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 A manufacturer enters into a contract to deliver two products to a customer (products X and Y), which will be delivered at different points in time. Product X will be delivered before product Y. The manufacturer has concluded that delivery of each product is a separate performance obligation and that control transfers to the customer upon delivery. No performance obligations remain after the delivery of product Y. The customer is not required to pay for the products until one month after both are delivered. Assume that no significant financing component exists. Question How should the manufacturer reflect the transaction in the balance sheet upon delivery of product X? Answer The manufacturer should record a contract asset and corresponding revenue upon satisfying the first performance obligation (delivery of product X), based on the portion of the transaction price allocated to that performance obligation. A contract asset is recorded rather than a receivable, because the manufacturer does not have an unconditional right to the contract consideration until both products are delivered. A receivable and the remaining revenue under the contract should be recorded upon delivery of product Y, and the contract asset related to product X should also be reclassified to a receivable. The manufacturer has an unconditional right to the consideration at that time, since payment is due based only upon the passage of time.

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Timing of invoicing and performance The timing of when an entity satisfies its performance obligation and when it invoices its customer can affect the presentation of assets and liabilities on the balance sheet. An unconditional right to receive consideration often arises after an entity transfers control of a good or service and invoices the customer, because receipt of payment is based only on the passage of time. An entity could, however, have an unconditional right to consideration before it has satisfied a performance obligation. For example, an entity that enters into a non-cancellable contract requiring advance payment could have an unconditional right to consideration before it performs under the contract. That is, the right to invoice and collect from the customer is not contingent on performance, even though the entity might have to refund all or a portion of the payment to the customer if it ultimately does not perform according to the contract. A receivable is recorded, with a corresponding credit to a contract liability (which could be referred to as ‘deferred revenue’); however, revenue is not recognised until the entity has transferred control of the goods or services promised in the contract. An entity that issues an invoice does not necessarily have an unconditional right to consideration. An entity that invoices a customer cannot record a receivable unless it has concluded that it has an unconditional right to consideration. An entity could, on the other hand, have an unconditional right to consideration before it invoices its customer, in which case it should record an unbilled receivable. For example, this could occur if an entity has satisfied 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 suggests that IAS 39 / IFRS 9 is applied to the variability. The IASB observed that the variable consideration constraint in IFRS 15 would not apply to variability arising solely from changes in market price. At 31 January 20X1 the entity will recognise a receivable and measure it in accordance with IAS 39 / IFRS 9. If the seller applies IAS 39, the variability associated with commodity price would give rise to an embedded derivative. Under paragraph 11 of IAS 39, the 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. If the seller has adopted IFRS 9, the receivable would fail the solely payments of principal and interest (‘SPPI’) test due to the variability associated with the commodity price. The receivable would be classified as fair value through profit or loss.

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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 1 January 20X1, entity B enters into a contract to sell commodity Y to a customer for delivery on 31 January 20X1. The quantity of the commodity will not be known until further processing and assessment by the purchaser at the delivery point. The goods are delivered and control transfers at 31 January 20X1. The consideration is payable at 30 April 20X1. The contract contains a schedule of per unit fixed prices for each commodity type. The consideration is derived from these fixed prices, based on the final amount of the commodity determined after the further processing and assessment. No adjustments are made for changes 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 at their December 2015 meeting suggests that IFRS 15 applies and the contract is subject to the variable consideration guidance in IFRS 15. This is because the entity’s right to consideration is contingent upon the physical attributes of the product delivered as confirmed by the customer. There is no embedded derivative to be separated at delivery under IAS 39 or IFRS 9. This is because the underlying is a non-financial variable specific to a party to the contract (being the physical attributes of the commodity 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 enters into a contract to sell commodity C to a customer on 1 January 20X1. Goods are delivered and control transfers at 31 January 20X1. The quantity of the commodities will not be known until further processing and assessment by the purchaser at the delivery point. The consideration is payable at 30 April 20X1, based on spot commodity price per unit at that date. The price is also subject to adjustment for the final quantity of the commodity determined after the further 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 enters into a contract to deliver a product to a customer for C5,000. The customer pays a deposit of C2,000, with the remainder due upon delivery (assume that delivery will occur three weeks later and a significant financing component does not exist). Revenue will be recognised upon delivery, because that is when control of the product 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 accounted for as a single contract, an entity should apply the presentation guidance to the combined contract. Contract assets and liabilities should therefore be presented net as either 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 described above differs from a contract liability, which is an obligation to transfer goods or services. Therefore, the entity should not include the refund liability with contract liabilities for the purposes of disclosure and 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 only specifically addresses the need to present contract assets and contract liabilities on a net basis. To determine whether it is appropriate to offset other balance sheet accounts (for example, accounts receivable against refund liabilities), management should assess the general guidance on balance sheet offsetting included 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? There is no guidance on whether an entity is required to present its contract assets and contract liabilities, or other balance sheet accounts related to contracts from customers (for example, refund liabilities), as separate line items in the balance sheet. Entities should look to other standards on financial statement presentation to determine if separate presentation is necessary.

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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? Yes. In a classified balance sheet, entities should refer to the guidance 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 requires Product A to be delivered first and states that payment for the delivery of Product A is conditional on the delivery of Product B. In other words, the consideration of CU1,000 is due only after the entity has transferred both Products A and B to the customer. Consequently, the entity does not have a right to consideration that is unconditional (a receivable) until both Products A and B are transferred to the customer. The entity identifies the promises to transfer Products A and B as performance obligations and allocates CU400 to the performance obligation to transfer Product A and CU600 to the performance obligation to transfer Product B on the basis of their relative stand-alone selling prices. The entity recognises revenue for each respective performance obligation when control of the product transfers 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 An entity enters into a contract with a customer on 1 January 20X9 to transfer products to the customer for CU150 per product. If the customer purchases more than 1 million products in a calendar year, the contract indicates that the price per unit is retrospectively reduced to CU125 per product. Consideration is due when control of the products transfers to the customer. Therefore, the entity has an unconditional right to consideration (ie a receivable) for CU150 per product until the retrospective price reduction applies (ie after 1 million products are shipped). In determining the transaction price, the entity concludes at contract inception that the customer will meet the 1 million products threshold and therefore estimates that the transaction price is CU125 per product. Consequently, upon the first shipment to the customer of 100 products the entity recognises the following: 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 represents a refund of CU25 per product, which is expected to be provided to the customer for the volume-based rebate (ie the difference between the CU150 price stated in the contract that the entity has an unconditional right to receive and the CU125 estimated transaction price).

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Presentation of a contract as a single contract asset or contract liability When a contract (or multiple contracts accounted for as a single combined contract in accordance with IFRS 15) contains more than one performance obligation, it is possible that the aggregate of amounts already paid by the customer and unpaid amounts recognised as receivables is less than the revenue recognised for some performance obligations, but exceeds the revenue recognised for other performance obligations. In such circumstances, an entity should not present separate contract assets (for those performance obligations for which the aggregate of amounts already paid by the customer and unpaid amounts recognised as receivables is less than the revenue recognised) and contract liabilities (when the converse applies). The appropriate unit of account for presenting contract assets and liabilities is the contract as a whole. Accordingly, it is not appropriate to present both contract assets and contract liabilities for a single contract; instead, a single net figure should be presented. IFRS 15 states that, “when either party to a contract has performed, an entity shall present the contract in the statement of financial position as a contract asset or a contract liability, depending on the relationship between the entity’s performance and the customer’s payment. An entity shall present any unconditional rights to consideration separately as a receivable”. This also applies to circumstances in which multiple contracts are combined and are accounted for as a single contract in accordance with the requirements for combination in IFRS 15. IFRS 15 explains that “the boards decided that the remaining rights and performance obligations in a contract should be accounted for and presented on a net basis, as either a contract asset or a contract liability. The boards noted that the rights and obligations in a contract with a customer are interdependent. … The boards decided that those interdependencies are best reflected by accounting and presenting on a net basis the remaining rights and obligations in the statement of financial position”. This issue was discussed by the TRG in October 2014.

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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 also recognise other types of assets and liabilities which relate to customers, as a result of revenue or other transactions. Examples might include costs of obtaining a contract capitalised in accordance with IFRS 15, financial assets and financial liabilities as defined in IAS 32, and provisions as defined in IAS 37. In practice, it will not be possible for entities to offset other assets and liabilities against contract assets and liabilities.  IAS 1 prohibits offsetting assets and liabilities unless required or permitted by an IFRS. Neither IFRS 15 nor any other IFRS includes such a requirement or permission in respect of contract assets and liabilities. This issue was discussed by the TRG in October 2014, with general agreement that entities should refer to other IFRS Standards when determining whether to offset other assets and liabilities against contract assets and contract 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 1 January 20X1. Goods are delivered and control transfers at 31 January 20X1. The sales price is payable at 30 April 20X1, based on the spot commodity price at that date. There is no other variability associated with the sales price charged. Entity A concludes that it has an unconditional right to consideration and recognises a receivable. The variability associated with market price is a separated embedded derivative if entity A is applying IAS 39 or results in the receivable failing the SPPI test and hence being measured at fair value through profit or loss if entity A is applying IFRS 9. 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 states that accounting policies in IFRS Standards do not need to be applied when the effect of their application is not material. IAS 1 states that an entity need not provide a specific disclosure required by an IFRS if the information is not material. Entities should assess both quantitative and qualitative factors to determine the materiality of information about revenue from contracts with customers. This applies not only to recognition and measurement but also to 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.” This assessment should be made for each reporting period because a disclosure deemed to be irrelevant or immaterial in previous periods may subsequently become material as a result of increases in the monetary values to be disclosed or changes in other qualitative factors. Entities should also consider the views of local regulators on the appropriate approach to assessing materiality in the context of disclosures.

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Format for disclosing disaggregated revenue The disclosure of disaggregated revenue does not need to be in any particular format and may be presented in a tabular or a narrative format. A tabular reconciliation is not required. However, an entity must still provide the information required in IFRS 15. This issue was discussed by the FASB transition resource group for revenue recognition in November 2016. This discussion was in 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 set out in IFRS 15 are the only two circumstances in which an entity is not required to disclose the information generally required under IFRS 15. Therefore, for a performance obligation that is part of a contract with an original expected duration of more than one year, the disclosure practical expedient is only available when the recognition practical expedient in IFRS 15 is applied. Calculation of quantitative information for the amounts allocated to unsatisfied (or partially unsatisfied) performance obligations may require the exercise of judgement, particularly when the transaction price is variable. However, it should be noted that amounts not included in the transaction price in accordance with IFRS 15 (notably, variable consideration constrained in accordance with IFRS 15 and adjustments to reflect a significant financing component in the contract) should not be included in the amounts disclosed. However, a qualitative explanation of their exclusion from the transaction price should be disclosed as required by IFRS 15. In addition, when the timing of future revenue recognition is uncertain, it might be appropriate to apply the option in IFRS 15 to disclose only qualitative information on that expected timing. This issue was discussed by the TRG in July 2015.

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Presentation and disclosure of the remaining performance obligations on cancellable contracts – example Company A enters into a two-year agreement to provide a right-to-use licence of intellectual property (IP) and post-contract customer support (PCS) during the contract term to Customer B in exchange for a fixed fee of CU2,400, which is prepaid by Customer B at contract inception. Customer B can terminate the contract for convenience at any time after the first month in exchange for a pro rata refund of its prepaid consideration. For example, if Customer B terminates the agreement at the end of month 1, Customer B would no longer be able to use the IP but would receive a refund of CU2,300. As a result of the cancellation provision, the contract is accounted for as a one-month term licence (and PCS) with optional monthly renewals each priced at CU100. If, and when, Customer B renews the licence (by not terminating after the first month), the licence and PCS obligation are extended by one month. Upon renewal, Company A transfers an additional one-month term licence to Customer B and is obligated to provide one month of PCS. For the purposes of applying the disclosure requirements in IFRS 15 regarding the remaining performance obligations at the reporting date, the contract term is only one month. Although Company A’s contract with Customer B has a stated contract term of two years, only the first month is legally enforceable because of Customer B’s ability to terminate the contract for convenience after one month with no penalty and therefore the contract term is only one month. Because the contract has an expected duration of one year or less (i.e. it is only for one month), Company A can elect to apply the practical expedient in IFRS 15 to not disclose information about its remaining performance obligations under the contract. If the practical expedient is not used, the information required in respect of the remaining performance obligation would be limited to the remaining portion of the one-month obligation to provide PCS. In addition, because CU2,300 of the upfront consideration received from Customer B is related to potential contract renewals that are, in effect, optional purchases (i.e. consideration for months 2 to 24), that amount should be presented as a financial liability rather than a contract liability. The CU2,300 does not represent Company A’s obligation to transfer goods or services to a customer for which the entity has received consideration (or for which the amount is due) from the customer. This is because Company A is not obligated to transfer additional one-month term licences and PCS to the customer until the customer exercises its option to renew the contract each month (by electing not to terminate the contract).

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Example Disclosure of the transaction price allocated to the remaining performance obligations On 30 June 20X7, an entity enters into three contracts (Contracts A, B and C) with separate customers to provide services. Each contract has a two-year non-cancellable term. The entity considers the requirements in IFRS 15 in determining the information in each contract to be included in the disclosure of the transaction price allocated to the remaining performance obligations at 31 December 20X7. Contract A Cleaning services are to be provided over the next two years typically at least once per month. For services provided, the customer pays an hourly rate of CU25. Because the entity bills a fixed amount for each hour of service provided, the entity has a right to invoice the customer in the amount that corresponds directly with the value of the entity’s performance completed to date in accordance with IFRS 15. Consequently, no disclosure is necessary if the entity elects to apply the practical expedient in IFRS 15. Contract B Cleaning services and lawn maintenance services are to be provided as and when needed with a maximum of four visits per month over the next two years. The customer pays a fixed price of CU400 per month for both services. The entity measures its progress towards complete satisfaction of the performance obligation using a time-based measure. The entity discloses the amount of the transaction price that has not yet been recognised as revenue in a table with quantitative time bands that illustrates when the entity expects to recognise the amount as revenue. The information for Contract B included in the overall disclosure is as follows:   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 Cleaning services are to be provided as and when needed over the next two years. The customer pays fixed consideration of CU100 per month plus a one-time variable consideration payment ranging from CU0–CU1,000 corresponding to a one-time regulatory review and certification of the customer’s facility (ie a performance bonus). The entity estimates that it will be entitled to CU750 of the variable consideration. On the basis of the entity’s assessment of the factors in IFRS 15, the entity includes its estimate of CU750 of variable consideration in the transaction price because it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur. The entity measures its progress towards complete satisfaction of the performance obligation using a time-based measure. The entity discloses the amount of the transaction price that has not yet been recognised as revenue in a table with quantitative time bands that illustrates when the entity expects to recognise the amount as revenue. The entity also includes a qualitative discussion about any significant variable consideration that is not included in the disclosure. The information for Contract C included in the overall disclosure is as follows:   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). In addition, in accordance with IFRS 15, the entity discloses qualitatively that part of the performance bonus has been excluded from the disclosure because it was not included in the transaction price. That part of the performance bonus was excluded from the transaction price in accordance with the requirements for constraining estimates of variable consideration.

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Example Disclosure of the transaction price allocated to the remaining performance obligations – qualitative disclosure On 1 January 20X2, an entity enters into a contract with a customer to construct a commercial building for fixed consideration of CU10 million. The construction of the building is a single performance obligation that the entity satisfies over time. As of 31 December 20X2, the entity has recognised CU3.2 million of revenue. The entity estimates that construction will be completed in 20X3, but it is possible that the project will be completed in the first half of 20X4. At 31 December 20X2, the entity discloses the amount of the transaction price that has not yet been recognised as revenue in its disclosure of the transaction price allocated to the remaining performance obligations. The entity also discloses an explanation of when the entity expects to recognise that amount as revenue. The explanation can be disclosed either on a quantitative basis using time bands that are most appropriate for the duration of the remaining performance obligation or by providing a qualitative explanation. Because the entity is uncertain about the timing of revenue recognition, the entity discloses this information qualitatively as follows: “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.”