the facts and circumstances due to the wide variety of credit card reward programmes
offered. The IASB TRG members did not discuss this issue because the question was
only raised in relation to legacy US GAAP.14
3.4.1.E Contributions
The FASB has amended ASC 606 to clarify that an entity needs to consider the
requirements in ASC 958-605 – Not-for-Profit Entities – Revenue Recognition – when
determining whether a transaction is a contribution within the scope of ASC 958-605
or a transaction within the scope of ASC 606.15 The requirements for contributions
received in ASC 958-605 generally apply to all entities that receive contributions
(i.e. not just not-for-profit entities), unless otherwise indicated.
Before the amendment, FASB TRG members discussed this issue in March 2015 and
generally agreed that contributions are not within the scope of ASC 606 because they
are non-reciprocal transfers. That is, contributions generally do not represent
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2009
consideration given in exchange for goods or services that are an output of the entity’s
ordinary activities. The IASB TRG members did not discuss this issue because the
question was only raised in the context of US GAAP.16
3.4.1.F Fixed-odds
wagering contracts
In fixed-odds wagering contracts, the payout for wagers placed on gambling activities
(e.g. table games, slot machines, sports betting) is known at the time the wager is placed.
Under IFRS, consistent with a July 2007 IFRS Interpretations Committee agenda
decision, wagers that meet the definition of a derivative are within the scope of IFRS 9.
Those that do not meet the definition of a derivative are within the scope of IFRS 15.
Under US GAAP, the FASB added scope exceptions in ASC 815 and ASC 924 –
Entertainment – Casinos – in December 2016 to clarify that fixed-odds wagering
arrangements are within the scope of ASC 606.
3.4.1.G
Pre-production activities related to long-term supply arrangements
In some long-term supply arrangements, entities perform upfront engineering and
design activities to create new technology or adapt existing technology according to the
needs of the customer. These pre-production activities are often a prerequisite to
delivering any units under a production contract.
Entities need to evaluate whether the pre-production activities are promises in a
contract with a customer (and potentially performance obligations) under IFRS 15.
When making this evaluation, entities need to determine whether the activities transfer
a good or service to a customer. Refer to 5.1.2.A below for further discussion on
determining whether pre-production activities are promised goods or services under
IFRS 15. If an entity determines that these activities are promised goods or services, it
will apply the requirements in IFRS 15 to those goods or services.
3.4.1.H
Sales of by-products or scrap materials
Consider an example in which a consumer products entity sells by-products or
accumulated scrap materials that are produced as a result of its manufacturing process.
In determining whether the sale of by-products or scrap materials to third parties is in
the scope of IFRS 15, an entity first determines whether the sale of such items is an
output of the entity’s ordinary activities. This is because IFRS 15 defines revenue as
‘income arising in the course of an entity’s ordinary activities’. [IFRS 15 Appendix A]. If an
entity determines the sale of such items represents revenue from a contract with a
customer, it would generally recognise the sale under IFRS 15.
If an entity determines that such sales are not in the course of its ordinary activities, the
entity would recognise those sales separately from revenue from contracts with
customers because they represent sales to non-customers.
We do not believe that it would be appropriate for an entity to recognise the sale of by-
products or scrap materials as a reduction of cost of goods sold. This is because
recognising the sale of by-products or scrap materials as a reduction of cost of goods
sold may inappropriately reflect the cost of raw materials used in manufacturing the
main product. However, this interpretation would not apply if other accounting
standards allow for recognition as a reduction of costs.
2010 Chapter 28
IAS 2 – Inventories – requires that the costs of conversion of the main product and the
by-product be allocated between the products on a rational and consistent basis.
However, IAS 2 mentions that most by-products, by their nature, are immaterial. When
this is the case, they are often measured at net realisable value and this value is deducted
from the cost of the main product. As a result, the carrying amount of the main product
is not materially different from its cost. We believe that the language in IAS 2 only
relates to the allocation of the costs of conversion between the main product and by-
product and does not allow the proceeds from the sale of by-products to be presented
as a reduction of cost of goods sold.
3.4.1.I
Prepaid gift cards
Entities may sell prepaid gift cards in their normal course of business in exchange for
cash. The prepaid gift cards typically provide the customer with the right to redeem
those cards in the future for goods or services of the entity and/or third parties. For any
unused balance of the prepaid gift cards, entities need to recognise a liability that will
be released upon redemption of that unused balance. However, the features of each
prepaid gift card may vary and the nature of the liability will depend on the assessment
of these features. Entities may need to use judgement in order to determine whether
the prepaid gift card is within the scope of IFRS 15 or another standard.
Prepaid gift cards that give rise to financial liabilities are within the scope of IFRS 9. If
a prepaid gift card does not give rise to a financial liability it is likely to be within the
scope of IFRS 15. For further information on applying IFRS 15 to prepaid gift cards
within its scope refer to 8.10 below.
An example of a prepaid gift card that is within the scope of IFRS 9 was discussed by
the Interpretations Committee at its March 2016 meeting. The issue related to the
accounting treatment of any unused balance on a prepaid card issued by an entity in
exchange for cash as well as the classification of the relevant liability that arises. The
discussion was limited to prepaid cards that have the specific features described in the
request received by the Interpretations Committee.17 In particular, the prepaid card:
(a) has no expiry date and no back-end fees. That is, any unspent balance does not
reduce unless it is spent by the cardholder;
(b) is non-refundable, non-redeemable and non-exchangeable for cash;
(c) can be redeemed only for goods or services to a specified monetary amount; and
(d) can be redeemed only at specified third-party merchants (the range of merchants
accepting the specific card could vary depending on the card programme) and,
upon redemption, the entity delivers cash to the merchant(s).
The Interpretations Committee observed that when an entity issues a prepaid card wit
h
the above features, it is contractually obligated to deliver cash to the merchants on behalf
of the cardholder. Although this obligation is conditional upon the cardholder redeeming
the card by purchasing goods or services, the entity’s right to avoid delivering cash to settle
this contractual obligation is not unconditional. On this basis, the Interpretations
Committee concluded that the entity’s liability for such a prepaid card meets the
definition of a financial liability and would fall within the scope of IFRS 9 and IAS 32 –
Financial Instruments: Presentation. Therefore, the Interpretations Committee decided
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2011
not to add this issue to its agenda. The Interpretations Committee also noted in its agenda
decision that its discussion on this issue did not include customer loyalty programmes.18
4
IFRS 15 – IDENTIFY THE CONTRACT WITH THE
CUSTOMER
To apply the model in IFRS 15, an entity must first identify the contract, or contracts, to
provide goods or services to customers. A contract must create enforceable rights and
obligations to fall within the scope of the model in the standard. Such contracts may be
written, oral or implied by an entity’s customary business practices. For example, if an
entity has an established practice of starting performance based on oral agreements with
its customers, it may determine that such oral agreements meet the definition of a
contract. [IFRS 15.10].
As a result, an entity may need to account for a contract as soon as performance begins,
rather than delay revenue recognition until the arrangement is documented in a signed
contract, as was often the case in practice under legacy IFRS. Certain arrangements may
require a written contract to comply with laws or regulations in a particular jurisdiction.
These requirements must be considered when determining whether a contract exists.
In the Basis for Conclusions, the Board acknowledged that entities need to look at the
relevant legal framework to determine whether the contract is enforceable because
factors that determine enforceability may differ among jurisdictions. [IFRS 15.BC32]. The
Board also clarified that, while the contract must be legally enforceable to be within the
scope of the model in the standard, all of the promises do not have to be enforceable to
be considered performance obligations (see 5.1 below). That is, a performance
obligation can be based on the customer’s valid expectations (e.g. due to the entity’s
business practice of providing an additional good or service that is not specified in the
contract). In addition, the standard clarifies that some contracts may have no fixed
duration and can be terminated or modified by either party at any time. Other contracts
may automatically renew on a specified periodic basis. Entities are required to apply
IFRS 15 to the contractual period in which the parties have present enforceable rights
and obligations. [IFRS 15.11]. Contract enforceability and termination clauses are
discussed at 4.2 below.
Example 28.8: Oral contract
IT Support Co. provides online technology support for customers remotely via the internet. For a fixed fee,
IT Support Co. will scan a customer’s personal computer (PC) for viruses, optimise the PC’s performance
and solve any connectivity problems. When a customer calls to obtain the scan services, IT Support Co.
describes the services it can provide and states the price for those services. When the customer agrees to the
terms stated by the representative, payment is made over the telephone. IT Support Co. then gives the
customer the information it needs to obtain the scan services (e.g. an access code for the website). It provides
the services when the customer connects to the internet and logs onto the entity’s website (which may be that
day or a future date).
In this example, IT Support Co. and its customer are entering into an oral agreement, which is legally
enforceable in this jurisdiction, for IT Support Co. to repair the customer’s PC and for the customer to provide
consideration by transmitting a valid credit card number and authorisation over the telephone. The required
criteria for a contract with a customer (discussed further at 4.1 below) are all met. As such, this agreement
will be within the scope of the model in the standard at the time of the telephone conversation, even if the
entity has not yet performed the scanning services.
2012 Chapter 28
4.1
Attributes of a contract
To help entities determine whether (and when) their arrangements with customers are
contracts within the scope of the model in the standard, the Board identified certain
attributes that must be present. The Board noted in the Basis for Conclusions that the
criteria are similar to those in previous revenue recognition requirements and in other
existing standards and are important in an entity’s assessment of whether the
arrangement contains enforceable rights and obligations. [IFRS 15.BC33].
IFRS 15 requires an entity to account for a contract with a customer that is within the
scope of the model in the standard only when all of the following criteria are met: [IFRS 15.9]
(a) the parties to the contract have approved the contract (in writing, orally or in
accordance with other customary business practices) and are committed to
perform their respective obligations;
(b) the entity can identify each party’s rights regarding the goods or services to be
transferred;
(c) the entity can identify the payment terms for the goods or services to be
transferred;
(d) the contract has commercial substance (i.e. the risk, timing or amount of the
entity’s future cash flows is expected to change as a result of the contract); and
(e) it is probable that the entity will collect the consideration to which it will be entitled
in exchange for the goods or services that will be transferred to the customer. In
evaluating whether collectability of an amount of consideration is probable, an entity
shall consider only the customer’s ability and intention to pay that amount of
consideration when it is due. The amount of consideration to which the entity will
be entitled may be less than the price stated in the contract if the consideration is
variable because the entity may offer the customer a price concession.
These criteria are assessed at the inception of the arrangement. If the criteria are met at
that time, an entity does not reassess these criteria unless there is an indication of a
significant change in facts and circumstances. [IFRS 15.13]. For example, as noted in
paragraph 13 of IFRS 15, if the customer’s ability to pay significantly deteriorates, an
entity would have to reassess whether it is probable that the entity will collect the
consideration to which it is entitled in exchange for transferring the remaining goods or
services under the contract. The updated assessment is prospective in nature and would
not change the conclusions associated with goods or services already transferred. That
is, an entity would not reverse any receivables, revenue or contract assets already
recognised under the contract. [IFRS 15.BC34].
If the criteria are not met (and until the criteria are met), the arrangement is not
&nb
sp; considered a revenue contract under the standard and the requirements discussed at 4.5
below must be applied.
4.1.1
Implementation questions on attributes of a contract
4.1.1.A Master
supply
arrangements (MSA)
An entity may use an MSA to govern the overall terms and conditions of a business
arrangement between itself and a customer (e.g. scope of services, pricing, payment terms,
Revenue
2013
warranties and other rights and obligations). Typically, when an entity and a customer
enter into an MSA, purchases are subsequently made by the customer by issuing a non-
cancellable purchase order or an approved online authorisation that explicitly references
the MSA and specifies the products, services and quantities to be delivered.
In such cases, the MSA is unlikely to create enforceable rights and obligations, which
are needed to be considered a contract within the scope of the model in IFRS 15. This
is because, while the MSA may specify the pricing or payment terms, it usually does not
specify the specific goods or services, or quantities thereof, to be transferred. Therefore,
each party’s rights and obligations regarding the goods or services to be transferred are
not identifiable. It is likely that the MSA and the customer order, taken together, would
constitute a contract under IFRS 15. As such, entities need to evaluate both the MSA
and the subsequent customer order(s) together to determine whether and when the
criteria in paragraph 9 of IFRS 15 are met. [IFRS 15.9].
If an MSA includes an enforceable clause requiring the customer to purchase a
minimum quantity of goods or services, the MSA alone may constitute a contract under
the standard because enforceable rights and obligations exist for this minimum amount
of goods or services.
4.1.1.B
Free trial period
Free trial periods are common in certain subscription arrangements (e.g. magazines,
streaming services). A customer may receive a number of ‘free’ months of goods or
services at the inception of an arrangement; before the paid subscription begins; or as a
bonus period at the beginning or end of a paid subscription period.
Under IFRS 15, revenue should not be recognised until an entity determines that a
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