KPMG 2018 IFRS update

©© 2018 KPMG Lower Gulf Limited and KPMG LLP, operating in the UAE and Oman, member firms of the KPMG network of independent member 5 An entity recognises revenue when or as it satisfie

2018 IFRS Update

October 2018KPMG Lower Gulf Limited

kpmg.com/ae

IFRS Update – Disclaimer

September 2018

Whilst care has been taken in the preparation of this training

material, details may be omitted which may be directly relevant to a particular entity Reference to the standards and other authoritative material should therefore be made, and specific advice sought, in respect of any particular transaction No responsibility for loss

occasioned to any person acting or refraining from action as a result

of anything in this training material can be accepted by KPMG.

This training material is based on standards, interpretations and other authoritative material issued until the 31 August 2018.

IFRS 16 Leases

IFRS 15

Industry considerations Disclosures

Why go through the process if change is not big?

Revenue may be only CUXXX ± ~10%

IFRS 15

IFRS 15

IFRS 15

The thought process changes even if the accounting doesn’t that much

Single comprehensive framework Important with evolving products and business

models Greater comparability

Revenue CUXXX

IAS 18

IAS 11

IAS 18

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What have we learnt

outcomes

5

Nobody has read the

‘terms and conditions’

Revenues and cost do not

match anymore

Clients underestimate the

impact of IFRS 15

You may no longer

continue the use of the

Percentage of Completion

method

Revenue recognition – New 5 step model

©© 2018 KPMG Lower Gulf Limited and KPMG LLP, operating in the UAE and Oman, member firms of the KPMG network of independent member

1

A contract exists if

rights to goods or services and payment terms can be identified.

it is approved and the parties are committed to their obligations.

Identify performance obligations in the

contract

Step 2

A performance obligation (PO) is a promise to deliver a good

or service that meets both the following criteria

Criterion 1: Can the customer

benefit from the good or

service either on its own or

together with other resources

that are readily available to the

customer?

Criterion 2: Is the promise to transfer the good or service separately identifiable from other promises in the contract?

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Determine the transaction price

Transaction price

…measured at fair value

unless it cannot be reliably

measured

Step 3

Variable consideration

Variable consideration can be

Incentives

Liquidated damages Discounts

Step 3

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Variable consideration – the amount to

include

Step 3

Is the consideration variable or fixed?

FIXED

Estimate the amount using the expected value or most likely amount

VARIABLE

Determine the portion, if any, of that amount for which it is highly

probable that a significant revenue reversal will not subsequently occur

Include the amount in the transaction price

Variable consideration

Estimate transaction

price

— Expected value or

— Most likely amount

— update each period

Apply constraint

— Highly probable no significant revenue reversal

— 5 indicators

Does this mean that assuming CU0 is a valid default?

Step 3

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— Transaction price compared to cash selling price.

— Period between payment and delivery

— Other reasons for payment terms

— Rate that would be used in separate financing transaction between the entity and customer

— No adjustment required if the period between performance and payment is 12 months or less

Allocate the transaction price to POs

Allocate based on relative stand-alone selling prices

Step 4

Performance obligation 1 Performance obligation 2 Performance obligation 3

Determine stand-alone selling prices

Best evidence

Estimate price Observable price

Adjusted market assessment

approach

Expected cost plus a margin

approach

If not available

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5

An entity recognises revenue when or as

it satisfies a performance obligation by transferring a good or service to a

customer, either at a point in time (when)

or over time (as) A good or service is

transferred when or as the customer

obtains control of it.

Measurement

principle

Recognize revenue as POs satisfied

A performance obligation is satisfied over time if either:

Step 5

1

2

3

Customer simultaneously receives and consumes

the benefits as the entity performs.

The customers controls the asset as the entity

creates or enhances it.

The entity’s performance does not create an asset

for which the entity has an alternate use and there

Routine or recurring services

e.g cleaning services

Construction on customer’s land;

customer controls the work in progress

Building a specialised asset that only customer can use or building an

©© 2018 KPMG Lower Gulf Limited and KPMG LLP, operating in the UAE and Oman, member firms of the KPMG network of independent member

Recognise revenue as POs satisfied

If a performance obligation is not satisfied over time, then an entity

recognizes revenue at the point in time at which it transfers control of the good or service to the customer

… physical possession

Indicators that control has passed include a customer having …

… a present

obligation to

pay

… risks and rewards of ownership

the asset

Step 5

Step 5: Points for consideration

Which method to measure

progress of revenue is more

appropriate – either input or

output method.

Do you have enforceable rights to payments by assessing termination clauses, reviewing legal precedence and determining whether you have the right to sue for

performance?

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Contract costs – What’s changed?

— Acceptable to measure

revenues and costs applying

POC with balance sheet

Capitalise or expense

Apply IFRS 15

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Pre-contract costs

Would costs be incurred

regardless of whether the

As a practical expedient, capitalisation of contract acquisition costs not

required if the amortisation period would be one year or less.

Costs to fulfil a contract

Direct costs that are eligible for

capitalisation if other criteria are

met

Costs to be expensed when incurred

Direct labour (e.g employee wages)

Cost that are explicitly chargeable to

the customer under the contract

Direct materials (e.g supplies)

General and administrative costs –

unless explicitly chargeable under the contract

Allocation of costs that relate directly

to the contract (e.g depreciation and

amortisation)

Other costs that were incurred only

Costs that relate to satisfied performance obligations

Costs of wasted materials, labour, or other contract costs

Costs that do not clearly relate to

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Fulfilment costs – capitalisation criteria

An entity can recognize an asset only if all the following are met:

of the entity that will be used to satisfy performance obligations in the future.

The costs are expected to be recovered.

If all 3 criteria are not met, then the costs must be expensed.

Contract assets

vs Trade

receivables

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Timing of recognition of receivables (1/5)

Issue:

— According to IFRS 15.108, an entity recognises a receivable – i.e a financial asset in the scope of IFRS 9 – when it has a right to consideration that is unconditional

— A right to consideration is unconditional if only the passage of time is required before payment

of that consideration is due

Has the entity performed?

Is the contract cancellable?

Does the entity have

an unconditional right to cash?

Recognise

a receivable and

a contract liability

Executory contract (no asset

or liability)

Contract asset Receivable

Yes No

IFRS 15 – A reminder of the consequential

Under IAS 11 / IAS 18

Under IFRS 15

Construction / Upgrade phase Operation phase

Real estate issues

IFRS 15 – A reminder of the ‘over-time criteria’

A performance obligation is satisfied over time if either:

Customer simultaneously

receives and consumes

the benefits as the entity

performs

Routine or recurring services

The customers controls the asset as the entity creates or enhances it

Asset built on customer’s site

The entity’s performance does not create an asset for which the entity has

an alternate use and there is an enforceable right to payment for performance to date

Asset built to order

(IFRS15.35)

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Enforceable right to payment

Issue:

— Developer D and Customer C enter into a binding contract for the sale of a real estate unit before D constructs the unit.

— D retains legal title to the real estate unit until construction is complete

— If C defaults, then D markets the unit for sale to other customers but the original customer remains liable for the purchase price in some circumstances.

Developer D

Revenue recognition in a real estate contract

35(b) or 35(c)?

How to assess enforceability?

Customer rights during construction?

Commenting

on a specific fact pattern?

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Enforceable right to payment (1/3)

Question:

— Does D have an enforceable right to payment, such that D can recognise revenue over time?

D keeps the resale

C pays D the shortfall

C remains liable for the original sale price

If D sells the

apartment to another

customer for more

than the original

selling price…

If D sells the apartment to another

customer for less

than the original

selling price…

If D cannot sell the apartment to another customer

Enforceable right to payment (2/3)

Does current contract transfer control?

Does it matter who pays?

Commenting

on a specific fact pattern?

Relevance of potential resale price?

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Enforceable right to payment (3/3)

IFRIC discussion:

An entity considers the rights and

obligations created by the contract,

taking into account the legal

environment, in assessing whether it

has an enforceable right to payment

for performance to date.

The payment the entity is entitled to from the customer relating to performance under the original contract is relevant in determining whether the entity has a right to payment for performance completed to date

The outcome of the entity’s

The principles and requirements

in IFRS 15 provide an adequate basis for an entity to determine whether an entity has an

enforceable right to payment for performance completed to date.

Next steps

The Committee tentatively decided not to add the issue to its standard-setting agenda.

IFRS 15 – A reminder of ‘identifying performance obligations’

Criterion 1:

Capable of being distinct

Can the customer benefit from the good

or service either on its own or together

with readily available resources?

A performance obligation (PO) is a promise to deliver a good or service

that meets both the following criteria

+

(IFRS15.22–27)

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Land in a real estate contract (1/2)

D purchases a piece of land

Developer D

Housing Association

H

Issue:

— Developer D and Housing Association H enter into a binding

contract for the sale of a building to H, before construction

commences

— On contract signature:

– title to the land transfers to H, this transfer cannot be

revoked; and

– H pays cash to D, this cash is not refundable.

— Subsequently, D constructs the building and receives progress

payments.

Question:

— Is sale of the land a separate performance obligation?

Real estate sale including transfer of land (2/2)

27(a) and 27(b)

Limited scope agenda decision

Functional vs transformative relationship?

Depends on the fact pattern

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Land in a real estate contract

IFRIC discussion:

— Identification of performance obligations involves judgement

and an assessment of the particular facts and circumstances

pertaining to the contract.

— The assessment under IFRS 15.27(b) focuses on whether

there is a transformative relationship between the land and the

construction of the building

— The promise to transfer the land would be separately

identifiable from the promise to construct the building on that

land if the entity concluded that:

— (a) its performance in constructing the building would be the

same regardless of whether the customer had purchased the

land from it or another party; and

— (b) it would be able to fulfil its promise to construct the building

even if the customer had purchased the land from another

party, and would be able to fulfil its promise to transfer the

land even if the customer purchased the construction services

from another developer.

— The principles and requirements in IFRS 15 provide an

adequate basis for an entity to recognise revenue in the fact

pattern described.

Next steps:

— The Committee tentatively decided not to add the issue to its standard- setting agenda

Principal

vs

Agent

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IFRS 15 – A reminder of principal vs agent

Control over specified goods or

services in advance of transferring

them to the customer

Discretion to establish prices for specified goods or services

Primary responsibility to provide specified goods or services Inventory risk

Control = ability to direct the use of and obtain the benefits from an asset

Disclosures

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Don’t overlook disclosures

Information about performance obligations

— Information about contract balances and changes

— Amounts allocated to remaining performance obligations

Contracts

with

customers

What obligations does the entity have?

What is the entity’s position?

?