IFRS 15 Revenue from Contracts with Customers

Overview:
IFRS 15 Revenue from the Contracts with Customers was issued on 28 May 2014. It supersedes:
-IAS 18 Revenue
-IAS 11 Construction contracts
IFRS 15 will improve comparability of reputed revenue over  a range of industries, companies and geographical areas globally.
Effective date:
IFRS 15 is effective for annual periods beginning on or after 1 January 2017 with early application permitted.
Objective:
This IFRS 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 customers
Scope:
The new revenue model would apply to all contracts except leases, insurance contracts, financial instruments, guarantees and certain non-monetary exchanges.
Key definitions:
Contract-An agreement between two or more parties that creates enforceable rights and obligations.
Income-Increases in economic benefits during the accounting period in the form of increasing assets or decreasing liabilities
Performance obligation-A promise in a contract to transfer to the customer either:
- a good or service that is distinct; or
- a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.
Revenue-Income arising in the course of an entity’s ordinary activities.
Transaction price-The amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer.
Revenue Recognition - IFRS 15 - 5 steps
Step 1: Identify the contract(s) with a customer
-The contract must be approved by all involved
-Everyone’s rights can be identified
-It must have commercial substance

-The consideration will probably be paid
Step 2: Identify the separate performance obligations in the contract
-This will be goods or services promised to the customer
-These goods / services need to be distinct and create a separately identifiable obligation
  Distinct means:
      -The customer can benefit from the goods/service on its own AND
      -The promise to give the goods/services is separately identifiable (from other promises)
  Separately identifiable means:
      -No significant integrating of the goods/service with others promised in the contract
      -The goods/service doesn’t significantly modify another good or service promised in the contract.
      -The goods/service is not highly related/dependent on other goods or services promised in the contract.
Step 3: Determine the transaction price
How much the entity expects, considering past customary business practices
Variable Consideration
If the price may vary (eg. possible refunds, rebates, discounts, bonuses, contingent consideration etc) - then estimate the amount expected.
However variable consideration is only included if it’s highly probable there won’t need to be a significant revenue reversal in the future (when the uncertainty has been subsequently resolved)
However, for royalties from licensing intellectual property - recognise only when the usage occurs
Step 4: Allocate the transaction price to the separate performance obligations
If there’s multiple performance obligations, split the transaction price by using their standalone selling prices. (Estimate if not readily available)
How to estimate a selling Price
- Adjusted market assessment approach
- Expected cost plus a margin approach
- Residual approach (only permissible in limited circumstances).
If paid in advance, discount down if it’s significant (>12m)
Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation
Revenue is recognised as control is passed, over time or at a point in time.
This could be over time or at a specific point in time.
What is Control
It’s the ability to direct the use of and get almost all of the benefits from the asset.
This includes the ability to prevent others from directing the use of and obtaining the benefits from the asset.
Benefits could be:
- Direct or indirect cash flows that may be obtained directly or indirectly
- Using the asset to enhance the value of other assets;
- Pledging the asset to secure a loan
- Holding the asset.
So remember we recognise revenue as asset control is passed (obligations satisfied) to the customer
This could be over time or at a specific point in time.
To be Continued.....
Sources: www.acowtancy.com, PKF other online resources

Accounting for non-current assets

Related Standards concerning Non-Current Asset are:
           IAS 16 Property, plant and equipment
           IAS 20 Accounting for government grants and disclosure of government assistance
           IAS 23 Borrowing costs
           IAS 36 Impairment of assets
           IAS 38 Intangible assets
           IAS 40 Investment property
           and
           IFRS 5 Non-current assets held for sale and discontinued operations
                                                                                                    

The elements of financial statements

The Framework lays out these elements as follows:

A.    Measurement of financial position in the statement of financial position

             -Asset

             -Liabilities

             -Equity

     B.    Measurement of performance in the income statement

-Income

-Expenses

Definition

Asset. A resource controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity.

Liability. A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

Equity. The residual interest in the assets of the entity after deducting all its liabilities. (Framework)

Income. Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.

Expenses. Decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.

IAS 1 (2007) Presentation of Financial Statements

Objective

To set out the overall framework for presenting general purpose financial statements, including guidelines for their structure and the minimum content.

Summery

• Fundamental principles established for the preparation of financial statements, including going concern assumption, consistency in presentation and classification, accrual basis of accounting, and materiality.

• Assets and liabilities, and income and expenses, are not offset unless offsetting is permitted or required by another IFRS.

• Comparative prior-period information is presented for amounts shown in the financial statements and notes.

• Financial statements are generally prepared annually. If the end of the reporting period changes, and financial statements are presented for a period other than one year, additional disclosures are required.

• A complete set of financial statements comprises:

– a statement of financial position;

– a statement of profit or loss and other comprehensive income;

– a statement of changes in equity;

– a statement of cash flows;

– notes; and

– a statement of financial position as at the beginning of the earliest comparative period.

• Entities may use titles for the individual financial statements other than those used above.

• Specifies minimum line items to be presented in the statement of financial position, statement of profit or loss and other comprehensive income and statement of changes in equity, and includes guidance for identifying additional line items. IAS 7 provides guidance on line items to be presented in the statement of cash flows.

• In the statement of financial position, current/non-current distinction is used for assets and liabilities unless presentation in order of liquidity provides reliable and more relevant information.

• The statement of profit or loss and other comprehensive income includes all items of income and expense – (i.e. all ‘non-owner’ changes in equity) including (a) components of profit or loss and (b) other comprehensive income (i.e. items of income and expense that are not recognised in profit or loss as required or permitted by other IFRSs). These items may be presented either:

– in a single statement of profit or loss and other comprehensive income (in which there is a sub-total for profit or loss); or

– in a separate statement of profit or loss (displaying components of profit or loss) and a statement of profit or loss and other comprehensive income (beginning with profit or loss and displaying components of other comprehensive income).

• Items of other comprehensive income should be grouped based on whether or not they are potentially reclassifiable to profit or loss at a later date.

• Analysis of expenses recognised in profit or loss may be provided by nature or by function. If presented by function, specific disclosures by nature are required in the notes.

• The statement of changes in equity includes the following information:

– total comprehensive income for the period;

– the effects on each component of equity of retrospective application or retrospective restatement in accordance with IAS 8; and

– for each component of equity, a reconciliation between the opening and closing balances, separately disclosing each change.

• Specifies minimum note disclosures which include information about

– accounting policies followed;

– the judgements that management has made in the process of applying the entity’s accounting policies that have the most significant effect on the amounts recognized in the financial statements;

–sources of estimation uncertainty; and

–information about management of capital and compliance with capital requirements.

• Implementation guidance for IAS 1 includes illustrative financial statements other than the statement of cash flows (see IAS 7).

IFRS 10 Consolidated Financial Statements

Objective

To introduce a single consolidation model for all entities based on control, irrespective of the nature of the investee (i.e., whether an entity is controlled through voting rights of investors or through other contractual arrangements as is common in special purpose entities). SIC-12 was, as a result, withdrawn.

Summary

• A subsidiary is an entity controlled by another entity, the parent.

• Control is based on whether an investor has

   1. power over the investee;

   2. exposure, or rights, to variable returns from its involvement with the investee; and

   3. the ability to use its power over the investee to affect the amount of the returns.

• IFRS 10 includes guidance on the assessment of control, including material on: protective rights; delegated power; de facto control; and de facto agency arrangements.

• Consolidated financial statements are financial statements of a group (parent and subsidiaries) presented as those  of a single economic entity.

• When a parent-subsidiary relationship exists, consolidated financial statements are required (subject to certain specified exceptions).

• Consolidated financial statements include all subsidiaries. No exemption for ‘temporary control’, ‘different lines of business’ or ’subsidiary that operates under severe longterm funds transfer restrictions’. However, if, on acquisition, a subsidiary meets the criteria to be classified as held for sale under IFRS 5, it is accounted for under that Standard.

• Intragroup balances, transactions, income and expenses are eliminated in full.

• All entities in the group use the same accounting policies and, if practicable, the same reporting date.

• Non-controlling interests (NCI) are reported in equity in the statement of financial position separately from the equity of the owners of the parent. Total comprehensive income is allocated between NCI and the owners of the

parent even if this results in the NCI having a deficit balance.

• Partial disposal of an investment in a subsidiary while control is retained is accounted for as an equity transaction with owners, and no gain or loss is recognised in profit or loss.

• Acquisition of a further ownership interest in a subsidiary after obtaining control is accounted for as an equity transaction and no gain, loss or adjustment to goodwill is recognised.

• Partial disposal of an investment in a subsidiary that results in loss of control triggers remeasurement of the residual holding to fair value. Any difference between fair value and carrying amount is a gain or loss on the

disposal, recognised in profit or loss. Thereafter, IAS 28, IAS 31 or IFRS 9/IAS 39 is applied, as appropriate, to the residual holding.

Effective date

Annual periods beginning on or after 1 January 2013. Earlier application permitted – but only if IFRSs 11 & 12 and IASs 27 & 28 (2011) are applied from the same date.

Introduction of the Accounting Equation

The statement of financial position reflects the accounting equation. It reports a company’s assets, liabilities, and owner’s (or stockholders’) equity at a specific point in time. Like the accounting equation, it shows that a company’s total amount of assets equals the total amount of liabilities plus owner’s (or stockholders’) equity.

Every business transaction will have an effect on a company’s financial position. The financial position of a company is measured by the following items:

1.     Assets (what it owns)

2.     Liabilities (what it owes to others)

3.     Owner’s Equity (the difference between assets and liabilities)

The accounting equation (or basic accounting equation) offers us a simple way to understand how these three amounts relate to each other. The accounting equation for a sole proprietorship is:

Assets = Liabilities + Owner’s Equity

The accounting equation for a corporation is:

Assets = Liabilities + Stockholders’ Equity

Assets are a company’s resources—things the company owns. Examples of assets include cash, accounts receivable, inventory, prepaid insurance, investments, land, buildings, equipment, and goodwill. From the accounting equation, we see that the amount of assets must equal the combined amount of liabilities plus owner’s (or stockholders’) equity.

Liabilities are a company’s obligations—amounts the company owes. Examples of liabilities include notes or loans payable, accounts payable, salaries and wages payable, interest payable, and income taxes payable (if the company is a regular corporation). Liabilities can be viewed in two ways:

(1) as claims by creditors against the company’s assets, and 
(2) a source—along with owner or stockholder equity—of the company’s assets.

Owner’s equity or stockholders’ equity is the amount left over after liabilities are deducted from assets:

Assets – Liabilities = Owner’s (or Stockholders’) Equity.

Owner’s or stockholders’ equity also reports the amounts invested into the company by the owners plus the cumulative net income of the company that has not been withdrawn or distributed to the owners.

If a company keeps accurate records, the accounting equation will always be “in balance,” meaning the left side should always equal the right side. The balance is maintained because every business transactionaffects at least two of a company’s accounts. For example, when a company borrows money from a bank, the company’s assets will increase and its liabilities will increase by the same amount. When a company purchases inventory for cash, one asset will increase and one asset will decrease. Because there are two or more accounts affected by every transaction, the accounting system is referred to as double entry accounting.

A company keeps track of all of its transactions by recording them in accounts in the company’s general ledger. Each account in the general ledger is designated as to its type: asset, liability, owner’s equity, revenue, expense, gain, or loss account.

REPORTING CASH FLOWS FROM OPERATING ACTIVITIES (USING INDIRECT METHOD)

The cash from operating activities is the ‘cash generated from operations’ less interest and tax actually paid in the year.

There are two ways of getting to ‘cash generated from operations’, the direct method and the indirect method.

With the indirect method, we start with Profit before tax, and then have to make some adjustments for:

A. Non cash items, eg depreciation, provisions, profits/losses on the sale of assets

B. Changes during the period in inventories, receivables and payables

C. Other items, the cash flows from which should be classified under investing or financing activities 

PROFORMA

Cash flows from operating activities                           $

Profit before taxation                                                    x

Adjustment for:

            Depreciation                                                    x         

            Foreign Exchange Loss                                    x

            Loss on Disposal of asset                                x

            Interest Expenses (net)                                    x

            Profit on disposal of asset                              (x)        

            Investment Income                                        (x)

                                                                                 x

            Decrease in inventories                                  x

            Increase in Trade Receivables                      (x)

            Decrease in Trade Payables                         (x)

Cash generated from operations                                 x

Interest Paid                                                             (x)

Income tax paid                                                        (x)

Net cash from operating activities                               x