Balance sheet

An entity will recognise an asset or liability if one of the parties to a contract has performed before the other. For example, where an entity performs a service or transfers a good in advance of receiving consideration, it will recognise a contract asset or receivable. A contract liability is recognised if the entity receives consideration (or if it has the unconditional right to receive consideration) in advance of performance.

Contract asset and contract liability recognition decision tree * An entity might conclude it has an unconditional right to consideration if the transaction price varies solely due to future changes in market price (for example, after the entity has already satisfied its performance obligations). ** If the customer can cancel the contract and receive a refund of the advance payment, the entity should generally exclude such amounts from contract liabilities and record a ‘customer deposit’ or similar liability.

Contract assets and receivables

A contract asset is an entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer, and it should be presented separately. If an entity transfers control of goods or services to a customer before the customer pays consideration, the entity should record either a contract asset or a receivable depending on the nature of the entity’s right to consideration for its performance. Contract assets are assessed for impairment under IAS 39/IFRS 9.

The revenue standard requires that a contract asset to be classified as a receivable when the entity’s right to consideration is unconditional (that is, when payment is due only on the passage of time). The point at which a contract asset becomes an account receivable might be earlier than the point at which an invoice is issued. The distinction between a contract asset and a receivable is important, because it provides relevant information about the risks related to the entity’s rights in a contract, such as whether the entity only has credit risk or if there are other risks, such as performance risk, remaining. Additionally, as discussed, contract assets and contract liabilities arising from the same contract are presented net as either a single net contract asset or a single net contract liability. Management should apply IAS 39/IFRS 9 when considering impairment. Examples 39 and 40 of the revenue standard illustrate this concept.

Distinguishing between a contract asset and a receivable The manufacturer has entered into a contract to supply two products, X and Y, to a customer, with each product to be delivered at different times. They’ve determined that the delivery of each product constitutes a distinct performance obligation, with control transferring to the customer upon delivery. Once product Y is delivered, no further performance obligations remain. Payment from the customer is not required until one month after both products have been delivered, and there’s no significant financing component involved. Question How should the manufacturer reflect the transaction in the balance sheet upon delivery of product X? Answer Upon satisfying the first performance obligation, which involves delivering product X, the manufacturer should record a contract asset and recognize revenue. This revenue should be based on the portion of the transaction price allocated to that specific performance obligation. The recorded asset is a contract asset rather than a receivable because the manufacturer doesn’t have an unconditional right to the contract consideration until both products are delivered. Upon delivering product Y, the manufacturer should record a receivable and the remaining revenue under the contract. Additionally, the contract asset related to product X should be reclassified to a receivable at this point, as the manufacturer now has an unconditional right to the consideration, which is based solely on the passage of time.

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Timing of invoicing and performance The timing of when an entity satisfies its performance obligation and invoices its customer can significantly impact the presentation of assets and liabilities on the balance sheet. Typically, an unconditional right to receive consideration arises after an entity has transferred control of a good or service and invoiced the customer. This means that receipt of payment is solely based on the passage of time. However, there are instances where an entity might have an unconditional right to consideration before satisfying a performance obligation. For instance, in non-cancellable contracts requiring advance payment, the entity could have an unconditional right to consideration before performing under the contract. In such cases, a receivable is recorded along with a corresponding credit to a contract liability, often termed as ‘deferred revenue’. However, revenue recognition is deferred until the entity has transferred control of the promised goods or services in the contract. Merely issuing an invoice does not necessarily grant an entity an unconditional right to consideration. It’s essential for the entity to conclude that it indeed has an unconditional right to consideration before recording a receivable. Conversely, there are scenarios where an entity might have an unconditional right to consideration before invoicing the customer. In such cases, the entity should record an unbilled receivable, which could happen if the entity has already fulfilled its performance obligations but has not yet issued the invoice. Example 1: Balance sheet presentation – recording a receivable Activity On 1 January, a producer enters into a contract to deliver a product to a customer on 31 March. The contract is non-cancellable and requires the customer to make an advance payment of C5,000 on 31 January. The customer does not pay the consideration until 1 March. Question How should the producer reflect the transaction in the balance sheet? Answer On 31 January, the producer should record a receivable because the producer has an unconditional right to consideration: Dr Receivable 5,000 Cr Contract liability 5,000 On 1 March, upon receipt of the cash, the producer should record the following: C C Dr Cash 5,000 Cr Receivable 5,000 On 31 March, upon satisfying the performance obligation, the producer should recognise revenue as follows: Dr Contract liability 5,000 Cr Revenue 5,000 The producer has an unconditional right to the consideration when the advance payment is due, because the contract is non-cancellable. As a result, the producer records a receivable on 31 January. The producer would not record a receivable on 31 January if the contract were cancellable because it does not have an unconditional right to the consideration. The producer would instead record the cash receipt and a contract liability on the date when the advance payment is received. Example 2: Balance sheet presentation – unbilled receivable Activity On 1 January, a producer enters into a contract to deliver a product to a customer. The producer delivers the product on 31 March and sends an invoice for C5,000 to the customer on 15 April. The customer pays the consideration on 30 April. There are no other performance obligations in the contract. Question How should the producer reflect the transaction in the statement of financial position? Answer On 31 March, upon satisfying the performance obligation, the producer would recognise revenue and record a receivable: C C Dr Receivable 5,000 Cr Revenue 5,000 On 15 April, there would be no entry for the producer to record when it issues the invoice. On 30 April, upon receipt of the cash, the producer would record the following: Dr Cash 5,000 Cr Receivable 5,000 The producer has an unconditional right to the consideration after it delivers the product. As a result, the producer would record a receivable on 31 March. The receivable is ‘unbilled’ because the producer has not yet issued an invoice; however, the balance should be included with receivables (as opposed to contract assets) because it is an unconditional right to consideration.

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Does IFRS 15 or IAS 39 / IFRS 9 apply where all variability in the receivable arises from a market price? On 1 January 20X1, entity A enters into a contract to sell commodity X to a customer for delivery on 31 January 20X1. Goods are delivered and control transfers at 31 January 20X1. The consideration is payable at 30 April 20X1, based on the spot commodity price at that date. There is no other variability associated with the consideration. Question Does IFRS 15 or IAS 39 / IFRS 9 apply where all variability in the receivable arises from a market price? Answer The IASB discussion at its December 2015 meeting indicates that the variability aspect is addressed under IAS 39 or IFRS 9. It was noted that the variable consideration constraint in IFRS 15 does not extend to variability stemming solely from changes in market prices. Consequently, as of January 31, 20X1, the entity will recognize a receivable and measure it according to the principles outlined in IAS 39 or IFRS 9. If the seller follows IAS 39, the variability associated with commodity prices would lead to the recognition of an embedded derivative. Pursuant to paragraph 11 of IAS 39, this embedded derivative would be separated from the host receivable and accounted for separately, unless the receivable is designated at fair value through profit or loss in its entirety under IAS 39. On the other hand, if the seller adopts IFRS 9, the receivable would not pass the solely payments of principal and interest (‘SPPI’) test due to the variability linked with the commodity price. Consequently, the receivable would be classified as fair value through profit or loss under IFRS 9.

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Does IFRS 15 or IAS 39 / IFRS 9 apply where all variability in the consideration arises from physical attributes (for example, quantity of contained metals in concentrate)? On January 1, 20X1, entity B engages in a contract to supply commodity Y to a customer, with delivery scheduled for January 31, 20X1. The exact quantity of the commodity remains uncertain until the purchaser further processes and assesses it at the delivery point. Control of the goods transfers on January 31, 20X1, while the consideration for the transaction is due on April 30, 20X1. The contract outlines fixed per unit prices for each type of commodity, and the consideration is calculated based on these fixed prices, adjusted according to the final quantity of the commodity determined after the purchaser’s further processing and assessment. There are no provisions for adjustments based on fluctuations in market prices. Question Does IFRS 15 or IAS 39 / IFRS 9 apply where all variability in the receivable arises from physical attributes? Answer The IASB discussion during their December 2015 meeting indicates that IFRS 15 applies to the contract, and it falls under the variable consideration guidance outlined in IFRS 15. This determination is based on the fact that the entity’s entitlement to consideration hinges on the physical characteristics of the product delivered, as verified by the customer. In this scenario, there is no embedded derivative to be segregated at the time of delivery under either IAS 39 or IFRS 9. This is because the underlying factor driving variability is a non-financial variable specific to one of the parties involved in the contract, namely, the physical attributes of the commodity being delivered.

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Does IFRS 15 or IAS 39 / IFRS 9 apply where variability arises from both market price and physical attributes (for example, quantity of contained metals in concentrate) and the two kinds of variability are not readily separable? Entity C engages in a contract to supply commodity C to a customer starting from 1 January 20X1, with the transfer of goods and control occurring on 31 January 20X1. The exact quantity of the commodities remains undetermined until the purchaser conducts further processing and assessment at the delivery location. Payment for the commodities is due on 30 April 20X1, based on the spot commodity price per unit at that date. Additionally, the price is subject to adjustment to reflect the final quantity of the commodity determined after the additional processing and assessment. Question Does IFRS 15 or IAS 39 / IFRS 9 apply where variability in the receivable arises from both market price and physical attributes and the two kinds of variability are not readily separable? Answer The variability would be considered on a combined basis. The IASB discussion at their December 2015 meeting suggests that the entity should apply IAS 39 / IFRS 9 to the variability.

Contract liabilities

An entity should recognise a contract liability if the customer’s payment of consideration precedes the entity’s performance (for example, by paying a deposit). Example 38 of the revenue standard illustrates this concept.

Recording a contract liability A producer agrees to supply a product to a customer for C5,000. Initially, the customer pays a deposit of C2,000, with the remaining amount payable upon delivery. The delivery is scheduled for three weeks later, and no significant financing component is involved. Revenue recognition is deferred until the product is delivered and control transfers to the customer. Question How should the producer present the advance payment, prior to delivery, in the balance sheet? Answer The C2,000 deposit was received in advance of delivery, so the producer should recognise a contract liability for that amount. The contract liability will be reversed and recognised as revenue (along with the C3,000 remaining balance) upon delivery of the product.

Netting of contract assets and contract liabilities

Entities often enter into complex arrangements with their customers, with payments due at different times throughout the arrangement. Entities sometimes receive consideration from their customers in advance of performance on a portion of the contract and, on another portion of the contract, perform in advance of receiving consideration. Contract assets and liabilities related to rights and obligations in a contract are interdependent, and therefore are recorded net in the balance sheet. Entities should look to other standards on financial statement presentation to conclude if it is appropriate to net contract assets and contract liabilities if they arise from different contracts that are not combined in accordance with the revenue standard.

Should contract assets and liabilities be presented net even if they arise from different performance obligations in a contract? Yes. A net contract asset or liability should be determined and presented at the contract level, not at the performance obligation level.

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Should contract assets and liabilities be recorded net in the balance sheet for contracts that are combined in accordance with the revenue standard? Or should they be presented separately? When contracts are combined and treated as a single contract, the presentation guidance should be applied to the combined contract. As a result, contract assets and liabilities should be presented net, appearing either as a single contract asset or a contract liability.

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Where an entity records a refund liability, which is an estimate of cash that will be refunded to customers that return products, should this refund liability be presented as a contract liability for the purposes of disclosure and netting with contract assets? No, the refund liability mentioned above is distinct from a contract liability, which represents an obligation to provide goods or services. Therefore, the entity should not categorize the refund liability with contract liabilities for disclosure purposes or for netting with contract assets..

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How should an entity assess whether to present other balance sheet accounts resulting from accounting for contracts with customers on a net basis (other than contract assets and contract liabilities)? The revenue standard explicitly addresses the requirement to present contract assets and contract liabilities on a net basis. However, for determining whether it’s suitable to offset other balance sheet accounts (such as accounts receivable against refund liabilities), management should evaluate the general guidance on balance sheet offsetting provided in IAS 1.

Presentation of contract assets and contract liabilities

Entities can use alternative descriptions in the balance sheet (for example, deferred revenue) instead of the terms ‘contract asset’ and ‘contract liability’. Certain industries, for example, have common terms that are used for these situations. Entities can use these alternative descriptions, as long as they provide sufficient information to distinguish between those rights to consideration that are conditional (that is, contract assets) from those that are unconditional (that is, receivables).

Should an entity present its contract assets and contract liabilities, or other balance sheet accounts related to contracts from customers as separate line items in the balance sheet? While the revenue standard does not provide specific guidance on whether entities must present contract assets, contract liabilities, or other balance sheet accounts related to customer contracts (e.g., refund liabilities) as separate line items in the balance sheet, entities should refer to other standards on financial statement presentation to determine if separate presentation is required.

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In a classified balance sheet, should contract assets and contract liabilities be presented as current and non-current assets and liabilities? Indeed, in a classified balance sheet, entities should follow the guidance outlined in IAS 1 to distinguish between the current and noncurrent portions of contract assets and contract liabilities.

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Example Contract liability and receivable Case A – Cancellable contract On 1 January 20X9, an entity enters into a cancellable contract to transfer a product to a customer on 31 March 20X9. The contract requires the customer to pay consideration of CU1,000 in advance on 31 January 20X9. The customer pays the consideration on 1 March 20X9. The entity transfers the product on 31 March 20X9. The following journal entries illustrate how the entity accounts for the contract: 1.      (a) the entity receives cash of CU1,000 on 1 March 20X9 (cash is received in advance of performance): Cash CU1,000   Contract liability CU1,000 2.      (b) the entity satisfies the performance obligation on 31 March 20X9: Contract liability CU1,000   Revenue CU1,000 Case B – Non-cancellable contract The same facts as in Case A apply to Case B except that the contract is non-cancellable. The following journal entries illustrate how the entity accounts for the contract: 1.      (a) the amount of consideration is due on 31 January 20X9 (which is when the entity recognises a receivable because it has an unconditional right to consideration): Receivable CU1,000   Contract liability CU1,000 2.      (b) the entity receives the cash on 1 March 20X9: Cash CU1,000   Receivable CU1,000 3.      (c) the entity satisfies the performance obligation on 31 March 20X9: Contract liability CU1,000   Revenue CU1,000 If the entity issued the invoice before 31 January 20X9 (the due date of the consideration), the entity would not present the receivable and the contract liability on a gross basis in the statement of financial position because the entity does not yet have a right to consideration that is unconditional.

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Example Contract asset recognised for the entity’s performance On 1 January 20X8, an entity enters into a contract to transfer Products A and B to a customer in exchange for CU1,000. The contract stipulates that Product A must be delivered first, and payment for its delivery is contingent upon the subsequent delivery of Product B. In essence, the full consideration of CU1,000 is only due after both Products A and B are transferred to the customer. Thus, until both products are delivered, the entity doesn’t possess an unconditional right to consideration (a receivable). The entity identifies two distinct promises within the contract: transferring Product A and transferring Product B. It allocates CU400 to the performance obligation of transferring Product A and CU600 to the performance obligation of transferring Product B, based on their respective stand-alone selling prices. Revenue recognition occurs for each performance obligation individually, coinciding with the transfer of control of the respective product to the customer. The entity satisfies the performance obligation to transfer Product A:   Contract asset CU400     Revenue CU400 The entity satisfies the performance obligation to transfer Product B and recognises the unconditional right to consideration:   Receivable CU1,000     Contract asset CU400     Revenue CU600

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Example Receivable recognised for the entity’s performance On 1 January 20X9, an entity enters into a contract with a customer to transfer products at a rate of CU150 per product. However, the contract specifies that if the customer purchases more than 1 million products in a calendar year, the price per unit retroactively decreases to CU125. Payment is due upon the transfer of control of the products, granting the entity an unconditional right to consideration of CU150 per product until the retrospective price reduction is triggered (i.e., after 1 million products are shipped). Upon contract inception, the entity estimates that the customer will meet the 1 million product threshold, resulting in an estimated transaction price of CU125 per product. Therefore, upon the first shipment of 100 products to the customer, the entity recognizes: Receivable CU15,000(a)   Revenue CU12,500(b)   Refund liability (contract liability) CU2,500 (a) CU150 per product × 100 products (b) CU125 transaction price per product × 100 products The refund liability of CU25 per product represents the amount expected to be refunded to the customer for the volume-based rebate. This rebate reflects the difference between the CU150 price stipulated in the contract, for which the entity has an unconditional right to receive, and the estimated transaction price of CU125

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Presentation of a contract as a single contract asset or contract liability When a contract or multiple contracts combined as a single contract under IFRS 15 involve more than one performance obligation, there may be situations where the total of amounts already received from the customer and unpaid amounts recognized as receivables is either less than or exceeds the revenue recognized for certain performance obligations. In such cases, separate presentation of contract assets or liabilities for each performance obligation isn’t appropriate. Instead, the contract as a whole should be considered as the appropriate unit of account for presenting contract assets and liabilities. According to IFRS 15, when either party has fulfilled its obligations under a contract, the entity should present the contract in the statement of financial position as a contract asset or liability, depending on the relationship between the entity’s performance and the customer’s payment. Any unconditional rights to consideration should be separately presented as a receivable. This principle extends to scenarios where multiple contracts are combined and treated as a single contract under IFRS 15. The standard emphasizes that the remaining rights and performance obligations in such contracts should be accounted for and presented on a net basis, either as a contract asset or a contract liability. This approach reflects the interdependencies within the contract’s rights and obligations and aligns with the intent of presenting a clear and accurate financial position.

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Offsetting contract assets and liabilities against other assets and liabilities IFRS 15 introduces the terms ‘contract asset’ and ‘contract liability’ in the context of revenue arising from contracts with customers and provides guidance on the presentation of such assets and liabilities in the statement of financial position. Entities may encounter various types of assets and liabilities related to customers arising from revenue or other transactions. These could include costs of obtaining a contract, which are capitalized in line with IFRS 15, financial assets and liabilities as defined in IAS 32, and provisions as defined in IAS 37. However, when it comes to offsetting these assets and liabilities against contract assets and liabilities, entities should note that IAS 1 prohibits such offsetting unless required or permitted by an IFRS. Neither IFRS 15 nor any other IFRS provides such a requirement or permission concerning contract assets and liabilities. This matter was deliberated by the TRG in October 2014, and it was generally agreed that entities should look to other IFRS Standards for guidance on whether to offset other assets and liabilities against contract assets and liabilities.

Income statement

An entity should present or disclose the following amounts:

• revenue recognised from contracts with customers separately from other sources of revenue. Other sources of revenue include revenue from interest, dividends and leases. Interest income and interest expense recorded where a significant financing component exists should be presented separately from revenue from contracts with customers in the income statement. An entity might present interest income as revenue in circumstances in which interest income arises from an entity’s ordinary activities.
• impairment loss from contracts with customers (for example, impairments of contract assets or receivables) separately from impairment losses from other types of contracts, and are not recorded as a reduction of revenue.

Does the seller adjust revenue if the fair value of the separated embedded derivative or the receivable changes? Entity A enters into a contract to sell commodity X to a customer on January 1, 20X1, with goods delivered and control transferred by January 31, 20X1. Payment for the sales price is due on April 30, 20X1, determined based on the spot commodity price at that date. No other variability is associated with the sales price. Entity A determines that it possesses an unconditional right to consideration and therefore recognizes a receivable. However, the variability linked to the market price constitutes a separate embedded derivative if Entity A is applying IAS 39. Alternatively, if Entity A is applying IFRS 9, the receivable would fail the SPPI (solely payments of principal and interest) test and be measured at fair value through profit or loss. Question Where the fair value of the embedded derivative or receivable changes, does the seller adjust revenue? Answer The receivable is accounted for in accordance with IAS 39 / IFRS 9 and not IFRS 15. IAS 39 / IFRS 9 require changes in the value of the embedded derivative or receivable to be recognised in profit or loss. Such changes do not meet the definition of ‘revenue from contracts with customers’, however, presentation as part of revenue in the primary statement with the amount disclosed as another type of revenue in the notes would be acceptable.

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Disclosures

Entities should disclose certain qualitative and quantitative information so that financial statement users can understand the nature, amount, timing and uncertainty of revenue and cash flows generated from their contracts with customers. An entity should disclose qualitative and quantitative information about:

1. its contracts with customers;
2. the significant judgements, and changes in those judgements, made in applying the standard; and
3. any asset recognised from the costs to obtain or fulfil a contract with a customer.

Management should consider the level of detail necessary to meet the disclosure objective. For example, an entity should aggregate or disaggregate information, as appropriate, to provide clear and meaningful information to a financial statement user.

Management should also disclose the use of certain practical expedients. An entity that uses the practical expedient regarding the existence of a significant financing component, or the practical expedient for expensing certain costs of obtaining a contract, for example, should disclose that fact.

Entities need not repeat disclosures if the information is already presented as required by other accounting standards.

Consideration of materiality in the context of IFRS 15 disclosure requirements IAS 8 specifies that accounting policies within IFRS Standards do not need to be applied when their impact is immaterial. Similarly, IAS 1 notes that if information required by an IFRS is not material, entities are not obligated to disclose it. Entities must evaluate both quantitative and qualitative factors to ascertain the materiality of revenue information from contracts with customers. This assessment extends beyond recognition and measurement to include disclosures in the financial statements. This concept is reiterated by the requirement in paragraph IFRS 15 to “consider the level of detail necessary to satisfy the disclosure objective and how much emphasis to place on each of the various requirements” and by IFRS 15, which states as follows. “The boards also decided to include disclosure requirements to help an entity meet the disclosure objective. However, those disclosures should not be viewed as a checklist of minimum disclosures, because some disclosures may be relevant for some entities or industries but may be irrelevant for others. The boards also observed that it is important for an entity to consider the disclosures together with the disclosure objective and materiality. Consequently, IFRS 15 clarifies that an entity need not disclose information that is immaterial.” Entities should conduct this assessment for each reporting period because what may have been considered irrelevant or immaterial in the past could become material due to changes in monetary values or other qualitative factors. Additionally, it’s essential for entities to take into account the perspectives of local regulators regarding the appropriate method for evaluating materiality concerning disclosures.

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Format for disclosing disaggregated revenue The disclosure of disaggregated revenue can take various formats, such as a tabular or narrative presentation, without a specific requirement for a tabular reconciliation. Nevertheless, entities must ensure that they include all the necessary information as per the requirements of IFRS 15. This issue was also addressed by the FASB transition resource group for revenue recognition in November 2016, within the context of Accounting Standards Codification Topic 606 (the US GAAP equivalent of IFRS 15).

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Example Disaggregation of revenue – quantitative disclosures An entity reports the following segments: consumer products, transportation and energy, in accordance with IFRS 8 Operating Segments. When the entity prepares its investor presentations, it disaggregates revenue into primary geographical markets, major product lines and timing of revenue recognition (ie goods transferred at a point in time or services transferred over time). The entity determines that the categories used in the investor presentations can be used to meet the objective of the disaggregation disclosure requirement in IFRS 15, which is to disaggregate revenue from contracts with customers into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. The following table illustrates the disaggregation disclosure by primary geographical market, major product line and timing of revenue recognition, including a reconciliation of how the disaggregated revenue ties in with the consumer products, transportation and energy segments, in accordance with IFRS 15. Segments Consumer products Transport Energy Total   CU CU CU CU Primary geographical markets North America 990 2,250 5,250 8,490 Europe 300 750 1,000 2,050 Asia   700   260        –    960 1,990 3,260 6,250 11,500 Major goods/service lines Office supplies 600 – – 600 Appliances 990 – – 990 Clothing 400 – – 400 Motorcycles – 500 – 500 Automobiles – 2,760 – 2,760 Solar panels – – 1,000 1,000 Power plant        –        – 5,250  5,250 1,990 3,260 6,250 11,500 Timing of revenue recognition Goods transferred at a point in time 1,990 3,260 1,000 6,250 Services transferred over time        –        – 5,250  5,250 1,990 3,260 6,250 11,500

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Application of relief from requirement to disclose details regarding the amount of the transaction price allocated to future performance obligations The circumstances outlined in IFRS 15 represent the only exceptions where entities are not mandated to disclose the information typically required. Therefore, for a performance obligation within a contract initially expected to last over a year, the disclosure practical expedient is only applicable if the recognition practical expedient in IFRS 15 is utilized. Quantitative calculations for amounts allocated to unsatisfied (or partially unsatisfied) performance obligations might necessitate judgment, particularly with variable transaction prices. However, it’s crucial to exclude amounts not factored into the transaction price per IFRS 15, such as constrained variable consideration and adjustments for significant financing components. Nonetheless, a qualitative explanation for their exclusion should be provided as required by IFRS 15. Moreover, when the timing of future revenue recognition remains uncertain, disclosing solely qualitative information regarding that anticipated timing might be appropriate.

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Presentation and disclosure of the remaining performance obligations on cancellable contracts – example Company A enters a two-year agreement with Customer B to provide a right-to-use license of intellectual property (IP) and post-contract customer support (PCS) in exchange for a prepaid fixed fee of CU2,400. Customer B has the right to terminate the contract for convenience after the first month, receiving a pro rata refund of prepaid fees. For instance, if Customer B ends the agreement at the end of month 1, they lose access to the IP but receive a refund of CU2,300. Due to this termination provision, the contract is treated as a one-month term license (and PCS), with optional monthly renewals priced at CU100. If Customer B renews the license, the obligation extends by one month, and Company A provides an additional one-month term license and one month of PCS.For disclosure purposes under IFRS 15, Company A considers the contract term to be one month, despite the stated two-year term. This is because only the first month is legally enforceable, given Customer B’s right to terminate without penalty. As the contract’s expected duration is one year or less, Company A can opt not to disclose remaining performance obligations. Alternatively, if the practical expedient isn’t used, disclosure would be limited to the remaining one-month obligation to provide PCS. Top of Form Furthermore, CU2,300 of the upfront payment from Customer B pertains to potential contract renewals, akin to optional purchases for months 2 to 24. Therefore, this amount should be classified as a financial liability, not a contract liability. It does not signify Company A’s obligation to provide goods or services, as the entity is not obliged to furnish additional one-month term licenses and PCS until Customer B opts to renew the contract monthly.

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Example Disclosure of the transaction price allocated to the remaining performance obligations On 30 June 20X7, the entity enters three contracts (Contracts A, B, and C) with distinct customers for service provision, each spanning a two-year non-cancellable term. In compliance with IFRS 15, the entity evaluates the criteria to determine the pertinent details for each contract to feature in the disclosure concerning the transaction price allocated to the remaining performance obligations as of 31 December 20X7. Contract A The entity is contracted to provide cleaning services over the next two years, usually at least once a month, with a billing rate of CU25 per hour of service. As the entity invoices the customer based on the direct value of completed performance, aligned with IFRS 15, no disclosure is required if the entity opts for the practical expedient. Contract B The entity is tasked with providing cleaning and lawn maintenance services as required, up to four visits per month, over the next two years, with a fixed monthly fee of CU400 for both services. Progress toward fulfilling the obligation is measured using a time-based metric. For Contract B, the entity discloses the portion of the transaction price yet to be recognized as revenue through a table featuring quantitative time brackets depicting when revenue recognition is expected   20X8  20X9  Total   CU  CU  CU Revenue expected to be recognised on this contract as of 31 December 20X7 4,800(a) 2,400(b) 7,200 (a) CU4,800 = CU400 × 12 months. (b) CU2,400 = CU400 × 6 months. Contract C For Contract C, the entity commits to providing cleaning services as required over the next two years. The customer pays a fixed fee of CU100 per month, along with a variable consideration payment ranging from CU0 to CU1,000, associated with a one-time regulatory review and certification of the customer’s facility. The entity estimates it will receive CU750 of the variable consideration. This estimate is included in the transaction price based on the entity’s judgment that a significant reversal in cumulative revenue recognition is highly improbable, as per IFRS 15 guidelines. Progress toward fulfilling the obligation is tracked using a time-based approach.   20X8  20X9  Total   CU  CU  CU Revenue expected to be recognised on this contract as of 31 December 20X7 1,575(a) 788(b) 2,363 (a) Transaction price = CU3,150 (CU100 × 24 months + CU750 variable consideration) recognised evenly over 24 months at CU1,575 per year. (b) CU1,575 / 2 = CU788 (ie for 6 months of the year). Furthermore, as per IFRS 15 guidelines, the entity provides a qualitative disclosure stating that a portion of the performance bonus has been omitted from the disclosure because it wasn’t accounted for in the transaction price. This exclusion aligns with the necessity to constrain estimates of variable consideration, ensuring accuracy and reliability in revenue recognition.

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Example Disclosure of the transaction price allocated to the remaining performance obligations – qualitative disclosure As of December 31, 20X2, the entity has recognized CU3.2 million of revenue from a contract entered into on January 1, 20X2, to construct a commercial building for a fixed consideration of CU10 million. The construction is deemed a single performance obligation fulfilled over time. While the entity anticipates completing the project by 20X3, there’s a possibility it extends into the first half of 20X4. Top of Form As of December 31, 20X2, the entity discloses the remaining transaction price yet to be recognized as revenue. Due to uncertainty regarding revenue recognition timing, the disclosure is qualitative. The entity expects to recognize this revenue as the building construction progresses, likely over the next 12–18 months. “As of 31 December 20X2, the aggregate amount of the transaction price allocated to the remaining performance obligation is CU6.8 million and the entity will recognise this revenue as the building is completed, which is expected to occur over the next 12–18 months.”