Ch 4: IFRS 15 Revenue from Contracts with Customers 

1. Introduction

1-2 Step 1: Identify the Contract [R]

1-3 Step 2: Identifying Performance Obligations [R]

1-5 Q&A ECL & eSolutions Limited (ICAP Spring 2017) [O]

YouTube Video (6 minutes)

Notes PDF - FA109

Query: Sir part b ke point 2 mein phir 3 performance obligation hon gy

Response: Exactly, yes. 1. License 2. Updates 3. Support.

2. Determining the Transaction Price

2-1 Step 3: Determining Transaction Price [I]

YouTube Video (20 minutes) 

Notes PDF - FL079

Query: Sir Humein yeh kese Pata chale ga ke borrowing rate Kab use Karna ha aur Kab interest rate implicit financing component ke tor pe

Ager question mein dono diya hoon jesa next question mein ha too hum kis ka istamal kAre ga

Response: IFRS 15 requires interest to reflect borrower's perspective. In most questions, there is only one rate given so there is no problem. In case multiple rates are given, use following guidance:

1. Use seller's incremental borrowing rate (in case of advance received by him before the revenue recognition).

2. Use customer's incremental borrowing rate (in case of revenue recognised and receivable created)

3. Use implicit or other rate (when no incremental borrowing rate is given)

2-3 Q&A Twenty - Two Limited [R]

2-4 Settlement Discount (Seller's Perspective) [O]

2-5 Q&A Twenty - Nine Limited [R]

YouTube Video (7 minutes)

Notes PDF - FA112

Query: Sir ager loan Diya hoo too aur dono rates incremental borrowing rate aur implicit interest rate diya hoo too phir kon sa interest rate use karein ga. Mtlb jab goods advance mein dilever kein hoo

Response: According to IFRS 15 Para 64 " entity shall use the discount rate that would be reflected in a separate financing transaction between the entity and its customer at contract inception. That rate would reflect the credit characteristics of the party receiving financing...".

Based on this following guidance can be developed (not all of this is examinable at CAF level though):

1. Use contractual rate if it reflects the separate financing transaction (IFRS 15 Illustrative Example 28 Case A)

2. Otherwise:

a) use interest rate that reflects credit characteristics of customer, if goods are delivered first and payment will be received later (IFRS 15 Illustrative Example 28 Case B)

b) use seller entity's incremental borrowing rate when advance is received first and control of goods will be transferred later (IFRS 15 Illustrative Example 29 (this question))

Note: Illustrative Example 28 is not examinable at CAF 5 level.

3. Allocating the Transaction Price

3-1 Step 4: Allocating the Transaction Price [I]

YouTube Video (20 minutes)

Notes PDF - FL080

Query: Sir, how an entity allocate Rs 105 on basis of their stand alone price of product bcs product D have the range not a specific value so shuld we consider mid value of that range? lec 16:30

Response: The question here (and illustrative example in IFRSs) does not provide any further details regarding this. Here, we just wanted to establish the concept that residual value may not always be relevant.

In practice, it would be appropriate to find stand-alone-selling price of Product D using adjusted market assessment approach or cost plus margin approach rather than residual value approach after we have concluded that residual value is not appropriate.

3-2 Q&A Brilliant Limited [I]

3-3 Q&A Jupiter Limited & Pluto Limited (ICAP Autumn 2017) [I]

3-4 Q&A Rhombus Limited (ii) (ICAP Autumn 2022) [I]

4. Recognition

4-1 Step 5: Satisfaction of Performance Obligations  [I]

4-2 Q&A Galaxy Telecommunications (ICAP Spring 2018) [O]

YouTube Video (10 minutes)

Notes PDF - FA113

Query: What about entry for cost of goods sold-mobile sets?

Response: If entity uses periodic inventory system (which is usual assumption): no entry is required and only period end inventory adjustment will be made.

If entity uses perpetual inventory system: Debit Cost of sales and Credit Inventory

4-4 Q&A Seventeen Limited [I]

4-5 Q&A Discount Vouchers [I]

YouTube Video (6 minutes)

Notes PDF - FA116

Query: Aoa sir. first of all thank you for the concise info. secondly, kya ap bta skte hain ke hamme 50 ko 80% se multiply kyun kia. 80% chance ke 50 ki sale hogi, aur 20% chance ke nai hogi. most likely outcome to 80% hoa na. to humne full amount 50 ki kyu nai li.

Response:  WA

1. Most likely outcome and expected value approach is used for determining transaction price (for variable consideration) [IFRS 15 Para 53]

2. For allocation of transaction price to performance obligations, likelihood is to be considered. [IFRS 15 Para B42]

The situation in Illustrative Example 49 above relates to second issue.

4-6 Q&A Customer Loyalty Program [I]

4-7 Q&A Stupa Ltd & Kushan Construction Ltd (ICAP Autumn 2020) [R]

5. Other Aspects

5-1 Incremental costs of obtaining a contract [R]

5-3 Contract Modifications [R]

YouTube Video (8 minutes)

Notes PDF - FL084

Summary of Situations

Situation (a) Distinct AND price reflects additional SASP

Situation (b) and (c) Distinct BUT price does not reflect additional SASP

Situation (d) NEITHER distinct NOR price reflects additional SASP

5-4 Q&A Contract Modifications Scenarios [I]

YouTube Video (16 minutes)

Notes PDF - FA115

Query: Sir, what about "discount allowed" for accounting credit given in part c

Response: Discount allowed is treated as reversal of revenue under IFRS 15. In the answer, third journal entry of part (c), this effect has been accounted for.

5-5 Q&A Rhombus Limited (i) (ICAP Autumn 2022) [R]

6. Comprehensive Examples

6-1 Q&A Thursday Enterprise (ICAP Autumn 2019) [I]

6-2 Q&A Car World & Saleem Engineering (ICAP Autumn 2016) [O]

6-3 Q&A Karim, Asif & Nazir (ICAP Spring 2016) [O]

6-4 Q&A Trich Mir Limited (ICAP Spring 2020) [I]

YouTube Video (16 minutes)

Notes PDF - FA002

Query: sir commission to sales employee incremental cost ha too isse capitalize kyun ni kar rahe kindly elaborate kar dein vedio mien ap ne kaha ha ke contract point in time ha iss liye iss ko capitalize ni karna samaj ni ai iss point ki iss se too yehe pata chalta ha ke ager incremental cost proformance obiligation ki nature (over time ya point in time) se match na karti hoo too uss ko capitalize karne ki bajaye usse expense karein ga kindly ye masla bata dein sir

Response: Good question. Cost are recognised over term of the contract so that we get reliable profit/loss by matching costs and revenue. According to IFRS 15, Para 94: "As a practical expedient, an entity may recognise the incremental costs of obtaining a contract as an expense when incurred if the amortisation period of the asset that the entity otherwise would have recognised is one year or less." 

So when revenue is recognised at point in time, related costs are also recognised at the same time.

Query: What is reason for not including closing inventory and cost of sale of 15 in 2nd part of trich mir

Response: The specialised machine being manufactured for customer is asset of customer and not an asset/inventory of TML.

6-5 Q&A Ravi Limited (ICAP Autumn 2018) [R]

6-6 Q&A Guitar World (ICAP Spring 2019) [R]

6-7 Q&A Covaxin Telecom (ICAP Spring 2021) [O]

6-8 Q&A Parodia Motors Limited (ICAP Autumn 2021) [I]

6-9 Q&A Bill and Hold Agreement [R]

7. Objective Based Q&A

7-1 MCQs 1 to 20 [R]

YouTube Video (22 minutes)

Notes PDF - FM036

Query: sir in mcq 2 shouldnt it be recorded as a contract laibility instead of trade payable?

Response: Not necessarily. Payable to Dolphin might be best description. This is simple amount payable. This is not obligation to transfer goods or services (see definition of contract liability).