20160820 bfrs 15 technical note

BFRS 15 Revenue from Contracts

BFRS 15by Mahamud Hosain FCA of 14

Title : BFRS 15 Revenue from Contracts with Customers

Date of Issuance : May 2014

Effective Date : On or after 1 January 2018

Existing standard Supersedes: BFRS 15 replaces the following standards and interpretations: BAS 11 Construction contracts BAS 18 Revenue IFRIC 13 Customer Loyalty Programmes IFRIC 15 Agreements for the Construction of Real Estate IFRIC 18 Transfers of Assets from Customers SIC-31 Revenue - Barter Transactions Involving Advertising Services

Sectors affected for which IASB issued implementation guidelines:

Aerospace and Defense Sector Travel, hospitality and Leisure Sector

Early Application : Allowed

Background of BFRS 15 :IASB’s predecessor body has issued BAS 11 Construction Contracts [1979] & BAS 18Revenue [1982] & SIC 31 Revenue - Barter Transactions Involving AdvertisingServices, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for theConstruction of Real Estate & IFRIC 18 Transfers of Assets from Customers

All the above mentioned standards cover their own areas & were revisedsubsequently. In order to address the concern/gap (risen time to time), specificguidelines through SIC & IFRIC were issued. IASB (and its predecessor) hadrelentlessly employed efforts to prescribe proper accounting treatments in theseareas. There was understood gap with related GAAP issued by FASB. Finally IASB hasundertaken project to bring convergence with FASB pronouncement/GAAP &integrate different standards in June 2002. After long time & due course of study ofdifferent accounting pronouncements/GAAP issued by variousnational/international standards setter/regulatory guidelines applied in differentpolitical boundary, knowledge sharing with different standards setters across theglobe, inviting & consideration of comments from interested group, meeting withexpert group/researcher, IASB has finally issued BFRS 15 in May 2014.



Major Changes from Earlier Standards

This new standard represents the integrated standards on revenue from customer contracts. With this newstandard the IASB has now completed its substantive re-deliberations in regard to standards for revenue.

Rationale for issuance of new BFRS (BFRS 15) superseding BAS 11 & BAS 18

Revenue is a crucial number to users of the financial statements in assessing a company’s performance andprospects.

The objective of issuance new BFRS covering revenue, is to prescribe proper accounting treatment & practicesthrough clarifying the principles for recognising revenue from contracts with customers.

In order to meeting the above said view this standard establishes & explains the principles that an entity shallapply regarding

o the nature, amount, timing and uncertainty of revenue; ando cash flows arising from a contract with a customer



Overview of BFRS 15

BFRS 15 specifies more specifically:

-how and when an entity shall recognise revenue;- require entities to provide users of financial statements with more informative, relevant disclosures; and-provides a single, principles based five-step model to be applied to all contracts with customers

The package of improvements introduced by BFRS 15 includes:-a methodical approach (how);-a principle oriented guideline on timing (when);-more disclosure with specific & decisive information; and-a substantially a single, principles based five-step model[similar approach of FASB pronouncement few often adopted by IASB under Norwalk agreement ofconvergence between standards issued by two major bodies (IASB & FASB)]

BFRS 15 is expected to assist user more specifically with directive & guidelines to cater the new/changed patternof business & evolution (since issuance of BAS 18, BAS 11 & others IFRIC & SIC). This new standard shall assistprepares/reviewer of financial statements with detail guidelines to encounter the prevailing gap which was notexhaustively covered through existing standards. Surely this standards shall bring together all aspects of:

-The accounting of revenue from contracts; and- Qualitative disclosure

Together with these above mentioned improvements/changes in BFRS 15, will enhance the credibility of financialstatements & better understanding by the users.

IASB stand that the new Standard will enhance investor confidence in regard to revenue and the financial systemas a whole

BFRS 15 Scope: It applies to all contracts with customers except leases, financial instruments and insurancecontracts, except:

BAS 17 Leases;financial instruments and other contractual rights or obligations within the scope of BFRS 9Financial Instruments,BFRS 10 Consolidated Financial Statements,BFRS 11 Joint Arrangements,BAS 27 Separate Financial Statements,BAS 28 Investments in Associates and Joint Ventures;insurance contracts within the scope of BFRS 4 Insurance Contracts; andnon-monetary exchanges between entities in the same line of business to facilitate sales tocustomers or potential customers

What value addition BFRS 15 bring: It establishes the principles that an entity shall apply to report usefulinformation to users of financial statements about

o the nature,o amount,o timing, ando uncertainty of revenue ando cash flows arising from a contract with a customer.

[employs significant emphasis on cash flow]



IASB has made clear cut guidelines in respect of coverage by another standards as

Area Issues DevelopmentsScope of BFRS15

A contract with acustomer may bepartially within thescope of BFRS 15 andpartially within thescope of anotherstandard. In thatscenario: [BFRS 15:7]

if other standards specify how to separate and/or initially measureone or more parts of the contract, then those separation andmeasurement requirements are applied first. The transaction priceis then reduced by the amounts that are initially measured underother standards; if no other standard provides guidance on how to separate and/or

initially measure one or more parts of the contract, then BFRS 15will be applied

Recognition Developed approach ofrevenue recognition

To bring the convergence with FASB GAAP/Pronouncement & laiddown specific guideline, 5 core principle are outlined to review &report the revenue

Income Defined veryspecifically

Increases in economic benefits during the accounting period in theform of inflows or enhancements of assets or decreases ofliabilities that result in an increase in equity, other than thoserelating to contributions from equity participants,

Revenue Defined veryspecifically

Income arising in the course of an entity’s ordinary activities.Earlier revenue was defined asRevenue is the gross inflow of economic benefits during the periodarising in the course of the ordinary activities of an entity whenthose inflows result in increases in equity, other than increasesrelating to contributions from equity participants.

Revenue includes only the gross inflows of economic benefitsreceived and receivable by the entity on its own account.

Recognition Specific framework BFRS 15 prescribes suggested framework to recognize revenue.It clearly direct in regard to:o the nature,o amount,o timing, ando uncertainty of revenue ando cash flows arising from a contract with a customer.

Future cashflow

employs significantemphasis on cash flow

BFRS 15 employs significance of cash flow to generate fromcontracts with customer

sales or usage-ed royaltyrevenue

A different, morerestrictive approach isapplied

Sales or usage-ed royalty revenue arising from licenses ofintellectual property is recognised only when the underlying salesor usage occurs.



What significant changed made & why it is important:

Accounting requirements for revenue

The core principle of BFRS 15 is that an entity will recognise revenue to depict the transfer of promised goods orservices to customers in an amount that reflects the consideration to which the entity expects to be entitled inexchange for those goods or services.

This core principle is delivered in a five-step model framework: [BFRS 15:IN7]

R

.Application of this guidance will depend on the facts and circumstances present in a contract with a customerand will require the exercise of judgment.

Convergence & IntegrationThis standard

- summarizes the revenue recognition in single standard in place of BAS 11, BAS 18, SIC31, IFRIC 13, IFRIC 15 & IFRIC 18 &

- facilitates convergence with FASB GAAP/Pronouncement

RecognitionProvides clear direction in regard to nature, amount, timing, certainty & cash flow from contractwith customer[Changes of pattern of principle based standards to bring convergence with GAAP issued byFASB. Further more emphasis given to cash flow to generate from contract with customer]

Step 1 Identify the contract(s) with a customer

Step 2 Identify the performance obligations in the contract

Step 3 Determine the transaction price (Amount)

Step 4 Allocate the transaction price to the performance obligations in the contract (How much)

Step 5 Recognise revenue when (or as) the entity satisfies a performance obligation

Requires qualitative & specific disclosure



Step Description Principle Guidelines Reviewer Comments ConclusionStep1

Identify thecontractwith thecustomer

A contract with acustomer will bewithin the scope ofBFRS 15 if all thefollowing conditionsare met: [BFRS 15:9]

1. the contract has been approved by theparties to the contract

2. each party’s rights in relation to the goodsor services to be transferred can beidentified

3. the payment terms for the goods orservices to be transferred can be identified;

4. the contract has commercial substance

5. it is probable that the consideration towhich the entity is entitled to in exchangefor the goods or services will be collected

Exception:If a contract with a customer does not yetmeet all of the above criteria, the entity willcontinue to re-assess the contract goingforward to determine whether itsubsequently meets the above criteria. Fromthat point, the entity will apply BFRS 15 tothe contract. [BFRS 15:14]

1. Clarify theobligation

2. Right &responsibilityestablishment

3. Cash flow (ifrequire to applypresent value)/adoption of timevalue of money

4. Establisheconomic valueabove merely legalobligation(substance overform/BFRSframework)

5. Due care to extentof certainty(probable thanlikely not tohappen)

The standard provides detailed guidanceon how to account for approved contractmodifications.(i) If following conditions are met, a

contract modification will beaccounted for as a separate contractwith the customer.

- the scope of the contract increases;- the price of the contract increases.

(ii) If not, it will be accounted for bymodifying the accounting for thecurrent contract with the customer.

Whether these changes to effectprospectively or retrospectivelydepends on whether the remaininggoods or services to be delivered afterthe modification are distinct fromthose delivered prior to themodification.Retrospective effect to given if theremaining goods or services [whichresulted from contract modification]are not distinct.

Step2

Identify theperformanceobligationsin thecontract

At the inception ofthe contract, theentity should assessthe goods or servicesthat have beenpromised to thecustomer, andidentify as a

1.a good or service that is distinct; or2.a series of distinct goods or services that are

substantially the same and that have thesame pattern of transfer to the customer.A series of distinct goods or services istransferred to the customer in the samepattern if both of the following criteria aremet: [BFRS 15:23]

The performance ofobligation under acontract can beidentified throughapplication of thementioned criterion.However regardsshall had to be

More specific & modality of evaluationof obligation performed are clearlyoutlined



performanceobligation: [BFRS15.22]

1. each distinct good or service in the seriesthat the entity promises to transferconsecutively to the customer would be aperformance obligation that is satisfied overtime; and

2. a single method of measuring progresswould be used to measure the entity’sprogress towards complete satisfaction ofthe performance obligation to transfer eachdistinct good or service in the series to thecustomer.A good or service is distinct if both of thefollowing criteria are met: [BFRS 15:27]

1. the customer can benefit from the good orservices on its own or in conjunction withother readily available resources; and

2. the entity’s promise to transfer the good orservice to the customer is separatelyidentifiable from other promises in thecontract.Factors for consideration as to whether apromise to transfer the good or service tothe customer is separately identifiableinclude, but are not limited to: [BFRS 15:29]

1. the entity does not provide a significantservice of integrating the good or servicewith other goods or services promised in thecontract.

2. the good or service does not significantlymodify or customize another good or servicepromised in the contract.

3. the good or service is not highly interrelatedwith or highly dependent on other goods orservices promised in the contract.

given to principleand not merely tooutlined criterion.



Step3

Determinethetransactionprice

1.The transaction price is the amount towhich an entity expects to be entitled inexchange for the transfer of goods andservices. When making this determination,an entity will consider past customarybusiness practices. [BFRS 15:47]

2.Where a contract contains elements ofvariable consideration, the entity willestimate the amount of variableconsideration to which it will be entitledunder the contract. [BFRS 15:50]

3.BFRS 15 deals with the uncertainty relatingto variable consideration by limiting theamount of variable consideration that canbe recognised.

4.A different, more restrictive approach isapplied in respect of sales or usage-basedroyalty revenue arising from licenses ofintellectual property. Such revenue isrecognised only when the underlying salesor usage occur. [BFRS 15:B63]

1.Modality (how) tomeasure value areguided by prudencejudgment inenhanced manner

2.

3.prudent approachto ensureconservativeness

4.prudent approachto ensureconservativeness

Specifically, variable consideration is onlyincluded in the transaction price if, and tothe extent that, it is highly probable thatits inclusion will not result in a significantrevenue reversal in the future when theuncertainty has been subsequentlyresolved. [BFRS 15:56]

Step4

Allocate thetransactionprice to theperformanceobligationsin thecontracts

In multipleperformanceobligations

1. Allocation of the transaction price to makebased on the performance of multipleactivities obligations in the contract byreference to their relative standaloneselling prices. [BFRS 15:74]

2. If a standalone selling price is not directlyobservable, the entity will need toestimate it. BFRS 15 suggests variousmethods that might be used, including:[BFRS 15:79] Adjusted market assessment

approach

1.Provide very cleardirective. This willenhancecomparability

2. Facilitate prudentapplication e



Expected cost plus a marginapproach

Residual approach (only permissiblein limited circumstances).

4. Where consideration is paid in advance orin arrears, the entity will need to considerwhether the contract includes a significantfinancing arrangement and, if so, adjustfor the time value of money. [BFRS 15:60]

3. Significantemphasis given toTime value ofmoney

A practical expedient is available wherethe interval between transfer of thepromised goods or services and paymentby the customer is expected to be lessthan 12 months. [BFRS 15:63]

Step5

Recogniserevenuewhen (or as)the entitysatisfies aperformanceobligation

Revenue isrecognised as controlis passed, either overtime or at a point intime. [BFRS 15:32]

1.Control of an asset is defined as the ability todirect the use of and obtain substantially allof the remaining benefits from the asset.This includes the ability to prevent othersfrom directing the use of and obtaining thebenefits from the asset.

The benefits related to the asset are thepotential cash flows that may be obtaineddirectly or indirectly. These include, but arenot limited to: [BFRS 15:31-33] using the asset to produce goods or

provide services; using the asset to enhance the value

of other assets; using the asset to settle liabilities or

to reduce expenses; selling or exchanging the asset; pledging the asset to secure a loan;

and holding the asset.

2.An entity recognises revenue over time ifone of the following criteria is met: [BFRS15:35] the customer simultaneously

receives and consumes all of the

More detailedapproach



benefits provided by the entity as theentity performs;

the entity’s performance creates orenhances an asset that the customercontrols as the asset is created; or

the entity’s performance does notcreate an asset with an alternativeuse to the entity and the entity hasan enforceable right to payment forperformance completed to date.

If an entity does not satisfy its performanceobligation over time, it satisfies it at a pointin time. Revenue will therefore be recognisedwhen control is passed at a certain point intime. Factors that may indicate the point intime at which control passes include, but arenot limited to: [BFRS 15:38] the entity has a present right to

payment for the asset; the customer has legal title to the

asset; the entity has transferred physical

possession of the asset; the customer has the significant risks

and rewards related to theownership of the asset; and

the customer has accepted the asset.



Presentation in FS:

Issues BFRS 15 Other BFRS Remarks

Presentation ofContractsAssets,Receivable &liability

Contracts with customers will be presented in an entity’sstatement of financial position as a contract liability, acontract asset, or a receivable, depending on therelationship between the entity’s performance and thecustomer’s payment. [BFRS 15:105]

A contract liability is presented in the statement offinancial position where a customer has paid an amountof consideration prior to the entity performing bytransferring the related good or service to the customer.[BFRS 15:106]

Contract liabilities,assets andreceivables shall beaccounted for inaccordance withBFRS 9.

Disclosure ofimpairment

Any difference between the initial recognition of areceivable and the corresponding amount of revenuerecognised should also be presented as an expense, forexample, an impairment loss. [BFRS 15:107-108]

Otherdisclosure

An entity to disclose sufficient information to enable usersof financial statements to understand the nature, amount,timing and uncertainty of revenue and cash flows arisingfrom contracts with customers. Therefore, an entityshould disclose qualitative and quantitative information[BFRS 15:110]

qualitativeandquantitativedisclosure



Impact analysis:



Bangladesh Context:

We, ICAB, only licensed body in Bangladesh by BFRS foundation for issuance of BFRSs as BFRSs & alsopresumed body to issue the GAAP/Accounting/Reporting standards needs to immediately address thechanges made in revenue recognition through BFRS 15 [Recognition & impairment adequately &comprehensively];

The area as covered through BFRS 15 has huge significance in Bangladesh. Considering the diversity &impact of these issues, urgent attention is required to ensure comprehensive guidelines & adequatedisclosure outlines in BFRS 15; and



History:

Date Development CommentsJune 2002 Project on revenue added

to the IASB's agendaHistory of the project

19 December 2008 Discussion PaperPreliminary Views onRevenue Recognition inContracts with Customerspublished

Comment deadline 19June 2009

24 June 2010 Exposure DraftED/2010/6 Revenue fromContracts with Customerspublished

Comment deadline 22October 2010

14 November 2011 Exposure DraftED/2011/6 Revenue fromContracts with Customerspublished (re-exposure)

Comment deadline 13March 2012

28 May 2014 IFRS 15 Revenue fromContracts with Customersissued

Effective for an entity'sfirst annual IFRS financialstatements

for periods beginning onor after 1 January 2017

26 March 2015 Implementing IFRS 15'Revenue from Contractswith Customers' - Apractical guide toimplementation issuesfor the travel, hospitalityand leisure sector

More specific guidelines

31 March 2015 Implementing IFRS 15'Revenue from Contractswith Customers' - Apractical guide toimplementation issuesfor the aerospace anddefense industry

More specific guidelines

With this new standard the IASB has now completed their substantive re-deliberations in regard to standardsfor revenue.

20160820 bfrs 15 technical note

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