REVENUE RECOGNITION –

IFRS 15
REVENUE RECOGNITION – IFRS 15
 Contract Identification

 Performance Obligation Identification

 Transaction Price Determination

 Transaction Price Allocation

 Revenue Recognition
 XYZ company uses a wholesale network to supply its products
to end-customers. XYZ company sells 1250 watches to a
retailer for Euro 75 each. The cost of each watch is Euro 25.

 XYZ company estimates, based on expected value method that

8% of watches sold will be returned, and it is highly probable
that returns will not be higher than 8%.

 XYZ company has no further obligation after transferring the

control of the watches. Retailer has a contractual right to return
the watches for a full refund for a contractually defined period.

 Retailer has no contractual right, but a company has a

customary business practice, where returns have been made
and are accepted.

 How should XYZ company recognize the revenue and

expected returns associated with the transaction in
accordance with IFRS 15?
REVENUE RECOGNITION – RIGHT TO
RETURN
 At the time of Sale
 Product Sales = (Total watches – Expected return) x
SP
 (1250-100) x Euro 75 = Euro 86,250
 Cost of Sales
 (1250-100) x Euro 25 = Euro 28750
 Asset for Anticipated Return = Cost of watch x
expected return quantity
 Euro 25 x 100 = Euro 2,500
 Liability for Customer Refund = Expected return
quantity x SP
 100 x Euro 75 = Euro 7500
REVENUE RECOGNITION – RIGHT TO
RETURN
 At the time of sale
 (Balance Sheet) Debit Cash Euro 93,750
 (Profit & Loss) Credit Revenue Euro 86,250
 (Balance Sheet Credit Contract Liability:
Customer Refund: Euro 7,500

 (Balance Sheet) Credit Inventory Euro 31,250

 (Profit & Loss) Debit Cost of Sales Euro
28,750
 (Balance Sheet) Debit Asset for Anticipated
Return Euro: 2,500
REVENUE RECOGNITION – RIGHT TO
RETURN
 On return of products
 (Balance Sheet) Credit Cash Euro 7,500
 (Balance Sheet Debit Contract Liability: Customer
Refund: Euro 7,500

 (Balance Sheet) Debit Inventory Euro 2,500

 (Balance Sheet) Credit Asset for Anticipated Return
Euro 2,500
 ABC company operates retail stores and a website
where customer can buy dresses. There is a customer
loyalty program in place, awarding customers 1 point
for every Euro 1 spent on buying dresses.

 Points are only redeemable for Euro 0.15 off future

purchases and cannot be redeemed for cash.

 ABC company expects 15% of the points to expire

unredeemed, based on historical trends.

 ABC company has sold dresses for Euro 2500 during

the period.

 How should ABC company account for the

loyalty program?
REVENUE RECOGNITION: LOYALTY
POINTS
 Total Discount on future purchases
 Euro 0.15 x 2500 = Euro 375
 Standalone SP = Total discount on future purchases –
expected breakage of points
 Euro 375 – (.15 x 2500 x.15) = Euro 318.75
 Allocation of Transaction Price = Price of Initial
Purchase + Option Value granted
 Euro 2,500 + Euro 318.75
 Customer Payment allocated to Loyalty Program
 = Euro 2,500 x (318.75/2818.75) = Euro 282.71
 Customer Payment allocated to Product Sales
 = Euro 2,500 x (2500/2818.75) = Euro 2217.29
REVENUE RECOGNITION: LOYALTY
POINTS
 (Balance Sheet) Debit Cash Euro 2,500
 (Profit & Loss) Credit Product Sales Euro 2217.29
 (Balance Sheet) Credit Contract Liability: Loyalty
Points Euro 282.71
 Gamma prepares its financial statements to 31 March each year.
Notes 1 contain information relevant to these financial statements:

 Note 1 – Sale and leaseback of property On 1 April 20X6, Gamma

sold a property to entity A for its fair value of $1,500,000. The
terms and conditions of the sale satisfy the sale and leaseback
requirements of IFRS® 15 – Revenue from Contracts with
Customers. The carrying amount of the property in the financial
statements of Gamma at 1 April 20X6 was $1,000,000. The
estimated future useful life of the property on 1 April 20X6 was 20
years.

 On 1 April 20X6, Gamma entered into an agreement with entity A

under which Gamma leased the property back. The lease term was
for five years, with annual rentals of $100,000 payable in arrears.
The annual rate of interest implicit in the lease was 10% and the
present value of the minimum lease payments on 1 April 20X6 was
$379,100.

 Required: Using the information in note 1, explain and show how

the event would be reported in the financial statements of Gamma
for the year ended 31 March 20X7.
SALE AND LEASEBACK - GAMMA
 Fair value of PP&E $1,500,000
 Carrying Amount of PP&E $1,000,000
 Useful life of PP&E (years) 20
 Sale and leaseback:
 Lease Term (years) 5
 Annual lease rentals (payable in arrears) $100,000
 Interest rate implicit in lease; 10%
 PV of Minimum Lease Rentals $379,100
 ($100,000 x PVIFA 0.10, 5)
SALE AND LEASEBACK - GAMMA
 Derecognize PP&E on April 1, 20x6, since the sale satisfies
the requirement of IFRS 15

 Recognize Economic Right of use of asset on April 1, 20x6

 Value of Economic Right of use of asset = PV of minimum

lease rentals / Fair Value of PP&E
 = $379,100 / $1,500,000 = 25.27%
 Carrying amount of Economic Right of use of asset
 $1,000,000 x 25.27% = $252,700
 Gain on Sale of PP&E (to the extent right has been sold)
 = (1,500,000 - $1,000,000) x (1 – 25.27%) = $373,650
 Right of use of Asset to be depreciated over lease term of
five years
 $252,700 / 5 = $50,540
SALE AND LEASEBACK - GAMMA
 April 1, 20x6
 (Balance Sheet) Debit Cash $1,500,000
 (Balance Sheet) Credit PP&E $1,000,000
 (Balance Sheet) Debit Economic Right of use of
PP&E Asset $252,700
 (Balance Sheet) Credit PV of minimum lease rentals
liability $ 379,100
 (Profit & Loss) Credit Gain on sale of PP&E
$ 373,650
SALE & LEASEBACK
 March 31, 20x7
 (Balance Sheet) Credit Economic Right to use of Assets
$50,540
 (Profit & Loss) Debit Depreciation $50,540

 Lease Liability at the end of year 1: PV of Lease rentals @

10% for four years = $100,000 x PVIFA 0.10,4 = $ 317,010

 (Balance Sheet) Credit Cash $100,000 (Payment of

lease rental of year 1 at the end of year)
 (Profit & Loss) Debit Finance cost $37,910 (10% of PV of
Lease rentals at the beginning of the year)
 (Balance Sheet) Debit PV of Lease rentals liability $
62,090 (difference between $379100 and $317010)
TELECOMMUNICATION COMPANIES
 Subsidized handsets

 Multiple-user plans

 Early upgrade rights

 Non-refundable fees for set-up services

 Customer retention discounts

 Contracts paid over more than a year

 Indirect channel sales

 Commissions and other contract costs