International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
Page 415
Transaction
price
selling price
% Allocation
Service A
$100
75%
$75
Option
$33
25%
$25
Total $100
$133
100%
$100
Upon executing the contract, Customer pays £100 and Entity begins transferring Service A to Customer. The
consideration of £75 that is allocated to Service A is recognised over the two-year service period. The
consideration of £25 that is allocated to the option is deferred until Service B is transferred to the customer
or the option expires. Six months after executing the contract, Customer exercises the option to purchase two
years of Service B for £300. Under this approach, the consideration of £300 related to Service B is added to
the amount previously allocated to the option to purchase Service B (i.e. £300 + 25 = £325). This is recognised
as revenue over the two-year period in which Service B is transferred. Entity is able to allocate the additional
consideration received for the exercise of the option to Service B because it specifically relates to Entity’s
efforts to satisfy the performance obligation and the allocation in this manner is consistent with the standard’s
allocation objective.
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The TRG members who favoured the contract modification approach generally did so
because the exercise of a material right also meets the definition of a contract
modification in the standard (i.e. a change in the scope and/or price of a contract). Under
this approach, an entity follows the contract modification requirements in
paragraphs 18-21 of IFRS 15 (see 4.4 above).
Since more than one approach would be acceptable, the TRG members generally
agreed that an entity needs to consider which approach is most appropriate, based on
the facts and circumstances, and consistently apply that approach to similar contracts.63
5.6.1.I
Customer options that provide a material right: Evaluating whether there
is a significant financing component
At their March 2015 TRG meeting, the TRG members discussed whether an entity is
required to evaluate a customer option that provides a material right to determine if
it includes a significant financing component and, if so, how entities would perform
this evaluation.
The TRG members generally agreed that an entity has to evaluate whether a material
right includes a significant financing component (see 6.5 below) in the same way that it
evaluates any other performance obligation. This evaluation requires judgement and
consideration of the facts and circumstances.64
On this question, the TRG agenda paper discussed a factor that may be determinative
in this evaluation. Paragraph 62(a) of IFRS 15 indicates that if a customer provides
advance payment for a good or service, but the customer can choose when the good or
service is transferred, no significant financing component exists. [IFRS 15.62(a)]. As a result,
if the customer can choose when to exercise the option, it is unlikely that there will be
a significant financing component.65
5.6.1.J
Customer options that provide a material right: recognising revenue
when there is no expiration date
Stakeholders have asked this question because paragraph B40 of IFRS 15 states that an
entity should recognise revenue allocated to options that are material rights when the
future goods or services resulting from the option are transferred or when the option
expires. [IFRS 15.B40]. However, in some cases, options may be perpetual and not have an
expiration date. For example, loyalty points likely provide a material right to a customer
and, sometimes, these points do not expire. We believe an entity may apply the
requirement in IFRS 15 on customers’ unexercised rights (or breakage) discussed at 8.10
below (i.e. paragraphs B44-B47 of IFRS 15). [IFRS 15.B44-B47]. That is, we believe it is
appropriate for revenue allocated to a customer option that does not expire to be
recognised at the earlier of when the future goods or services, resulting from the option,
are transferred or, if the goods or services are not transferred, when the likelihood of
the customer exercising the option becomes remote.
5.7
Sale of products with a right of return
An entity may provide its customers with a right to return a transferred product. A
right of return may be contractual, an implicit right that exists due to the entity’s
customary business practice or a combination of both (e.g. an entity has a stated
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return period, but generally accepts returns over a longer period). A customer
exercising its right to return a product may receive a full or partial refund, a credit
that can be applied to amounts owed, a different product in exchange or any
combination of these items. [IFRS 15.B20].
Offering a right of return in a sales agreement obliges the selling entity to stand ready
to accept any returned product. Paragraph B22 of IFRS 15 states that such an
obligation does not represent a performance obligation. [IFRS 15.B22]. Instead, the
Board concluded that an entity makes an uncertain number of sales when it provides
goods with a return right. That is, until the right of return expires, the entity is not
certain how many sales will fail. Therefore, the Board concluded that an entity does
not recognise revenue for sales that are expected to fail as a result of the customer
exercising its right to return the goods. [IFRS 15.BC364]. Instead, the potential for
customer returns needs to be considered when an entity estimates the transaction
price because potential returns are a component of variable consideration. This
concept is discussed further at 6.4 below.
Paragraph B26 of IFRS 15 clarifies that exchanges by customers of one product for
another of the same type, quality, condition and price (e.g. one colour or size for
another) are not considered returns for the purposes of applying the standard.
[IFRS 15.B26]. Furthermore, contracts in which a customer may return a defective product
in exchange for a functioning product need to be evaluated in accordance with the
requirements on warranties included in IFRS 15. [IFRS 15.B27]. See further discussion on
warranties at 10.1 below.
Under legacy IFRS, revenue was recognised at the time of sale for a transaction that
provided a customer with a right of return, provided the seller could reliably estimate
future returns. In addition, the seller was required to recognise a liability for the
expected returns. [IAS 18.17]. The standard’s requirements are, therefore, not significantly
different from legacy IFRS.
We do not expect the net impact of these arrangements to change materially. However,
there may be some differences as IAS 18 did not specify the presentation of a refund
liability or the corresponding debit. IFRS 15 requires that a return asset be recognised
in relation to the inventory that may be returned. In addition, the refund liability is
required to be presented separately from the corresponding asset (i.e. on a gross basis,
rather than a net basis, see 6.2.2, 6.3 and 6.4 below).
; 6
IFRS 15 – DETERMINE THE TRANSACTION PRICE
When (or as) an entity satisfies a performance obligation, an entity recognises revenue
at the amount of the transaction price (which excludes constrained estimates of variable
consideration – see 6.2.3 below) that is allocated to that performance obligation.
[IFRS 15.46]. The standard states that ‘an entity shall consider the terms of the contract and
its customary business practices to determine the transaction price. 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, excluding amounts
collected on behalf of third parties (for example, some sales taxes). The consideration
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promised in a contract with a customer may include fixed amounts, variable amounts,
or both.’ [IFRS 15.47].
The nature, timing and amount of consideration promised by a customer affect the
estimate of the transaction price. When determining the transaction price, an entity shall
consider the effects of all of the following: [IFRS 15.48]
(a) variable
consideration;
(b) constraining estimates of variable consideration;
(c) the existence of a significant financing component in the contract;
(d) non-cash
consideration;
and
(e) consideration payable to a customer.
For the purpose of determining the transaction price, an entity shall assume that the
goods or services will be transferred to the customer as promised in accordance with
the existing contract and that the contract will not be cancelled, renewed or modified.
[IFRS 15.49].
The transaction price is based on the amount to which the entity expects to be
‘entitled’. This amount is meant to reflect the amount to which the entity has rights
under the present contract (see 4.2 above on contract enforceability and termination
clauses). That is, the transaction price does not include estimates of consideration
resulting from future change orders for additional goods or services. The amount to
which the entity expects to be entitled also excludes amounts collected on behalf of
another party, such as sales taxes. As noted in the Basis for Conclusions, the Board
decided that the transaction price would not include the effects of the customer’s
credit risk, unless the contract includes a significant financing component (see 6.5
below). [IFRS 15.BC185].
The IASB also clarified in the Basis for Conclusions that entities may have rights under
the present contract to amounts that are to be paid by parties other than the customer
and, if so, these amounts would be included in the transaction price. For example, in the
healthcare industry, an entity may be entitled under the present contract to payments
from the patient, insurance companies and/or government organisations. If that is the
case, the total amount to which the entity expects to be entitled needs to be included in
the transaction price, regardless of the source. [IFRS 15.BC187].
Determining the transaction price is an important step in applying IFRS 15 because this
amount is allocated to the identified performance obligations and is recognised as
revenue when (or as) those performance obligations are satisfied. In many cases, the
transaction price is readily determinable because the entity receives payment when it
transfers promised goods or services and the price is fixed (e.g. a restaurant’s sale of
food with a no refund policy). Determining the transaction price is more challenging
when it is variable, when payment is received at a time that differs from when the entity
provides the promised goods or services or when payment is in a form other than cash.
Consideration paid or payable by the entity to the customer may also affect the
determination of the transaction price.
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Figure 28.11 illustrates how an entity would determine the transaction price if the
consideration to be received is fixed or variable:
Figure 28.11:
Fixed versus variable consideration
Is the consideration expected to be received
under the present contract fixed or variable?*
Fixed
Variable
Estimate the amount using either the
expected value or most likely amount
method for each type of variable
consideration
(see 6.2.2 below)
Constrain the estimate to an amount
that is not highly probable of a
significant revenue reversal
(see 6.2.3 below)
Include the amount in the transaction price
Consideration expected to be received under the contract can be variable even when the stated
* price in the contract is fixed. This is because the entity may be entitled to consideration only
upon the occurrence or non-occurrence of a future event (see 6.2.1 below).
6.1
Presentation of sales (and other similar) taxes
Sales and excise taxes are those levied by taxing authorities on the sales of goods or
services. Although various names are used for these taxes, sales taxes generally refer to
taxes levied on the purchasers of the goods or services, and excise taxes refer to those
levied on the sellers of goods or services.
The standard includes a general principle that an entity determines the transaction price
exclusive of amounts collected on behalf of third parties (e.g. some sales taxes). Following
the issuance of the standard, some stakeholders informed the Board’s staff that there could
be multiple interpretations regarding whether certain items that are billed to customers
need to be presented as revenue or as a reduction of costs. Examples of such amounts
include shipping and handling fees, reimbursements of out-of-pocket expenses and taxes
or other assessments collected and remitted to government authorities.
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At the July 2014 TRG meeting, the TRG members generally agreed that the standard is
clear that any amounts that are not collected on behalf of third parties would be
included in the transaction price (i.e. revenue). That is, if the amounts were incurred by
the entity in fulfilling its performance obligations, the amounts are included in the
transaction price and recorded as revenue.
Several TRG members noted that this would require entities to evaluate taxes
collected in all jurisdictions in which they operate to determine whether a tax is
levied on the entity or the customer. In addition, the TRG members indicated that an
entity would apply the principal versus agent application guidance (see 5.4 above)
when it is not clear whether the amounts are collected on behalf of third parties. This
could result in amounts billed to a customer being recorded net of costs incurred
(i.e. on a net basis).66
The FASB’s standard allows an entity to make an accounting policy election to present
revenue net of certain types of taxes (including sales, use, value-added and some excise
taxes) with a requirement for preparers to disclose the policy. As a result, entities that
make this election do not need to evaluate taxes that they collect (e.g. sales, use, value-
add
ed, some excise taxes) in all jurisdictions in which they operate in order to determine
whether a tax is levied on the entity or the customer. This type of evaluation would
otherwise be necessary to meet the standard’s requirement to exclude from the
transaction price any ‘amounts collected on behalf of third parties (for example, some
sales taxes)’. [IFRS 15.47].
The IASB decided not to include a similar accounting policy election in IFRS 15, noting
that the requirements of IFRS 15 are consistent with legacy IFRS requirements.
[IFRS 15.BC188D]. As a result, differences may arise between entities applying IFRS 15 and
those applying ASC 606.
6.2 Variable
consideration
The transaction price reflects an entity’s expectations about the consideration to which
it will be entitled to receive from the customer. ‘If the consideration promised in a
contract includes a variable amount, an entity shall estimate the amount of
consideration to which the entity will be entitled in exchange for transferring the
promised goods or services to a customer.’
‘An amount of consideration can vary because of discounts, rebates, refunds, credits,
price concessions, incentives, performance bonuses, penalties or other similar items.
The promised consideration can also vary if an entity’s entitlement to the consideration
is contingent on the occurrence or non-occurrence of a future event. For example, an
amount of consideration would be variable if either a product was sold with a right of
return or a fixed amount is promised as a performance bonus on achievement of a
specified milestone.’ [IFRS 15.50-51].
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In some cases, the variability relating to the promised consideration may be explicitly
stated in the contract. In addition to the terms of the contract, the standard states that
the promised consideration is variable if either of the following circumstances exists:
• the customer has ‘a valid expectation arising from an entity’s customary business
practices, published policies or specific statements that the entity will accept an
amount of consideration that is less than the price stated in the contract. That is, it
is expected that the entity will offer a price concession. Depending on the
jurisdiction, industry or customer this offer may be referred to as a discount,