Further detail about these specific requirements can be found at IFRS 15:113-129. A good or service is distinct if both of the following criteria are met (IFRS 15.27): A 2-step approach seems to work best. The following implications flow from this definition: (a) Revenue should be stated before deduction of costs of sale. The project is in its final stage of development and a new standard is likely to apply for accounting periods beginning on or after 1 January 2017. limited practically from readily directing the asset in its completed state for another use (as is the case when assets are significantly customised for the customer). This is because the supply by the seller in the case of a construction contract takes place gradually over the term of the contract. The detail The proposed requirements would affect any entity that enters into contracts with customers unless those contracts are in the scope of other standards (for example, insurance contracts or lease contracts). The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. Other Standards have made minor consequential amendments to IFRS15, including IFRS16Leases(issued January 2016) andAmendments to References to the Conceptual Framework in IFRS Standards(issued March 2018). The fact that the customer is obliged to pay for the work performed to date is a crucial indicator that the customer controls the asset and performance obligation is satisfied over time. [IFRS 15:32], Control of an asset is defined as the ability to direct the use of and obtain substantially all of the remaining benefits from the asset. it is probable that the consideration to which the entity is entitled to in exchange for the goods or services will be collected. Further details on accounting for contract modifications can be found in the Standard. A telecommunications company promises a free smartphone to each customer who subscribes for a premium telecommunications service. [IFRS 15:91-94], Costs incurred to fulfil a contract are recognised as an asset if and only if all of the following criteria are met: [IFRS 15:95], These include costs such as direct labour, direct materials, and the allocation of overheads that relate directly to the contract. Residual approach (only permissible in limited circumstances). It seems yes. Basically, in the first step, you are assessing the minimum characteristics for a good or service to be distinct and thus accounted for separately. The same applies for 1-year support services. An entity that chooses to apply IFRS 15 earlier than 1 January 2018 should disclose this fact in its relevant financial statements. Recognition and Measurement(2010th) (2010) IAS 39 (2009th) Financial Instruments: Recognition and Measurement (2009th) (2009) IAS 40: IFRIC 15: Agreements for the construction of Privacy and Cookies Policy From an IFRS perspective, the new standard arising out of the project is likely to be more robust than the existing standards. However the standard does provide some examples of suitable methods (4): Input methods are covered in IFRS 15.B18-B19. Under IFRS 15, revenue is recognised when (or as) a performance obligation is satisfied by transferring a promised good or service (i.e. In other words, the revenue is recognised gradually, rather than all at one critical point, as is the case for revenue from the sale of goods. Instead the profit or loss on disposal is treated as a deduction from operating expenses (or as a separate line item in the statement of profit or loss, if it is sufficiently material). [IFRS 15:56], However, a different, more restrictive approach is applied in respect of sales or usage-based royalty revenue arising from licences of intellectual property. direct the use of and asset (which includes restricting another entity from using an asset), and. [IFRS 15:74] If a standalone selling price is not directly observable, the entity will need to estimate it. (c) The amount of revenue can be measured reliably. As stated earlier, these implementation examples accompany, but are not part of, IAS 18. Application of this guidance will depend on the facts and circumstances present in a contract with a customer and will require the exercise of judgment. IFRS15 provides a comprehensive framework for recognising revenue from contracts with customers. Paragraph IFRS 15.BC100 notes that the assessment of whether the customer can benefit from the goods or services on its own should be based on the characteristics of the goods or services themselves instead of the way in which the customer may use the goods or services. You should always look to the substance of the contract. An entity that chooses to apply IFRS 15 earlier than 1 January 2018 should disclose this fact in its relevant financial statements. In April 2016 the Board issuedClarifications to IFRS 15Revenue from Contracts with Customers clarifying the Boards intentions when developing some of the requirements in IFRS15. a good or service (or bundle of goods or services) that is distinct; or, each distinct good or service in the series that the entity promises to transfer consecutively to the customer would be a performance obligation that is satisfied over time (see below); and. How should Construction Co account for this arrangement as at 30 June 2017? The ship was completed on 31 December 2017. Often this does not happen in the case of dividends until the shareholder actually receives the dividend. The project managers estimate would not be appropriate as it is merely an estimate while the costs are actually known. Skanska is the fifth-largest construction company in the world according to Construction Global magazine. Therefore this has led to calls by some users for a more rigorous approach that removes some of the uncertainty that is caused by the existing IFRSs. In September 2015 the Board issuedEffective Date of IFRS15which deferred the mandatory effective date of IFRS15 to 1January 2018. The entity normally earns a margin of 20% on service revenue. presume that another entity fulfilling the remainder of the performance obligation would not have the benefit of any asset that is presently controlled by the entity and that would remain controlled by the entity if the performance obligation were to transfer to another entity. Such revenue is recognised only when the underlying sales or usage occur. Therefore IAS 11 basically requires that, where the outcome of a construction contract can be recognised reliably, revenue on such contracts should be recognised according to the stage of completion of the contract (7). Access our Standards, Interpretations and related materials here. Entity A should recognise revenue for the transportation completed to date (i.e. The International Accounting Standards Board (IASB) has issued two International Financial Reporting Standards (IFRSs) that provide guidance in this area: IAS 18 is the IFRS that deals with revenue for the majority of entities, whilst IAS 11 very much applies the principles of IAS 18 to entities in the construction sector. The most typical application of this criterion is in construction industry, when an asset is created or enhanced on the customers land. Thank you! See Example 11 Cases A/E, Example 12 and Example 56 Case A accompanying IFRS 15. They assume that the amounts of revenue and related costs can be measured reliably, and that the economic benefits will probably flow to the seller. To recognise revenue under IFRS 15, an entity applies the following five steps: In April 2001 the International Accounting Standards Board (Board) adopted IAS11Construction Contractsand IAS18Revenue, both of which had originally been issued by the International Accounting Standards Committee (IASC) in December 1993. Does IFRS 15 change the pattern of revenue recognition? [IFRS 15:105], A contract liability is presented in the statement of financial position where a customer has paid an amount of consideration prior to the entity performing by transferring the related good or service to the customer. (c) Completion of a physical proportion of the contract work. Questions or comments? In respect of prior periods, the transition guidance allows entities an option to either: [IFRS 15:C3]. It does so, because in concludes that conditions in paragraph IFRS 15.35(c) are met (more on performance obligations satisfied over time below). Each of the goods or services is significantly affected by one or more of the other goods or services in the contract (they are highly interdependent or highly interrelated). It simply does not integrate the software to the combined output and it is not highly interrelated, because also other entities can provide installation. When the entity is unable to measure the progress reliably, revenue is recognised only to the extent of the costs incurred, provided that the entity expects to recover them. The goods are inventories that need to mature for five years before being ready for sale. It contracts with a car producer to manufacture 1 million car seats over the next three years. apply IFRS 15 in full to prior periods (with certain limited practical expedients being available); or. a good or service (or bundle of goods or services) that is distinct; or, each distinct good or service in the series that the entity promises to transfer consecutively to the customer would be a performance obligation that is satisfied over time (see below); and. (d) If the seller is acting as agent, rather than as the principal, in a transaction, the revenue the seller should recognise is the amount of commission receivable rather than the gross amount collected from the customer. The standard should be applied in an entitys IFRS financial statements for annual reporting periods beginning on or after 1 January 2018. If you accept all cookies now you can always revisit your choice on ourprivacy policypage. See Example 11 Case D accompanying IFRS 15. The setup of manufacturing line is not a distinct service and does not constitute a separate performance obligation as it does not result in a transfer of goods or services to the customer. The entitys year end is 31 December. and For example, a construction contract might involve the vendor procuring high value items for installation, such as elevators. Learn More. Systems to recognise revenue and account for timing differences between payment/invoicing and revenue. IAS 23 was reissued in March 2007 and I work for a software company. The fact pattern in this example indicates that at least two of the conditions required for the recognition of revenue on the sale of goods have not been satisfied: Therefore it is inappropriate for entity A to recognise revenue when the goods are sold on 1 January 2013. An output method results in revenue being recognised on the basis of direct measurement of the value of goods or services transferred to date, while input methods result in revenue being recognised based on measures such as resources consumed, costs incurred or machine hours. As already stated, revenue is a crucial number to users of financial statements in assessing an entitys financial performance and position. Does the customer have legal title to the asset? However, revenue recognition requirements in US generally accepted accounting principles (GAAP) differ from those in International Financial Reporting Standards (IFRSs). retain prior period figures as reported under the previous standards, recognising the cumulative effect of applying IFRS 15 as an adjustment to the opening balance of equity as at the date of initial application (beginning of current reporting period). Therefore, software, installation and 1-year support are each distinct goods or services in this case and you need to account for them separately. The Interpretation was developed by the Interpretations Committee to apply to the accounting for transfers of items of property, plant and equipment by entities that receive such transfers from their customers. IFRS 15 replaces the following standards and interpretations: The objective of IFRS 15 is to establish the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a contract with a customer. The conditions are such that all are likely to be satisfied at a particular point in time and so there is a critical point at which all the revenue from the sale of goods would be recognised. If a performance obligation is not satisfied over time, it must be treated as satisfied at a point in time (IFRS 15.32). In order to achieve the disclosure objective stated above, the Standard introduces a number of new disclosure requirements. IASB defers effective date of IFRS 15 to 1 January 2018, The UKs withdrawal from the European Union, International Financial Reporting Standards, Collection of IFRS 15 news and publications, Joint Transition Resource Group for Revenue Recognition, Clarifications to IFRS 15: Issues emerging from TRG discussions, FRC publishes findings on the quality of corporate reporting in 2021/2022, ESMA publishes 26th enforcement decisions report, FRC publishes findings on the quality of corporate reporting in 2020/2021, Call for papers Research on IASBs post-implementation reviews of IFRS Standards, IASB, FASB, and The Accounting Review call for academic research papers on the performance of standards in capital markets, Governance in brief FRC sets out key matters for 2022/23 reporting season, Deloitte comment letter on tentative agenda decision on principal versus agent software reseller, Governance in focus On the board agenda 2022, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers, SIC-31 Revenue Barter Transactions Involving Advertising Services, Project on revenue added to the IASB's agenda, Effective for an entity's first annual IFRS financial statements for periods beginning on or after 1 January 2017, New effective date for an entity's first annual IFRS financial statements for periods beginning on or after 1 January 2018. if other standards specify how to separate and/or initially measure one or more parts of the contract, then those separation and measurement requirements are applied first. For example, if the terms are FOB IAS 18 outlines the recognition principles in three parts: 1. Measurement of progress can be based on the output or the input. At the reporting period, the package has already been transported to Berlin. IAS 11 replaced For example if goods are sold for $110, inclusive of recoverable sales taxes of 10%, the revenue is $100, not $110. A good or service should be treated as a separate performance obligation irrespective of the business model adopted by an entity. Whilst a construction contract relates to the supply of goods, the critical event basis used in IAS 18 as a means of determining the timing of the recognition of revenue on the supply of goods is not really suitable. (b) It is probable that the economic benefits associated with the transaction will flow to the seller. Entity A is a company manufacturing car parts. If a promised good or service is not distinct, it should be combined with other promised goods or services until they become distinct together (a bundle). For official information concerning IFRS Standards, visit IFRS.org. The manufacturer charges $0.5 million of up-front setup costs and $100 for each manufactured piece. (c) Determine the transaction price. Consequently, an entity would disregard any contractual limitations that might preclude the customer from obtaining readily available resources from a source other than the entity. Each word should be on a separate line. retailers store without being compensated from retailer and at time engage third party specialist to provide such services. Examples of such activities are setup of a manufacturing process or connecting a customer to a telecommunications network. On 12 April 2016, clarifying amendments were issued that have the same effective date as the standard itself. Activities that do not transfer a good or service to a customer are not a performance obligation even though they may be necessary to fulfil a contract (IFRS 15.25). They can either be sold separately by the entity or by another entity, or the customer has already obtained them from the entity from other transactions or events. Therefore the entity would recognise revenue from the sale of the product of $14,000 ($20,000 - $6,000) at the date of supply and service revenue of $6,000 over the two years following the supply. Control is the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset, or to restrict the access of other entities to those benefits (IFRS 15.31-34). The standard provides a single, principles based five-step model to be applied to all contracts with customers. from Madrid to Berlin) as another entity would not need to substantially re-perform the work that Entity A has completed to date if that other entity were to fulfil the remaining performance obligation to the customer and transport the package from Berlin to Moscow (IFRS 15.B4). 12. Terms and Conditions Becoming an ACCA Approved Learning Partner, Virtual classroom support for learning partners. IFRS 15 contains specific, and more precise guidance to be applied in determining whether revenue is recognised over time (often referred to as percentage of completion under existing standards) or at a point in time. the costs relate directly to a contract (or a specific anticipated contract); the costs generate or enhance resources of the entity that will be used in satisfying performance obligations in the future; and, Performance obligations satisfied over time, Methods for measuring progress towards complete satisfaction of a performance obligation, Customer options for additional goods or services, the significant judgments, and changes in the judgments, made in applying the guidance to those contracts; and. These include, but are not limited to: [IFRS 15:31-33], An entity recognises revenue over time if one of the following criteria is met: [IFRS 15:35], If an entity does not satisfy its performance obligation over time, it satisfies it at a point in time. This does not mean that an entity must have an unconditional right to payment at the reporting date but, instead, it must have an enforceable right to demand payment for performance completed to date if the customer were to terminate the contract before completion. using the asset to produce goods or provide services; using the asset to enhance the value of other assets; using the asset to settle liabilities or to reduce expenses; the customer simultaneously receives and consumes all of the benefits provided by the entity as the entity performs; the entitys performance creates or enhances an asset that the customer controls as the asset is created; or. IAS 18 states that entities should recognise revenue from the use of their assets yielding interest, royalties and dividends when (11): Viewpoint. [IFRS 15:B63], Step 4: Allocate the transaction price to the performance obligations in the contracts, Where a contract has multiple performance obligations, an entity will allocate the transaction price to the performance obligations in the contract by reference to their relative standalone selling prices. identify the contract(s) with a customer. [IFRS 15:97], The asset recognised in respect of the costs to obtain or fulfil a contract is amortised on a systematic basis that is consistent with the pattern of transfer of the goods or services to which the asset relates. IFRS 15 lists a few situations when two or more goods or services are NOT separately identifiable and thus not distinct: As an example, you sell software, but before it is functional and customer can use it, you need to customize it to the customers environment. A performance obligation is treated as satisfied over time under this criterion when both of the following criteria are met: An asset created by an entitys performance does not have an alternative use to an entity if the entity is either: The assessment of whether an asset has an alternative use to the entity is made at contract inception (IFRS 15.36). [IFRS 15:63], Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation, Revenue is recognised as control is passed, either over time or at a point in time. Factors that may indicate the point in time at which control passes include, but are not limited to: [IFRS 15:38], The incremental costs of obtaining a contract must be recognised as an asset if the entity expects to recover those costs. Shipping Terms. Compliance Challenges in Billing and ASC 606 for Construction Companies. Derived from the IFRS for SMEs, the Financial Reporting Council has made significant modifications to address company law requirements and incorporate additional accounting options. Office. Similarly, construction companies do not recognise revenue when they deliver building materials to the construction site if the customer contracted them to construct a building. Menu. Will advance billing hurt your balance sheet? Where the outcome of a construction contract cannot be estimated reliably revenue shall be recognised only to the extent of contract costs incurred that it is probable will be recoverable. IFRS is the IFRS Foundations registered Trade Mark and is used by Simlogic, s.r.o In determining fair value it would be necessary to take into account any trade discounts or volume rebates granted by the seller. In addition, IAS 18 provides limited guidance on important topics such as revenue recognition for multiple-element arrangements. A contract asset is recognised when the entitys right to consideration is conditional on something other than the passage of time, for example future performance of the entity. Cookies that tell us how often certain content is accessed help us create better, more informative content for users. To sum up, here are the 5 steps: Identify contract with the customer; Identify the performance obligations in the contract; Entity A contracts to transport a package from Madrid to Moscow. direct labour hours, time elapsed or resources consumed. IFRS 15 was issued in May 2014 and applies to an annual reporting (b) Royalties should be recognised on an accruals basis in accordance with amounts receivable as a result of asset use up to the reporting date. IFRS 15 specifies how and when an IFRS reporter will recognise revenue as well as requiring such entities to provide users of financial statements with more informative, relevant disclosures. Recognise revenue when (or as) the entity satisfies a performance obligation. [IFRS 15:111]. hyphenated at the specified hyphenation points. Contracts with customers will be presented in an entitys statement of financial position as a contract liability, a contract asset, or a receivable, depending on the relationship between the entitys performance and the customers payment. One or more of the goods or services significantly modifies or customises, or are significantly modified or customised by, one or more of the other goods or services promised in the contract (e.g. the entitys performance does not create an asset with an alternative use to the entity due to legal and/or practical restrictions and. Public consultations are a key part of all our projects and are indicated on the work plan. Review some of the implementation examples that are provided as an accompaniment to IAS 18. The company's performance is measured to the extent to which its asset inflows (revenues) compare with its asset outflows ().Net income is the result of this equation, but revenue typically enjoys equal attention during a standard earnings call.If a company displays solid top-line growth, analysts could view the [IFRS 15:99], Further useful implementation guidance in relation to applying IFRS 15. Each word should be on a separate line. work-in-progress) is created that is not consumed immediately by the customer (IFRS 15.BC128). (b) Interest revenue of $3,310 ($13,310 - $10,000). retain prior period figures as reported under the previous standards, recognising the cumulative effect of applying IFRS 15 as an adjustment to the opening balance of equity as at the date of initial application (beginning of current reporting period). In December 2001 the Board issuedSIC31RevenueBarter Transactions Involving Advertising Services. (e) The costs incurred or to be incurred by the seller in respect of the transaction can be measured reliably. For example, cookies allow us to manage registrations, meaning you can watch meetings and submit comment letters. Earlier application is permitted. a good or service (or a bundle of goods or services) that is distinct; or. Amended by IAS 39 Financial Instruments: Recognition and Measurement, effective 1 January 2001: 16 April 2009: Appendix to IAS 18 amended for Annual Improvements to IFRSs 2009. A performance obligation is satisfied by transferring a promised good or service to a customer (IFRS 15.31). Entity X produces a specialised equipment which is installed at customers premises. the costs relate directly to a contract (or a specific anticipated contract); the costs generate or enhance resources of the entity that will be used in satisfying performance obligations in the future; and, Performance obligations satisfied over time, Methods for measuring progress towards complete satisfaction of a performance obligation, Customer options for additional goods or services, the significant judgments, and changes in the judgments, made in applying the guidance to those contracts; and. But, despite these items are capable of being distinct, they are NOT distinct in the context of the contract, because the contractor promised to deliver a combined output a house. Preference cookies allow us to offer additional functionality to improve the user experience on the site. Performance obligation is satisfied over time if one of the criteria given in IFRS 15.35 is met: Questions or comments? Under HKFRS 15, the amount and pattern of revenue recognition of construction contracts could differ from those that applied under HKAS 11. A customer cannot benefit from the roof on its own, but if the house is ready just without the roof, then yes, customer can buy the roof elsewhere and benefit from it. It is then a matter of deciding when exactly a performance obligation is satisfied, which is the date when a customer obtains control of a promised good or service (an asset) (IFRS 15.38). an asset) to a customer. I have written 2 articles about the new rules in the past, namely: IFRS 15 vs. IAS 18: Huge change is here! [IFRS 15:51], The standard deals with the uncertainty relating to variable consideration by limiting the amount of variable consideration that can be recognised. As a result, companies may need to change their accounting for those costs on adoption of IFRS 15 for annual reporting periods beginning on or after 1 January 2018. Examples include choosing to stay logged in for longer than one session, or following specific content. IFRS 15 does not have any specific provisions on onerous (loss-making) contracts, therefore these IAS 37 requirements apply. [IFRS 15:32], Control of an asset is defined as the ability to direct the use of and obtain substantially all of the remaining benefits from the asset. Any impairment relating to contracts with customers should be measured, presented and disclosed in accordance with IFRS 9. Revenue is a crucial part of financial statement analysis. Entity A retains managerial involvement to the degree usually associated with ownership. If you register with us for a free acccount, you can access PDF files of this year's consolidated IFRS Accounting Standards, IFRIC Interpretations, theConceptual Framework for Financial Reporting andIFRS Practice Statements,as well as available translations of Standards. Revenue will therefore be recognised when control is passed at a certain point in time. These words serve as exceptions. the entitys performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date. The International Accounting Standards Board (IASB) and the US national standard-setter, the Financial Accounting Standards Board (FASB), initiated a joint project to clarify the principles for recognising revenue and to develop a common revenue standard for IFRSs and US GAAP that would (16): Heres the article on construction contracts under IFRS 15. Suppose entity A sells goods to entity B on 1 January 2013 for $400,000. Processes needed to identify the appropriate revenue recognition pattern using specific fact patterns for each transaction, Systems to calculate over time or point in time revenue recognition, Systems to isolate significant amounts of uninstalled materials such as elevators and other significant costs which are not proportionate to the entitys progress in satisfying its performance obligation. For arrangements with trial/evaluation periods, revenue is not recognised until the customer accepts the asset or trial period ends and customer becomes committed to pay consideration for the asset (IFRS 15.B86). Such performance obligations are usually treated as satisfied over time with straight-line revenue recognition. These topics should be considered carefully when applying IFRS 15. However, those incremental costs are limited to the costs that the entity would not have incurred if the contract had not been successfully obtained (e.g. In July 2008 the Board issued IFRIC15Agreements for the Construction of Real Estate. When the entity has transferred a legal title to a customer under a contract, it is an indicator that the control of the asset has been passed to a customer. IFRS 15 for the construction industry Timing of revenue recognition, Working with BDOs Audit & Assurance team, Technology, Media & Entertainment, & Telecommunications, Public Anti-Bribery and Corruption Statement, Information Security and Privacy Statement, Legal, Privacy & Terms and Conditions of use. Measurement methods include surveys, milestones reached, time elapsed or units delivered. Basis for Conclusions to IFRS 15 and Example 19 include specific discussion on uninstalled materials (IFRS 15.BC170-BC175) and inefficiencies and wasted materials (IFRS 15.BC176-BC178). Customer A engages Construction Co to build a ship for $2,000,000 (expected cost $1,500,000) on 1 January 2017. Most of the examples are relatively self-explanatory. It is one of the changes in the retained earnings over the course of the year and if you are making statement of cash flows by this super-proven method, then you need to examine the change in retained earnings and consider if anything of it enters into the statement. [IFRS 15:106]. The standard provides a single, principles based five-step model to be applied to all contracts with customers. Both standards are principles based and short on detail (this is particularly true of IAS 18). Construction contracts 3. [IFRS 15:C1], When first applying IFRS 15, entities should apply the standard in full for the current period, including retrospective application to all contracts that were not yet complete at the beginning of that period. [IFRS 15:5], A contract with a customer may be partially within the scope of IFRS 15 and partially within the scope of another standard. In respect of prior periods, the transition guidance allows entities an option to either: [IFRS 15:C3]. Measurement method should take into account all goods and services promised in the contract. Step 1: Identify the contract with the customer, A contract with a customer will be within the scope of IFRS 15 if all the following conditions are met: [IFRS 15:9], If a contract with a customer does not yet meet all of the above criteria, the entity will continue to re-assess the contract going forward to determine whether it subsequently meets the above criteria. In June 2007 the Board issued IFRIC13Customer Loyalty Programmes. IFRS 15 was issued in May 2014 and applies to an annual reporting period beginning on or after 1 January 2018. Please check your inbox to confirm your subscription. Given the normal margin on service work this would equate to revenue of $6,000 ($4,800 X 100/80). Example 11 servicing fees included in the price of a product (15). (a) The proportion that contract costs incurred for work performed to date bear to total estimated contract costs. These amendments do not change the underlying principles of IFRS15 but clarify how those principles should be applied and provide additional transitional relief. (c) Sales taxes that are collected from the customer and remitted to the relevant authorities are not revenue. Each car seat is a distinct good, but Entity A treats the whole contract as one performance obligation under paragraph IFRS 15.22(b). success fees paid to agents). [IFRS 15:74] If a standalone selling price is not directly observable, the entity will need to estimate it. Residual approach (only permissible in limited circumstances). recognise revenue when a performance obligation is satisfied by transferring a promised good or service to a customer (which is when the customer obtains control of that good or service). Construction Co should recognise its revenue over time because the third criterion in IFRS 15, paragraph 35(c) is met. However, where the consideration is deferred, IAS 18 explains that the arrangement effectively constitutes a financing transaction and the substance of the transaction is a supply of goods or services plus the provision of finance. (a) Identify the contract with a customer. Where the entity has performed by transferring a good or service to the customer and the customer has not yet paid the related consideration, a contract asset or a receivable is presented in the statement of financial position, depending on the nature of the entitys right to consideration. under licence during the term and subject to the conditions contained therein. (d) Provide more useful information to users of financial statements through improved disclosure requirements, and However, IAS 11 applies the basic principles we have already identified to such contracts, which are defined in IAS 11 as follows (6): Contracts specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use. Similarly, construction companies do not recognise revenue when they deliver building materials to the construction site if the customer contracted them to construct a building. Example: A series of distinct goods or services that are substantially the same. the entity does provide a significant service of integrating the goods or services with other goods or services promised in the contract; the goods or services significantly modify or customise other goods or services promised in the contract; the goods or services are highly interrelated or highly interdependent. The IFRS Foundation's logo and theIFRS for SMEslogo, the IASBlogo, the Hexagon Device, eIFRS, IAS, IASB, IFRIC, IFRS,IFRS for SMEs, IFRS Foundation, International Accounting Standards, International Financial Reporting Standards, NIIFand SICare registered trade marks of the IFRS Foundation, further details of which are available from the IFRS Foundation on request. Installation services seem capable of being distinct, too, because the question said that the customer could buy the installation from the software vendor. However they are useful as an aid to application and well worth reviewing. IFRS 15 is effective for annual reporting periods beginning on or after 1 January 2018, with earlier application permitted. The global body for professional accountants, Can't find your location/region listed? The International Financial Reporting Standards Foundation is a not-for-profit corporation incorporated in the State of Delaware, United States of America, with the Delaware Division of Companies (file no: 3353113), and is registered as an overseas company in England and Wales (reg no: FC023235). None of this information can be tracked to individual users. (b) Revenue is recognised on the provision of goods and services that relate to the ordinary activities of the entity. We do export using different inco-terms i.e FOB, FCA CIF, DDP. Measuring progress using an input method may be based on e.g. An entity should aggregate or disaggregate disclosures to ensure that useful information is not obscured. Does the installation significantly modify software? If it is not possible to reliably measure the outcome of a transaction involving the provision of services (perhaps because the transaction is in its very early stages) then revenue should be recognised only to the extent of costs incurred by the seller, assuming these costs are recoverable from the buyer (5). There are different ways I can help you, visit the services page for details. On 15 December 2018, Building Co enters into a contract to refurbish an old building and install an elevator for $5,000,000. The imputed rate of interest is the prevailing borrowing rate of the buyer or, if more easily determinable, the rate that discounts the future cash receivable to the current cash price of the goods or services. In other words, the entity is using the goods or services as inputs to produce or deliver the combined output or outputs specified by the customer. IAS 23 requires that borrowing costs directly attributable to the acquisition, construction or production of a 'qualifying asset' (one that necessarily takes a substantial period of time to get ready for its intended use or sale) are included in the cost of the asset. 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