Revenue from contracts with customers

Revenue from contracts with customers

1. Step 1: Identifying the contract

   • Shall account for a contract with customer when ALL of following criteria are met: 1. parties approved the contract and committed; 2. can ID each party's rights; 3. ID payment terms; 4. contract has commercial substance; 5. probable that entity will collect the consideration.
   • If contract does not meet criteria, entity recognise consideration received as revenue only when either: 1. entity has no remaining obligation to transfer goods & consideration is non-refundable; or 2. contract is terminated & consideration non-refundable
   • Combination of contracts
     • When 2/more contracts near and with same time & customer/related party as a single contract if criteria are met: 1. single commercial; 2. consideration of 1 contract depends on performance of other; 3. goods are a single performance obligation.
   • Contract modifications

2. Step 2: Identifying performance obligations (PO)

   • At inception entity assess G/S promised in contract, & ID as a PO each promise to transfer to customer either: 1. G/S is distinct; OR 2. Series of distinct G/S have same pattern of transfer to customer.
   • Promises in contract
     • PO not limited to G/S, IF promise is implied, or business practice or policy will = Promise in contract.
   • G/S promised are distinct IF: 1. customer benefits; & 2. Promise is separately ID frm other promises

3. Step 3: Determining transaction price (TP)

   • Consider terms & business practices to determine TP
   • TP is amount the entity expects to be entitled to, excl. amounts collected on behalf of 3rd parties
   • Variable consideration
     • Estimating by use of "expected value" method (probability-weighted method)
     • OR, estimating by use of "most likely amount"
   • a Significant financing component
     • Adjust promised amount for effects of time value of money
     • Relevant facts: the difference between promised amount & cash selling price; effect of time between transfer of G/S & PMT and market interest rate.
   • Non-cash consideration
   • Consideration payable to customer (eg. vouchers/coupons)

4. Step 4: Allocating the TP to performance obligation (PO)

   • Objective to allocate an amount that depicts amount entity expects to be entitled in exchange
   • Allocation based on stand-alone selling prices
     • Determine S-A SP at contract inception for distinct G/S for each PO & allocate TP in proportion to S-A SP
       • Methods for estimating S-A SP: 1. Adjusted market assessment; 2. Expected cost + margin; 3. Residual.
   • Applies only to contracts with more than 1 PO

5. Step 5: Recognise revenue

   • When entity satisfies a PO by transferring a promised G/S to Customer. Asset is transferred when Customer obtains CONTROL over asset.
   • PO satisfied over time
     • if one of criteria met: 1. Customer simultaneously receives & consumes; 2. Performance enhances customer's asset; 3. Performance do not create asset with alternative use & enforceable right to PMT at completion.
   • PO at point in time
     • Transfer of control/ present right to PMT = point in time