IFRS 15 vs. IAS 18: Huge Change Is Here!
When to recognize revenue? This simple question is one of the most controversial issues in today’s accounting.
Why?
Well, it’s simple and easy when you sell goods, but how about long-term contracts or some sort of services?
You need to have some rules on WHEN to recognize the revenue from all these things, because all your profits and losses, your reputation in front of the outside world and your taxes depend on this.
Revenue recognition rules have just changed and later in this article, you’ll find an example showing you the impact of this change.
Revenue Recognition: IFRS vs. US GAAP
Until now, revenue recognition was exactly one of the biggest gaps between IFRS and US GAAP.
As you know, IAS 18 Revenue contains principles for revenue recognition, but they are quite broad and as a result, many companies use their judgment to apply them in their specific situation. Some companies even developed their own IFRS policies based on the US GAAP rules.
Opposed to IFRS, US GAAP guidance about revenues is very detailed – US GAAP contains about 100 separate documents and protocols about revenue recognition in specific areas (often conflicting, by the way).
Finally, these 2 standards came closer and tried to solve all these differences on 28 May 2014.
IFRS 15 Revenue from Contracts with Customers
New revenue recognition standard was issued: IFRS 15 Revenue from Contracts with Customers and it should fill the gap between IFRS and US GAAP.
FASB (the US GAAP standard setting body) issued the new revenue recognition standard, too: Topic 606, which is almost a mirror of IFRS 15 (full text of Topic 606 is here).
Although I’ll cover this standard in one of my videos in the following months, here are the basic points for your information:
-
- You’ll need to apply IFRS 15 for reporting periods beginning on or after 1 January 2018 (early application permitted);
- IFRS 15 will replace the following standards and interpretations:
- IAS 18 Revenue,
- IAS 11 Construction Contracts
- SIC 31 Revenue – Barter Transaction Involving Advertising Services
- IFRIC 13 Customer Loyalty Programs
- IFRIC 15 Agreements for the Construction of Real Estate and
- IFRIC 18 Transfer of Assets from Customers
- The core principle of IFRS 15 is that an entity will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration (payment) to which the entity expects to be entitled in exchange for those goods or services.
To apply this principle, you need to follow a five-step model framework described below.
- IFRS 15 contains guidance for transactions not previously addressed (service revenue, contract modifications);
- IFRS 15 improves guidance for multiple-element arrangements;
- IFRS 15 requires enhanced disclosures about revenue.
Five-Step Model Framework
Every company must follow the five-step model in order to comply with IFRS 15. We’ll not go into details, just let me brief you a bit:
- Step 1: Identify the contract(s) with a customer.
IFRS 15 defines a contract as an agreement between two or more parties that creates enforceable rights and obligations and sets out the criteria for every contract that must be met.
- Step 2: Identify the performance obligations in the contract.
A performance obligation is a promise in a contract with a customer to transfer a good or service to the customer.
- Step 3: Determine the transaction price.
The transaction price is the amount of consideration (for example, payment) to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties.
- Step 4: Allocate the transaction price to the performance obligations in the contract. For a contract that has more than one performance obligation, an entity should allocate the transaction price to each performance obligation in an amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for satisfying each performance obligation.
- Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
Who Will Feel the Biggest Impact of IFRS 15?
The experts say that the most impacted industries are telecom, software development, real estate and other industries with long-term contracts.
If you work in an industry where bundled contracts of “product + service” are quite common, then you should pay attention.
I’m referring mainly to software development or telecommunications, where customers usually buy a prepayment plans with a handset or software development comes with implementation and post-delivery service in 1 package, or any similar arrangements.
Under the new model, companies in telecom and software will probably recognize revenue earlier than under older rules.
Why is that?
Well, because under new IFRS 15, the transaction price must be allocated to the individual performance obligations in the contract and recognized when these obligations are delivered or fulfilled.
It means that under new IFRS 15, telecom operator must allocate a part of the revenue from prepayment plan with free handset to the sale of handset, too.
Under IAS 18, the revenue is defined as a gross inflow of economic benefits arising from ordinary operating activities of an entity.
It means that if the operator gives a handset for free with the prepayment plan, then the revenue from handset is 0.
OK, if that sounds a bit confusing, we’ll better look at numbers.
Example: IAS 18 vs. IFRS 15
Johnny enters into a 12-month telecom plan with the local mobile operator ABC. The terms of plan are as follows:
- Johnny’s monthly fixed fee is CU 100.
- Johnny receives a free handset at the inception of the plan.
ABC sells the same handsets for CU 300 and the same monthly prepayment plans without handset for CU 80/month.
How should ABC recognize the revenues from this plan in line with IAS 18 and IFRS 15?
OK, let’s ignore a couple of things here, like a price of a SIM kit, or the situations when Johnny hangs on the phone for hours and spends some minutes in excess of his plan. Let’s focus just on these 2 things.
Revenue under IAS 18
Current rules of IAS 18 say that ABC should apply the recognition criteria to the separately identifiable components of a single transaction (here: handset + monthly plan).
However, IAS 18 does not give any guidance on how to identify these components and how to allocate selling price and as a result, there were different practices applied.
For example, telecom companies recognized revenue from the sale of monthly plans in full as the service was provided, and no revenue for handset – they treated the cost of handset as the cost of acquiring the customer.
Some companies identified these components, but then limited the revenue allocated to the sale of handset to the amount received from customer (zero in this case). This is a certain form of a residual method (based on US GAAP’s cash cap method).
For the simplicity, let’s assume that ABC recognizes no revenue from the sale of handset, because ABC gives it away for free. The cost of handset is recognized to profit or loss and effectively, ABC treats that as a cost of acquiring new customer.
Revenue from monthly plan is recognized on a monthly basis. The journal entry is to debit receivables or cash and credit revenues with CU 100.
Revenue under IFRS 15
Under new rules in IFRS 15, ABC needs to identify the contract first (step 1), which is obvious here as there’s a clear 12-month plan with Johnny.
Then, ABC needs to identify all performance obligations from the contract with Johnny (step 2 in a 5-step model):
-
-
- Obligation to deliver a handset
- Obligation to deliver network services over 1 year
-
The transaction price (step 3) is CU 1 200, calculated as monthly fee of CU 100 times 12 months.
Now, ABC needs to allocate that transaction price of CU 1 200 to individual performance obligations under the contract based on their relative stand-alone selling prices (or their estimates) – this is step 4.
I made it really simple for you here, so let’s do it in the following table:
Performance obligation | Stand-alone selling price |
% on total | Revenue (=relative selling price = 1 200*%) |
Handset | 300.00 | 23.8% | 285.60 |
Network services | 960.00 (=80*12) | 76.2% | 914.40 |
Total | 1 260.00 | 100.0% | 1 200.00 |
The step 5 is to recognize the revenue when ABC satisfies the performance obligations. Therefore:
-
-
- When ABC gives a handset to Johnny, it needs to recognize the revenue of CU 285.60;
- When ABC provides network services to Johnny, it needs to recognize the total revenue of CU 914.40. It’s practical to do it once per month as the billing happens.
-
The journal entries are summarized in the following table:
Description | Amount | Debit | Credit | When |
285.60 | FP – Unbilled revenue | P/L – Revenue from sale of goods | When handset is given to Johnny | |
Network services | 100.00 (= monthly billing to Johnny) | FP – Receivable to Johnny | When network services are provided; on a monthly basis according to contract with Johnny | |
76.20 (=914.40/12) | P/L – Revenue from network services | |||
23.80 (=285.60/12) | FP – Unbilled revenue |
So as you can see, Johnny effectively pays not only for network services, but also for his handset.
What’s the Impact of the IFRS 15?
The biggest impact of the new standard is that the companies will report profits in a different way and profit reporting patterns will change.
In our telecom example, ABC reported loss in the beginning of the contract and then steady profits under IAS 18, because they recognized the revenue in line with the invoicing to customers.
Under IFRS 15, ABC’s reported profits are the same in total, but their pattern over time is different.
Why does it matter?
Well, because some contracts surpass one accounting period. They are long-term and reporting revenues in incorrect accounting periods might cause wrong taxation, different reporting to stock exchange and other things, too.
Don’t believe me?
Just look at ABC. Let’s say that contract started on 1 July 20X1 and ABC’s financial year-end is 31 December 20X1. Just look how much profits ABC reports from the same contract with Johnny under IAS 18 and IFRS 15 in the year 20X1:
Performance obligation | Under IAS 18 | Under IFRS 15 |
Handset | 0.00 | 285.60 |
Network services | 600.00 (=100*6) | 457.20 (=76.2*6) |
Total | 600.00 | 742.80 |
How to Prepare for IFRS 15
I really do think that IFRS 15 is a huge change and it requires a massive amount of work not only from accountants, but also from IT departments, tax people and maybe other departments in your company, too.
A few ideas for your future steps:
- Go through your contracts and evaluate
Your profit reporting will depend on the specific contract terms. If your company has a number of different types of contracts, you need to assess each type separately and decide how to deal with that type in line with IFRS 15.
- Change your accounting system
OK, how many customers does the “average” telecom company have?How many contracts are there?
Thousands. Millions. Tens of millions.
And once you decide how to recognize revenue for each type of contract that you have, then you need to implement this accounting process into your accounting software or system.
Whether you realize it or not, the implementation of IFRS 15 will cost affected companies significant amount of money for system upgrades, consultants, training the employees and other related activities.
That’s why IFRS 15 must be implemented starting 1 January 2018 – some time is left for making these changes.
- Go back and restate existing contracts
I did not want to scare you in my previous point, but this is going to be a bit scary:All companies need to look back and recalculate profits and revenue reporting from all contracts.
When you apply IFRS 15, you need to apply it as the new rules have always been in place, that is retrospectively.
Let’s say that Johnny and ABC enter into 2-year plan on 1 July 2015 and IFRS 15 has not applied yet; thus ABC recognized zero revenue for handset and monthly revenues from network services in line with the billing.
On 1 January 2017, ABC will apply IFRS 15 and contract with Johnny is still open (it expires on 30 June 2017). ABC needs to perform all the calculations as shown above and adjust opening balances related to the contract.
What does it mean?
Companies will need to gather lots of numbers, fair values, estimates, stand-alone selling prices and other things and then perform lots of recalculations and adjustments.
Just imagine you work in a construction of real estate and you’re affected by IFRS 15. Some contracts run for 10 or 15 years … OK, I finish here and leave it to your imagination.
UPDATE 2018: I have written few articles about IFRS 15 and you can check them out here:
- IFRS 15 Examples: How IFRS 15 affects your company
- Accounting for discounts under IFRS
- How to account for customer incentives under IFRS
- Principal or agent – revenue or liability?
- Short summary of IFRS 15 Revenue from Contracts with Customers (with video)
Now, I’d really love to hear your view. Do you think IFRS 15 will hit you hard? Are you making your plans to adopt or implement it? Please leave a comment below and if you liked reading this article, share it with your friends here.
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Hi silvia ,
how did u arrived at the 300 for handset and 960 (80 X 12) in the 1st numerical eg . ?
Hi Oomesh, the question is example said that ABC sells handsets normally for CU 300 and monthly plans without free handsets for CU 80 / month. That’s how you need to allocate revenues to individual items in a bundle offer: try to find their stand-alone selling prices if available, so how how much you would charge for these items individually and then allocate the transaction price based on relative stand-alone selling prices.
S.
Sylvia,
If the contract was longer than a year, could the difference (R60) not have been treated as finance income and recognised over the period of the contract using the effective interest rate?
Hi Ronell, the thing is that the full amount is not received in 1 amount – it’s just an aggregate of monthly billings. Also, the service is not provided in 1 moment of time. It is the continual service provided over 1 year. So I would say in this case, you would not discount anything. S.
Hi Silvia,
In above illustration you have mentioned that the ABC can sell the handset separately as well, what if they don’t sell the handset separately? Business nature is such that they provide only together (handset+ network services) Then there should be single performance obligation right? We do not have to find the standalone price for handset? will there still be allocation of transaction price?
Hi Silvia,
Thanks so much for that elaborate and simple example, But my question is how are the limitations of IAS 11 been solved or addressed by the new standard IFRS 15
Thank you
Thank you madam. For that example/illustration
Hi Silvia,
What are the Balace sheet implications will we have a Contract Asset/Liability as a result of the subsidy given on the device. Also will there be continuities required for disclosure purposes.
Hi Khan, your questions would require detailed answer, not very suitable in the comments, but in short – yes of course it has an impact on a balance sheet, since before you recognized zero revenue for the device and thus zero contract asset; now you have some asset that needs to be tested for impairment under IFRS 9.
hi silvia , sorry , yeah i got it its in the scenario . i saw it . thanks .
Hi Silvia
What is the impact for Construction Contracts, the percentage of completiom remain aplicable?
Well, it depends on WHAT your construction contract says. IFRS 15 defines when the revenue should be recognized “at the point of time” and when “over time”.
So when your construction contract meets one of 3 criteria for recognizing revenue “over time”, then yes, you may apply percentage of completion method (=”method of measuring progress toward complete satisfaction of performance obligation”).
But you need to make sure that contract meets ONE of those 3 criteria.
This is very useful and easy to be understood. Thank you and wish you the best, Silvia ^^
Thank you! 🙂
Good day Silvia, thank you for always making IFRS interesting. Your write up about IFRS 15 above drives it home. It is an eye opener to the standard. Thank you.
Hi, Ayodeji, thank you! That’s exactly what I wanted to achieve 🙂
Hi Silva, Thank you so much for sharing a great amount of knowledge. I would like to know how IFRS15 is applicable on Shipping and freight revenues. Any idea?
Hi Sylvia
thanks for the explanations with illustrated example.
Really made it easy
Kind regards
Raj
Glad to help 🙂 Thank you! S.
Hi Silvia,
Thank you for this interesting introduction to the new IFRS.
But my confusion is that application of the new IFRS will be retrospective as you mentioned. I think I need more clarifications
OK, when you apply new accounting policy, you need to apply it retrospectively – that is as the new policy had always been in place, also for the existing items. That’s the requirement of IAS 8. New IFRS 15 is definitely a change in accounting policy. Therefore, when you find out that some of your contracts would be presented differently under IFRS 15 than under IAS 18, you need to re-calculate the revenues from these contracts from their beginning and make adjustment as of 1 January 2017 (or whatever is your application date).
Also, you need to be careful about comparative figures, too (year 2016).
Hi Silvia, In the above case of retrospective application of the revenue standard, what is the treatment to be followed if the contracts have already been closed/completed?
Do we need recognize the impact for the closed contracts also?
Hi DJ,
for closed contracts, there is no adjustment, right? But it depends on when the contracts were closed – if before the transition date, then there shouldn’t be any adjustment. However, you should check out the transitional provisions in IFRS 15, as they precisely specify the exceptions from making the transition (closed contracts are one of them). S.
Hi
Thanks for the explanation provided.
However I still do not think or see where the difference is between IAS 18 and IFRS 15 in terms of the recognition of revenue due to the following:
IAS 18 states that revenue should be recognised when there is a transfer of risks and rewards which I feel is essentially the same as the IFRS 15 requirements with the criteria that needs to be met. Thus the two standards are the same regarding the TIMING of the revenue recognition.
I think that the only difference comes into play regarding the allocation of the transaction price of the components of a transaction.
Can you please help me on this:-)
Thanks in advance.
Could I just clarify application date, you refer to as 2017. Should this read 2018?
Hi Silvia, Osama
From the above, if all existing contracts would time out by December 2016, I gather it would be best to adopt the new standard immediately.
Don’t forget that you need to re-calculate all contracts open before 2016 too, because you need comparative figures 🙂
And yes, adopting the new standard immediately is a nice idea, but it’s very difficult to implement it, because it requires a change in the accounting software or system, too (mainly in the companies with lots of contracts).
S.
Hi Sylvia,
Thank you for making IFRS a pleasure to read.
Pls keep up the good work!
Mike
Hi Sylvia,
I’ve managed to pass the ACCA, IFRS certification And your articles have helped me so much in this.
Thank you very much
GREEEAAAAAT!!!!
Big congratulation!!!!
Thank you for letting me know and CELEBRATE IT – you deserve it! 🙂 S.
Congrajulations for what you have achieved It would really a favour if you tell me the benefit to get this IFRS Certificate I am ACCA also.
Hi Silvia!
Great article
Hi Silvia,
Your doing a great job !!!
Hi Sylvia,
How would you recognise revenue if a firm deals in writing policy papers about investment strategy in overseas market. These kind of assignments may straddle over a number of months.
Mike
Hi Mike, again, it depends on the terms stated in the contract. As I have written in some previous comment, you need to examine whether the revenue can be recognized “over time” or “at the point of time”. For example, are these papers delivered at 1 point of time and a client takes a control over them at the delivery date? Then the revenue should be recognized accordingly. S.
Thanks Silvia,
Outstanding and easy to understand. Keep going.
Al-Amin (Shanto)
Great Article 🙂
Hi Silvia,
Your presentation is superb and simple. Keep going. Thanks for all of it.
Dear Silvia,
Currently I’m working on real estate company. However, Kindly explain with an example how it will affect my revenue since we do not provide any free services?
Hi Rosham, well, IFRS 15 impacts real estate companies in a different way. It depends on what your company specifically does. Do you develop real estate? Are you a construction company? Then IFRS 15 defines when the revenue shall be recognized “over time” or “at the point of time”. And only a small change in contractual terms decides whether to apply 1 or another approach. And what’s the difference? Well if you recognize revenue “over time”, then you can apply some percentage of completion method. When you recognize revenue “at the point of time”, then percentage of completion does not apply; you rather recognize revenue at the certain dates in line with the contract.
It’s not really possible to illustrate all this in 1 single article. I just wanted to say: Stay awake and carefully examine, because you might be affected. S.
Hello Sylvia,
Thank you so much for putting IFRS 15 in a simple to understand format. I really like the way the diagrams illustrated the 5 steps. (One doesn’t forget pictorials easily) God bless you & cheers
hi Sylvia.
your examples tend to be around contracts how would IFRS15 be treated for say a managed savings accounts MSA?
thanks
Hi Emmanuella, of course, this was just 1 example of the impact of IFRS 15. This standard will affect many entities in many different ways and it’s necessary to study it carefully. But as I see, lots of people are interested in practical examples and therefore, I’ll issue some short guide to IFRS 15 a bit later. S.
I work for a company doing Hire Purchase and Leasing . In what way will the new IFRS 15 affect revenue reporting ?
Hi silvia :
its very useful
waiting your interesting video ….
In the case of addition is an example of calculating the revenue for construction contracts will answer additional questions .
Best Regards
Hi Osama,
thank you for your comment.
The point with construction contracts is far more complicated. It ALL depends on WHAT specifically is written in the contract. So in fact, there could be a situation that you build 2 same assets for 2 customers, just the contract terms are a bit different – and the accounting treatment for these same assets can be totally different.
But I’ll work on it in the future 🙂
S.
A very simple and easy to grasp case study of IFRS 15 application for student. Thank you Silvia! 🙂
Came across your website when looking for new IFRS and was pleasantly surprised to find very simple and easy to understand xplanations of complex standards including IFRS 15 and IAS 39! Keep it up Sylvie!
Hi, this is a very nice example. But i think there is a mistake. In your second table you show that the sum of the stand alone values is higher than the total price of the contract. IFRS 15.81 says that this would lead to a discount.
Or am i wrong ?
Hi Lukas, it’s OK. IFRS 15.81 says that
“Any overall discount compared to the aggregate of standalone selling prices is allocated between performance obligations on a relative standalone selling price basis.” – this is what I did in the short example.
IFRS 15.81 continues: “In certain circumstances, it may be appropriate to allocate such a discount to some but not all of the performance obligations.” – so yes, it might be OK to allocate this discount just to 1 obligation, for example to mobile phone sale. It all depends on the contract terms.
All the best! S.
Hi:
I am in a game developer company, and how can I put the value added tax to the revenue according to the gross method like USGAAP?
Hi Silvia – great website!
The resource is quite informative.
I am unclear on how to recognize revenue relating to the provision of hardware (lets say handsets) and variable billing
– How would we recognize revenue on a) sale of handsets, if sales of handsets are included in the contract, but no price is set. Would it be the same as in the previous IAS? i.e revenue recognized based on invoice price.
– Would the revenue recognition of variable billing for capacity change? I would assume not.
Thanks
Hi Muhammad,
I promise I’ll write something more detailed about the standard IFRS 15 – this was really just an intro to make people aware. But shortly to your questions: 1) you need to apportion the revenue to handsets based on relative stand-alone prices. If there is no stand-alone price, then go for fair values and IFRS 15 gives a guidance on that. But you cannot bill the revenue based on invoice (as sale of handsets would be 0).
2) it depends on how specifically the contract is set. Kind regards, S.
Thanks Sivia. Great article. I liked your Telecom example.
i have a disagreement with the author. on telecom case Johnny. Reference to IAS 18 para 9 “”Revenue is measured at the fair value of the consideration received or receivable””. May be i;m wrong but i seek your guidance on this matter. the revenue should be recognized at 1,260 amount instead 1200. but i don’t know what IFRS 15 say about fair value as compared to Para 9 of IAS 18 because it is a pretty new standard couple of months ago
Hi Zunair,
thank you for your comment. The thing with Johnny’s example is that the revenue cannot really be measured at 1260, because all what ABC gets is 1200 in cash, isn’t it? FV of cash is still cash value, if received within 12 months.
In fact, the difference of 60 (1260-1200) is a kind of some discount that Johnny gets in return for subscribing for the whole year. This discount can be allocated to just 1 performance obligation, or allocated just as I did – by relative stand-alone selling prices.
Please note that this was the very simple example to illustrate the impact of IFRS 15. The reality can be much more complex. Have a nice day!
S.
Hi silivia , please I didn’t understand why u write in the first entry Unbilled revenues why we didn’t write it as account receivable /or cash in debit ,,, also in the second entry why u didn’t make the entry as cash or accounts receivable by 76.20 in debit and revenue by 76.2 revenue ,, thanks in advance
Hi Dalia,
1) Unbilled revenues in the first entry: well, you can’t really book neither cash (as no cash has been received yet) nor receivables (these are reserved for invoices and no invoice has been issued for that amount). “Unbilled revenues” is a kind of deferral account.
2) In fact, I made that entry you mentioned. When you look at it you’ll see that there’s 100 in debit – which is aggregated amount of 76.20 and 23.80. The first part of the credit is exactly 76.20 to P/L. The second part of credit entry 23.80 is monthly portion transferred from unbilled revenues (what you booked in the first entry) to P/L. Hope it helps! S.
Many Thanks Sivia , please i need another example for the cnstruction industry when adopt IFRS 15
Dear Ehab, please be patient, I will cover it in the future for sure! S.
Thanks Sivia. Your article is Great.
Hi, thanks for your article. I would like to ask regarding the IFRS 15, what do you think the future global development expected to be??
Hi Silvia,
Thanks for the Article. But I ma one of them who requires illustrative example of construction or contracting company. Waiting !!!!
Hi Ibrahim, I’m sorry, I have some editorial plan of these free articles and believe, I work to give as much as I can! S.
Silvia,
As per IAS 18 also Revenue for handset would be recognised.
😉
Thank you for a great website. I would like to see practical ways in obtaining the required information from a group to assess impact in the retail and wholesale industry.
Hi IFRS Kid, yes, impact on retail and wholesale industry will be quite significant, as there are some discounts, gift cards, “3 for 2”, and other transactions involved. I’ll cover that in the future 🙂 S.
Hey Sylvia thanks for simplifying the new standard. I wish to know how would this affect the food industry
Hi Silvia,
Your article is brilliant. I am now so much addicted and looking forwards for updates from you. This IFRS is mind blowing and scary too, lots to learn and there are million possibilities of going wrong. You are guiding us really well. Thankyou
Hi Lakshmi, thank you 🙂 That’s a BIG responsibility to guide people, but believe, sometimes I can be wrong, too 🙂 S.
Hi 🙂
1- IFRS 15 said that contract must be enforceable and enforceability is a matter of law >>
how come oral contracts are enforceable?
2- why u didnt write Contact asset in entry 1 instead of unbilled revenue ?
Hi Sara 🙂
1) I can’t find where I wrote that oral contracts were enforceable 🙂
2) That’s the matter of naming the things. For me, unbilled revenue fits quite well. 😉
it has been written in IFRS 15 , the standard said that contract is enforcabble and ( the parties to the contract have approved the contract (in writing, ORALLY or in accordance with other customary business practices)
🙂
thnx
Sure, I know it’s in IFRS 15, just did not understand your first comment. Aaaa, now I see, do you ask why is it there in IFRS 15 as it’s hardly enforceable due to oral character? Well, in some countries, oral word has a strong power and often replaces written form (I think for example in Islamic countries). S.
Hi Sylvia, one quick question? If an OEM sells a car and an extended warranty service(‘EWS’) along with the car, is the EWS should be treated as a separate performance obligation or bundled along with the sale of car. When shall we recognize the sale of EWS. is that point of sale of car or is that the EWS which starts after 2 years from sale of car.
How probable is extending the warranty service after 2 years? Also, do you charge extra fee for EWS? In other words – is a car with EWS more expensive than a car without it? There are more questions to answer before you can assess the situation and decide. For me, it’s difficult to say without seeing the contract – revenue recognition strongly depends on what’s written there.
Hi Sylvia.
Great article, thank you.
One question I have is around the accounting treatment at the end of contract life. Regarding your journal entries during the life of hhe contract:
Dr FP Receivable £100
Cr P/L Revenue £76.20
Cr FP £23.80
Presumably then after fulfillment of the 12 month contract, the balance built up in the FP of £23.80 * 12 = £285.60 would be recognised immediately in p/l in month 12?
Kind regards
Hi again Silvia
Please ignore my question. I see the build up in the FP of the £23.80 each month then offsets the £285.60 already in the FP from the “sale” of the phone which is recognised immediately on sale of the handset.
Great article, thank you again.
Paul
Exactly! And thank you 🙂 S.
You do really understand the IAS 18 preactice in telecom industry previously, don’t you?
Hi Sylvia
Will there be any changes in the banking industry, regarding how they account for revenue? Upfront charges, etc
Hi Sylvia
I would appreciate it if you can explain the likely impact of IFRS 15 in revenue recognition of banks
Hi Nathan,
I will write an article about the impact of IFRS 15 on various types of businesses, but in short for banks here:
You should probably watch out for the contracts or types of services where variable pricing incurs, for example, when your banks provides “performance bonuses” to clients (e.g. rewards them for maintaining certain balance on their account or making certain amount or volume of transactions), or some structuring fees, etc. Here, the rules are more rigid than before and you should examine whether IFRS 15 impacts you or not (it does not need to).
Then also, you should examine whether to capitalize certain costs related to obtaining the contract, for example success fees (currently, everybody treats that differently).
And there are couple of other things to watch out, like up-front fees, loyalty programs (e.g. for paying frequently with the debit/credit card), etc. I’m not necessarily saying that everything will change under IFRS 15 – it depends on your own practices, but you should definitely go through it and make appropriate conclusions.
Look, I don’t know where you’re from, but in March 2015, I’m leading live 2-day seminar “IFRS for banks” in Bratislava and be sure I’ll cover that too. If you’d like to come to discuss, you’re welcome 🙂
It’s really a very simple direct short and fruitful explanation for a big and major issue in the ifrs 15
I appreciate your way in delivering the information smoothly and effectively
Thx
keep going ….
Hi silivia ,,
Does Unbilled revenue is the same as Un earned revenues ?
Hi Dalia,
well, not exactly.
Unbilled revenues = revenues of the current year that will be invoiced in the future periods.
Unearned revenues = revenues of the future reporting periods that have been invoiced in the current reporting period (or in the past).
However, everybody is using different terminology! S.
Hi Silvia,
Thank you for your efforts.
Could you comment on the treatment of sales discounts using IFRS15 and how it differs from previous IAS18.
Thank you,
Silvia, compliments for making complex subject look simple and range of questions is testimony to the fact people really understood the concept.
In the context of your example don’t you think Handset transaction is more in the nature of Loan or Financing transaction and not Sales.
Similarly remaining with your example, what happens if user stops making payment, may be bacause that person lost the instrument or just vanished with Handsset. What is IFRS 15 interpretaion of such events.
Hi
How does IFRS 15 change the way we will account for revenue under IFRIC 18?
Hi Silvia,
First of all thanks for giving us an easier explanation of what this standard entails. I am still a student and we are currently undergoing a research on the impacts of the recent amendments on the software industry.
What do you think are the main impacts, and how will companies cope with this?
Also, if I am not mistaken it has been told that the effective date has been moved by one year, 2018, is this true?
Thanks
Hi Jenise,
hm, your question is very broad and it’s not really possible to reply in a comment. Maybe I will come back to this topic and write an article about it.
As with the effective date – I don’t think it has been moved, it’s still 1 January 2017 (although there are some discussions about it). S.
Hi Silvia,
First of all thank you for your article. I am student and i have a project how the IFRS15 impact to the KPN. I found that KPN mainly expects an impact on the timing of revenue recognition
due to the removal of the cash restriction rule currently applied in revenue arrangements with multiple deliverables and on the accounting treatment of dealer commissions. I would like if is possible to explain me a shortly this proposal and how impact to the KPN. Thank you in advance
Dear Jessy, sorry for my ignorance, but what is KPN?
KPN is a Dutch ladline and mobile telecommunications company
In this case, Jessy, I’m afraid I’m not the right person to explain this. I don’t know how KPN recognizes revenues currently – I would need to know the details and then assess the impact. I am sorry but I don’t have any capacity to study it. Please turn to someone from that company – hope they will be able and willing to help. S.
Hey Silvia!Very interesting and helpful explanation about the IFRS 15.I would like you to inform me, if is possible how the financial statement of the telecommunication company will be affected from the IFRS 15 which recognize revenue under the IAS 18.
Hey Anthi,
there are many ways in which mostly telecom companies are affected and for me, it’s not possible to list them in the comment. However, I gave you example above in this article – it’s exactly about the telecom. S.
Thanks Silvia for making IFRS 15 easy to understand. I have been reading publications on this topic from professional accounting websites, but could not make meaning of what they are saying; but just reading your article solved my problem. Thanks again.
Hi Sylvia,
Great read and I echo the sentiments above. As an accounting student, my knowledge is somewhat limited at the moment so I apologise if this sounds naive.
But when you state that the standard will have to be introduced retrospectively, how will this impact the statements of previous periods?
Thanks,
Jack
This is great Silvia.
It will really help me on my assignment.
please keep it up.
Dickson Kalinga
Student University of Malawi.
Hi
According to my view, IAS 18 also requires to recognise revenue separately to multiple components of one single transaction.
Para 13 of IAS 18:
However, in certain circumstances, it is necessary to apply the
recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction. For example,when the selling price of a product includes an identifiable amount for subsequent servicing, that amount is deferred and recognised as revenue over the period during which the service is performed.
Hence, if we apply para 13 of IAS 18, than separately identifiable components in a transaction are handset and monthly plan and than revenue to be recognised accordingly. Hence, no difference between IAS 18 and IFRS 15 for this.
Kindly let me know your views.
Hello,
my example is very simplified and only illustrative. But it’s a great question and I added a few words to the article to clarify it a bit more.
Unfortunately, IAS 18 does not give a guidance on how to identify separate transaction and as a result, telecom companies applied different accounting practices, for example:
– some telecom companies simply treated the cost of free handset as a cost of acquiring the customer (marketing cost) and accounted for revenue as described above
– many telecom companies did identify separate transactions (sale of handset and monthly plan), but then they applied “residual” method and really, they limited the revenue for the sale of handset to the amount paid by the customer for the handset. As an example, search for France Telecom financial statements.
Under IFRS 15, these methods will not be permitted. Hope it helps! S.
Hi Silvia,
its a really great work you are doing Silvia- much appreciated!!
Would you be able to tell me how this IFRS will impact revenue recognition of construction contracts – we are having two types of contracts 1) fixed price where we are recognizing revenue on POC basis and others are open ended time and material contracts where we are recognizing revenue based on agreed invoices.
Will appreciate your help.
Regards,
Irfan
Hi Silvia,
Your article is excellent. You are guiding us really well. Thank you for your efforts in making us understand IFRS 15.
Can you share few illustrative examples of construction or contracting or engineering or EPC (Engineering, Procurement and Construction) company/industry?
Also in case of say EPC Company, how the advances from customers will be treated as per IFRS 15? can you explain with some practical example this?
Regards,
Akhil
Hi Akhil,
thank you for your nice comment.
Yes, I will do an article about IFRS 15 vs. IAS 11 as the construction contracts leave some confusion. But give me some time for this 🙂
All the best
S.
In case you really make a version for construction contracts
plz keep me updated
wonderfull work!
Hi Silvia,
You have a talent in making standards easily understandable. thanks a lot..
A real estate company that rent buildings for 8 to 10 years and the contract includes a clause that if the lessor terminated the contract he shall pay 50% of the total lease amount. how should the real estate company account for this clause/ the contract as a whole?
Appreciate receiving your advice..
I mean if lessee (the one who rent the building) terminated the contract. thanks 🙂
Dear Mohamed,
it depends on the past experience of the lessor with similar cases and the specifics in the contract, but I would normally account for the lease 8-10 years and then settled the lease when the premature termination happens. S.
Thanks for the update, Sylvia. I have been trying to raise awareness in my company for these upcoming changes in order to comply with the new standard (my organization deals with complex revenue arrangements in media, entertainment, intellectual property rights, bundled deals, services, hardware, software)
I am curious what systems (i.e. not a large ERP system) do practitioners out there see as the leading edge and/or best practices.
Unfortunately, error prone, labor-intensive spreadsheets seem to rule the day. I don’t see this changing, unless a low cost solution is out there that has escaped me.
Input from you or the community appreciated.
Dear Reginald,
I guess I’m not the best person to answer this. However, I hope there’s someone reading it and can advise you on great information systems that are able to spit out info as needed. As far as I know, SAP modules work nicely. But I agree with you that excel still rules 🙂 S.
Hi
Thanks for the great explanation you did in the article.
I really enjoyed reading it.
great work.
This article rocks! And you rock!
Hi Silvia,
Please could you explain to me what modification of contract mean in IFRS 15 in a simple way. Also what are the impacts the new revenue standard has on businesses. Thanks.
Hi Bridget, very simply – modification is a change in the contract terms, e.g. change in the scope, price or whatever. It can give rise to new obligations and rights, therefore sometimes, you need to account for it as for the new contract.
To your second question – it’s not so easy to respond in the comment. Therefore, I plan to issue new article about this topic sometimes in February – March 15, so stay tuned 🙂 Have a nice day!
Thanks for Illustration of IFRS 15 in a simple way.
Kindly also provide practical implication of IAS 11 as per new IFRS 15.
Thanks.
Hi Silvia,
Based on the example you provides, could you explain how to record the cost entry under IAS 18 and IFRS 15? Thanks a lot for your help.
Hi Yvonne, I’m not sure what you mean by “cost entry”. Can you please specify?
Hi Silivia,
Could you please advise how should a company record compensation received (based on performance bond / letter of guarantee) from contractor for not fulfilling construction requirements .
Appreciate advising also on IFRS reference
Hi,
If normal credit period allowed to customer is 30 days and to few customer its 180 days.How revenue should be bifurcated between Revenue and Interest revenue in both the above cases as per IAS 18.
Hi Gulshan,
if the customer under credit term of 180 days pays you more than cash price equivalent, then the difference is the interest revenue (and cash price equivalent is revenue for your goods/services). You should allocate it to the individual periods by the effective interest method (find your internal rate of return), while your total period is 180 days.
If the client pays you the same amount as under cash price equivalent, then you should discount the amount to be received by the interest rate applicable for similar instruments in the market and recognize discounted amount as revenue.
Hope it helps! S.
how about the subscription fee for a service rather than a sale of software with incidental support services? how is the revenue recognized? would IFRS 15 have huge impact on revenues?
Lovely but my concern is simply now accounting is becoming more and more difficult to understand for non accountant …life is enough complicated..
Any way thanks very clear
Hi Silvia – We are waiting for your new article. Is it published? Thanks.
Hi Poonam,
article about what? About IFRS 15? Yes, it’s been published and I sent you the e-mail about it (if you are subscribed to my newsletter). The article is here: http://www.cpdbox.com/ifrs-15-examples/
Enjoy! S.
I am from ICAI & Member of ICAI . I am thinking to affilated with online course & provide the training in nepal
hie good people can you assist me with the differences between ias 18 and ifrs 15
can we say that the change to ifrs 15 was necessary and is it an improvement? if so why?
Because unlike the current guidance, IFRS 15 provides unified framework and unified rules for every revenue generating transaction (with some exceptions). Also, as the rules are more detailed, the entities cannot interpret them in their own way as until now and as a result, financial statements will be more comparable among companies.
Hi Silvia,
This is a great article! I am wondering what do you think about how IFRS 15 will impact the recruitment industry?
Thanks:)
Hi Silvia! Was wondering how set-up costs are accounted for under IFRS 15. Are they added to the network services or handset allocation assuming the fee is $79.95? Thanks!
Hi Gordon,
id depends on what is the set-up costs. Do they represent some transfer of good or service to a customer? Or are they internal costs in order to prepare for performance (e.g. investment into a new system, or preparation of the site for the construction…)?
If the first one is the case, then the transfer would be a separate performance obligation and yes, you need to allocate a part of transaction price to it.
If there is no transfer to a customer, then set up costs are “contract costs” and you would either treat them under IAS 16/38/40 if possible, or capitalize and amortize them over the contract life if they qualify, or expense them in P/L if they do not qualify. IFRS 15 sets exact rules. S.
Hi Silvia,
Your example of explaining IFRS 15 was really great. I would request you to please take a complete example with calculations showing us what the retrospective calculations would be in the above example if the customer goes for a two year contract with ABC starting from 1st July 2015
Why there is a different in definitions of revenue between IAS 18 and IFRS 15 ?
Hi Dalia, well, IAS 18 did not cover complex transactions well and IFRS 15 is more precise in this. Anyway, you should be more specific in your question. S.
Ias 18 defines revenue ( the gross inflow of economic benefits during the period arising in the course of ordinary activities of an entity when those inflows results i increases in equity , other than increases relating to contributions from equity participants ) but IFRS 15 defines revenue as ( income arising in the course of an entity’s ordinary activities ) IF We See the definition of income (( increases in economic benefits during the accounting period in the form of inflows or enhancement of assets or decreases of liability that result in an increase in equity , other than those relating to contributions from equity participants …. ?? Why u say that in the above example that there is a difference between these two definitions??? Are u relate the answer by including only the criteria of inflow of money in IAS 18 definition ? But in IFRS 15 revenue will be arise as a result of increasing performance so decrease in liability ,,, thanks in advance
Sorry, Dalia, I don’t get it. Where do I say there’s a difference between these two definitions? Anyway, this was a practical illustration and I do not understand how you relate the definitions of a revenue to this particular example.
There is a difference between IAS 18 and IFRS 15 on the disclosures of the figures.
In IFRS 15, we have asset and liability for a revenue but in IAS 18 all the transactions are on the asset.
My question what ‘is the accounting scheme with the new model IFRS 15 between Asset and liability .
Thank you
Hi Sylvia – great article thank you. In your intro to the Telecoms example you make the assumption that the customer does not exceed the bundle. In reality this does happen as roamed calls and international calls are outside the bundle. How should these be dealt with under IFRS 15? Should they be considered as part of the contract or as new contracts (modifications) in each instance?
Thank you
Rob.
Hi Rob,
it depends on the contract, its specific conditions, etc. – there’s no unified answer. I would need far more place than 1 comment to elaborate on that, but let me give you a brief hint: anyway, roamed/international calls are billed separately by the amount actually spent, isn’t it? If this is the case, then it seems like a distinct performance obligation satisfied at the point of time. I guess you don’t really make additional contract or contract amendment and clients agree up front to pay separately for these calls. If this is the case, then you simply recognise revenues for these calls at the point of time – when they occur based on actual amounts. Hope it helps! S.
Sorry for silly question…but what is the meaning of FP in the example? Is it an abbreviation of an account where the debit is being posted?
Sorry, I should have clarified. It’s a financial position – or the statement of financial position (balance sheet). S.
Many thanks for this article! It’s the best explanation I have read so far. I really like that you explained everything using an example
Hi Sylvia
Came across your site accidentally while searching for IFRS 15 material. Need to congratulate you for the simplified explanation for such a complex subject.
I have a question on the example provided. Does the revenue allocation change if the cost of handset is CU 290? If not, aren’t we inflating the revenue from network services?
Hi Saji,
of course, the allocation would change a bit. The way of calculation is the same, just the numbers change. S.
Hi Silvia
That was a superfast response. Thanks.
Not sure whether my message was confusing. CU 290 is the cost of handset to ABC.The revenue allocation based on stand alone selling prices of POs (as in the example) will result in ABC recording a loss in handset sale and profit in network services. This does not reflect the real commercial sense of the transaction.Is there a IFRS supported way to avoid this anomaly. Para 82 is not helpful where the POs are not sold separately at a discount to their stand alone selling prices.
Saji,
Now I got you – I read too quickly and interchanged “cost” for “revenue”. But yes, it’s possible under IFRS 15.
Silvia
THanks for your response. Appreciated
Can you elaborate on section/s in IFRS 15 which will support a different allocation of consideration in such a situation?
Saji, I’ve done this – it’s in my IFRS Kit. Have a nice day! S.
Hi Silvia,
Thanks for this illustration it was so helpful.
I have a question, in the contract inception we made an assumption of the expected monthly commitment (914.40/12=76.2 per Month), based on this assumption we booked the handset revenue (285.60).
What if the actual monthly invoice for this customer was with different amount than (76.2) which we made our assumptions upon.(True-Up)
Shall we recalculate or adjust the percentage of allocation each month based on the actual invoice or to recognize all the difference as a service revenue and ignore any adjustment in the handset amount or percentage.
I will be very thankful to hear from you soon as I am building an excel model to calculate this process.
Thanks in advance
Amr El Hefny
Hi Silvia,
I have been tracking the trails of various queries and your clarifications. It’s simply great. I have one doubt though. Could you please clarify as to how the adoption of a newly introduced standard can be treated as ‘a change in accounting policy’ and require retrospective application?
Hi Milind,
I guess you have used some accounting policy for certain items before the adoption of the new standard. When the new standard is adopted, then you are forced to change your previous accounting – so that is a change in accounting policy. Moreover – it is clearly written in IAS 8.
With regard to retrospective application – the new standard usually contains a guidance for adopting it. Some standards require full retrospective application, but some of them permit you some exceptions. For example, also IFRS 15 contains 2 options for application – full retrospective approach or modified approach (which is less strict). Hope it helps S.
Hi S
Thanks for the clarification. Probably I had not paid enough attention to the para C3 of the transition provision in the text of the standard. It’s clear now. My take is the modified approach will suit most of the adopters.
Really its a very useful article which simplifies many complex issues…thanks:)
Thanks Silvia M for your useful paper. I am studying Paper P2 ”Corporating reporting” in the ACCA program. Its a challenging paper, i need to gain a sound knowledge on IAS to pass the exam. So pls share your helpful papers like that. Thank you so much!
Hi,
We have the following transactions:
“Sale Rebate Promotion expense” transaction wherein our customer is given rebate if they achieved monthly and quarterly target.
“0% Subsidy Promotion Expense” is an exepense that we subsidize for bank charges for 0 interest installment.
My question is “Is this deductible from Revenue” under IFRS 15?
Hope someone can help me.
Thanks,
Dennis
Hi Dennis,
these items need to be taken into account when you estimate the total transaction price (step 3 in the 5-step model). So if you estimate some sale rebate promotion to your customer in the future, you should reasonably reflect it in the total transaction price in order to recognize revenue in line with the 5 step model. S.
Hi Silvia,
Thank you for your prompt reply. For sales rebate, I understand that this is just like a voume discount. The difference is our sales rebate is based on amount instead of volume. For 0% subsidy, can you explain futher why this should be deducted against revenue? Currently, we present this as promotion expense.
Thanks in advance for your help.
Hi Dennis, could you explain in a detail what 0% subsidy exactly is? I’m a bit confused or I miss something in your above information. I thought it’s a sort of compensation provided to a client, but maybe I’m wrong, so please clarify. S.
If our dealer offer a 0% interest to their customer..this mean that our dealer shoulders the credit card charges… portion of this credit charges will subsidize by our company…
thanks for the explanation.
I need to know why there was a shift from IAS 18 to IFRS 15
Hi Silvia
How the change order will going to treat in any case ? Can you explain something with change orders .( Anything apart from Telecom Industry ).
Thank you.
Hi Silvia
Thanks for this great helpful article
I would like to know your view on application of IFRS 15 to Shipbuilding industry. I’m working in shipbuilding industry and all our contracts are long-term (more than 2 years). Final product is delivered to customer after construction is completed. I am a bit confused if i should wait for the delivery point for revenue recognition? If that is so, all periods until delivery period will boil up with huge amount of loss
May i know the measurement theory behind the standard IFRS 15 is what ??
Thank Silvia for the interesting explanation.
Although this is mainly focused on Telecom and wherever I read about IFRS 15, it focuses mainly on Telecom.
I have a question here:
– what happens to percentage of completion method in long term construction contracts? – thanks.
Mohammad,
IFRS 15 also introduces a sort of percentage of completion method, when you assess that you’ll recognize revenue over time in some long-term contracts. So maybe it will remain untouched in your particular case, but it needs to be carefully assessed. S.
Hi Silva,
Your notes are very clear and understandable, I like it thanks,
Hi, why did u say the IAS 18 revenue principles are broad? Could you give example of why is it broad? Thanks
Hi Silvia! thank you for your effort in explaining matters about IFRS15. I would want to ask you about how does the implementation of IFRS15 would affect retail players?What specific aspect/s would be affected by it and how? Actually I’m doing a research now with regards to this matter. I hope you can answer me precisely. Thank You!
Charmaine,
this is very broad question to answer precisely in one comment – it would require a whole essay. Just think of many activities retailers do and analyze. For example – how buy 1+get 1 free will be accounted? Loyalty schemes? Listing fees? Etc. S.
Hi Silvia, thanks for your response. As for what I asked from you, could you explain what corollaries would a retail player undergo under IFRS 15 considering their accounting for contract costs, gift cards, customer loyalty programs, warranty and sales returns? Thank you so much!!!
and how would the application of IFRS 15 affect the profit reporting of these retail players?
Hi Silvia, please, could you help me? I have to write essay about IFRS 15 in telecommunications company and I don´t understand it. The unit offers program for 20 EUR per month. Customers can also buy cell phone for 2 EUR with this program. Stand-alone price of cell phone is 170 EUR. If customer doesn’t buy cell phone, how many revenues company can recognizes? Is possibility to buy cell phone a new performance obligation? Must company allocate transaction price to cell phone? Thank you for your help. Have a nice day 🙂
Someone published your article on Linkedin:https://www.linkedin.com/pulse/ifrs-15-vs-ias-18-huge-change-here-tarek-kamar
Thank you very much for this info. See, lots of people simply steal the content. I will file a DMCA action against it. Thank once again! S.
Hi Silvia,
I’m writing a thesis on the IFRS 15. I found your example really usefull and easy. Did you write other articles about the differences between ifrs and the other IAS 11, IFRIC 13,15, 18 etc, which will be replaced?
Thanks,
Margaux, no, not yet. Everything I wrote is available on this web. S.
Hi Silvia,
Please clear below doubt:
As per IAS 18 para 9 “Revenue is measured at the fair value of the consideration received or receivable”.
Also recognition criteria to the separately identifiable components of a single transaction (here: handset + monthly plan).
SO it means Fair value has to be calculated for each identifiable component separately.
My query is, How IAS 18 is different from IFRS 15 here. As both recognize revenue based upon Fair value and separately identifiable component basis.
Thanks in advance.
Dear Abishek,
please read the article above, paragraph Revenue under IAS 18, below Example. I explained that yes, there was a vague statement of separability, but the guidance was missing and companies interpreted it in their own way. Please read more above. Thank you. S.
Hi Silvia,
Please elaborate below:
How does IAS 11 Construction Contracts affect IFRS 15 and can you please provide some explanations and video on IAS 37.
Thank You.
Hi,
IFRS 15 will replace IAS 11 eventually. The video on IAS 37 is here. S.
Hi Siliva
I red in IFRS-15 that it also deal with cost incurred for fulfillment of contract. What does it mean?
Could you plaese provide a snapshot of all the IFRs which are changing and have effective dates of 1st January 2017
hi
what is the application of the new accounting policy to Microsoft company?
Hello Silvia,
I wonder that ABC Co. can recognise a revenue from headset on delivery day however ABC Co. will get money montly. So the money of headset will be delayed. Is interest should be calculated for delayed money of headset?
I think a part of recognised headset revenue is an interest income based on IFRS-15, 61,b (i).
Not in this example as the revenue is spread over 12 months. S.
Thank you, Silvia. Do you have some examples about software industry based on IFRS 15? I am writing an article. Thanks again.
Dear Ilker,
I wrote about one example in this article, please check it out! S.
Great Article,
Your article is very easy to understand. Can you make article about IFRS 16: Lease?or do you have reference for me about that?I am going to learn that IFRS for implementation. Thanks Silvia.
Warm Regards,
Dea
Hi Dea, try this one. S.
Woooww, thanks you so much silvia. I really appreciate it. I will start read now hehehe. Thanks.
Hi Silvia, I have a question on a scope exemption for IFRS 15. If an entity has an interest in a joint operation accounted for under IFRS 11, and the joint operation has a contract with a customer, is that contract scoped out of IFRS 15? Thank you.
What if you have three contract with different names and different price how could you show them in financial statement ?
Hi Silvia, could you provide revenue recognition examples like how you did for the network plan for property development under IAS 18 and IFRS 15?
Dear Lina,
I wrote another article with examples on IFRS 15 and I think I included one related to property development. You can check them out here. S.
Dear Silvia,
One more cringe worthy point to add:
In the example given above (wrt Johnny), the Telecom company will report higher revenue in the period from Jan’17 to Jul’17. Whereas, a part of that revenue is already TAXED in the previous period. I don’t think any Tax authority in any country will give a credit for the tax already paid in prior period. This resulting in single income taxed twice. And beauty of it is : Many of the companies will not even know the exact quantum of impact.
Dear Ram,
this is a valid point. But, the taxation depends on the country rules. Some countries tax the profits based on IFRS rules and in this case, the tax effect will be just OK. However, if the legislation asks to calculate taxable profit under the rules different from IFRS, then yes, you are right and here, the deferred tax needs to be recognized. Not mentioning the cash flow effect. S.
Hi Silvia,
Will IFRS 15 effect the financial Ratio’s of a company? And Which one?
if Company is offering handset free and other network services are charged at 80 per month Than what would be the treatment under IFRS 15.
Hmmm, I think the process is described in the article. You need to alocate the total contract cost of 80*number of monhts between the handset and monthly services based on their relative stand-alone selling prices. Then the journal entries are the same in principle (just the numbers are different) S.
Hi Sylvia. Your explanations help so much, thank you for all the hard work. I just wanted to ask about the old IFRIC 13 and how that will now be accounted for in terms of IFRS 15. I wanted to specifically know if the customer uses loyalty programs and pays a fee in advance per annum and uses his card for discounts etc during the year. Will revenue be calculated over time or at a point in time ?
Thank you silvia, this is very nice and easy to understand the concept clearly. Thanks a lot.
Hi Sylvia – Thanks for the article.
I am working for a medical device and we only work via distributor contracts. So we sell our tangible products to the distributor and he sells it further to hospitals etc. We recognize the revenue when we invoice and ship the goods and he pays in x days. Is there any impact of the IFRS 15 on our set up on how we do things?
Thanks for your answer
Dear Laveena,
if the situation is that straightforward as you described, then I think there would be no change. You should be just careful when delivering at discounts, providing some post-delivery services, making returns/refunds, etc. S.
Hi Silvia,
I am grateful for your hard research and clear explanation on this monster IFRS15 standard – I feel like it’s a bomb when hearing about it!
Can I please ask how IFRS15 would affect the university sector where there are typically 2 types of contracts:
1. Student Fees
2. Research Contracts
If you could give an example about this situation, it would be much appreciated.
Thank you.
Raul.
Hi Silvia,
You’re awesome. Your way of explaining complex things with ease is what makes you different fro others. I really like it as it makes learning more interesting. Can you please explain the impact of IFRS 15 on revenue contracts entered with related parties? What could be the impact is such contracts are on arms length price or at a price agreed by related parties?
hi,
I have a question .We use IFRS 15 Revenue recognition point of time.Supply of machineries.Payment terms are like (1) 50% advance (2) 30% on delivery (3) 10% after 1 month of delivery,(4) 10 % after 1 year warranty period. How to record the receivables .Can we debit the full amount in customer a/c at the time of delivery ? actually the payment 3 & 4 is not due on the date of revenue recognition. please advise on this
Hi Albi,
if you are reasonably sure that you will receive the full revenue, you can recognize it in full. However, you should discount the payment due in 1 year to its present value. S.
Hi Silvia,
Could you please elaborate How to calculate discount it into present value . Should we consider this charges (discount rate) while pricing the item to the Customer.means charge it from the Customer
Is is it worth if we use Installment payment method installment sales method, cost recovery method.
How is credit rating of customers related with IFRS 15? I have heard credit rating of customers will be required because of IFRS 15.
Arif, it’s quite tough to explain this in the comments, but I try shortly: under IFRS 15, you account for a “contract asset” sometimes. That’s when you supplied more than your billing is (very simply said). You should test this contract asset for an impairment and in this case, you should take customer’s credit risk into account. But, you don’t need to ask for credit rating necessarily if you are able to assess customer’s credit risk in some other way. S.
can you please explain
1. Transition guidance for contract that will be completed after jan 2018
2. also do we have to make adjustment to the contract that will get completed before Jan 2018.
Hi Silvia,
Good day!! I have 2 questions
1) the previously IAS 11 stated that eg if a profti is expected to be made then the same sould be made on stage of completion. How does this link with IFRS 15.
2) on your example with the phone device + network, is it correct to recognise full 12 momths of the network charge at the start of the contract as deferred income and release revenue on a monthly basis?
Hi Demetris,
i am not an expert but just helping with an opinion. on the issue of question 2. what i understand is that you only defer revenue if you have received money for services yet to be performed. but in the example of Silvia, the services have not yet been rendered so no deferred revenue. Hope this is helpful
Hi Silvia
Would be great if you can offer some insight on how IFRS 15 will impact on revenue recognition for university offering scholarship to students.
E.g. normal tuition fee is $100. A student is admitted and only needs to pay $50 (remaining $50 is scholarship, hence no payment to be made by student).
Thanks a ton and keep up the great work!
Hi Silvia,
Thanking you for your descriptions. Would you please give us another real life example ?
Hi Silvia,
Nice Article with very easy example. Can you please confirm if along with handsets and monthly subscription Fee, ABC also provide 100 free call minutes (standalone price of minutes is CU 1) for 1st month. My question is…. Will these mins price be allocated with handsets and subscription fee.
2) Also if ABC decide to give these mins after 6 months of the contract. (as mentioned in contract as subsidy)
3) Under normal scenario (No free Mins) What if customer terminate the contract after 3 months and return the handset. what would be accounting entries.:(
Well explained article. Thank You
Thank u well understood
Well explained article. Thank You
very well explained But I want 100s of scenarios with solution as above to get prepared for upcoming exams in March for ICAP papers.
I want that too, Ali! 🙂
Dear Silvia
I am in foods FMCG company. What would be the impact to our business. We have open contract with customer and currently recognize revenue as and when deliver the products to them.
Also, we have to pay rebates based on agreements. For example 5% on sales as rebate on using supermarket shelves and currently accounting under trade marketing cost (selling and distribution)
Appreciate your feedback.
Excellent explanation , GOOD WORK ….
😉
Hi Silvia,
Good day and Happy New Year!
As the others say, a very nice article. You presented the details with great simplicity and clarity. This will surely help me in my course work in the graduate school on Revenue Recognition. I am really having a hard time with this one since my background is in finance, management accounting and IT accounting, not on financial accounting.
Just some questions and clarifications related with your example, as follows:
1) What if the monthly price of the plan with the head set is much lower than the normal price of the plan without the headset (e.g. at CU 70), how will this affect the transaction price, allocation of the price and the recognition of revenues?
Although this seems to be unusual because when we offer a bundle, the price of the plan with the headset is normally higher than the price of the plan without the headset (to cover portion of the cost of the headset). This is just for illustration purposes.
2) In relation to no.1), what if the price of the plan with the headset is just the same with the price of the plan without the headset (meaning price is CU 80), how will this affect the transaction price, allocation of the price and recognition the revenues?
Again, this seems unusual. Just for the purpose of illustration.
3) What if ABC separately offers an extended warranty for two years, in addition to the one year quality assurance of one year, amounting to CU 60. The extended warranty is paid immediately upon purchase of the plan in addition to the monthly payments of CU 100. How will this affect the transaction price, allocation of the price and the recognition the revenues?
Thank you very much Silvia. Your response will really be of great help. GB:)
Dear Silvia,
For determining the transaction price, do we need to consider the probable excess usage that over and above the contract benefits based on history of that customer segment? In that case, the revenue is extrapolated than contract price and there is always an realization of that amount from customer to customer.
Secondly, if customer opts for any service add-on, does it need to be factored as part of original contract price?
You always do the right thing. God Bless you.
Thank you
Hi Silvia,
Does the following wording in Step 4
“allocate the transaction price to each performance obligation in an amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for satisfying each performance obligation.”
mean that should the company deem it appropriate, they could recognise the full CU300 for the handset and have the “discounted” element applied to the monthly rental income? i.e. 900 / 12 = 75 per month
Thanks
Alison
Dear Alison,
all that matters: relative stand-alone prices. So no, if these standalone prices would have been like in the above example, then the company cannot allocate 75/month and 300. S.
Hello Ms. Sylvia. How about for installment sales wherein there is no reasonable assurance for estimating the degree of collectibility of your receivables, are we going to recognize the revenue at the point of sale or can we depart from it.
Hi Elaine, it all depends on what the contract says – when the control over the asset is passed to the customer. If at the inception, then yes, recognize sale at the inception. However, you should take the probability of collecting the revenue into account when determining the transaction price. S.
How about sale return’s recognition ?
Hi Ki Ki,
you need to take the probability of returns into account, based on past statistics or other data. I solved the complex example about it in my IFRS Kit. S.
Hi silvia , please write short compare between IFRS15 and IAS 18
Thank you in advance
Hi,
Thanks. Your explanations are Simple, Excellent and very useful to understand.
Regards&Thanks in Advance,
VasuM
Hi,
What if the company is offering free credits with every purchase of a prepaid SIM Card. what would be the impact of IFRS 15?
Hi RK,
in this case, the company must allocate the transaction price (to be received from customer) to the individual performance obligations, i.e. to credits within SIM card and free credits. S.
Hi Silvia,
I am a big fan of yours, always refer your articles on ifrs whenever i need some clarification or understanding. You have made all the standards very easy to grasp. I don’t have to refer so many pages to get what i want and still be nowhere.
Thank you and all the very best to you, so that you can always keep up the good work.
Regards
shilpa
Hi Shilpa, great to read this 🙂 can I include your quote to testimonials? All the best 🙂
Hi
How will IFRS 15 affect a school that receives money in advance. Some parent register their kids soon after birth.
Hi
Can you plz through some light how revenue recognition is done in case of fixed bid and time and material contract with help of an example
Hi,Can you please explain why IAS 18 was replaced by IFRS 15?
Hi Silvia,
I am new to IFRS and you make it so easy to read and understand. My question to you is that would the revenue for a one-year training passport that gives customers unlimited access right to online materials be recognized immediately once the access right is granted? Under ASC 605, we recognize such revenue over 12 months. Thanks!
firstly, you are doing an amazing job simplifying these standards which are usually worded to be complex!!!
as for the example on pricing the phone and service price i was thinking more in terms of having the usual service price fixed at 80 per month and considering the delta of 240(1200-(80*12)) as the price for the handset i.e. in effect the handset is discounted and not the service. makes sense?
Dear Narasimhan,
I see your point, but this is not the case. You would allocate the full discount to the handset and IFRS 15 does not permit it (there are some exceptions though). S.
Hi Silvia,
May I know how does iFRS 15 affect manufacturing companies that produce alum, ore,etc ? And how to anticipate the transaction price in the contract since the market price for the product is vary? Lastly, if the promised quantity stated in the existing agreement did not meet, do I need to restate contract ?
Hi Silvia ,
Thanks for the great effort, I am thinking of buying your IFRS KIT and then apply for the EXAM.
But I have a concern that it will not have enough examples for construction and engineering industries which will not be very helpful for me.
So would you please give an honest advice ?
Thanks, Mostafa
Hi Mostafa, thanks for your interest! Please, for further information about the IFRS Kit, write me an e-mail 🙂 Silvia
I thank you very much Silvia for this explanation!
Mahfoud
i began to enjoy the world of IFRS!
Hi Silvia,
Don’t you believe that the sale of the handset to Johnny involves financing cost that supposed to be accounted for by the ABC Telecom?
Abdalla
Hi Abdalla, not in this case, because it’s 12 months. But sure, if the plan is longer, then you have a significant financing component there and you must take this into account. Anyway, I don’t want to complicate the things when explaining the basics, that’s why I picked up a simple case. S.
In the old standard, the free handset will be recognised as an expense. In contrast, the for the new standard we have to allocate the cost of free gift and recognise as revenue.
Does it mean that the company will understate its expenses for the new standard since it does not do not recognise the free handset as an expense? The free handset is a cost to the company and why isn’t it recorded as an expense?
Hi Sharon,
no, the expenses will not be understated. Under the new standard, you still have to recognize the expense for the free handset as cost of sales (not marketing cost) and recognize corresponding revenue (0 under IAS 18). S.
Hi Slyvia, I wondered what would happen to the following revenue methods in line with the implementation of IFRS 15, as follows: (1) Installment Methods for installment sales , (2) Percentage of Completion for long-term construction contract , and (3) cost-recovery method. Are these mentioned revenue methods still applicable?
hi, I want ask whether we have to recognise the revenue from an incomplete job, for example if a company was given a contract to manufacture a specialize equipment for the customer’s operation and the equipment 80% complete by the end of the accounting period. do we have to recognize the revenue such deposit? I appreciate if you could reply to this thank you
Under IFRS 15, you need to assess whether the control passes to customer at the point of time or over time. There are 3 criteria for control pass over time – if one of them is met, then yes, you recognize revenue based on the progress, if none of them is met, then you recognize revenue when the asset is handed over to your customer. From what you wrote, I can’t really assess it because I don’t enough information. S.
Silvia Hi
What if the equipment (special production line tailored to customer) is sold with the assembly service that has to be performed by the producer of equipment (bundle). In the middle the equipment is transported to the customers facility for the assembly (invoice issued) and the customer obtains physical control over the unassembled equipment that can not use until assembled and tested. We presumed that in this case we have just one performance obligation. Would you have any concern with this? The contract doesn’t define that the producer has the enforceable right to retain payment (this means that very probably the producer would have to return the advance payments and go into a lawsuit for damages. This would indicate that the revenue recognition is at point in time. How would you suggest to recognise revenue?
Hi Silvia,
Why did you recognize all of the revenue from the headset in the first 6 months (and not over 12 months) in your example when the revenue extends into another accounting period (i.e. July 1) above?
This obviously will lead to an overstatement in revenues; in the journal entry example you gave, you´re taking the 100.00 from the monthly service received and you´re allocating 76.20 to revenue from network services and 23.80 to revenue from unbilled revenue which makes sense because it is over 12 months. But then right below it you´re taking 285.60 of revenue being allocated to the headset and you´re recognizing it all in the first 6 months of the contract.
There is a mismatch and I don´t understand it – I think it should still be over 12 months regardless of whether or not the contract was entered into in July.
Please let me know what I am missing. Thank you for your help!
John
Please see my example below: I think you should be recognizing revenue of 600.00 in both years from the same contract.
Month Headset Rev Network Rev Total
july 23,80 76,20 100,00
august 23,80 76,20 100,00
sept 23,80 76,20 100,00
october 23,80 76,20 100,00
novembe 23,80 76,20 100,00
december23,80 76,20 100,00
jan 23,80 76,20 100,00
feb 23,80 76,20 100,00
march 23,80 76,20 100,00
april 23,80 76,20 100,00
may 23,80 76,20 100,00
jun 23,80 76,20 100,00
Nevermind, I see my mistake. We recoginze the revenue when we fullfill the obligation and give Johnny the headset. sorry, my mistake!
Hi Silvia,
I think there is an alternative treatment for first time adopters, which is called the simplified transition, under which the effect is recorded as a lumpsum adjustment to retained earnings on 1-1-2018 without affecting the comparative information, please advise.
Hi Ahmed, yes, there is. It is called modified retrospective approach. I wrote similar article about implementing IFRS 16 Leases with example illustrating both full and modified approach here. With IFRS 15, it’s the same methodology. S.
Hi Saliva,
This is excellent! I actually have an assignment on this and I find this extremely useful; it has, by far, enhanced my knowledge and understanding of both IFRS 15 and IAS 18 and my coursework is now a lot easier. God bless you!
Regards,
Glodz
Thank you, glad to help 🙂
I think it might be fare value of handset in the market.
Hi silva,
i’m working in company sale of goods with free service and free parts credit voucher.
1.1.1 With free service
eg: 3000 hours free service on labour,
mileage ,travelling time and filter only
-Issue WII and charge services/part costs to respective department as free service
1.1.2 With parts credit
– Finance-AR issued parts & service voucher after customer fully paid for machinery
Current practice
free svc
DR Aft Sls Service
CR Service sales
Parts credit
DR Trade debtors credit
CR Parts credit recorded
How to recognised revenue under MFRS15 changes?
Hi, i still dont really understand the the degree of collectibility of the receivables,
lest say below example
I have a service contract with customer with $ 100,000 on monthly base, and i Delivered the service to him but i am not sure he can pay , what should i record in my books DR and CR in this case
Hi,
is it IFRS15 or not if my company offer is 12 months plan(mobile data) with 50% discount. Only the service.
Thanking You in advance,
Marina
Thanks it very helpful
how about interest example term loan interest at property development have effect under IFRS 15
Hi Silvia,
Can you please explain with an example of IT company view point? That would be great!!
Regards
Pankaj Singla
Hi Silvia,
I hope everything would be fine on your side.
Really it is great that you are sharing knowledge.
My question is that i want to know that how we gonna treat construction contract in IFRS-15.
Like we incur the cost but the revenue should be recognize at the time when customer satisfy, but what about the cost we gonna incur in manufacturing the asset for customer.
kindly let me know with proper double entry and relate the scenario with example, it will be very helpful for me.
Your corporation will be appreciated.
Thank you in advance.
Hi Adnan,
thanks a lot for this question! I plan to publish a full article within a few months, so stay tuned!
Very useful.
Hi Silvia. what does FP in your above illustration stand for? Also could you kindly clarify what the double entries for the 285,60 for the handset should be? Many thanks
Hi Sunat, FP stands for financial position (balance sheet). And, I strongly believe that all double entries for the 285,60 are there!
Dear Silvia,
Thank you for your valuable articles and videos in IFRS. I am a huge fan of your work.
I have question:
When companies capitalizes costs “cost to acquire a contract and cost to fulfill contact” it will be presented in the statement of financial position.
What about the cash flow statement?! where are such costs presented? CFO or CFI? and why? please
Dear Silvia
Thank you for providing such deep insights regarding “How to account for customer incentives under IFRS 15”. I am still not clear about certain aspects of customer incentive such as
i) Wholesale company provides free insurance coverage to their dealers if they purchase a specified amount of products during the financial year. How should this transaction be treated as a reduction of revenue or marketing expense? In addition, it may be mentioned here that insurance plan is purchased by the company from insurance company so that they can provide it to dealers.
II) Retail company provides free foreign tour to their customers if they purchase a specified amount of products during the financial year. How should this transaction be treated as a reduction of revenue or marketing expense? In addition, it may be mentioned here that foreign travel tour plan is purchased by the company from travel agency so that they can provide it to customers.
Thanks in advance. Appreciate your effort and time to make IFRS easy for everyone..
Warm regards
Mymoon
Dear Silvia,
I would like to request an example for the changes from construction contracts(AIS11) using input method vs. revenue recognition (IFRS15) using output method.
Thank you so much in advance. Very much appreciated your way of sharing your knowledge.
Hi Arn, I will publish such an article soon, no worries!
Hi Silvia,
thanks for your useful information. could you please advise if the companies needs to apply IFRS 15 and 9 for interim periods of 2018 under ias 34? say 6m 2018? it confuses me, because the standards are applicable for the annual periods usually.
Hi Silvia
How does this affect the Banking industry
Hi Silvia,
How does IFRS 15 account for work in progress?
I think this can help.
Hi Silvia,
If retrospective application is dependent on a significant amount of data, which is not readily available, can one apply the “impracticable” provision in IAS 8?
What onus of proof is necessary to prove that it is “impracticable” to apply it retrospectively?
Well, you need to have some justification that the cost of getting that retrospective information would exceed the benefits – in other words, the items are not so material and the cost of getting the info is too high.
Hello Silvia,
Thanks for your invaluable article on this topic.
If a Company has carried out all the performance obligation but could not certainly tell how much Revenue it will receive from its customer at the end, must such a Company wait till when payment is received from customer before recognizing it? Or what is the correct treatment?
(The Customer pays based on the services rendered by the Company and because of the volume of the services, there is always disagreement between the two parties on the number of services rendered in a month in most cases and as such the income the Company receives may be different from what is expected from the Customer)
Hie Silvia
How do we recognise revenue for Non profit organisations under IFRS 15. The organisations receive funding or grants from Funders or Partners
Silvia thankyou for this information that very help full,
i want to ask how about construction contract ? do you have an example?
please let me know,
Thankyou verymuch
Yes, I think this will help. S.
thankyou very much Silvia, wish you the best.
Dear Silvia
I hope you are well.
Your articles have simplified the standard. Can you please assist me as well, I am working for university in the accounting department, i just want to bounce my ideas with you.
University major sources of income are tuition and other fees, residence fees, government grants.
Government grants are excluded on IFRS 15.
I have a question though on tuition and other fees and residence fees.
Do we have a contract with the students?
My view is we have a contract.
The second question is what is University performance obligations?
My view again is to provide education services and accommodation.
Determination for transaction price is not a problem since we charge separately for each component. and allocation of transaction price is also not an issue.
The last question is when the university should recognise revenue?
The standard requires the revenue to be recognized when performance obligation is satisfied.
My view is we recognise the revenue at the end of the semester or year depends on the duration of the coarse. At the end of the financial year which is linked to the academic period, we can recognise the revenue for yearly cause and recognise revenue for semester coarse after 6 months.
In case of accommodation, when the university has provided the accommodation to the students, which will also be end of the semester.
Please help
Hi Rose,
I generally agree with what you wrote – yes, you have a contract related to tuition and other fees and yes, your main performance obligation is to provide tuition (education). I see it as satisfied over time, and thus you should recognize the tuition fees over time based on the progress towards completion. For example, let’s say the student pays the annual fee of 10 000 for the period from September Y1 to June Y2; and for the sake of simplicity let’s say that the tuition is evenly distributed and you can use straight-line basis to calculate progress towards completion. Student pays you in September Y1 the full amount, thus you need to book Debit Cash Credit Contract Liability 10 000. In December Y1 (let’s assume this is the end of your financial year), you recognize revenue of 4 000 (4 months/10 months) and the entry would be Debit Contract Liability Credit Revenue 4 000. Sure, you can use other methods of calculating progress towards completion – but that’s roughly how I see it. I hope it helps!
Silvia Thanks for your contribution to accounting knowledge especially the focus on ever changing scenarios
How would the accounting treatment work if the cellphone contract were over 2 years.
IFRS 15 offers the practical expedient of ignoring time value of money if the contract is for 12 months or less. So in the instance where the contract expands over 2 years, would we be discounting the stand-alone selling price of the monthly installments too? Or do we argue that the data bundle is provided on a monthly basis, and payment is on a monthly basis, in which case the time frame is less than one year so there is no discounting for that. Is there any instance where we would discount the stand-alone selling price?
Hi Thomas,
great question. Well, IFRS 15 says that there is a significant financing component if timing of payment of promised goods/services provides either customer or the entity with the significant benefit of financing. However, in the case of similar monthly prepaid plan this is not the case, because the service is provided over time, a performance obligation is partially met over time and the payment relates to that part satisfied within the last month, thus there is no significant financing component and no need to discount anything.
Example of a significant financing component would be purchase of a machine with immediate delivery, but the customer pays 1/2 now and 1/2 after 18 months – the time difference between the satisfaction of a performance obligation (delivery of a machine) and 1/2 payment is 18 months, thus you have significant financing component and you need to discount the second half.
Hi Silvia,
Thanks for writing a very helpful article on IFRS 15.
I am in the retail industry where the company is offering $200 voucher having a validity of one year on the purchase of $1000.
How do I recognize revenue & voucher?
Very simplified points and example – this is amazing.
Thanks!
Hi Silivia,
Very informative site..
In case of telecom sector, Entity providing internet service, cable tv service and landline phone service these services are bundled I-e $ 3000 and also sold separately with $ 2000, $ 500 and $ 1000 respectively basis. Revenue in respect of these should be recognised over the time as customers are invoiced on monthly basis. Is it necessary to allocate contract price to separate performance obligation as revenue in total remained the same I-e $ 3000 or allocation is necessary for disclosure purpose. Pleas comment..
Hi Silvia, If the company receives deposits for work done, how should that be handled in terms of revenue recognition? Should this be credited to another account until all the work is done? Additionally, should VAT be charged the deposit up front, or to the total contract price?
Thanks for your response in advance!
Hi Anika,
as for VAT – it depends on your VAT legislation, so I cannot really say. In our country, we need to charge VAT also on the deposits received. If you cannot retrieve VAT from the state, then you can include it in the cost of PPE/other asset.
As for received deposits, typically you need to recognize them as Debit Cash/Credit Contract liability and as soon as you meet the conditions to recognize revenue, you will book Dr. Contract liability/Cr. Revenue. Here there is the solved example. I hope it helps! S.
Thank you so much salvia!!!