer as a separate entity in a sale and purchase transaction (separately).

Examples of sources of information about a separate sale price - tariffs for services, price list of the organization.

6. What is a contract in the context of IFRS 15?

The concept of a contract is critical to the application of IAS 15. It is based on the definition of a contract in US law and is similar to the definition in IAS 32 Financial Instruments: Presentation: a contract is an agreement between two or more parties that results in enforceable rights and obligations (see question 11).
The contract does not have to be in writing. Whether the obligations in the contract are subject to fulfillment is determined in the context of the legislation in the jurisdiction of the contract. A contractual obligation must include a promise that creates a legitimate expectation by the customer that the entity will transfer a good or service to the customer, even if the promise is not legally binding.

IFRS 15 applies to contracts with eligible customers (see question 10). Typically, IFRS 15 is used at the individual contract level. However, it is permitted to apply it to a set of contracts that are similar in their characteristics as a single contract, provided the expectation is justified that the effect of this approach on the financial statements will not differ materially from the application of IFRS at the level of a single contract.

If the parties can terminate a contract without paying penalties before the obligations under it are fulfilled, it is not a contract for the purposes of revenue recognition, since it does not affect the financial position of the entity until the parties begin to fulfill obligations under it.
If the contract at the time of its conclusion does not meet the criteria established by IFRS 15, the parties periodically subsequently check its terms, if they change, for compliance with the criteria established by IFRS 15, and apply this standard when recognizing revenue from the moment the contract meets these criteria. At the same time, if the contract at the time of its conclusion meets the criteria established by IFRS 15, there is no need for periodic verification of compliance with these criteria, unless significant change the facts and circumstances of this contract.

If the contract provides for the transfer of non-financial assets not related to the ordinary activities of the entity - items of property, plant and equipment, real estate, intangible assets - the entity applies IFRS 15 to determine when to derecognise the asset and how much to recognize the gain or loss on disposal, so how the transaction is more similar to the transfer of the asset to the buyer than to another sale of the asset.

For example, a distributor sells part of a fleet of used trucks, or a manufacturer of a product sells the technological equipment needed to manufacture a given product to a third party. The proceeds from this type of sales do not quite meet the definition of income, since the receipts of economic benefits from the sale of non-current assets necessary for the production of goods and services are not normal activities in this example. However, the provisions of IFRS 15 on the recognition, measurement, determination of the fact whether a contract is such in the sense of IFRS 15, in this case, should be applied to determine when and how much revenue should be recognized.

Therefore, IFRS 15 only applies to revenue from contracts with customers, which implies the existence of other types of revenue from contracts that are not covered by IFRS 15.

7. Which contracts are not covered by IFRS 15?

The new revenue recognition model applies to all contracts with customers except:
lease agreements that are in accordance with IAS 17 Leases;
insurance contracts in accordance with IFRS 4 Insurance Contracts;
financial instruments and other contractual rights and obligations under IFRS 9 Financial Instruments, IFRS 10 Consolidated financial statements”, IAS 27“ Separate financial statements ”and IAS 28“ Investments in associates and joint ventures ”;
contracts within the scope of IFRS 11 Joint Arrangements.

For example, an entity may enter into contracts with counterparties to participate in an activity or process where the risks and benefits of that activity or process are shared between the parties to the contract, which is often referred to as a “joint agreement”. In such cases, an entity must determine whether the other entity is a “acquirer” (see question 8) to determine whether transactions with that entity are covered by IFRS 15;

Contracts that provide for non-cash exchanges of assets between entities engaged in the same type of business, which are conducted with the aim of promoting sales to existing or potential customers.

For example, IFRS 15 does not apply to an agreement between two organizations - oil sellers that have agreed to exchange oil with each other on an ongoing basis in order to reduce transportation costs and meet the demand of their buyers, who are geographically remote from the seller under the agreement. The application of IFRS 15 in this case would lead to an overestimation of revenue and transportation costs.

If the contract implies the fulfillment of obligations, some of which fall under other IFRS, the requirements of other standards apply first, and the remaining amount is credited to the results falling under IFRS 15. At the same time, the transaction price is reduced by the amount that is estimated in accordance with other IFRS ... In the absence of relevant requirements in other standards, IFRS 15 applies.

For example, the portion of a lease with subsequent servicing that relates directly to a lease should be accounted for in accordance with IAS 17 Leases. The service portion of this contract is accounted for in accordance with IFRS 15, with the transaction price allocated on an individual selling price basis (see question 5).

IFRS 15 does not apply to the recognition of interest and dividend income.

8. Who is a buyer in the context of IFRS 15?

A customer is a counterparty who has entered into a contract with an entity to purchase goods or services that are an output of the entity's ordinary activities in exchange for a consideration.
A party to a contract is not a customer in the context of IFRS 15 if its terms provide for the parties to participate in an activity or process that results in the parties sharing risks and benefits (for example, the development or development of an asset or a cooperation agreement).

9. What steps should be taken to recognize revenue in accordance with IFRS 15?

Revenue recognition involves several stages.
Stage 1. Identification of the contract (s) with the buyer.
Stage 2. Identification of obligations to be performed under the contract (s).
Stage 3. Determination of the transaction price.
Stage 4. Allocation of the transaction price to the obligations to be fulfilled.
Stage 5. Recognition of revenue at the time of fulfillment (or in the process of fulfillment) of obligations to be fulfilled.

The revenue recognition steps have remained unchanged since the publication of the draft standard in 2010. However, many amendments have been made regarding their specific application, which will be discussed below.
At first glance, the five-step revenue recognition model does not seem very complex, but its actions are logical, consistent and include most of what the previous standard envisaged.
However, each of the five steps will require significant judgments from the organization's management, in consultation with its auditors, in applying the key revenue recognition principle, especially with regard to the transfer of control when assessing the appropriateness of its recognition. Prior to the new standard, assessing whether the “risks and benefits” associated with a good or service have been transferred is no longer a key indicator for revenue recognition.

10. Stage 1: how to identify the contract with the buyer?

A contract is subject to IFRS 15 if it meets all of the following conditions:
the parties to the agreement approved it (in writing, orally or in another way generally accepted in a particular type of business), as a result of which they are obliged to fulfill the corresponding obligations under the agreement; the conclusion of a contract, thus, can be orally, in writing, and also be implied, that is, arising from certain actions of the parties;
the entity can identify the rights of each party to the contract with respect to the goods or services to be transferred;
the entity can identify the terms of payment for the goods or services to be transferred; The contract is inherently commercial, that is, the risk, timing, or amount of the entity's future cash flows is expected to change as a result of performance of the contract;
it is probable that the entity will receive the consideration to which it is entitled in exchange for the goods or services that will be transferred to the customer.

In assessing the likelihood of receiving a consideration, an entity should consider the customer's ability and intent to pay the award when it becomes due. In this case, the amount of such remuneration may be less than the price specified in the agreement, if the cost changes depending on certain conditions of the agreement.
In some cases, for the purposes of revenue recognition, it is possible to combine several contracts with similar characteristics and treat them as one (single) contract.
Several contracts of an organization with the same counterparty or related parties are collectively assessed as a single contract if the following criteria are met:
if the contracts were concluded in a package with a single commercial purpose;
if the amount of remuneration payable under one contract depends on the price or performance of other contracts;
if the goods or services promised under the contract, or some of the goods or services promised in each contract within the package of contracts, are a single enforceable obligation.

IFRS 15 provides a detailed description of the accounting for changes (modifications) to a contract, which, depending on their terms, can be accounted for as a new contract or as a change in the original contract.
A contract modification is treated as a separate contract if two conditions are met:
in accordance with its terms, the additional volume of goods or services is separable and increases the volume of the contract;
the price of goods or services under the contract is increased by the amount of consideration, which reflects the separate price for the additional volume of goods or services and any corresponding adjustment to this price, reflecting the circumstances of the particular contract.

If these conditions are not met, the modification of the contract is taken into account:
prospectively (by allocating the remaining revised transaction price to the remaining contractual obligations);
retrospectively (for commitments that are settled over time (see question 14), resulting in a cumulative adjustment to revenue).

The choice of option depends on whether the remaining and not yet delivered goods or services under the contract differ from those that were delivered before the modification of the contract, as a change in the current contract with the buyer.

Example 4
According to the terms of the contract, the organization promised to sell 150 units to the buyer for 15,000 (at a price of 100 per unit). The goods are transferred at a specific point in time within a three-month period. After the organization transferred 100 units of goods, the contract was changed (modified) by agreement of the parties, the quantity of goods increased by 50 units.
If the additional supply is sold at a separate sales price, for example 90, and this occurs during the duration of the main contract, the additional product is separated from the original product, the contract modification revenue is accounted for as a separate contract and does not affect the accounting for revenue under the original contract. Thus, after fulfilling the obligations under the contract, the organization recognizes revenue in the amount of 150 × 100 = 15,000 for the original contract and 50 × 90 = 4500 for the modification.

Example 5
As indicated in the conditions of example 4, the parties agreed to sell an additional volume of goods in the amount of 50 units. At the same time, as in example 4, the price of an additional consignment of goods is reduced, but differs from the individual selling price and is equal to 85. In addition, the fact of inadequate quality was established for an already delivered consignment of 100 units, therefore the organization makes a price discount for this consignment of goods in the amount of 15.
Since the additional item is sold at a price of 85, which is different from the separate selling price (90), this modification cannot be accounted for as a separate contract.
In addition, since the goods not yet delivered are separable from those already delivered, this modification is treated as termination of the original contract and the emergence of a new contract.

Therefore, the entity recognizes a decrease in revenue (recognized in example 4 equal to 15,000 for 100 items supplied) of 1,500 = 15 × 100.
The proceeds for the remaining goods, of which 50 are under the original contract and 50 are under the modification, will be recognized after the transfer of control over these goods at a mixed price = (50 × 100 + 50 × 85): 100 = 92.5.

11. Stage 2: How to identify the contractual obligations to be performed? What is “separability” of a product or service, or a package of products or services?

The identification of enforceable contractual obligations is the establishment of the units of account to which the transaction price is to be allocated and to which revenue is to be recognized.
First, you need to evaluate all the goods or services promised to the buyer in accordance with the terms of the contract, from the position of identifying the obligations to be fulfilled in relation to these goods or services, using the criteria set out in IFRS 15:
for goods or services or packages of goods or services that are essentially separable;
a series of goods or services that are essentially the same and have the same transfer pattern to the customer.

The key factor is the “separability” of a good or service, or a package of goods or services: if the goods or services are separable from each other, the obligation to transfer them is accounted for separately for the purpose of revenue recognition.
A product or service is separable if the customer can use the product or service on its own or in conjunction with other resources that are readily available to the customer, and the entity's obligation to transfer the product or service to the customer is separately identified from other contractual obligations.
In order for a resource to be considered readily available, the buyer should be able to freely purchase it either from the organization - the seller of the product (service) or from another seller, or the buyer should already own this resource at the time of purchase of the product or service.
A series of identical separable goods or services with the same transfer schemes are accounted for as the fulfillment of a single separable contractual obligation if the following conditions are met:
each separable item promised and consistently transferred to a customer is a commitment to be fulfilled over a period of time;
The same measurement method will be used to assess the progress of contractual obligations in order to fully meet the obligations to transfer to the buyer each separable good or service within the series.

Example 6
Referring to example 3, all four obligations to transfer goods and services to be performed under this agreement are separable:

• the buyer has the opportunity to use each of them individually or in aggregate, and all of them are easily accessible to him;
• obligations to transfer each good and service are separately identifiable from each other:
• A product or service cannot be considered a separable contractual obligation if it cannot be used without another product or service that has not yet been delivered under this contract.
• installation services are not significantly changed and not customized to the needs of the buyer;
• the software and installation services are separate and independent from each other, and not part of a combined product or service.

Example 7
If the organization sells part of a complex technological equipment and services for the installation of this equipment, and at the same time installation services can only be provided by the seller and no one else, this resource (installation services) is not readily available. Sale of equipment is not separable from installation services, as the buyer cannot use the equipment without installing it and, accordingly, revenue is recognized after the transfer of equipment and the provision of installation services.

Example 8
If an entity sells a software license and installation services that require significant customization to meet the needs of that customer, the goods and services are not separable from each other, contract revenue is recognized after the software has been transferred and installed.

In this case, an inseparable product or service can be combined with other goods or services until the organization identifies their totality as a separable set (package) of goods or services.

Example 9
The manufacturer includes a one-year warranty on all sales (as required by law) and also offers an optional two-year warranty.
The one-year guarantee is not a separable enforceable obligation, but any sale of the additional two-year guarantee is a separable enforceable obligation, which delays revenue recognition.

A series of separable goods or services that are substantially the same may be treated as a single contractual obligation for revenue recognition purposes if each good or service has the same transfer pattern to the customer.

For example, weekly cleaning services for a period of one year, processing services for bank card transactions, or a contract for the supply of electricity.

Thus, IAS 15 defines indicators for determining the “separability” of goods or services under a contract, which is expected to enable management of the entity to apply professional judgment to identify a separate liability that best reflects the economic substance of a transaction under the contract.
The algorithm for identifying a separate obligation to be fulfilled in the event that the contract provides for the transfer of more than one good (one service) can be presented as follows:
A. Checking the conditions for "inseparability", we answer the questions:
The goods (services) are highly interrelated and their transfer to the buyer requires that the organization also provide essential services for the integrated goods (services) in combination, which is provided for by the terms of the contract?
Has the package of goods (services) been substantially modified or adjusted in order to fulfill the contract?
B. If yes - combine with other goods (services) until a separable package of goods (services) is identified.
B. If not, check that the conditions for recognizing a separate obligation have been met.

To do this, answer the question: is the product (service) sold separately on a regular basis, or can the buyer use the product (service) independently or together with other resources freely available to him?
If not, repeat step B.
If so, accounted for as a separate performance obligation.

12. Stage 3: how to determine the transaction price?

The transaction price is the amount of consideration to which the entity is expected to be entitled in exchange for the goods and services transferred to the customer.
As in the previous IFRS on revenue, taxes such as VAT, sales tax are excluded from the price.
The transaction price can be a fixed amount, include a non-cash part, as well as a variable part of the remuneration.
The transaction price may include an element of variable remuneration in the event of discounts, bonuses, incentives, incentive programs, fines, etc.
If the price includes a variable portion of the consideration, the entity shall estimate the amount of the consideration taking into account the variable portion. The transaction price should also be estimated on the basis of the expected value, weighing the expected amounts by the probability-weighted amount or the most likely amount that the entity expects to receive as part of the exercise of its rights to the consideration under the contract, and if do this to take into account factors that may reduce this likelihood.

Example 10
The organization provides services to the customer. The terms of the contract include the payment of a performance bonus associated with certain performance indicators achieved within a limited period of time. The organization estimates the bonus as follows: with a probability of 50% - 100,000, with a probability of 25% - 80,000, with a probability of 20% - 60,000, with a probability
5% - 0. Total estimated transaction price = 100,000 × 50% + 80,000 × 25% +
+ 60,00 × 20% + 0 × 5% = 82,000.

The estimated variable consideration is included in the transaction price unless it is probable that there will be a significant return in the cumulative revenue already recognized, in the event that the uncertainty surrounding the variable consideration subsequently materializes.

Example 11
The buyer enters into a contract with the organization for the supply of goods on February 5 for a period of one year at a price of 500. If the quantity of goods during the term of the contract exceeds 1000 units, then the price of the goods retrospectively decreases to 450. Thus, the transaction price under this contract includes an element of variable rewards.

As of May 5, the customer has purchased only 100 units of the item, and therefore the entity estimates that during the life of the contract, the purchases will not exceed the threshold that would allow the discount of 50 to be applied.

Thus, based on its experience with this customer and this type of product, the entity believes that it is highly probable that the accumulated recognized revenue at the price of 500 will not be returned if the uncertainty associated with variable consideration (applying a volume discount sales), subsequently (when the actual sales volume with this buyer is known) is realized.

Therefore, for the first quarter of the contract, the organization recognizes revenue 500 × 100 = 50,000.
During the next quarter, there is a change of ownership of the buyer. In the second quarter, purchases reach 700 units. Thus, new facts and circumstances arise that make it possible to estimate with a high degree of probability that purchases during the term of the contract will exceed the threshold value of 1000. This leads to the need for retrospective price reductions.

Therefore, the entity recognizes revenue for the second quarter in the amount of 450 × 700 = 315,000. In addition, the entity reduces the previously recognized revenue for the first quarter by the amount of the transaction price change (500 - 450) × 100 = 5,000.

The transaction price is also adjusted for the effect of the value of money over time if the contract includes a material financial component. Indicators of the presence of such a component are the difference between the promised remuneration and the “cash” selling price and the expected time between delivery and payment in excess of one year.
In order to adjust the amount of consideration, an entity should use a discount rate that should reflect the credit risk specific to the recipient of the funding, as well as the potential collateral for the financial liability. This discount rate is fixed and does not change in the event of a change in interest rates, or in the event of a change in other circumstances.

Example 12
The organization sells computer equipment for 2000 if prepaid. Delivery of goods - two years after payment. The attraction rate, taking into account the seller's credit risk, is 5%.
At the time of receipt of payment:

Dt"Accounts for accounting Money»
CT"Contractual Commitment" - 2000

During the two years prior to the delivery date of the goods, interest expense should be recognized:

Dt"Interest expenses"
CT"Contractual commitment" - 2000 - 2000 × 1.05 × 1.05= 205 (at the time of delivery).

At the time of transfer of the goods after two years:

Dt"Commitment"
CT“Revenue” - 2000 + 205 = 2205 (for example purposes, the tax effect is ignored).

The amount of proceeds (2205) will be more than the amount of actually received funds (2000).

Any portion of the consideration in a form other than cash and / or at a price other than market price must be carried at fair value. If an entity is unable to measure the non-cash consideration at fair value, it shall use the indirect valuation method using the separate selling prices of the related goods / services.

Example 13
The organization provides services on a weekly basis throughout the year. Services are a separate obligation under a service contract, since they are a series of separable services, essentially the same, with a similar pattern of transferring services to a customer.

These services are rendered over a period (in this case, a year) and have the same method of assessing the progress of the provision of services - a time-based measure of progress.
In exchange for the services rendered, every week for a year after the successful completion of the services, the organization receives from the buyer 30 shares for a week (total 1560 per year) at their market value.

Market value is determined by reference to the quoted market price at the date of transfer of each batch of 30 shares, which in this case is the transaction price and revenue recognized as services are rendered on a weekly basis. An entity does not recognize any change in revenue if the market value of the shares received or receivable subsequently changes.

Once the transaction price has been determined, the entity assesses the likelihood of receiving the consideration.
If the entity believes that it is probable that the revenue will flow, revenue is recognized. If a change in circumstances subsequently occurs that affects that likelihood, the entity assesses its materiality and impact on the likelihood of receiving the remainder of the revenue.
An example of a material change in circumstances that affect the likelihood of receiving revenue would be a material deterioration in a buyer's credit risk and the ability to access credit due to losses for most buyers. If the entity believes that it is not probable that the amount of revenue will be received, revenue is not recognized. Receivables from uncollected but already recognized revenue are assessed for impairment in accordance with IAS 39
“Financial Instruments - Recognition and Measurement” or IFRS 9 “Financial Instruments” with a loss recognized, if impaired, in the income statement. Credit losses are recognized on a separate line and not as a deduction from revenue.

Example 14
The organization has set a price of 500 for the item. However, it offers the buyer a concession (concession) of 100 because it believes that establishing a positive relationship with that buyer can help build relationships with other potential buyers. Therefore, the price for this transaction is 400. After the fulfillment of obligations under the contract, for example, the delivery of goods, the organization must assess the likelihood of receiving revenue from it. If it is probable that revenue will be received from the entity's point of view, the entity recognizes revenue in full: 400. If it is not probable that all or part of the revenue will be received, revenue is not recognized until:

• its receipt will become likely;
• the organization will actually receive it in full or in large part after the fulfillment of all obligations under the contract (as a result of which the organization has no obligation to return it to the buyer);
• the contract will be terminated if the proceeds received are not refundable to the buyer.

If, after the recognition of revenue, but before it is actually received, circumstances change that affect the customer's ability to settle the revenue receivable, resulting in the entity believing that it will receive only 250 instead of 400, it shall recognize an impairment loss on the receivable totaling 150, without reducing the amount of revenue recognized.
If circumstances lead to the cancellation of the concession proposed to the buyer, this change is reflected as a change in the transaction price and as a result of the amount of recognized revenue, which increases by 100 to 500.

13. Stage 4: how to allocate the transaction price to the contractual obligations?

An entity allocates the transaction price to each contract liability, using as the basis the relative individual selling price for each separable good or contract service.
If a particular price is not observable, the entity makes an estimate. IFRS 15 provides three possible valuation methods:
method of adjusted market prices;
the expected cost plus a margin approach;
residual approach (in limited cases).

Example 15
The organization entered into an agreement for the sale of products 1, 2 and 3 for 200. The fulfillment of obligations for the supply of these products is carried out at different times. Since the entity sells item 2 on an ongoing basis, the individual selling price for that item is directly observable. The individual selling prices for items 1 and 3 are not directly observable, so the entity must estimate them. For product 1, the organization uses the “expected cost plus margin” method (hereinafter the “expected cost method”), and for product 3, the method of adjusted market prices, making the most of the observable inputs for valuation.
As a result, the following individual sales prices have been determined:




Total 230

Since the individual selling prices are higher than the contract value, this means that the buyer was provided with a discount on the package of goods 1, 2, 3. Since it is not seen in the terms of the contract that this discount relates to the obligations to supply certain goods, it must be distributed among all goods under this contract on the basis of a separate sales price:

Item 1 70 = 200: 230 × 80
Item 2 78 = 200: 230 × 90
Product 3 52 = 200: 230 × 60
Total 200

Example 16
In the conditions of example 15, the organization, in addition to the above obligations under the contract, supplies product 4. There is no previous experience of selling this product. The discount does not apply to product 4. The transaction price becomes 250.
The separate price of goods 4, based on the residual value method, is 50 = 250 - 200. Then the transaction price, based on the individual sales prices for goods 1-4:

Item 1 80 Expected Cost Method
Commodity 2 90 Directly observed individual selling price
Commodity 3 60 Method of adjusted market prices
Product 4 50 Residual value method
Total 280

Then the distribution of prices for contractual obligations used in recognizing revenue on these obligations at the time of their fulfillment:

Item 1 70 = 200: 230 × 80
Item 2 78 = 200: 230 × 90
Product 3 52 = 200: 230 × 60
Product 4 50 Discount does not apply to product 4
Total 250

All subsequent changes in the transaction price must be attributed to the contractual obligations in the same manner as the original transaction price. The amount of price changes allocated to the underlying contractual commitments shall be recognized as revenue or as a deduction in the periods when those prices change.

14. Step 5: How to recognize revenue as the contractual obligations are settled?

Revenue can only be recognized when the entity has fulfilled its obligations under the contract. It can be recognized at a point in time or over a period of time.
An entity recognizes revenue at a point in time when the contractually promised goods or services are rendered to a customer. Essentially, goods (services) are transferred (provided) when the buyer gains control over them. Consequently, revenue is recognized when the customer gains control over the related assets (since goods and services are assets when they are received).

REFERENCE
Control is the ability to manage use and derive substantially all of the existing benefits from an asset. Including control includes the ability to prevent the management of the use of an asset or obtaining benefits from its use by another person (organization).

The benefits of using the asset by the customer include potential cash flows (cash inflows and reduced cash outflows) that could be sourced from,
for example:

• use of an asset to produce goods or provide services;
• increase in the value of other assets;
• settlement of obligations;
• cost reduction;
• sale or exchange of an asset;
• use of the asset as collateral for the loan received;
• retention of an asset.

Factors that may mean that control of an asset has been transferred at a particular point in time include, but is not limited to:

• the entity has the right to receive payment for the transferred asset;
• the buyer has ownership of the asset;
• the organization has transferred physical ownership of the item;
• the buyer has accepted the asset;
• the buyer bears significant risks and benefits from owning the asset.

An entity recognizes revenue over a period of time if one of the following criteria is met:

• the buyer simultaneously receives and consumes the benefits as the selling organization delivers (provides) them;
• the fulfillment of obligations by the selling entity results in the creation or improvement of an asset that the acquirer has the ability to control as the asset is created;
• fulfillment of obligations by the selling entity does not create an asset with an alternative use, and the entity is entitled to receive payment for the obligations settled at a specific date.

In order to determine whether an alternative use of an asset is possible, it is necessary to assess the effect of contractual and practical restrictions on the entity's ability to easily transfer goods or services to another customer.

Example 17
The selling entity has the option to use an asset alternatively if it is substantially fungible with other assets that the entity could transfer to the customer without violating the terms of the contract and without incurring significant costs that would otherwise be incurred under the contract. Conversely, an asset has no alternative use if the contract contains material terms that preclude the transfer of the asset to other customers, or if the entity must incur significant costs to do so (for example, the cost of converting the asset).

Revenue from commitments fulfilled over a period of time is recognized when those commitments are satisfied. To determine it, the organization selects the appropriate methods for assessing the progress in fulfilling the obligations under the contract - output methods or input methods.

Inputs are used when revenue is recognized on the basis of a direct estimate of the value of the goods or services transferred to the customer at the date of the date of the remaining promised goods or services.

They include a survey method for a specific date of the degree of production, an assessment of the results achieved and milestones, time spent, produced and delivered units of products. Such methods can be used if the raw data are directly observable and there is no significant cost to obtain them. If an entity believes that using a particular method of inputs will provide a reasonable estimate of the level of fulfillment of its contractual obligations, it uses that method.

Example 18
The source data method based on the number of units produced or delivered will not allow to reliably estimate the degree of fulfillment of obligations under the contract if at the reporting date there is work in progress or such finished goods that have not yet been transferred to the buyer (not controlled by him) and which, accordingly, not included in the baseline data for the estimate. In this case, the raw data method cannot be used.

If an entity is entitled to a customer consideration in an amount that directly corresponds to the cost of the services rendered at a particular date (for example, if the entity bills a fixed amount under a service contract for each unit of time during the period of service), it may recognize revenue equal to to which she has the right to issue an invoice.

Example 19
The organization provides comprehensive wellness services that include use of the pool and sauna, fitness and physical monitoring, including weight and blood pressure measurements. The buyer entered into a contract for a period of one year. Payment per month in the amount of 200. According to the contract, the buyer is provided with free access to the services and he has the right to use them during the month as many times as he wishes. Thus, we can state the following:

• the extent to which the buyer uses the services during the month does not affect the amount of remaining contractual services to which the buyer is entitled;
• the buyer simultaneously receives and consumes the benefits provided to him by the organization - the seller of the services;
• therefore, revenue should be recognized over the period of service, rather than at a specific point in time;
• it can be assumed that the services are provided evenly throughout the year, since they are available to the buyer, regardless of whether he uses them or not;
• therefore, it is possible to apply a method for assessing the progress of fulfillment of obligations under this contract, based on an even distribution over the duration of the contract and recognizing revenue on a systematic basis throughout the year, 200 each month.

Using the input data method, revenue should be recognized on the basis of the resources spent on the fulfillment of obligations under the contract at a certain date (the cost of material resources consumed; machine-hours; labor or other types of costs, including time) relative to the total amount of resources required to fulfill obligations under the contract. If these resources are expended on a straight-line basis over the fulfillment of the contractual obligations, revenue may be recognized on a straight-line basis.

The disadvantage of the input data method is that in some cases there is no direct relationship between input data and the transfer of control over goods or services to the buyer. In such cases, an entity should exclude from the input method the effect of any inputs that, for the purpose of the method, to measure the degree of fulfillment of contractual obligations, do not reflect the entity's performance in transferring control of the goods or services to the customer.

So, when applying the "input data - costs" method, when assessing the progress of fulfillment of obligations under the contract, an adjustment is required:

• if these costs did not participate in the fulfillment of obligations
• under contract.

For example, an entity does not recognize revenue based on costs incurred that relate to a significant decrease in the efficiency of fulfillment of obligations and that were not included in the contract price (unforeseen costs for the loss of raw materials, labor or other resources that were used to fulfill obligations under the contract, etc.) . NS.);
if these costs are disproportionate to the degree of fulfillment of obligations under the contract. In this case, you need to recognize revenue only to the extent of the costs incurred.

For example, revenue should be recognized in an amount equal to the value of the goods used to meet contractual obligations if the entity, upon entering into the contract, expects the following conditions to be met:
the goods are inseparable from other components of the contract to be transferred under the contract;
the buyer is expected to gain control of the item prior to receiving services related to the item;
the cost of the goods transferred is significant in relation to the total expected costs necessary for the full fulfillment of obligations under the contract;
the organization, acting as a principal, purchases the product from a third party and is not involved in the design and manufacture of the product.

Updated 01.17.2019 at 17:44 11,633 views

When it comes to assessing the financial condition of a company or its economic productivity, the first indicators that come to the mind of any person more or less involved in the topic are revenue and profit.

Some domestic economists are accustomed to focusing only on actual corporate profits, not taking into account such an important indicator as operating revenue. But it is he who reflects the actual value and the prospective forecast potential of the company in terms of generating cash flows that can be disposed of in the course of its activities. We will talk about what includes and what functions the IFRS 15 standard “revenue from contracts with customers” fulfills in today's article.

General information on the standard. Objectives and Key Concepts of IPSAS 15

When an external investor, a new lender, a potential strategic partner, or even the owner himself evaluate a company in terms of its financial condition, first of all, they see how much money this company generates. This is natural, since no other indicator worries a person who wants to receive money from the company on a regular basis, as much as profit.

The total money supply of the company is usually considered according to the criteria component parts and the total amount of funds by spending comparative analysis data for the current period with retrospective information and indicators of competitors to see what the situation is in fact in the business at the moment and what is his mid-term forecast.

IFRS 15 Revenue from Contracts with Customers has been developed and implemented to enable companies to reliably and accurately recognize their revenue based on various practical business circumstances, showing their external interests an objective picture of the entire cash flow. In essence, the standard is a practical guide for companies from various sectors of the economy, using which, they provide a ubiquitous identity in the work of financers with reporting on revenue. By doing this, they increase the general literacy of the market in matters of financial accounting and solve a substantive problem - they present the statements of different companies in the same form, in the same language and in the same form.

The new revenue standard IFRS 15 is designed so that companies doing business in different sectors of the economy have the same ability to manage revenue data. The basic principle The standard is that the company records its revenue as a result of the transfer of goods or services to the buyer in exchange for remuneration in the amount that the parties came to in the negotiation process. That is, planning data cannot be recognized as revenue, since this will be considered a contractual asset, but it is mandatory to recognize receivables or actual cash receipts to the company's settlement accounts as revenue if the goods were actually transferred to the ownership of the buyer. In fact, the appearance of proceeds is due to the fact that one party performs the process of transferring goods to the other party and the corresponding acceptance of such goods and the transfer of ownership from one party to the other.

Revenue in the methodology of IFRS 15 is any incoming cash income that, for some economic reason, arose in the course of the ordinary activities of the organization. The guidance on the application of IFRS 15 does not provide guidance on deciphering the meaning of the term "ordinary activities", therefore it is customary to mean in this matter any economic activity of the organization, thanks to which the company "makes money". Any counterparty with whom the company has an agreement (this is required condition transactions) for the transfer of some goods and services in exchange for a fee. For example, a barter transaction is not included in this standard and refers to a different procedure for reflection in the financial statements in exactly the same way that cooperation with a buyer under IFRS 15 is not such cooperation, which provides for the joint participation of the parties in a project for the development of an asset in accordance with a cooperation agreement.

As noted, in the process of economic interaction with its customers, the seller has a so-called "performance obligation" or a contractual obligation. Under this obligation, the seller must transfer goods and services to his customer, and in return receive payment, which, when the obligation is fulfilled, is transformed into revenue in the form of a cash flow or, at least, a receivable.

At the same time, at the time the obligation to transfer the goods arises (in fact, at the time of the conclusion of the transaction between the parties in the form in which they entered into it), the amount of future proceeds from this transaction, which is called the "Hotel sale price", is also agreed. Based on this logic, it becomes clear that the transaction price determines the amount of future revenue (all other things being equal), and at the organization level is regulated by all kinds of price regulations - tariffs, price lists, discount policies, and others. This component allows companies to forecast their work and plan the size and frequency of cash flows.

In the context of IFRS 15 Revenue from Contracts with Customers, the issue of contractual relationships is critical. The IFRS 15 standard does not impose special requirements on the specific forms or procedure for concluding contracts, allowing the conclusion of contracts in any form between the parties, depending on the legal context of the transaction. In fact, the need for an agreement between the parties in any form is due to the subsequent obligation to transfer material values ​​/ services and their payment. That is, in this form, the existence of a contract with agreed terms is the main one for the subsequent generation of revenue. An entity shall use this revenue recognition standard for any contracts that fall within its scope. economic activity, except for those falling under other standards:

• Do not use the standard for leases, as there is a specific standard for them IAS 17.
• Do not use IFRS 15 for insurance contracts as they are subject to IFRS 4.
• Exclude all obligations and rights acquired by the company that are subject to other IFRS standards in the field of investments and their return, in the field of financial instruments and joint non-monetary activities.

According to the terms of IFRS 15 IFRS, in order for an organization to recognize its revenue and reflect its amount in the relevant financial statements, it is necessary to comply with certain stages of actions, which are approved in the framework of the standard for recognizing revenue from contracts with customers.

• Carry out the procedure for the complete identification of the contract.
• Carry out a procedure for identifying and classifying the obligations arising from the parties under the contract.
• Determine the fair agreed price of the transaction, which was negotiated by the parties.
• Segment the price of the transaction according to the obligations that the parties have accepted for execution within the framework of cooperation.
• Recognize actual revenue, after all possible production adjustments, when the obligations are fully satisfied or as each item of the selling party's obligation is fulfilled.

Drawing. Revenue recognition procedure under IFRS 15.

This consistency forces the management and financial specialists of the company to act in the area of ​​revenue recognition in accordance with the criteria of good faith and consistency. The appropriateness of revenue recognition is a very important aspect for external users of financial statements, and the procedure laid down in IFRS 15 ensures that this criterion is met.

Let's consider each of these stages separately:

1.Identification of contracts... The main task of financial management is to ensure that contracts fall under IFRS 15, which means they have certain characteristics. The financial manager should identify contracts according to common sense, not splitting, for example, package agreements into many separate sources of revenue, but on the contrary, summarizing them. But any commercial contract with a client must have certain characteristics in order to be subject to IFRS 15:

• The agreement in any form is approved and accepted by the parties without reservations outside the framework of the agreement;
• Under the contract, the rights and obligations for the goods / services of each of the parties are clearly understood, which arose in the process of concluding the contract;
• Both parties understand and accept the terms of payment within the framework of the concluded agreement;
• The contract contains the characteristics of the commercial terms approved by the parties;
• According to the agreement, the probability of receiving a cash flow in a certain amount is assumed, the risks of non-receipt of payments are assessed;
• The agreement has the ability to use such additional conditions as price assignment, discount, postponement, increase and other changes in the financial part of the transaction, which may affect the company's revenue, but come into force only after agreement by the parties.

2.Identification and classification of liabilities... In this process, the firm determines the units of account in the transaction (the constituent parts) for which the contract price will be allocated to the revenue that the company can recognize. It is important to take into account the so-called “separability” criterion, when goods sold in packages are accounted for separately from individually supplied goods.

3.Transaction price... An indicative indicator of future revenue, which in reality is the estimated amount of remuneration for the company for fulfilling its obligations under the contract. Price can be a highly variable indicator, since it is often not fixed by the contract and includes, for example, a variable part of the transaction, it also depends on exchange rates and other conditions that ultimately affect the revenue that will be recognized by the company. According to IFRS, a transaction is also evaluated according to the criterion of the planned value (sometimes also called the “expected value”) and the probability of receiving the specified transaction. The simplest example can be considered a foreign exchange transaction, in which the expected value is now equal to one amount, but the probability of getting exactly this expected value is extremely low due to the high volatility of the exchange rate. In such a situation, each company considers individually, since for some, a 2% change in rate is very critical, while for others it is a business margin of error.

4.Segmentation of the price into component parts of obligations... To divide the price into contractual obligations, economists are advised to take all separable parts of the product and allocate a fair price for each using one of the available methods: check and adjust market prices for analogues, estimate their expected costs together with the planned margin. Then you get the most correct price for the individual components of the contract.

5.Recognize revenue... Revenue can be recognized only when the company has fulfilled its obligations under this segment of the contract. In fact, you can take a certain point in time, estimate how many obligations are fulfilled and, based on this, recognize the actual values ​​of revenue. This approach is most productive because it makes it possible to avoid double actions in cases where the selling prices and conditions are not completely clear, and there is no main reason (the fact of transfer of goods) for the obligation to pay to arise. Thus, we can say that revenue is recognized when the buyer takes possession of the corresponding tangible assets that are transferred to him in the course of the interaction.

Practical Application: Additional Features of IFRS 15 Revenue from Contracts with Customers

As with any other IFRS, IFRS 15 has additional requirements and considerations that must be taken into account by entities complying with this standard.

Features of consideration of receivables... Accounts receivable in the understanding of IFRS is the unconditional right of the company to the proceeds (more specifically, the right to reimbursement), which is unconditional within the framework of the contract. In fact, there is nothing in danger of a receivable as an element prior to the emergence of revenue if the fact of payment is delayed only by the agreed terms of the contract. But in the event that the amount of receivables and the amount of recognized revenue as a result differ from each other, this difference should be presented as justified expenses, for example, from losses.

Peculiarities of treating contracts with buyers as obligations to transfer goods and payments. When fulfilling all or part of the terms of the concluded contract, the organization must submit the contract in the report on financial situation either as an asset or as a liability under a contract, depending on the proportion of obligations fulfilled and payments made. In this case, the receivable is presented separately as a right to receive reimbursement / consideration. The contract itself assumes that the organization arises both the right to reimbursement of money, and a whole range of obligations under this contract. But the right of the organization to compensation arises from the very fact of the contract and requires the organization to take into account the fact of depreciation of the asset under the contract if the conditions and terms of receipt of the actual payment for the goods are violated. This Standard uses specific terminology to describe these matters, but does not limit an entity's use of other names or the implementation of its own terminology in the statement of financial position.

Disclosure considerations... The key goal of the IFRS 15 standard, by analogy with others, is the formation of such a system and documentary reporting that will be the most transparent and reliable. According to this logic, IFRS 15 assumes a method and completeness of disclosures that provide users of financial statements with the maximum opportunity to understand the amounts and characteristics of revenue recognition, as well as disclosure of uncertainties associated with revenue, liabilities and cash flows from contracts with buyers. The features of such detailing in the disclosure of information include:

• Separation of revenue into segments and components of contracts;
• Segmentation of receivables;
• An indication of the essential terms of payment or performance of contracts;
• Disclosure of types of guarantees and other obligations;
• An indication of revenue recognized in the period for obligations fulfilled earlier;
• Depreciation and any costs associated with the loss of the value of the reimbursement.

Features of consideration of the organization's responsibilities to its customers... The company must disclose to the users of the statements, in the most reliable and detailed form, the contractual obligations assumed: the conditions for the release of goods, the specifics of shipments, the financing of supplies, the characteristics of goods and services that are subject to the company's obligations, the conditions for returns and guarantees.

Objective problems

Today, the issue of deliberate manipulations with revenue indicators in order to distort and form a favorable conclusion for the business on the result of considering the statements is quite acute. Revenue itself is the most abusive asset of a company due to its nature and the potential for distortion, manipulation, concealment or simple theft.

Often, financial statements are distorted for the immediate benefit of specific executives or financial managers, who, by deliberately overstating indicators on paper, plan to receive significant bonuses, ignoring violations of legislation, creating "holes" in corporate finance and misleading investors.

Another common problem, especially relevant for Russia, is the attempt by companies to steal part of their revenues into the shadows in order to avoid paying taxes in required size... Of course, deliberate manipulation is always a complex action that was initiated by someone and executed by someone, but at the level of strategic partners, the implementation of the IFRS 15 standard in a controlled company at least reduces the risk and creates significant barriers to such abuse. ...

Conclusions and conclusion

When the developed standard “IFRS 15 Revenue from contracts with customers” is introduced into practice, companies will receive a system based on special principles for reflecting business information useful to users that characterizes and discloses all aspects of the amount, time distribution, reasons and conditions for the occurrence of revenue and cash flows generated the company through contracts with customers.

When applying this standard, the company's management team and financial managers should be as careful as possible in analyzing, interpreting and detailing all possible conditions, facts, circumstances and consequences arising in the course of business activities of contracts on the execution of which the emergence of cash flows for the company depends on.

The implementation of IFRS 15 will allow the company to identify the most significant and significant revenue streams and types of contacts, due to which the main cash flow of the organization arises. Such segmentation can, in a managerial sense, help a company pay more attention to those deals and segments that are the most monetary for it in terms of the ratio of revenue and terms of performance of such contracts. Thanks to the control system incorporated within the IFRS 15 standard, companies will gradually improve their own documentary system and consistently eliminate the risks that were previously assumed due to insufficient attention to contractual relationships with clients.

The use of the standard in work on an ongoing basis will help all organizations, but depending on the area of ​​business and internal structure the standard will have a different impact on each organization. For example, the involvement in the information field of business and the level of awareness of stakeholders in industries that were traditionally sufficiently isolated from the disclosure of important information will significantly increase. Here it comes about all kinds of digital and digital companies, telecommunications, technology and innovation business. Companies working on multi-component contracts, which include many stages, each of which has its own limit of obligations, timing and cost, should receive a huge benefit from the implementation of the standard.

At the same time, due to the work in accordance with IFRS 15, the company will undergo organic changes. organizational structure and discipline of transactions, by establishing strong intracorporate relationships, as well as a system of continuous exchange and coordination of information between employees of the accounting / financial department and employees responsible for sales. In addition to the above, an increase in the efficiency of the company as a whole can be expected due to the indirect effect of IFRS 15 on key performance indicators and personnel remuneration systems.

Chunikhina T. Yu., ACCA

When assessing the financial condition of an organization, revenue, along with net profit, is the most important item in the financial statements. At the same time, it cannot be determined without an estimate of revenue, which, as a rule, is the most significant item in the statement of comprehensive income.

The second part addresses the issues:

- How should the costs of contracts with customers be recognized?

- What disclosures are required by IFRS 15?

- What are the requirements for the presentation of information established by IFRS 15?

- What standards and clarifications are canceled by IFRS 15?

- When does IFRS 15 come into force and what are the options for transition to IFRS 15?

- What impact will IFRS 15 have on the reporting of organizations?

- What actions should be taken and when to apply the new standard?

15. How should the costs of contracts with customers be recognized?

Costs under contracts with customers are incremental costs associated with entering into contracts with customers and the costs associated with the performance of such contracts.

Such costs are recognized as assets when the conditions below are met. These assets are amortized on a systematic basis over a period that is consistent with the transfer pattern of the goods or services to which they directly relate.
IFRS 15 applies to accounting for contract performance costs only if they are not within the scope of other applicable standards (for example, IAS 2 Inventories, IAS 16 Property, Plant and Equipment, IAS 38 "Intangible assets").

For reference

Additional costs associated with the conclusion of contracts are those costs that would not have been incurred if the contract had not been entered into, such as sales commissions.

For incremental costs associated with entering into contracts with customers, IFRS 15 states that if an entity expects to recover such costs in the future, they are recognized as assets if their amortization period is more than one year. If their amortization period is less than a year, they are recognized as an expense.

Example 20

Consulting organization won a tender to provide consulting services to a new buyer. In this case, the following costs were incurred:

legal services for preparing a proposal for a tender - 100;

travel expenses - 200;

commission paid on sales of employees - 150.

Total costs: 450.

Under IAS 15, an entity recognizes an asset of 150 as an incremental contracting cost because it assumes that these costs will be recovered in the future through the receipt of consulting cash.

Legal services the preparation of the tender proposal and travel expenses were incurred regardless of whether the tender was won or not, therefore they are not capitalized but recognized as an expense in the period in which they were incurred.

The organization also pays an annual sales bonus based on the sales quantitative indicators- sales volume, profitability in general and individual performance indicators. Such costs are not capitalized as they are not incremental contracting costs and cannot be directly attributed to specific contracts with customers.

Costs related to the fulfillment of contracts with customers are recognized as assets if they meet all of the following
criteria:

• they are directly related to an existing or proposed contract that the entity can specifically identify;
• they generate or improve the resources of the organization, which will be used in the future to fulfill obligations under contracts;
• reimbursement of these costs is expected subsequently.

Examples of such costs can be: direct material costs; labor costs; distribution of overhead costs directly related to the contract; costs that are recoverable by the buyer; other costs that were incurred only due to the fact that a contract was concluded with the buyer.

16. What disclosures are required by IFRS 15?

IFRS 15 provides for disclosures that are intended to enable users of financial statements to understand the nature, amount and timing or timing of revenue recognition, as well as the uncertainties associated with revenue and cash flows arising from the fulfillment of obligations under contracts with customers. Such disclosures are:

• revenue recognized under contracts with customers, including the split of revenue into components;
• balances under contracts, including:
  • incoming and outgoing balances of receivables, contractual assets and contractual obligations;
  • revenue recognized in the reporting period that was included in contract opening balances;
  • revenue recognized in the reporting period for contractual obligations fulfilled in previous periods;
• enforceable obligations under contracts with customers, including a description of how the entity normally meets the obligations, including:
  • essential terms of payment;
  • the type of goods and services promised to be transferred under contracts;
  • obligations for returns and refunds and other similar obligations;
  • types of guarantees and other similar obligations;
• the transaction price, which is allocated to the remaining obligations under the contract;
• Significant judgments and their changes in relation to the requirements of contracts with customers, including:
  • the time period for the fulfillment of obligations under contracts with buyers;
  • transaction price and amounts allocated to obligations to be fulfilled under contracts;
• assets recognized for costs associated with entering into and performing contracts with customers, including:
  • a description of the judgments in determining the amount of costs and the depreciation method used in each reporting period;
  • outgoing balances of recognized assets at costs;
  • the amount of amortization and any impairment losses recognized in the period.

17. What are the requirements for the presentation of information established by IFRS 15?

An entity presents in the statement of financial position performance of contracts with customers as a contractual asset or a contractual obligation, depending on the extent to which the entity has fulfilled its obligations and the customer has made payment under the contract.

Any unconditional entitlement to remuneration is presented separately as.

If a customer prepays before the entity transfers control of the related good or service, a contractual commitment is presented in the statement of financial position.

If the buyer has not yet paid the appropriate transfer fee for the good or service, the statement of financial position shall include:

• Contractual asset (an entity's right to a consideration in exchange for goods or services transferred to a customer for a reason other than the passage of time - for example, future performance of a contractual obligation by the entity (see also the example in question 2);
• or a receivable (unconditional entitlement to remuneration that does not depend on the passage of time).

The contractual asset and receivables and any impairment attributable to them must be accounted for in accordance with IFRS 9 Financial Instruments.

The difference between the initially recognized amount of the receivable and the amount of revenue should be recognized as an impairment charge.

18. What standards and interpretations are canceled by IFRS 15?

With the entry into force of IFRS 15, the following IFRSs will lose their validity:

• IAS 18 Revenue;
• IAS 11 Construction Contracts;
• IFRIC Interpretation 13 Customer Loyalty Programs;
• Interpretation of the IFRIC 15 “Agreements for the construction of real estate”;
• IFRIC Interpretation 18 Transfers of Assets from Customers;
• SIC Interpretation 31 Revenue - Barter Transactions Including Advertising Services.

19. When does IFRS 15 come into force and what are the options for transition to IFRS 15?

IFRS 15 is effective for annual periods beginning on or after 1 January 2017, with early adoption permitted. Thus, it will need to be applied when preparing interim reports in 2017, as well as annual reports for 2017 and thereafter.

It applies to new contracts entered into from the date of entry into force of IFRS 15, as well as to existing contracts that are not completed at the date of its entry into force.

There is a choice of retrospective application, retrospective application with partial exemptions (capital adjustment date - January 1, 2016) or using a modified approach upon transition to the new standard.

Under the modified approach, comparative periods are not restated. Instead, the entity recognizes the cumulative effect of first-time adoption of IFRSs as an adjustment to the opening retained earnings balance at 1 January 2017.

Comparatives for the year ended 31 December 2016 are not restated. Disclosure of revenue is required in accordance with the previously applied accounting principles, as well as the amount by which each item in the financial statements in the reporting period has changed compared to the indicators determined in accordance with the previous revenue accounting standards.

For example, if the contract with the buyer was concluded in 2015 and is valid until mid-2018, then in the annual reporting for 2017:

• if the retrospective approach is applied, the balance of accumulated profit is recalculated as of 01.01.2016 (for 2015) and 01.01.2017 (for 2016);
• if the modified approach is applied, the data for 2015 and 2016 are not recalculated; the adjustment of the incoming accumulated profit as of 01.01.2017 is carried out with the reflection of the accumulated effect as of that date, which is the amount of change in accumulated profit in comparison with the indicators determined in accordance with the previously valid revenue accounting standards.

All entities will be required to disclose the effect of changes in accounting policies arising from the adoption of the new standard.

In the annual reports for 2014, in accordance with IAS 8 "Accounting policies, changes in accounting calculations and errors", it will be necessary to disclose an estimate of the potential impact of IFRS 15 on financial statements after its entry into force.

20. What impact will IFRS 15 have on the reporting of organizations? What actions should be taken and when to apply the new standard?

IFRS 15 will affect all organizations, but in different ways, depending on their type of business.

For example, credit institutions are expected to be less affected, as interest income, which accounts for the majority of banks' income, and dividend income are not subject to IFRS 15.

IFRS 15 is expected to have the greatest impact on activities related to asset management, construction, franchising, pharmaceuticals, real estate transactions, software development, telecommunications, including mobile networks and cable lines.

The level of disclosures may also vary depending on the type of business of the selling entity.

The most significant impact of IFRS 15 will have on multi-delivery contracts, multi-part contracts, including delivery, customization, design development, post-contractual service and delivery of updates. These components may represent separate enforceable obligations to which the transaction price would need to be allocated on the basis of the component's individual selling price.

Contracts that involve changes in price depending on the occurrence of events, the existence of a right of return, pricing based on discounts or the degree of achievement of objectives will need to be assessed in terms of variable consideration using judgment and estimates, included in the total transaction price and reflected in reporting as an element of revenue.

With regard to costs, it will be necessary to identify the costs of the loss of material and labor resources due to inefficient activities that cannot be capitalized, as well as capitalized costs - for example, learning curve costs, activation and installation. It will be necessary to determine and include in the information system a basis for the amortization of these costs - for example, depending on the term of the contract, while differentiating between contracts with a validity period of more than a year and up to a year (in this case, the costs are not capitalized, but are expensed).

It seems appropriate to first of all assess:

• the most significant types of revenue streams, as well as analyze the main types of contracts that generate this revenue, paying particular attention to long-term carryover contracts in terms of the need to amend them and the potential integration of their material terms affecting the recognition of contractual assets, contractual liabilities and revenue, in accounting system; additional knowledge in the field of national and international legislation in terms of obligations to be fulfilled under contracts with buyers may be required;
• the need to amend Information Systems data on contracts that are relevant for the purposes of revenue recognition in accordance with IFRS 15, as well as in internal control systems, in key performance indicators (KPI), remuneration and bonus programs, dividend policy;
• the need to change the level of interaction and information exchange between accounting employees and employees responsible for sales, which is required for the correct and timely recognition of revenue at a specific point in time or as the obligations under the contract are fulfilled, the necessary disclosures are made, including in terms of contractual assets and contractual obligations;
• the impact of new approaches to revenue recognition on financial results, assets and liabilities, performance indicators, including from the point of view of investors, as well as the fulfillment of covenants.

2015-02-24 30

IFRS 15 Revenue from Contracts with Customers: Summary of the New Standard

KFO No. 9 2014
Asadova E.V.,
Director of PwC Russia

The article was provided by the editors of the magazine "Corporate financial reporting. International Standards "within the framework of the joint project" IFRS Methodology for Companies and Experts "by the Publishing House" Methodology "and the Financial Academy" Aktiv "for experts in the field of IFRS.

All IFRS methodology, expert comments, practical developments, industry recommendations are available with an annual and semi-annual subscription to the magazine.

IFRS 15 Revenue from Contracts with Customers (hereinafter referred to as IFRS 15) contains a new revenue recognition model and involves a significant increase in the scope of disclosure requirements. The standard will certainly affect and in many cases significantly change the current approaches of companies to revenue recognition. The purpose of this article is to consider certain theoretical provisions of the standard and analyze how they will affect the existing approaches of companies to revenue recognition.

IFRS 15 introduces a fundamentally new concept of revenue recognition. A number of new concepts and new guidance are introduced to address some of the revenue recognition issues, for example:

• separate obligations for the performance of the contract;
• new guidance on when revenue is recognized;
• the concept of variable consideration, which is used to determine the amount of revenue recognized when the amount of revenue may change;
• new guidance on the allocation of transaction prices to individual liabilities;
• accounting for the time value of money.

REFERENCE

The new 15th IFRS is the result of years of efforts to converge IFRS and US GAAP. This is probably why the new revenue standard has turned out to be quite voluminous - it is about 350 pages, which is an order of magnitude more impressive than the current guidance in terms of revenue recognition.

The current guidance on revenue recognition is contained in two standards: IAS 18 Revenue and IAS 11 Construction Contracts - and a number of clarifications: IFRIC 13 Customer Loyalty Programs, IFRIC ( IFRIC 15 Real Estate Construction Agreements, SIC 31 Revenue - Barter Transactions Including Advertising Services.

Taking into account the large amount of work, a working group was created on the transition to IFRS 15, which will monitor the implementation practice, determine the need to develop additional guidance, and act as a platform for discussing complex issues of practical application of the new standard between various groups users, etc.

The standard is effective for annual periods. starting January 1, 2017 , and requires retrospective application; however, the standard provides for a number of practical exceptions. Alternatively, a simplified retrospective application approach is possible.

In accordance with the simplified approach, comparative data are revised only for contracts in force (in progress) as of January 1, 2017.

Thus, companies are given considerable time to prepare and transition to the new standard. This is primarily due to a completely different revenue recognition model, which could potentially entail the need for significant changes existing IT solutions and business processes.

The table summarizes the main changes in the revenue recognition model from the current guidance.

The current guidance provides for different approaches to revenue recognition depending on the type of transactions (supply of goods, rendering of services, construction contracts). IFRS 15 introduces a single model for accounting and determining when revenue is recognized regardless of the type of transaction. This model should be applied for each individual performance obligation under a contract.

The determination of when revenue is recognized in accordance with the guidance of IAS 18 is based on the transfer of risks and rewards criterion. The new standard introduces the concept of transfer of control. The standard states that professional judgment is required to determine when control is transferred, and one of the indicators of the transfer of control is the transfer of risks and rewards. At the same time, there are other indicators that must be considered in order to resolve the issue of the moment of transfer of control: the right to payment, the right to physical use, the fact of acceptance of the goods / services by the client. In general, the concept of control is broader, and in theory, when the new guidance is applied to a number of transactions, the timing of revenue recognition may be different from that of the current guidance.

Another distinguishing feature of the new standard is the large number of detailed guidelines on specific issues, for example: how to distinguish individual performance obligations; how to allocate the transaction price between individual performance obligations; what to do when the amount of remuneration may change (approach to the so-called variable consideration); how to account for proceeds from the transfer of licenses, etc.

Scope of IFRS 15

The new revenue standard applies to all contracts with customers. In doing so, the standard provides guidance on what constitutes a contract and introduces a definition of a customer.

It establishes a closed list of operations that are outside the scope of the new standard, namely:

• rent;
• insurance;
• financial instruments;
• financial guarantees;
• exchange of a homogeneous product between companies in the same industry for the purpose of simplifying the logistics of selling to customers.

In practice, difficult cases are possible when the same agreement has elements that fall under the new revenue standard and elements that should be regulated by the requirements of other standards.

New model

The new revenue recognition model under IFRS 15 is a mandatory five steps:

Step 1. Determination of the relevant contract with the client

Step 2. Determination of individual obligations for the performance of the contract

Step 3. Determining the price of the operation

Step 4. Transaction price distribution

Step 5. Revenue recognition when a performance obligation is fulfilled (or as it is fulfilled)

Step 1. Determination of the contract with the client

The new standard introduces the concept of a customer.

Customer is the party who receives goods or services that are a result of the ordinary activities of the company.

Let's look at an example.

Example 1

A pharmaceutical company has entered into an agreement with a biotech company to jointly develop a new drug. As part of the application of the new standard, the question arises as to what the essence of the transaction is:

1. that a biotechnology company sells a substance and provides R&D services, or
2. that the parties have entered into a cooperation agreement under which they share the risks of developing a new drug?

The second type of agreement is outside the scope of the new revenue standard, as the parties to the agreement are not the supplier and the customer, but the cooperating parties. In contrast, in the first option, the pharmaceutical company is a customer biotech company therefore the contract must be accounted for in accordance with IFRS 15.

Consolidation of contracts

At this stage, it is also necessary to determine whether it is necessary to combine several contracts into one. It is important to consider the following factors:

• contracts are negotiated within the entire package in order to achieve a single commercial goal;
• the price is interrelated, i.e. the remuneration under one contract depends on the price or the result under another contract;
• goods, works and services under different contracts constitute a single performance obligation.

Changes to the terms of contracts

In practice, it is not uncommon for agreements to change: new services are added, volumes and prices change. In this regard, the question arises as to whether the amendment of the contract should be treated as a new contract and the revenue under it should be recognized separately or as a continuation of the old contract (in this case, it is possible to recalculate revenue and immediately recognize the results of the change as an adjustment catch-up adjustment). Changes to the terms of the contract are subject to consideration as a new separate contract if both conditions are met:

• the volume of goods / services under the contract is increasing;
• the additional contractual remuneration reflects the separately agreed-upon individual selling price of the additional volume of goods / services.

Step 2. Determination of individual performance obligations (or individual components in accordance with current guidance)

Often, a single contract can contain several components (for example, sale of goods with installation or maintenance services).

In doing so, it is necessary to determine whether the various elements of the contract are separate performance obligations. The importance of this decision is also due to the fact that different timing of revenue recognition can be determined for different performance obligations.

A separate obligation to perform the contract is allocated in cases where the product / service:

• provides benefits to the client alone or in conjunction with other resources available to the client, and
• does not depend on other elements (goods / services) under the contract and is not interconnected with them - in other words, it is a separately identifiable product / service.

A number of substantially similar goods or services can also be considered as a separate performance obligation if there is a consistent, systematic procedure for communicating results to the client, for example: daily cleaning of the premises, call center services.

To determine whether a product / service is separately identifiable, the standard uses indicators, for example, it is necessary to establish whether integration services.

It should be noted that in many cases professional judgment is required to resolve this issue.

Example 2

The company is building a compressor station. At the same time, the contract describes certain types of work that involve the development of the necessary technical characteristics and parameters, delivery of individual units of equipment, assembly. The key question here is the following: does the company provide services for the integration of individual parts in order to deliver the facility on a turnkey basis? If so, this is one commitment.

Another indicator is customization level ... If a company is implementing customized software that requires a license to use, then selling the license is unlikely to be a separate performance obligation.

And finally, how interconnected are the elements, can they be bought separately? For example, a guarantee: if it can be bought separately, then we most likely have a separate obligation.

When within existing treaty the client is given the right to purchase additional goods, works, services (for example, within the framework of loyalty programs), then a separate obligation to perform the contract arises only if the buyer obtains a substantive right that he would not have received in another situation (that is, without the primary transaction for the purchase of goods / services ).

Step 3. Determining the price of the operation

The transaction price is how much the company will receive as a result of the transaction in exchange for the work and services provided. One of the key decisions in determining the price of a transaction is to determine the amount of variable consideration.

There are many cases where the amount of compensation may vary, for example:

• discounts;
• fines;
• bonuses, incentives;
• performance bonuses;
• other.

To determine the amount of variable consideration, the most probable cost, or the estimated cost using expectations, is used, whichever is more applicable in the particular case.

For variable consideration, the standard is conservative: the amount of variable consideration should be recognized as revenue in an amount for which it is highly probable that it will not need to be reversed in subsequent periods. At the same time, the standard describes a number of factors that can adversely affect the assessment of the likelihood of receiving variable remuneration, for example: the presence of uncertainty over a long period, limited experience with similar contracts, exposure to uncontrollable factors, a wide range of prices and results.

Example 3

When it comes to discounts on a new product line in a new market, which involves limited experience and a wide range of outcomes, a minimum amount must be determined that is safe to recognize and does not need to be reversed in the future.

Therefore, it should be recognized "Minimum amount" revenue with a high degree of probability that it will not lead to a reversal, and spend reassessment amounts at the end of each reporting period.

Note that in many cases professional judgment is required to resolve this issue.

Example 4

The company sells equipment for 100 million conventional units (cu) with a bonus of up to 5% depending on the achievement of future performance targets. Bonus is taken into account if it exists high probability that there will be no significant reversal in relation to the bonus amount.

On initial recognition, there is evidence that it is highly probable that the bonus will be at least 3%. The price of the deal is $ 103 million. That is, that amount is recognized as revenue when control is transferred.

On revaluation at the balance sheet date, it is highly probable that the bonus will be received in full. The price of the deal is $ 105 million. e. At the reporting date, additional CU2 million is recognized. That is, revenue, even though some uncertainty persists.

Exception! As a general rule, variable consideration is recognized in an amount that is unlikely to need to be reversed. However, there is an exception - for intellectual property licenses.

For intellectual property licenses for which royalties are based on sales or use, revenue is recognized only when the sale or use occurs. Thus, the “high likelihood” limitation does not apply for intellectual property licenses. It should be noted that this exemption is not intended to be applied by analogy.

Example 5

Film screening rights. An impression royalty consideration will only be recognized when revenue from end consumers(spectators) as a result of ticket sales.

The next component that can affect the amount of remuneration is the financial component. Revenue should be adjusted if there is a material financial component.

It should be noted that in many cases professional judgment is required to resolve this issue.

Note! IAS 18 also assumes that the effect of discounting is taken into account when revenue is recognized if the deferred payment implies a significant financial component. However, the effect of discounting was not taken into account in situations where the company received an advance payment.

Under IFRS 15, revenue is adjusted for the effect of discounting and if an advance payment is received (provided that there is a material financial component). In this case, the total revenue recognized in respect of the performance obligation under the guidance of the new standard may be higher than the transaction consideration, since the income statement will separately reflect the revenue, taking into account the financial component and financial expense in relation to this financial component.

Step 4. Distribution of the transaction price

The distribution of the transaction price between individual obligations for the performance of the contract must be performed according to the following algorithm:

1. Define a separate selling price:
   • actual or calculated;
   • The “residual” method if the selling price is very uncertain or variable (change from current practice). The residual method involves not proportionally allocating the transaction price to the individual components, but determining the fair value of one component (for example, the fair value of loyalty points) and allocating the difference between the transaction price and the fair value of the above component to the cost of the remaining component.
2. Distribute the transaction price based on the relative individual selling prices, as if the products were sold separately. However, if there are compelling reasons, the amount of the contract discount (the difference between the transaction price and the sum of the individual selling prices for the individual components) can be attributed to a specific performance obligation.

Step 5. Revenue recognition

The key question at this stage is: when does the transfer of control take place - simultaneously or over a period? When should revenue be recognized?

In accordance with the new guidance, it is first necessary to analyze whether revenue is to be recognized over the period (in fact, this is an analogue of the revenue recognition model by percentage of completion in the terminology of the current management). There are three clear criteria for this. If none of these are met, revenue is recognized immediately when control is transferred.

REFERENCE

Three criteria for recognizing revenue during a period:

• the client receives benefits as the activity progresses, for example, from the provision of transportation services, cleaning;
• the activity creates or improves an asset controlled by the client, for example: in the case of the construction of a building or structure on the client's land plot, the right to an unfinished building almost always remains with the client (unless under the terms of the contract, if the contract is not completed, this structure cannot be dismantled and the right to it does not pass to the contractor);
• an asset is created for which there is no possibility of alternative use (that is, only the customer can use it) and the company has the right to receive payment for the work performed at any time (and not only the right to reimbursement of the actual costs incurred).

Chart 1 provides an algorithm for determining when revenue is recognized in accordance with IFRS 15.

Figure 1: Separate guidance for the recognition of license revenue

The new standard has separate guidelines for recording revenue from licenses: franchises, software rights, films, patents, etc.

If the license is a separate performance obligation, then it must be determined whether the license gives the holder a right of use or a right of access.

The right to use is taken into account at once. Access right - during the period. The granting license assumes that:

1. the object of the license - intellectual property - changes over time due to the actions of the company that provides the license;
2. the client is exposed to risks associated with the consequences of the activities of the licensor company;
3. the activities of the licensing company are not a separate product or service.

Example 6

Granting the right to use the logo of a sports team during the period is an access right, as the intellectual property changes: the sports team plays and gains popularity.

In contrast, the right to use an existing music library is rather a right to use.

Impact of IFRS 15 on an organization's business processes

The impact of the new standard on the organization's business processes is shown in Figure 2.

Diagram 2. Impact of the new standard on the organization's business processes

The impact of the standard in different industries depends on existing business models and will at least be expressed in the following:

• influence on information disclosure;
• the need for training and education of personnel;
• the need to analyze all contracts or major types of contracts;
• assessment of revenue collection, time value of money and other factors.

The expected impact of the standard on companies in various industries is presented in the table:

Impact of IFRS 15 on companies in various industries

Key Considerations to Consider When Applying IFRS 15

In preparing for the application of the new revenue standard, attention should be paid to the following aspects:

P.S. You can see the full record

With the introduction of IFRS 15, the accounting for long-term contracts has changed. The most significant changes are in the definition of which contracts are to be revenues recognized as work is performed. This is described in detail in the previous article. This article will discuss how to calculate revenue from such contracts in accordance with the new standard (two examples). In this case, IFRS 15 requires revenue for the reporting period to be recognized at an amount that reflects progress in meeting the performance obligation. Use or to measure this progress.

It will be a little boring theory at first, but it is necessary. Those who want to immediately delve into the practice can follow the link to at the end of the article.

Basics of IFRS 15 "Revenue from Contracts with Customers"

The new IFRS 15 introduces the concept of a “performance obligation”. The word “obligation” can be translated as “obligation” and “obligation”. The official translation into Russian uses the term “obligation to perform”. I will use both translations.

Obligation to perform Is a distinct product or service (or set of goods and services) that the selling company promises to deliver to the buyer.

A performance obligation is the unit of account for revenue recognition. This term was implied in the old revenue standard, but there was no precise definition.

The term “distinguishable goods” means that a good can be distinguished from other goods: the seller supplies it separately, and the buyer can use it (= benefit) separately from other goods of the seller. The same applies to services.

The selling company recognizes revenue if and when it satisfies the performance obligation. It can happen or at a certain point in time, or as the company performs work under the contract. In the second case, the seller recognizes revenue gradually over time using a suitable method to measure the degree of fulfillment of the contractual obligation. This will be discussed in this article.

The recognition of revenue over time (in different reporting periods) does not depend on the length of the contract, as it was before when IFRS 11. Now certain must be met. If they are not met, then all contract revenue is recognized when the obligation under the contract has been fully fulfilled.

If the criteria are met, then revenue is recognized based on progress towards complete satisfaction of that performance obligation. That is, the revenue for the reporting period is multiplied by the percentage of fulfillment of the obligation under the contract. The question is how to calculate this percentage.

Methods for measuring progress

IFRS 15 provides two methods for measuring progress in meeting a contractual obligation:

• output method
• resource method (input method)

It is these terms that are used when translating the standard into Russian. The clearer names are method of work performed and method of cost incurred. Later in this article, both names will be used.

Results method recognizes revenue based on direct measurement of the results of work performed at the reporting date. Possible methods are listed in the standard in clause B15:

To be honest, I don't understand the practical difference between surveys and appraisals. Interestingly, in the old IAS 11 Work Contracts, paragraph 30 (b), the name of the method “surveys of work performed” was translated into Russian as “ expert review executed works".

The developers of the standard point out that the method chosen should reflect as best as possible the extent to which the contractor has fulfilled its contractual obligations. If some results are not included in the calculation, then the amount of revenue will be underestimated. For example, a method based on counting units produced or delivered does not take into account work in progress. In the event that the work in progress is significant, these methods will lead to a distortion of the results of work performed and an underestimation of revenue, since the calculation will not take into account revenue from work in progress, which is controlled by the client.

In some cases, for the sake of simplicity, the contractor may recognize revenue in the amount for which he was entitled to invoice (has a right to invoice). This is possible if there is a direct relationship between the value of the results for the buyer and the amount of compensation to which the seller is entitled. For example, if in the contract for the provision of services, the seller issues an invoice for each hour of his work.

Only this method was specified in the original draft version. This is not surprising, since there is a direct logical connection between the results of activities and the revenue due. The main disadvantage of this method is the complexity and cost of obtaining information. Therefore, after the initial discussion of the draft version of the standard, a second method was added, which was widely used in the past when IAS 11 was in force. This is the cost method or the resource method.

Resource Method provides for the recognition of revenue based on the efforts made by the seller to fulfill the obligation under the contract, or the resources consumed for this. That is, we take the costs incurred and see what percentage they represent from the total expected costs of the contract. It remains to determine in what units to measure the costs incurred: in hours, in money, in the amount of materials or other resources. In the standard possible options listed in paragraph B18:

English in standard	Official translation
resources consumed	consumed resources
labor hours expended	spent working time
costs incurred	costs incurred
time elapsed	elapsed time
machine hours used	used machine time

Here, too, something is not clear. How does the “elapsed time” in the resource method differ from the “elapsed time” in the results method? In the method of incurred costs, the time spent on the work of personnel or equipment is allocated separately. What, then, is meant by "elapsed time"?

Elapsed time in the results method is also not a very clear term. Since leases are outside the scope of IFRS 15, the timing of the rental or lease of the asset is not appropriate here. I think this is how you can measure the results of service contracts, the responsibilities of which are measured in terms of time. Say, 100 hours of consulting services or an annual membership to a fitness club or sports event.

The resource method is less costly to use, since it is much easier to estimate the amount of resources expended than the amount of results obtained. This is its advantage. The disadvantage is that there may not be a direct relationship between costs and results. Indeed, costs and revenues are not always directly correlated with each other. This is especially obvious in the event that there are ineffective costs, defects in work, losses. In this case, the costs will be incurred, but they will not lead to the fulfillment of the obligation under the contract.

To recognize revenue, it is necessary to estimate the volume of assets (goods and services), control over which was transferred to the customer during the reporting period. And if there is no direct relationship, then the use of the method of incurred costs may lead to a distortion in the amount of revenue under the contract for the reporting period.

Therefore, when applying the method of resources (method of incurred costs), the contractor company must exclude the impact on the estimate of revenue of those consumed resources that did not affect the results of operations. Therefore, if the company chooses the cost method, then it must adjust the calculation of the% from which the revenue will be calculated:

• 1) in case of loss of materials, labor and other resources (inefficiency, marriage)
• 2) if the costs are not proportional to the results

In these cases, such costs are simply not included in the calculations. But in the second case, if certain conditions are met, revenue can be recognized in the amount of the costs incurred (see example 1 below). These conditions are listed in paragraph B19 (b):

If at the time of the conclusion of the contract, the fulfillment of all the conditions below is expected:

• (i) the goods are not distinguishable *;
• (ii) the buyer is expected to gain control of the goods significantly prior to receiving services related to the goods;
• (iii) the actual cost of the transferred good is significant relative to the total expected cost of meeting the full performance obligation; and
• (iv) the company purchases a product from a third party and does not significantly participate in the development and production of the product (but it acts as a principal, not an agent, i.e. it controls the promised product or service before it is transferred to the buyer).

* the term “distinguishable” means that a product can be distinguished from other products: the seller supplies it separately, and the buyer can use it (= benefit) separately from other products of the seller.

Important note. The Basis for Conclusions to the standard states that having two methods does not mean that a company has “free choice”. The contractor should select the measurement method that best represents the performance of the company in the performance of the contractual obligation. To do this, the company must analyze the nature of its activities, what is the created asset or the service provided, and do the most suitable choice method based on this analysis. (BC 159). For those in the know English I will give this point in English:

BC 159 Accordingly, an entity should use judgment when selecting an appropriate method of measuring towards complete satisfaction of a performance progress obligation. That does not mean that an entity has a ‘free choice’. The requirements state that an entity should select a method of measuring progress that is consistent with the clearly stated objective of depicting the entity’s performance-that is, the satisfaction of an entity’s performance obligation-in transferring control of goods or services to the customer.

The company must apply the chosen method for the specific performance obligation consistently throughout the contract. This same method should be applied for all contracts with similar performance obligations.

Examples of revenue recognition over time

The first example is taken from the illustrative examples for IFRS 15, the second from the P2 exam of the main ACCA course.

Example 1. Illustrative example for IFRS IFRS 15.

In November 2012, Omega entered into a contract with a client for the renovation and refurbishment of a three-story building, including the installation of new elevators. Omega purchases elevators from an elevator manufacturer and installs them as they are (no rework) in the client's building. The contract price is $ 5 million. The expected cost of the work is 4 million, of which 1.5 million is the cost of the elevators.

Contract price - 5,000,000 (expected revenue from the contract)

Elevators - 1,500,000
Other costs - 2,500,000
Total expected contract costs - 4,000,000

At 31 December 2012, Omega incurred costs in the amount of 500,000 excluding the cost of the elevators. The elevators were delivered to the building in early December 2012, but their installation is not expected until June 2013. Omega uses the resource method (the ratio of costs incurred to total contract costs) to estimate intermediate results for similar projects.

Solution

1) Omega has one commitment - home remodeling

2) This performance obligation is fulfilled over time because

• a) the buyer simultaneously receives and consumes the benefits from the promised asset (work is carried out at the buyer's site)
• b) the asset created by Omega has no alternative use for it (cannot be sold to another buyer) and Omega is entitled to payment under the contract.

3) Omega acts as a principal in the elevators as it gains control of them before transferring them to the customer.

4) Control of the elevators passed to the buyer as they were delivered to the site in December 2012. The cost of the elevators is significant relative to the overall project costs. However, Omega has nothing to do with elevator manufacturing, so the purchase cost of the elevators ($ 1.5 million) does not reflect the extent to which Omega has met the performance obligation. Thus, 1.5 million should be excluded from the percentage of fulfillment of the contractual obligation.

5) Omega recognizes revenue from the transfer of elevators in an amount equal to their purchase value (with zero profit).

6) Calculations
Degree of fulfillment of obligations under the contract: 500,000 / 2,500,000 = 20%
Revenue (no elevators): 20% x (5,000,000 - 1,500,000) = 700,000
Elevator handover revenue: 1,500,000

OSD for the year ended 31.12.12

Revenue: 1,500,000 + 700,000 = 2,200,000
Cost: 1,500,000 + 500,000 = 2,000,000
Profit for the project: 200,000

This example illustrates the accounting treatment for material resources uninstalled materials. If the client obtains control over the asset (goods) before it is installed / assembled by the contractor, then it would be inappropriate to recognize such goods as inventory on the contractor's balance sheet. Instead, the contractor must recognize revenue for the goods transferred in accordance with the core principle of IFRS 15. But recognizing all profits on these goods before they are installed could overstate revenue. And the recognition of profit (margin) on these goods, which differs from the profitability (margin) of the whole contract can be a difficult exercise.

Therefore, the drafters of the standard decided that in certain circumstances, an entity should recognize revenue from the transfer of goods, but only on the basis of the costs incurred. In this case, the value of these costs should be excluded from the calculations by the resource method.

The second task was on the P2 exam " Corporate reporting»The main ACCA program. As a rule, the tasks on this exam test the knowledge of several provisions of international standards at once. In this case, the P2 examiner tested knowledge of IFRS 15 in terms of revenue recognition over time, variable consideration and contract modification. This topic (revenue over time) has not yet been tested for the Dipifr exam through December 2016.

On December 1, 2014, Delta entered into a contract for the construction of printing equipment at the client's site. The contract value is $ 1,500,000 plus a $ 100,000 bonus if the equipment is built in 24 months. At the time of inception of the contract, Delta correctly chose to account for the manufacture of the equipment as the only performance obligation in accordance with IFRS 15. The contract costs are expected to be $ 800,000. Since the manufacture of printing equipment is sensitive to external factors(due to the supply of many components by third parties), there is a high probability that the equipment will not be manufactured in 24 months and Delta will not be eligible for the bonus.

As of November 30, 2015, Delta had incurred contract execution costs in the amount of $ 520,000. As of this date, Delta management still believes that it is unlikely that the conditions will be met to receive the bonus. However, on December 4, 2015, the contract was changed. As a result, fixed consideration and expected contract costs increased by $ 110,000 and $ 60,000, respectively. The time required to receive the bonus has also been increased by 6 months. As a result, Delta management now believes that the conditions for the bonus are likely to be met. The contract continues to have a single performance obligation.

How should this contract be reflected in Delta's accounts as of November 30, 2015 and December 4, 2015?

Solution.

The condition explicitly states that the only performance obligation is the manufacture of printing equipment.

The bonus in the amount of $ 100,000 is not included in the remuneration under the agreement, since at the time of its conclusion there is no certainty that this bonus will not have to be canceled in the future.

• Expected revenue: $ 1,500,000
• Expected Cost: $ 800,000

The percentage of completion of the contract obligation can be calculated using the cost incurred method:

520,000/800,000 = 65%

• Revenue - $ 975,000 (1,500,000 x 65%)
• Costs - $ 520,000 (all costs incurred)

Since the contract was amended on December 4, 2015, contract fees and expected costs have increased. In addition, the eligible time for receiving the bonus was extended by six months, with the result that Delta's management concluded that the inclusion of the bonus in the contract price would not reverse this amount in the future. Consequently, the $ 100,000 premium can be included in the transaction price.

Delta management also concluded that printing equipment manufacturing remains the only performance obligation. Therefore, a change to a contract in accordance with IFRS 15 must be accounted for as part of the original contract. There is a separate article.

After the modification of the contract:

• The expected revenue under the contract is 1,710,000 (1,500,000 + 110,000 + 100,000 bonus)
• Expected contract costs 860,000 (800,000 + 60,000)

Since the change in the contract took place after the reporting date, this will not affect the reporting as of November 30, 2015 (non-adjusting event).

But on December 4, 2015, additional revenue of $ 59,550 must be recorded.

• new percentage of fulfillment of the obligation: 520,000 / 860,000 = 60.5%
• revenue under the contract as of December 4, 2015: 1,710,000 x 60.5% = 1,034,550
• adjustment less previously recognized revenue: 1,034,500 - 975,000 = 59,550

Difference between IFRS IFRS 15 and IFRS 11

The old standard IAS 11 Work Contracts prescribed long-term contracts to be accounted for by percentage of completion: to be recognized in the income statement, the total expected revenue and expenses of the contract were multiplied by the percentage of completion at the reporting date. The balance sheet reflected the amounts for settlements with customers, calculated according to the formula prescribed in the standard.

IFRS 11 proposed such methods for assessing the stage of completion of work under a contract.

• (a) comparing the contract costs incurred to complete the work to date to the total contract costs;
• (b) expert assessment of the work performed; or
• (c) an estimate of the proportion of work performed under the contract in kind.

Mathematically, the new IFRS 15 uses the same methods as before. However, the calculated percentage is applied only to revenue, and the cost is recognized at the cost incurred. The difference in figures will appear when using the results method, as the costs incurred may not be directly correlated with the progress in fulfilling the contractual obligation.

In general, the approaches to accounting for long-term contracts in the old IFRS 11 and in the new IFRS 15 differ markedly. Therefore, for those who have been studying for a long time international standards and knows IFRS 11, you should carefully read the provisions of the new revenue standard, and not rely on old knowledge.