NZ IFRS 15: Revenue from Contracts with Customers

About the Author:

Paul Wilton (editor)

CA with degrees in commerce, accounting and information technology. Paul worked overseas in the “Big 4” accounting firms and served as a director at Audit New Zealand before setting up his own consultancy. Author of A-Z of New Zealand Business Law, Paul has over 20 years of experience as a business owner and consultant. He joined FBA in 2004 and is totally committed to providing excellence in quality and value to our subscribers. 

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Effective for reporting periods beginning on or after 1 Jan 2018

This new accounting standard establishes principles to be applied in reporting information about the nature, amount, timing anduncertainty of revenue and cash flows arising from a contract with a customer.

 This Standard, when applied, will supersede the following Standards: 

(a) NZ IAS 11 Construction Contracts; 
(b) NZ IAS 18 Revenue; 
(c) NZ IFRIC 13 Customer Loyalty Programmes; 
(d) NZ IFRIC 15 Agreements for the Construction of Real Estate; 
(e) NZ IFRIC 18 Transfers of Assets from Customers; and 
(f) NZ SIC-31 Revenue—Barter Transactions Involving Advertising Services.

The crux of the statement

Whether cash is received up front, monthly throughout a contract, or in any other pattern, this does not affect how revenue is to be recognised.

The core principle [of IFRS 15] is that a company should recognise revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.
- International Accounting Standards Board (IASB)

In other words, the timing of revenue recognition depends very much on the delivery and agreed price of the promised goods or services to the customer.

What contracts are affected?

Chartered Accountants Australia and New Zealand (CAANZ) points out that for most straightforward contracts, there will be few, if any, changes to the amount and timing of revenue recognition. However, for contracts that extend over time or have multiple elements, there could be changes. For some entities, those changes could be significant.

The standard applies to all contracts with customers except:

• Lease contracts;

• Insurance contracts;

• Financial instruments and other contractual rights and obligations; and certain non-monetary exchanges.

CAANZ examples of the types of contracts that are likely to be affected include:

• Construction contracts;

• Licences;

• Customer incentives such as free product giveaways, coupons issued with purchase, rights of return, and loyalty programmes;

• Product warranties; and

• Bundled products such as mobile phones sold with service contracts.

Five Steps

NZ IFRS 15 provides a five-step model to be applied to all contracts with customers. 

Step 1: Identify the contract with the customer;
Step 2: Identify the performance obligations in the contract;
Step 3: Determine the transaction price; 
Step 4: Allocate the transaction price to the performance obligations in the contract; and 
Step 5: Recognise revenue as and when the entity satisfies a performance obligation.

Contracts

Contracts can be written, oral or implied from the customary business practices of the supplier (entity). A contract under NZ IFRS 15 must comply with all of the following:

• The parties have approved the contract; 

• The contract has commercial substance; 

• The entity can identify the rights of each party and the payment terms for the goods and services to be transferred;

• It is probable the entity will collect the consideration, based on the customer’s ability and intention to pay.

Combining of contracts

Contracts are combined if they are entered into with the same customer, at or about the same time, if:

• the contracts are negotiated as a package with a single commercial objective; or

• the consideration for each contract is interdependent on the other; or

• the overall goods or services of the contracts represent a single performance obligation.

Contract modifications

A change in enforceable rights and obligations such as scope or price, is only accounted for as a contract modification if it has been approved, and creates new or changes existing enforceable rights and obligations.

Contract modifications are accounted for as a separate contract if, and only if:

• The contract scope changes due to the addition of distinct goods or services, and

• The change in contract price reflects the standalone selling price of the distinct good or service.

Contract modifications that are not accounted for as a separate contract, are accounted for as:

• Replacement of the original contract with a new contract, if the remaining goods or services under the original contract are distinct from those already transferred to the customer; or

• Continuation of the original contract, if the remaining goods or services under the original contract are distinct from those already transferred to the customer, and the performance obligation is partially satisfied at modification date; or

• A combination of the above, if both elements are present.

Performance obligations

A performance obligation is:“A promise in a contract with a customer to transfer to the customer either:

• a good or service (or a bundle of goods or services) that is distinct; or

• a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.”

A good or service is distinct when either:

• the customer can benefit from it; or 

• the promise to transfer the good or service is separate from other promises in the contract.

The transaction price

This is the amount of consideration an entity expects to be entitled to for the goods or services in the contract. It may be fixed or variable and the consideration need not be in cash.

Allocation of the transaction price to the performance obligations

The total transaction price should be allocated according to the standalone selling prices of the performance obligations when entering into the contract. 

IFRS 15 proposes three possible approaches to the allocation of standalone selling prices where the detailed breakdown is unknown: 

• adjusted market assessment 

• expected cost plus margin 

• residual.

Recognition of revenue

IFRS 15 requires that at the start of the contract, the entity has to determine whether it will meet its performance obligation over a period of time or at a particular point in time. Revenue is recognised when the customer gains control of each good or service promised in the contract.

Recommendations

• Consult your accountants and make sure that they are prepared for the changes and implications for your business, including restating of comparative figures.

• Establish whether adjustments are required to your contracts, terms of trade, policies or other business practices to accommodate the change.

• Understand the impact that these changes may have (if any) on your: 

  • financial reporting, revenue recognition and disclosure;

  • accounting systems;

  • relationships and commitments  (For example with your bank or insurers);

  • Key Performance Indicators (KPIs) and any staff incentives or other possible flow-on effects.

As with the introduction of all change within your business, analyse the impact on staff and others carefully and ensure that care is given to providing appropriate help and support to those who are affected.

FBA Editor

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