sold, changes in contract costs or similar.
In addition, the entity needs to consider the requirements in IAS 7, in particular
paragraph 16(a) of IAS 7, when determining the classification of cash flows arising
from costs to obtain a contract (i.e. either as cash flow from operating activities or
investing activities).
• In contrast, the nature of costs to fulfil a contract is such that they directly impact
the entity’s performance under the contract. Therefore, costs to fulfil a contract
should be presented as a separate class of asset in the statement of financial
position and its amortisation within cost of goods sold, changes in contract costs
or similar.
We do not believe it would be appropriate to analogise to the requirements for
intangible assets in IAS 38. Instead, such costs are consistent in nature to costs incurred
in the process of production, as is contemplated in IAS 2. That is, in nature, they are
consistent with work in progress, or ‘inventory’, of a service provider. Whether costs to
fulfil a contract meet the criteria for capitalisation in paragraph 95 of IFRS 15 or are
expensed as incurred, we believe that presentation of such costs in the statement of
profit and loss and other comprehensive income and the presentation of related cash
flows in the statement of cash flows needs to be consistent.
Capitalised contract costs are subject to impairment assessments (see 10.3.4 below).
Impairment losses are recognised in profit or loss, but the standard is silent on where to
present such amounts within the primary financial statements. We believe it would be
appropriate for the presentation of any impairment losses to be consistent with the
presentation of the amortisation expense.
10.3.4
Impairment of capitalised costs
Any asset recorded by the entity is subject to an assessment of impairment. This is
because costs that give rise to an asset must continue to be recoverable throughout the
contract (or period of benefit, if longer), in order to meet the criteria for capitalisation.
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An impairment exists if the carrying amount of any asset(s) exceeds the amount of
consideration the entity expects to receive in exchange for providing the associated goods
or services, less the remaining costs that relate directly to providing those goods or
services. Impairment losses are recognised in profit or loss. [IFRS 15.101]. Refer to 10.3.3.F
above for further discussion on presenting impairment losses within profit or loss.
In July 2014, the TRG members generally agreed that an impairment test of capitalised
contract costs should include future cash flows associated with contract renewal or
extension periods, if the period of benefit of the costs under assessment is expected to
extend beyond the present contract.147 In other words, an entity should consider the total
period over which it expects to receive economic benefits relating to the asset, for the
purpose of both determining the amortisation period and estimating cash flows to be used
in the impairment test. The question was raised because of an inconsistency within
IFRS 15. IFRS 15 indicates that costs capitalised under the standard could relate to goods
or services to be transferred under ‘a specific anticipated contract’ (e.g. goods or services
to be provided under contract renewals and/or extensions). [IFRS 15.99]. The standard also
indicates that an impairment loss would be recognised when the carrying amount of the
asset exceeds the remaining amount of consideration expected to be received
(determined by using principles in IFRS 15 for determining the transaction price, see 6
above). [IFRS 15.101(a), 102]. However, the requirements for measuring the transaction price
in IFRS 15 indicate that an entity does not anticipate that the contract will be ‘cancelled,
renewed or modified’ when determining the transaction price. [IFRS 15.49].
In some instances, excluding renewals or extensions would trigger an immediate
impairment of a contract asset because the consideration an entity expects to receive
would not include anticipated cash flows from contract extensions or renewal periods.
However, the entity would have capitalised contract costs on the basis that they would
be recovered over the contract extension or renewal periods. When an entity
determines the amount it expects to receive (see 5 above), the requirements for
constraining estimates of variable consideration are not considered. That is, if an entity
were required to reduce the estimated transaction price because of the constraint on
variable consideration, it would use the unconstrained transaction price for the
impairment test. [IFRS 15.102]. While unconstrained, this amount must be reduced to
reflect the customer’s credit risk before it is used in the impairment test.
IFRS 15 does not explicitly state how often an entity needs to assess its capitalised contract
costs for impairment. We believe an entity needs to assess whether there is any indication
that its capitalised contract costs may be impaired at the end of each reporting period.
This is consistent with the requirement in paragraph 9 of IAS 36 to assess whether there
are indicators that assets within the scope of that standard are impaired.
However, before recognising an impairment loss on capitalised contract costs incurred
to obtain or fulfil a contract, the entity needs to consider impairment losses recognised
in accordance with another standard (e.g. IAS 36). After applying the impairment test to
the capitalised contract costs, an entity includes the resulting carrying amounts in the
carrying amount of a cash-generating unit for purposes of applying the requirements in
IAS 36. [IFRS 15.103].
Under IFRS, IAS 36 permits the reversal of some or all of previous impairment losses on
assets (other than goodwill) or cash-generating units if the estimates used to determine
Revenue
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the assets’ recoverable amount have changed. [IAS 36.109-125]. Consistent with IAS 36,
IFRS 15 permits reversal of impairment losses when impairment conditions no longer
exist or have improved. However, the increased carrying amount of the asset must not
exceed the amount that would have been determined (net of amortisation) if no
impairment loss had been recognised previously. [IFRS 15.104].
Under US GAAP, the reversal of previous impairment losses is prohibited.
11
IFRS 15 – PRESENTATION AND DISCLOSURE
IFRS 15 provides explicit presentation and disclosure requirements, which are more
detailed than under legacy IFRS and increase the volume of required disclosures that
entities have to include in their interim and annual financial statements. Many of the
requirements involve information that entities did not previously disclose.
In practice, the nature and extent of changes to an entity’s financial statements depend
on a number of factors, including, but not limited to, the nature of its revenue-generating
activities and the level of information it previously disclosed.
As part of their adoption of IFRS 15, entities also need to reassess their accounting policy
disclosures. [IAS 1.117]. Under legacy IFRS, entities provided brief and, sometimes,
boilerplate disclosures of the policie
s in respect of revenue recognition. The brevity may
be due, in part, to the limited nature of the guidance provided in legacy revenue recognition
requirements. Given the complexity of the requirements in IFRS 15, the policies that apply
to revenues and costs within the scope of the standard are also more challenging to explain
and require entities to provide more tailored and detailed disclosures.
The disclosure requirements discussed below are required on an ongoing basis.
Disclosures required as part of the transition to IFRS 15 are discussed at 2.3 above.
As discussed more fully below, IFRS 15 significantly increases the volume of disclosures
required in entities’ financial statements, particularly annual financial statements. In
addition, many are completely new requirements.
We believe entities may need to expend additional effort when initially preparing the
required disclosures for their interim and annual financial statements. For example, entities
operating in multiple segments with many different product lines may find it challenging to
gather the data needed to provide the disclosures. As a result, entities need to ensure that
they have the appropriate systems, internal controls, policies and procedures in place to
collect and disclose the required information. In light of the expanded disclosure
requirements and the potential need for new systems to capture the data needed for these
disclosures, entities may wish to prioritise this portion of their implementation efforts.
For US GAAP preparers, the standard provides requirements on presentation and
disclosure that apply to both public and non-public entities and provide some relief on
disclosure requirements for non-public entities. The FASB’s standard defines a public
entity as one of the following:
• a public business entity, as defined;
• a not-for-profit entity that has issued, or is a conduit bond obligor for, securities
that are traded, listed or quoted on an exchange or an over-the-counter market; or
• an employee benefit plan that files or furnishes financial statements with the SEC.
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An entity that does not meet any of the criteria above is considered a non-public entity
for purposes of the FASB’s standard.
IFRS 15 does not differentiate between public and non-public entities. Therefore, an
entity that applies IFRS 15 must apply all of its requirements.
The extracts in this chapter illustrate possible formats entities might use to disclose
information required by IFRS 15, using real-life examples from entities that have
early adopted IFRS 15 or the FASB’s revenue standard. US GAAP preparers are
specifically labelled.
11.1 Presentation requirements for contract assets and contract
liabilities
The revenue model is based on the notion that a contract asset or contract liability is
generated when either party to a contract performs, depending on the relationship
between the entity’s performance and the customer’s payment. The standard requires
that an entity present these contract assets or contract liabilities in the statement of
financial position. [IFRS 15.105]. In the following extract, Raytheon Company presents
these amounts separately using the terminology from the standard.
Extract 28.1: Raytheon Company (2017) (US GAAP)
CONSOLIDATED BALANCE SHEETS [Extract]
(In millions, except per share amounts) December 31:
2017 2016
Assets [Extract]
Current assets
Cash and cash equivalents
$ 3,103
$ 3,303
Short-term investments
297
100
Receivables, net
1,324
1,163
Contract assets
5,247
5,041
Inventories
594
608
Prepaid expenses and other current assets
761
670
Total current assets
11,326
10,885
Liabilities, Redeemable Noncontrolling Interest and Equity [Extract]
Current liabilities
Commercial paper
$ 300
$ –
Contract liabilities
2,927
2,646
Accounts payable
1,519
1,520
Accrued employee compensation
1,342
1,234
Other current liabilities
1,260
1,139
Total current liabilities
7,348
6,539
Revenue
2283
When an entity satisfies a performance obligation by transferring a promised good or
service, the entity has earned a right to consideration from the customer and, therefore,
has a contract asset. When the customer performs first, for example, by prepaying its
promised consideration, the entity has a contract liability. [IFRS 15.106-107].
Contract assets may represent conditional or unconditional rights to consideration.
The right is conditional, for example, when an entity must first satisfy another
performance obligation in the contract before it is entitled to payment from the
customer. If an entity has an unconditional right to receive consideration from the
customer, the contract asset is accounted for as a receivable and presented
separately from other contract assets. [IFRS 15.105, BC323-BC324]. A right is
unconditional if nothing other than the passage of time is required before payment
of that consideration is due. [IFRS 15.108].
In the Basis for Conclusions on IFRS 15, the Board explains that in many cases an
unconditional right to consideration (i.e. a receivable) arises when an entity satisfies a
performance obligation, which could be before it invoices the customer (e.g. an unbilled
receivable) if only the passage of time is required before payment of that consideration
is due. It is also possible for an entity to have an unconditional right to consideration
before it satisfies a performance obligation. [IFRS 15.107, BC325].
In some industries, it is common for an entity to invoice its customers in advance of
performance (and satisfaction of the performance obligation). For example, an entity
that enters into a non-cancellable contract requiring payment a month before the entity
provides the goods or services would recognise a receivable and a contract liability on
the date the entity has an unconditional right to the consideration (see 11.1.1.F below for
factors to consider when assessing whether an entity’s right to consideration is
considered unconditional). In this situation, revenue is not recognised until goods or
services are transferred to the customer.
In the Basis for Conclusions, the Board noted that making the distinction between a
contract asset and a receivable is important because doing so provides users of financial
statements with relevant information about the risks associated with the entity’s rights
in a contract. Although both are subject to credit risk, a contract asset is also subject to
other risks (e.g. performance risk). [IFRS 15.BC323].
Under the standard, entities are not required to use the terms ‘contract asset’ or ‘contract
liability’, but must disclose sufficient informatio
n so that users of the financial statements
can clearly distinguish between unconditional rights to consideration (receivables) and
conditional rights to receive consideration (contract assets). [IFRS 15.109]. In Extract 28.8
at 11.4.1.B below, General Dynamics Corporation illustrates the use of such an approach,
using alternative terminology, but explaining in its revenue note how those terms align
with the terms used within the revenue standard.
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The standard provides the following example of presentation of contract balances.
[IFRS 15.IE198-IE200].
Example 28.96: Contract liability and receivable
Case A – Cancellable contract
On 1 January 20X9, an entity enters into a cancellable contract to transfer a product to a customer on 31 March
20X9. The contract requires the customer to pay consideration of £1,000 in advance on 31 January 20X9.
The customer pays the consideration on 1 March 20X9. The entity transfers the product on 31 March 20X9.
The following journal entries illustrate how the entity accounts for the contract:
• The entity receives cash of £1,000 on 1 March 20X9 (cash is received in advance of performance):
Cash £1,000
Contract liability
£1,000
• The entity satisfies the performance obligation on 31 March 20X9:
Contract liability
£1,000
Revenue £1,000
Case B – Non-cancellable contract
The same facts as in Case A apply to Case B except that the contract is non-cancellable. The following journal
entries illustrate how the entity accounts for the contract:
• The amount of consideration is due on 31 January 20X9 (which is when the entity recognises a receivable
because it has an unconditional right to consideration):
Receivable £1,000
Contract liability
£1,000
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 454
