(a) Core Principle

IFRS 15 is based on a core principle that requires an entity to recognise revenue:

In a manner that enables the transfer of goods or services to customers at an amount that reflects the consideration of the entity expects to be entitled to in exchange for the goods or services.

(b) Combination of contracts

Two or more contracts entered into at or near the same time with the same customer (or related parties) must be combined and treated as a single contract if one or more of the following conditions are present:

(i) the contracts are negotiated as a package with a single commercial objective;

(ii) the amount of consideration to be paid in one contract depends on the price or performance of the other contract; or

(iii) the goods or services promised in the contracts (or some goods or services promised in the contracts) are a single performance obligation.

(c) Application Criteria

The general IFRS 15 model applies only when or if:

(i) the parties have approved the contract and are committed to perform their respective obligations;

(ii) the entity can identify each party‟s rights;

(iii) the entity can identify the payment terms for the goods and services to be transferred;

(iv) the contract has commercial substance (i. e it is expected to change the risk, timing or amount of an entity‟s future cash flows); and

(v) it is probable that the entity will collect the consideration.

(d) Performance obligation in relation to distinct goods and services

At the inception of a contract, the entity must assess the goods and services promised in a contract and identify as a performance obligation each promise to transfer to the customer either:

(i) a good or service (or a bundle of goods or services) that is distinct or

(ii) a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer (described by reference to promises satisfied over time, and progress to completion assessment).

A good or service is distinct if both of the following criteria are met:

(i) the customer can benefit from the goods or service either on its own or together with other resources that are readily available to the customer; and

(ii) the entity‟s promise to transfer the goods or service is separately identifiable from other promises in the contract.

If a promised good or service is not distinct, it must be combined with other promised goods or services until a bundle of goods or services that is distinct can be identified. This could mean that all of the goods or services promised in a contract might be accounted for as a single performance obligation. This sounds quite complicated but simply means that at the inception of a contract an entity must determine whether the contract is for sale of a single deliverable or several deliverables. This is important as revenue is recognised as these separate goods and services are delivered to the customer.

(e) Step 3 to 5 of the IFRS 15, 5 step Model

Step 3: Determine the transaction price

i. The transaction price is the amount of consideration an entity expects to be entitled to in exchange for the goods or services promised under a contract, excluding any amounts collected on behalf of third parties (for example, sales taxes).

ii. The nature, timing and amount of consideration promised by a customer affect the estimate of the transaction price. An entity must consider the effects of other factors when determining the transaction price including:

 Variable consideration (including the constraining estimates of variable consideration); and

 Time value of money;

Step 4: Allocate the transaction price to the performance obligations

i. The objective is to allocate the transaction price to each performance obligation (or distinct good or service) in an amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for transferring the promised goods or services to the customer.

ii. The transaction price is allocated to each performance obligation in proportion to those stand-alone selling prices determined at the inception of the contract.

iii. A stand-alone selling price is the price at which an entity would sell a promised good or service separately to a customer.

iv. When the sum of the stand-alone selling prices of goods or services promised in a contract exceeds the promised consideration the customer is receiving a discount. The discount should be allocated entirely to one or more (but not all) performance obligations in the contract if all of the following criteria are met:

 each distinct good or service (or each bundle of distinct goods or services) in the contract is sold regularly on a stand-alone basis;

 a bundle (or bundles) of some of those distinct goods or services are sold regularly at a discount to the stand-alone selling prices of the goods or services in each bundle; and

 such discounts are substantially the same as the discount in the contract.

Step 5: Recognise revenue when or as an entity satisfies performance obligation

i. Revenue is recognised when (or as) a company satisfies a performance obligation by transferring a promised good or service to a customer. The amount of revenue recognised is the amount of the transaction price allocated to the performance obligation.

ii. Goods and services are assets, even if only momentarily, when they are received and used (as in the case of many services). An asset is transferred when (or as) the customer obtains control of that asset. Control of an asset refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset.

iii. A performance obligation might be satisfied (i.e., goods and services might be transferred):

 over time (in which case revenue would be recognised over time); or

 at a point in time (in which case revenue is recognised at that point in time).