IFRS 15- Revenue from Contract with Customers

In this series we shall briefly cover the key definitions that standard carries and would give examples of recognizing revenues of various industries.

Key definitions

Performance Obligation

A promise in the contract with the customer to transfer to the customer either a good or service (or a bundle of good or services) that is distinct; A series of distinct goods or services

Revenue Recognition

that are substantially the same and that have the same patterns.

Transaction price

The amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to customer, excluding amounts collected on behalf of third parties.

Under IFRS-15 a 5 step model framework is used to recognize revenue which are

Identify contract with customer

Identify performance obligation in the contract

Determine the transaction price

Allocate the transaction price to the performance obligations

Recognize the revenue when entity satisfies a performance obligation

IFRS-15 – Retail Industry and its consumers

Scenario-1 Where retailer can return the goods to manufacturer (main supplier)

Tv Company has wholesale network to supply its products to end consumers. It sells 1000 TV’s to retail shop for 50 USD each. The cost of each TV is 25 USD. There is past experience of 8 % sales return.

Case-A The retail shop has contractual right to return the TVs for a full refund for defined period of time.

Case-B  The retail shop has no contractual right but as customary practice TV Company accepts return & refunds.

Q How revenue shall be recognized under IFRS-15

Case A- Revenue shall be recognized when TV shall be delivered & liability deducted from expected returns. Further, an asset would be created for expected return however, it would be recorded after evaluation of impairment and necessary adjustment shall take effect. Following are Revenues, Cost & liability

Revenues – Sales price per TV x Units net (Expected return)

                     50 USD x 1000 ( 1-.08) =46,000 USD

Cost-   Costs x Units net (Expected return)

                      25 USD x 920 TVs = 23,000 USD

Asset- Carrying amount x expected to be returned

                      25 x 80 = 2,000 USD                  


Customary practice would be treated in the same as in case of contractual obligation.

Reference to IFRS for understanding

IFRS 15.10: “A contract is an agreement between two or more parties that creates enforceable rights and obligations. Enforceability of the rights and obligations in a contract is a matter of law. Contracts can be written, oral or implied by an entity’s customary business practices. The practices and processes for establishing contracts with customers vary across legal jurisdictions, industries and entities […]. An entity shall consider those practices and processes in determining whether and when an agreement with a customer creates enforceable rights and obligations.”

A right of return is not a separate performance obligation, but it affects the estimated transaction price for transferred goods. Revenue is only recognized for those goods that are not expected to be returned.

Paragraph B21 of IFRS 15 requires entities to account for sales with a right of return recognizing all of the following: a) “Revenue for the transferred products in the amount of consideration to which the entity expects to be entitled (therefore, revenue would not be recognized for the products expected to be returned) b) A refund liability c) An asset (and corresponding adjustment to cost of sales) for its right to recover products from customers on settling the refund liability.”

Scenario-2 Volume Discount

C LTD, an furniture manufacturer signs an agreement with one retailer under which retailer shall receive 3% discount on all purchases if retailer’s purchase exceeds 50,000 USD for annual period ending 31 December 2018.

At March 31, purchases by the retailer from C LTD amount to 25,000 USD and forecasts that annual purchase would reach to 130,000-150,000 USD.

What revenue should be recognized by C LTD?

Ans- Since the transaction price includes the element of a consideration which is contingent. Therefore, it must estimate and book liability at 31 March 2018 of 750 USD (25,000 USD x 3%)

Reference to IFRS for understanding

Paragraph 50 of IFRS 15 states: “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.”

Paragraph 51 of IFRS 15: “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 products was sold with a right of return or a fixed amount is promised as a performance bonus on achievement of a specified milestone.”

Scenario-3 Holding arrangements

PK LTD a washing machine manufacturer enters into supply of 1,000 machines to a retail outlet LH Limited branded with LH’s Logo to be delivered at year end. As per contract it specified where goods to be delivered.

By the year end 900 machines have been delivered whereas remaining 100 machines ready for delivery in all aspects but retailer asks to hold as does not have space.

Question- When PK LTD should recognize revenue of 1,000 machines? Delivered or not.

Ans-  PK LTD should recognize revenue for all 1,000 unites because criteria to transfer control is met LH LTD since goods are branded & belongs to LH LTD and cannot be sold to another retailer.

Reference to IFRS for understanding

Entities must assess whether control has transferred to the customer, even though the customer does not have physical possession of the goods. Revenue is recognized when control of the goods transfers to the customer.

Paragraph B81 of IFRS 15 presents the following additional criteria that all need to be met in order for the customer to have obtained control in a bill-and-hold arrangement: a) the reason for the bill-and-hold arrangement must be substantive (for example, the customer has requested the arrangement); b) products must be identified separately as belonging to the customer; c) products currently must be ready for physical transfer to the customer; and d) products cannot be used or directed to another customer.