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Project Summary and Feedback Statement

May 2014

IFRS 15 Revenue from Contracts with Customers

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2 | IFRS 15 Revenue from Contracts with Customers | May 2014

At a glance

We, the International AccountingStandards Board (IASB), issued IFRS 15 Revenue from Contracts with Customers in May 2014. IFRS 15 sets out therequirements for recognising revenuethat apply to all contracts with

customers (except for contracts thatare within the scope of the Standardson leases, insurance contracts andnancial instruments).

IFRS 15 is effective from 1 January2017. Earlier application is permitted.

The issuance of IFRS 15 signies the culmination ofa joint project with the US national standard-setter,the Financial Accounting Standards Board (FASB), todevelop a high-quality global accounting standard forrevenue recognition.

IFRS 15, which is converged with AccountingStandards Update 2014-09 Revenue from Contracts withCustomers issued by the FASB, establishes a single,

comprehensive framework for revenue recognition. The framework will be applied consistently acrosstransactions, industries and capital markets, and

will improve comparability in the top line of thenancial statements of companies globally.

IFRS 15 replaces the previous revenue Standards:IAS 18 Revenue and IAS 11 Construction Contracts , andthe related Interpretations on revenue recognition:IFRIC 13Customer Loyalty Programmes , IFRIC 15

Agreements for the Construction of Real Estate , IFRIC 18Transfers of Assets from Customers and SIC-31 Revenue

Barter Transactions Involving Advertising Services .

The IASB and the FASB have formed a group ofexternal stakeholders to identify and discuss issuesthat may arise in the implementation of IFRS 15 and

Accounting Standards Update 2014-09. The groupto be known as the Transition Resource Groupwillhave a limited life and will not issue guidance. Moreinformation on the Transition Resource Group isavailable at www.ifrs.org.

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IFRS 15 Revenue from Contracts with Customers | May 2014 | 3

Information about revenue is usedto assess a companys nancialperformance and position and tocompare that company with othercompanies. However, previous revenuerequirements in IFRS and US GAAP

made it difcult for investors andanalysts (investors) to understand andcompare a companys revenue.

Why change the requirements for recognising revenue?

Disclosure requirements were inadequate

The disclosure requirements in previous IFRS andUS GAAP often resulted in information that wasinadequate for investors to understand a companysrevenue, and the judgements and estimates made

by the company in recognising that revenue. Forinstance, investors were concerned that the revenueinformation disclosed was often boilerplate in

nature or was presented in isolation and withoutexplaining how the revenue recognised related toother information in the nancial statements.

Inconsistencies and weaknesses in previous revenueStandards

In IFRS, signicant diversity in revenue recognitionpractices had arisen because previous revenueStandards contained limited guidance onmany important topics, such as accounting forarrangements with multiple elements. Furthermore,the limited guidance that was provided was

often difcult to apply to complex transactions,particularly because previous revenue Standards didnot include any basis for conclusions. Consequently,some companies supplemented the limited guidancein IFRS by selectively applying US GAAP.

In US GAAP, broad revenue recognition concepts were supplemented by numerous industry andtransaction specic requirements, which oftenresulted in economically similar transactions beingaccounted for differently. Furthermore, even with allof those specic requirements, revenue recognitionquestions continued to arise as new types oftransactions emerged.

IFRS 15 addresses those deciencies by specifyinga comprehensive and robust framework for therecognition, measurement and disclosure of

revenue. In particular, IFRS 15: improves the comparability of revenue

from contracts with customers;

reduces the need for interpretive guidanceto be developed on a case-by-case basis toaddress emerging revenue recognitionissues; and

provides more useful information throughimproved disclosure requirements.

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An overview of IFRS 15a framework for recognisingrevenue

IFRS 15 establishes a comprehensiveframework for determining when to recognise revenue and how much revenue to recognise.

The core principle in thatframework is that a companyshould recognise revenue todepict the transfer of promisedgoods or services to the customerin an amount that reects theconsideration to which thecompany expects to be entitledin exchange for those goods orservices.

Step 1 Step 2

Identify the contract(s) withthe customer

A contract is an agreement between two ormore parties that creates enforceable rightsand obligations. A company would applyIFRS 15 to each contract with a customer thathas commercial substance and meets otherspecied criteria. One criterion requires acompany to assess whether it is probable thatthe company will collect the consideration to

which it will be entitled in exchange for thepromised goods or services.

In some cases, IFRS 15 requires a companyto combine contracts and account for themas one contract. IFRS 15 also species howa company would account for contractmodications.

Identify the performance obligations in the contractPerformance obligations are promises in a contract to transfer to acustomer goods or services that are distinct.

In determining whether a good or service is distinct, a companyconsiders if the customer can benet from the good or service on itsown or together with other resources that are readily available to thecustomer. A company also considers whether the companys promiseto transfer the good or service is separately identiable from otherpromises in the contract. For example, a customer could benet

separately from the supply of bricks and the supply of constructionlabour. However, those items would not be distinct if the companyis providing the bricks and construction labour to the customeras part of its promise in the contract to construct a brick wall forthe customer. In that case, the company has a single performanceobligation to construct a brick wall. The bricks and constructionlabour would not be distinct goods or services because those itemsare used as inputs to produce the output for which the customer has

contracted.

To recognise revenue, a company would apply the following ve steps:

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Step 3 Step 4 Step 5

Determine the transaction price The transaction price is the amount ofconsideration to which a company expects to beentitled in exchange for transferring promisedgoods or services to a customer.

Usually, the transaction price is a xed amountof customer consideration. Sometimes,the transaction price includes estimates ofconsideration that is variable or consideration

in a form other than cash. Some or all of theestimated amount of variable consideration isincluded in the transaction price only to theextent that it is highly probable that a signicantreversal in the amount of cumulative revenuerecognised will not occur when the uncertaintyassociated with the variable consideration issubsequently resolved. Adjustments to thetransaction price are also made for the effects ofnancing (if signicant to the contract) and forany consideration payable to the customer.

Allocate the transaction price A company would typically allocate thetransaction price to each performanceobligation on the basis of the relativestand-alone selling prices of each distinct goodor service. If a stand-alone selling price is notobservable, the company would estimate it.

Sometimes, the transaction price mayinclude a discount or a variable amount of

consideration that relates entirely to a specicpart of the contract. The requirements specify when a company should allocate the discountor variable consideration to a specic part ofthe contract rather than to all performanceobligations in the contract.

Recognise revenue when a performance obligation is satised

A company would recognise revenue when (or as) it satises a performanceobligation by transferring a promised good or service to a customer (which is when the customer obtains control of that good or service).

A performance obligation may be satised at a point in time (typically forpromises to transfer goods to a customer) or over time (typically for promisesto transfer services to a customer). For a performance obligation satisedover time, a company would select an appropriate measure of progress todetermine how much revenue should be recognised as the performance

obligation is satised.

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Other requirements

Portfolio of contracts Although IFRS 15 species the accounting requiredfor an individual contract, in some cases, a companymay be able to apply the requirements to a portfolioof contracts instead of applying the requirementsseparately to each contract with a customer.

Contract costsIFRS 15 also includes requirements for accountingfor some costs that are related to a contract with acustomer.

A company would recognise an asset for theincremental costs of obtaining a contract if thosecosts are expected to be recovered.

For costs to full a contract that are not within thescope of other Standards, a company would recognisean asset for those costs if the following criteria aremet:

the costs relate directly to a contract (or aspecic anticipated contract);

the costs generate or enhance resources ofthe company that will be used in satisfyingperformance obligations in the future; and

the costs are expected to be recovered.

Disclosure To help investors better understand the nature,amount, timing and uncertainty of revenue and cashows from contracts with customers, IFRS 15 requiresa company to disclose quantitative and/or qualitativeinformation about:

revenue recognised from contracts withcustomers, including the disaggregation ofrevenue into appropriate categories;

contract balances, including the opening andclosing balances of receivables, contract assetsand contract liabilities;

performance obligations, including when thecompany typically satises its performanceobligations and the amount of the transactionprice that is allocated to the remainingperformance obligations in a contract;

signicant judgements, and changesin judgements, made in applying therequirements; and

assets recognised from the costs to obtain or

full a contract with a customer.

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What will change from existing practice?

Before IFRS 15 was issued,inconsistencies and weaknesses inrevenue Standards often resulted incompanies accounting for similartransactions differently, which ledto diversity in revenue recognition

practices. By replacing thoserequirements with a comprehensiveframework, contracts with customersthat are economically similar will beaccounted for on a consistent basis.

However, the previous diversity in revenuerecognition practices will mean that the nature andextent of the changes will vary between companies,industries and capital markets.

Consequently, the requirements in IFRS 15 willresult in changes in the accounting for only some revenue transactions for some companies. However,those changes are necessary to achieve consistent

accounting for economically similar transactions incontracts with customers.

For many contracts, such as manystraightforward retail transactions, IFRS 15 willhave little, if any, effect on the amount andtiming of revenue recognition.

For other contracts, such as long-term servicecontracts and multiple-element arrangements,IFRS 15 could result in some changes either to

the amount or timing of the revenue recognised by a company.

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Extensive due process and outreach activities

Over the course of the revenuerecognition project, we consulted with many interested parties whocontributed to the development ofIFRS 15.

Together with the FASB, we held or participated inover 650 meetings around the world with a varietyof stakeholders. We also regularly consulted withadvisory groups such as the IFRS Advisory Council,the Global Preparers Forum and the Capital Markets

Advisory Committee on topics such as customercredit risk, the constraint on variable considerationand licences of intellectual property.

We also went beyond the normal due processrequirements by publishing a revised ExposureDraft after previously publishing both a DiscussionPaper and an initial Exposure Draft. These three dueprocess documents garnered over 1,500 commentletters in total.

Who did we hear from? Academics Accountancy bodies Auditors and accounting rms Governments Individuals

Industry groups Investors and analysts Preparers Regulators Standard-setting bodies

2008Discussion

paper

2010 Exposure

Draft

2011Revised

Exposure

Draft

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Feedback Statement

The boards received signicantfeedback from the outreach activitiesand comment letters on the three dueprocess documents published over thecourse of the projecta DiscussionPaper (published in 2008), an Exposure

Draft (published in 2010) and a revisedExposure Draft (published in 2011). That feedback demonstrated thatthere is broad support for the corerevenue recognition principle andthe 5 steps to apply that principleto contracts with customers. Thesefeatures of IFRS 15 have remainedlargely unchanged throughout theproject.

The revenue recognition principles proposed inthe Discussion Paper were further developed andrened in the Exposure Drafts published in 2010and 2011 and in the redeliberations that followed.

As the project has progressed, the issues raised byrespondents have narrowed substantially. As a result,feedback on the 2011 Exposure Draft focused mainlyon requests to further clarify and rene the boardsproposals, although some respondents also disagreed

with aspects of those proposals.

The following pages outline the more signicantmatters raised and how the boards responded:

Performance obligations satised over time

Identifying performance obligations

Collectability (customer credit risk)

Constraining estimates of variableconsideration

Signicant nancing components

Disclosure requirements

Transition: retrospective application

Licensing intellectual property

Onerous performance obligations

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2011 Exposure Draft Feedback The boards response A company would recognise revenue when it satises aperformance obligation by transferring control of a goodor service to a customerwhich occurs either at a point intime or over time.

The 2011 Exposure Draft provided criteria to determine when control of a good or service transfers to a customerover time and, hence, when a performance obligation issatised (and the company recognises revenue) over time.

Those criteria would require a company to consider whether the companys performance would create anasset with an alternative use to the company and also

whether: the customer simultaneously receives and

consumes the benet of the companysperformance as it performs;

another company taking over the performanceobligation would need to re-perform the workcompleted to date; and

the company has a right to payment for workcompleted to date.

Most respondents supported the addition of criteria todetermine when a performance obligation is satised overtime because the criteria provided guidance to assess whencontrol of a service or a partly completed asset transfersto a customer. However, respondents commented thatthe criteria in the 2011 Exposure Draft appeared complex,

with duplication in the criteria identied as contributingto that complexity. Respondents also requested additionalguidance to assess whether an asset has an alternativeuse or whether a company has a right to payment forperformance completed to date.

In response, the boards claried the application ofeach criterion for determining whether a performanceobligation is satised over time and, in doing so, limitedthe duplication between those criteria.

IFRS 15 also includes application guidance to explain themeaning and application of key concepts in the criteriaincluding: determining whether an asset has an alternative

use to the company after considering anycontractual restrictions or practical limitations onthe companys ability to readily direct an asset toanother customer; and

factors that determine whether a company has aright to payment for performance completed todate.

Performance obligations satised over time

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2011 Exposure Draft Feedback The boards response A company would apply IFRS 15 retrospectively. The boards proposed retrospective application for IFRS 15 because it would ensure that all contracts with customers would be recognised and measured consistently bothin the current period and in the comparative periodsregardless of whether those contracts were entered into

before or after the requirements became effective. To ease the burden of retrospective application withoutsacricing comparability, the boards proposed thatcompanies could elect to use one or more practicalexpedients when applying IFRS 15 retrospectively.

Feedback from investors supported the proposal forIFRS 15 to be applied retrospectively. They explained thatretrospective transition is important to preserve trendinformation that is used in nancial analysis.

Many other respondents acknowledged the conceptualmerits of retrospective transition, but they consideredthat the costs required to comply with the proposed basisfor transition, even after applying the proposed practicalexpedients, would far outweigh the benets.

The boards decided to require companies to apply IFRS 15retrospectively so that investors and analysts have accessto trend information about revenue. However, in thelight of the practical difculties that companies mayencounter when applying IFRS 15 retrospectively, the

boards decided to allow a company to choose whetherto apply IFRS 15 retrospectively to each prior periodpresented (with optional practical expedients) orretrospectively according to an alternative transitionmethod. The alternative method requires retrospectiveapplication with the cumulative effect of applyingIFRS 15 to be recognised in the year of initial application,

but does not require restatement of comparative periods.In addition, to provide investors with sufcient trend

information, this method requires a company to provideadditional disclosures to illustrate the effect of IFRS 15relative to previous revenue Standards.

Transition: retrospective application

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2011 Exposure Draft Feedback The boards response A performance obligation would be onerous if the lowestcost of settling that performance obligation exceeds thetransaction price allocated to it.

The 2011 Exposure Draft proposed that a company wouldrecognise a liability and a corresponding expense for anonerous performance obligation only if the performanceobligation is satised over a period of time that is greaterthan one year.

To limit the unintended consequences of applying theonerous test to some contracts, the original proposals inthe 2010 Exposure Draft were revised to reduce the scopeof the onerous test and to clarify the circumstances in

which a performance obligation is onerous.

Respondents acknowledged that the revised proposalsin the 2011 Exposure Draft would address some of theirconcerns about the application of the onerous test.However, many were still concerned that the onerous testmight result in performance obligations being identiedas onerous, even though the contract as a whole wasprotable.In the light of those concerns, many respondents suggestedthat IFRS 15 should not include an onerous test and insteada company should apply the requirements in existingstandards, which work well in practice.

Investors had mixed views on the onerous test. Somethought the proposals would capture performanceobligations where they thought it was critical that anonerous loss should be recognised. However, othersthought that such a test may create results that are notuseful because protability is assessed at the contract levelor higher.

The boards agreed that existing requirements in IFRS andin US GAAP are sufcient for accounting for contractsthat are onerous. Consequently, the boards decided thatIFRS 15 should not include an onerous test.

Onerous performance obligations

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Notes

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