NZ IFRS 15: Revenue from Contracts with Customers

Overview

Effective for periods beginning 1 January 2017 (early adoption is permitted) the New Zealand equivalent of IFRS 15: Revenue from Contracts with Customers will provide a single source of requirements for accounting for all contracts with customers (except for some specific exceptions, such as lease contracts and insurance contracts) and will replace all current accounting pronouncements on revenue, including:

  • NZ IAS 11: Construction Contracts
  • NZ IAS 18: Revenue
  • NZ IFRIC 13: Customer Loyalty Programmes
  • NZ IFRIC 15: Agreements for the Construction of Real Estate
  • NZ IFRIC18: Transfers of Assets from Customers
  • NZ SIC-31: Revenue – Barter Transactions Involving Advertising Services.

Consistent with current pronouncements, NZ IFRS 15 contains principles-based requirements.  Nevertheless, the new Standard will have an impact on reported results of some entities, particularly those entities that:

  • Provide customers with bundled products and services
  • Provide customers with warranties or rebates
  • Have contracts with customers where the collectability of the consideration varies significantly from contract to contract
  • Have contracts with customers where the amount of consideration potentially varies; and/or
  • Regularly renegotiates the scope and/or price of its contracts with customers.

The new Standard requires entities to adopt a five-step model for recognising revenue from contracts with customers.  To apply this model, an entity will in some circumstances need to exercise significant judgement when considering the terms of the contract(s) and all of the facts and circumstances in relation to the contract(s), including implied contract terms.  IFRS 15 also contains requirements applicable to items that are not normally considered to be revenue, including some costs associated with obtaining and fulfilling a contract and the sale of some non-financial assets.

The core principle underpinning the requirements in NZ IFRS 15 is provided in paragraph 2 of the Standard, which states, in part, that:

…the core principle of this Standard is that an entity shall recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

Consistent with this core principle, NZ IFRS 15 requires an entity to apply the following five-step model for recognising revenue from contracts with customers.

The steps to apply the Core Principle in IFRS 15 are as follows:

  1. Identify the contract(s) with the customer
  2. Identify the distinct performance obligations
  3. Determine the transaction price
  4. Allocate the transaction price to the performance obligations
  5. Recognise revenue when (or as) a performance obligation is satisfied.

It is important clients get their heads around how this standard may affect them. Please contact your local Moore Stephens Markhams advisor for more specific details.

Spring 2014

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