Sia Bloviation - Revenue Recognition

Re: SIA Bloviation- Revenue Recognition

Scenario Overview

The revenue recognition principles were amended. The following information explains the basic concepts and process of revenue recognition, provides example on subscription-based revenue account and differences between IFRS 15 and ASC 16 and it affection on US GAAAP reporting package.

Concept and Process of Revenue Recognition Under the New IFRS Standard

Revenue from contracts with customers is recognised accordingly Five Step Model application: the contract identification, the performance obligation identification, the transaction price determination, the transaction price to each performance obligation allocation and revenue recognition when each obligation is satisfied (see the FASB 606-10-05-4 ).

Step 1. Identifying the contract. Contract is an agreement between two or more parties that creates enforceable rights and obligations (see FASB 606-10-65-1). Identifying the agreement, i.e. contract, should be considered 3 main aspects: features of ‘contract’ under IFRS 15 (see FASB 606-10-25-1 till FASB 606-10-25-8), combining multiple contracts (see FASB 606-10-25-9) and contract modification (see FASB 606-10-25-10 till FASB 606- 10-25-13). Main features of ‘contract’ under IFRS 15 are: the contract has been approved, the contract has commercial substance, the payment terms to be identified, consideration may be received. (see FASB 606-10-25-1). Combining multiple contracts are possible if they both was entered at the same time (see FASB 606-10-25-8). Contract modifications is a change in rights and obligations (see FASB 606-10-25-10). Contract modifications are accounted for as a separate contract; however, they are only if the contract scope changes due to the addition of distinct goods or services (see FASB 606-10-25-11) and price reflects the standalone selling price (see FASB 606-10-25-12). Definition of ‘distinct’ will be met in Step 2. Standalone Selling Price is defined as the price at which an entity would sell a promised good or service separately to a customer (see FASB 606-10-65-1).

Step 2. Identifying the performance obligations (see FASB 606-10- 25-14 and FASB 606-10-25-15). In order to identify the performance obligations, first, should be taken into account the definition of the performance obligation. Accordingly, appears the ‘distinct’ definition since the term ‘distinct’ is included in performance obligation definition.

FASB 606-10-65-1: “Performance obligation is a contract with a customer to transfer to the customer, distinct goods or services. either individually..<..> or as a series over time”. ‘ Distinct’ is executed when are met two criteria: the customer can ‘ benefit’ from the good or service and the promise to transfer the good or service is separable from other promises of the contract. (see FASB 606-10-25-15).

Step 3. Determining the transaction price. The transaction price is the amount of the consideration an entity expects to be entitled to in exchange for transferring the promised good (see FASB 606-10-32-2). According to FASB 606-10-32-3, when determining the price the entity should take in consideration the facts: variable consideration (see FASB 606-10-32-5 till 32-5), financing component (see FASB 606-10-32-15 till 32-20), non-cash considerations (see FASB 606-10-32-31 till 32-34) and payable consideration (see FASB 606-10-32-35 till 32-27).

Step 4. Allocating the transaction price to each performance obligation. The transaction price allocation is based on stand-alone selling price of each performance obligation (see FASB 606-10-32-29). Stand-alone selling price is the price at which entity would sell a promised good or service (see FASB 606-10-65-1). If the stand-alone selling price is not observable there exist other applicable methods (see FASB 606-10-32-34). Should be also allocated a ‘discount’ (see FASB 606-10-32-36 ) and variable consideration