ED Revenue from contracts with customers - P2

ED proposes a single revenue recognition model in which entity recognises revenue as it satisfies performance obligation in the contract by transferring a promised good or service to customer. The use of percentage of completion method in IAS 11 is withdrawn. As the contract progresses, the remaining rights and obligations change, resulting in either contract asset (net right to receive consideration) or contract liability (net remaining performance obligations). In applying the model, 5 steps are followed:

1. Identifying the contract
One contract would be separated into two or more contracts accounted for separately if some goods or services are priced independently (if interdependently, then no need to separate).

2. Identifying separate performance obligations
This will determine whether to account the performance obligation separately or not. If goods or services are provided at the same time (performance obligations satisfied at the same time), then account for single performance obligation. If the performance obligations are distinct and satisfied at different times, then account for separate performance obligations. For example, sale of goods with one year warranty have two performance obligations, ie. sale of goods and sale of warranty.

3. Determine transaction price
The transaction price should reflect the probability-weighted amount of consideration that is expected to receive in exchange for delivering goods or services. If transaction price is variable (eg. subject to discounts), it will be estimated at each reporting date. Transaction price and revenue recognised include only amounts that can be estimated reasonably.

4. Allocating transaction price to separate performance obligations
Transaction price is allocated to separate performance obligations in proportion to their relative stand-alone selling prices. If it is not directly observable, use approaches such as expected cost plus margin approach or adjusted market assessment approach. Subsequent change in transaction price would be allocated to all performance obligations, including those satisfied.

5. Satisfying performance obligations
Performance obligation is satisfied when control is transferred to customer, ie. when customer has the ability to direct use of and receive benefit from the goods or services. Revenue is recognised when the performance obligation is satisfied.

Other proposals
1. Costs incurred in fulfilling the contract which are not eligible for capitalisation (eg. cost incurred to obtain a contract) under other IFRSs would be expensed unless they relate directly to future performance under a contract and are expected to be recovered, then they are recognised as separate asset.
2. Test would be conducted to identify performance obligations that are deemed onerous (expected directly related costs to satisfy obligation exceed allocated transaction price). If performance obligation is deemed onerous, contract loss is recognised resulting in impairment of assets related to the contract and/or recognise separate liability.

Presentation
Contract asset/liability is presented depending on the remaining rights and obligations in the contract. Contract costs capitalised would not be presented as part of contract asset/liability but according to their nature.