Application of IFRS® 15, Revenue from Contracts with Customers became mandatory for annual reporting periods beginning on or after 1 January 2018. For many entities, such as those in the retail trade, the introduction of IFRS 15 has had little effect on how revenue is accounted for. However, some industry sectors have felt a much greater impact. For example, the amount and timing of revenue for entities that deal primarily in contracts with multiple performance obligations (eg telecommunication companies) and those that deal with contracts that span multiple periods (eg construction companies) may be significantly different than in the past.
IFRS 15 is a complex standard and since its introduction, the FR examining team at ACCA has become aware of some confusion regarding the accounting treatment of certain elements of IFRS 15. In particular, how to account for contract assets and contract liabilities
IFRS 15 includes the following definitions:
|An entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer when that right is conditioned on something other than the passage of time (for example, the entity’s future performance).
|An entity’s obligation to transfer goods or services to a customer for which the entity has received consideration (or the amount is due) from the customer.
In simple terms, this means that a contract asset arises when an entity has done work for a customer that has been recognised as revenue to date but has not yet issued an invoice or received payment for that work. A contract liability arises when an entity has invoiced the customer or received payment from them but has not yet done the work and the invoices and/or payments exceed the revenue recognised to date.
Although IFRS 15 uses the terms ‘contract asset’ and ‘contract liability’, these might also be referred to using different terminology such as ‘accrued income’ and ‘deferred income’ respectively. Whatever terminology is used, entities must make sure that they are accounted for as being distinct from trade receivables which will arise when an invoice has been issued.
ACCA are aware that some candidates and learning providers are still using the accounting requirements of IAS® 11, Construction Contracts rather than the requirements of IFRS 15 when calculating contract assets and contract liabilities. IAS 11 is one of the accounting standards that was superseded by the introduction of IFRS 15.
Calculating the contract asset or contract liability under IFRS 15 is very straight forward. It is simply:
Revenue recognised to date
Less: Amounts invoiced to date
For contracts where performance obligations are satisfied over a period of time, the stage of completion is required to calculate how much revenue should be recognised to date. However, there is no requirement to calculate the estimated profit/loss on the contract (except to the extent of determining whether the contract is onerous).
For the purposes of the FR exam, any costs incurred to fulfil a contract with a customer should be expensed to the statement of profit or loss as they are incurred. This simplification assumes that all costs incurred to date have been incurred in meeting performance obligations in the current year and that they do not relate to future performance obligations. Costs incurred in the current year but relating to future performance obligations would be recognised as a contract asset but are not examined in FR.
Costs falling under the scope of another standard (eg plant and equipment purchased and used for the purposes of a contract – IAS 16) may be examined and should be accounted for under the relevant standard (ie capitalise and depreciate the asset used for the purposes of a contract – the depreciation charge being an allowable costs of contract).
The calculation of the contract asset under IFRS 15 outlined above is the technically correct one and the FR examining team will only accept this approach.
Written by a member of the FR examining team