contract cost assets alongside this disclosure.
Extract 28.15: Ford Motor Company (2017) (US GAAP)
NOTES TO THE FINANCIAL STATEMENTS [Extract]
NOTE 4. REVENUE [Extract]
Automotive Segment [Extract]
Extended Service Contracts. We sell separately-priced service contracts that extend mechanical and maintenance
coverages beyond our base warranty agreements to vehicle owners. The separately priced service contracts range from
12 to 120 months. We receive payment at the inception of the contract and recognize revenue over the term of the
agreement in proportion to the costs expected to be incurred in satisfying the obligations under the contract. At
January 1, 2017, $3.5 billion of unearned revenue associated with outstanding contracts was reported in Other
Liabilities and deferred revenue, $1 billion of this was recognized as revenue during the year ended December 31,
2017. At December 31, 2017, the unearned amount was $3.8 billion. We expect to recognize approximately
$1.1 billion of the unearned amount in 2018, $1 billion in 2019, and $1.7 billion thereafter. We record a premium
deficiency reserve to the extent we estimate the future costs associated with these contracts exceed the unrecognized
revenue. Amounts paid to dealers to obtain these contracts are deferred and recorded as Other assets. These costs are
amortized to expense consistent with how the related revenue is recognized. We had a balance of $232 million in
deferred costs as of December 31, 2017, and recognized $63 million of amortization during the year ended
December 31, 2017.
The Board also provided a practical expedient under which an entity can decide not to
disclose the amount of the remaining performance obligations for contracts with an
original expected duration of less than one year or those that meet the requirements of
the right to invoice practical expedient in paragraph B16 IFRS 15 (see paragraph 121 of
IFRS 15). As explained in 8.2.1.A above, the right to invoice practical expedient permits
an entity that is recognising revenue over time to recognise revenue as invoiced if the
entity’s right to payment is an amount that corresponds directly with the value to the
2312 Chapter 28
customer of the entity’s performance to date. [IFRS 15.121]. For example, an entity is not
required to make the disclosure for a three-year service contract under which it has a
right to invoice the customer a fixed amount for each hour of service provided. If an
entity uses this disclosure practical expedient, it is required to qualitatively disclose that
fact. [IFRS 15.122].
Disclosing revenue recognised from performance obligations satisfied in previous
periods is likely to be a change in practice for most entities. Entities need to make sure
they have appropriate systems, policies and procedures and internal controls in place
to collect and disclose the required information.
ASC 606 contains optional exemptions that are consistent with the optional practical
expedients included in paragraph 121 of IFRS 15. However, ASC 606 includes additional
optional exemptions (that IFRS 15 does not) to allow entities not to make quantitative
disclosures about remaining performance obligations in certain cases and require
entities that use any of the new or existing optional exemptions (previously referred to
as practical expedients) to expand their qualitative disclosures.
The standard provides the following examples of these required disclosures.
[IFRS 15.IE212-IE219].
Example 28.100: Disclosure of the transaction price allocated to the remaining
performance obligations
On 30 June 20X7, an entity enters into three contracts (Contracts A, B and C) with separate customers to
provide services. Each contract has a two-year non-cancellable term. The entity considers the requirements
in paragraphs 120-122 of IFRS 15 in determining the information in each contract to be included in the
disclosure of the transaction price allocated to the remaining performance obligations at 31 December 20X7.
Contract A
Cleaning services are to be provided over the next two years typically at least once per month. For services
provided, the customer pays an hourly rate of £25.
Because the entity bills a fixed amount for each hour of service provided, the entity has a right to invoice the
customer in the amount that corresponds directly with the value of the entity’s performance completed to date
in accordance with paragraph B16 of IFRS 15. Consequently, no disclosure is necessary if the entity elects to
apply the practical expedient in paragraph 121(b) of IFRS 15.
Contract B
Cleaning services and lawn maintenance services are to be provided as and when needed with a maximum of
four visits per month over the next two years. The customer pays a fixed price of £400 per month for both
services. The entity measures its progress towards complete satisfaction of the performance obligation using
a time-based measure.
Revenue
2313
The entity discloses the amount of the transaction price that has not yet been recognised as revenue in a table
with quantitative time bands that illustrates when the entity expects to recognise the amount as revenue. The
information for Contract B included in the overall disclosure is as follows:
20X8
20X9
Total
£
£
£
Revenue expected to be recognised on
this contract as at 31 December 20X7
4,800(a)
2,400(b)
7,200
(a) £4,800 = £400 × 12 months.
(b) £2,400 = £400 × 6 months.
Contract C
Cleaning services are to be provided as and when needed over the next two years. The customer pays fixed
consideration of £100 per month plus a one-time variable consideration payment ranging from £0-£1,000
corresponding to a one-time regulatory review and certification of the customer’s facility (i.e. a performance
bonus). The entity estimates that it will be entitled to £750 of the variable consideration. On the basis of the
entity’s assessment of the factors in paragraph 57 of IFRS 15, the entity includes its estimate of £750 of
variable consideration in the transaction price because it is highly probable that a significant reversal in the
amount of cumulative revenue recognised will not occur. The entity measures its progress towards complete
satisfaction of the performance obligation using a time-based measure.
The entity discloses the amount of the transaction price that has not yet been recognised as revenue in a table
with quantitative time bands that illustrates when the entity expects to recognise the amount as revenue. The
entity also includes a qualitative discussion about any significant variable consideration that is not included
in the disclosure. The information for Contract C included in the overall disclosure is as follows:
20X8
20X9
Total
£
£
£
Revenue expected to be recognised on
1,575(a) 788(b) 2,363
this contract as at 31 December 20X7
(a) Transaction price = £3,150 (£100 × 24 months + £750 variable consideration) recognised evenly over
24 months at £1,575 per year.
(b) £1,575 ÷ 2 = £788 (i.e. for 6 months of the year)
.
In addition, in accordance with paragraph 122 of IFRS 15, the entity discloses qualitatively that part of the
performance bonus has been excluded from the disclosure because it was not included in the transaction price.
That part of the performance bonus was excluded from the transaction price in accordance with the
requirements for constraining estimates of variable consideration.
The standard also provides an example of how an entity could make the disclosure
required by paragraph 120(b) of IFRS 15 using qualitative information (instead of
quantitatively, using time bands) as follows. [IFRS 15.IE220-IE221].
2314 Chapter 28
Example 28.101: Disclosure of the transaction price allocated to the remaining
performance obligations – qualitative disclosure
On 1 January 20X2, an entity enters into a contract with a customer to construct a commercial building for
fixed consideration of €10 million. The construction of the building is a single performance obligation that
the entity satisfies over time. As at 31 December 20X2, the entity has recognised €3.2 million of revenue.
The entity estimates that construction will be completed in 20X3, but it is possible that the project will be
completed in the first half of 20X4.
At 31 December 20X2, the entity discloses the amount of the transaction price that has not yet been
recognised as revenue in its disclosure of the transaction price allocated to the remaining performance
obligations. The entity also discloses an explanation of when the entity expects to recognise that amount as
revenue. The explanation can be disclosed either on a quantitative basis using time bands that are most
appropriate for the duration of the remaining performance obligation or by providing a qualitative
explanation. Because the entity is uncertain about the timing of revenue recognition, the entity discloses this
information qualitatively as follows:
‘As at 31 December 20X2, the aggregate amount of the transaction price allocated to the remaining
performance obligation is €6.8 million and the entity will recognise this revenue as the building is
completed, which is expected to occur over the next 12-18 months.’
11.4.1.D
Use of the ‘backlog’ practical expedient when the criteria to use the
‘right to invoice’ practical expedient are not met
If an entity determines that it has not met the criteria to use the ‘right to invoice’ practical
expedient (e.g. because there is a substantive contractual minimum payment or a volume
discount), can the entity still use the disclosure practical expedient under which an entity
can decide not to disclose the amount of transaction price allocated to remaining
performance obligations? The TRG considered this question at the July 2015 TRG meeting.
The TRG members generally agreed that the standard is clear that an entity can only use
the practical expedient to avoid disclosing the amount of the transaction price allocated
to remaining performance obligations for contracts: (a) with an original expected duration
of less than one year; or (b) that qualify for the ‘right to invoice’ practical expedient.
[IFRS 15.121]. If a contract does not meet either of these criteria, an entity must disclose the
information about remaining performance obligations that is required by Paragraph 120
of IFRS 15. [IFRS 15.120]. However, under these requirements, an entity is able to
qualitatively describe any consideration that is not included in the transaction price (e.g.
any estimated amount of variable consideration that is constrained).
Stakeholders had questioned whether an entity can still use this disclosure practical
expedient if it determines that it has not met the criteria to use the right to invoice
practical expedient (e.g. because there is a substantive contractual minimum payment
or a volume discount).152
11.4.2 Significant
judgements
The standard specifically requires disclosure of significant accounting estimates and
judgements (and changes to those judgements) made in determining the transaction
price, allocating the transaction price to performance obligations and determining when
performance obligations are satisfied. [IFRS 15.123].
Revenue
2315
IFRS currently has general requirements requiring disclosures about significant
accounting estimates and judgements made by an entity. Because of the importance
placed on revenue by users of financial statements, as noted in the Basis for Conclusions
on IFRS 15, the Board decided to require specific disclosures about the estimates used
and the judgements made in determining the amount and timing of revenue recognition.
[IFRS 15.BC355]. These requirements exceed those in the general requirements for
significant judgements and accounting estimates required by IAS 1 and discussed in
more detail below. [IAS 1.122-133].
11.4.2.A
Determining the timing of satisfaction of performance obligations
IFRS 15 requires entities to provide disclosures about the significant judgements
made in determining the timing of satisfaction of performance obligations. The
disclosure requirements for performance obligations that are satisfied over time
differ from those satisfied at a point in time, but the objective is similar – to disclose
the judgements made in determining the timing of revenue recognition. Entities must
disclose: [IFRS 15.124]
• the methods used to recognise revenue (e.g. a description of the output methods
or input methods used and how those methods are applied); and
• an explanation of why the methods used provide a faithful depiction of the transfer
of goods or services.
For performance obligations that are satisfied at a point in time, entities must disclose
the significant judgements made in evaluating the point in time when the customer
obtains control of the goods or services. [IFRS 15.125].
When an entity has determined that a performance obligation is satisfied over time,
IFRS 15 requires the entity to select a single revenue recognition method for each
performance obligation that best depicts the entity’s performance in transferring the
goods or services. Entities must disclose the method used to recognise revenue.
For example, assume an entity enters into a contract to refurbish a multi-level building
for a customer and the work is expected to take two years. The entity concludes that
the promised refurbishment service is a single performance obligation satisfied over
time and it decides to measure progress using a percentage of completion method, based
on the costs incurred. The entity discloses the method used, how it has been applied to
the contract and why the method selected provides a faithful depiction of the transfer
of goods or services.
When an entity has determined that a performance obligation is satisfied at a point in
time, the standard requires the entity to disclose the significant judgements made in
evaluating when the customer obtains control of the promised goods or services. For
example, an entity needs to consider the indicators of the transfer of control listed in
paragraph 38 of IFRS 15 to determine when control transfers and disclose the significant
judgements made in reaching that conclusion.
2316 Chapter 28<
br />
In Extract 28.12 at 11.4.1.C above, Alphabet Inc. describes the methods used to
recognise its advertising revenue over time and explains the relationship between
the methods and the different types of advertising it provides. Ford Motor Company
recognises revenue at a point in time in relation its vehicle, parts and accessories
sales. Extract 28.11 at 11.4.1.C above provides a description of when control transfers
to the customer for these sales. Raytheon Company provides qualitative information
about the method it uses to recognise revenue over time. It explains the ‘Estimate at
Completion (EAC)’ process in which management reviews progress and execution of
performance obligations and discloses the impact on operating income, income from
continuing operations and diluted earnings per share (EPS) based on this EAC
assessment (i.e. changes in estimates). It also describes the judgement and complexity
involved in Extract 28.16.
Extract 28.16: Raytheon Company (2017) (US GAAP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Extract]
Note 1: Summary of Significant Accounting Policies [Extract]
Revenue Recognition [Extract]
We generally recognize revenue over time as we perform because of continuous transfer of control to the customer.
For U.S. government contracts, this continuous transfer of control to the customer is supported by clauses in the
contract that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus
a reasonable profit and take control of any work in process. Similarly, for non-U.S. government contracts, the customer
typically controls the work in process as evidenced either by contractual termination clauses or by our rights to
payment for work performed to date plus a reasonable profit to deliver products or services that do not have an
alternative use to the Company.
Because of control transferring over time, revenue is recognized based on the extent of progress towards completion
of the performance obligation. The selection of the method to measure progress towards completion requires judgment
and is based on the nature of the products or services to be provided. We generally use the cost-to-cost measure of
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 460
