IFRS 15

1. IFRS15 Revenue from contractswith customers Prepared By: Tilak Chand Shaw Nov 9,2017 1

2. Overview of newStandard • 5 step Model • ContractCost • Specific guidance • Transition • Presentation andDisclosure • Example explaining the implementation. Flow of Journal Entry. • Impacts, challenges andissues i. Background of revenue recognitionstandard PresentationAgenda 4

3. Released on 28, May 2014 – as IFRS15. Effective Date: 1, January2018 Basic, Timing &Scope One Model Basic objective is to keep a single, joint revenue standard to be applied across all industries and capital market. Backround Approach: Full retrospective or modifiedretrospective (i.e. Running dual system for gathering information on historical data). • Scope: All contracts with customersexcept • Lease contracts, IAS 17 • Insurance contracts, IFRS 4 • Financial instruments, IFRS 9 • Non-monetary exchanges between entities in same line of business to facilitate sales tocustomers • or potentialcustomers Scope 3

4. STEP1 STEP2 STEP4 STEP5 STEP3 Allocate the transaction Price (TP) tothe separate performance obligations (PO) Recognize revenue when (or as) an entity satisfies aPO Identify the separate performance obligations (PO) Determine the transaction Price(TP) Identify the contract with thecustomer 5-StepModel Oral /written? Contract modification? Promises Are they distinct? Fixed? Variable? Stand-aloneselling prices or Residual approach Overtime? At the pointof time?

5. Allocatethe transaction Price (TP) to the separate performance obligations(PO) Recognize revenue when (oras) an entity satisfies aPO Identify the separate performance obligations (PO) Determine the Tranaction Price(TP) Identification of the contract with thecustomer ` Contract • = agreement between 2 or more parties creating enforceable rights +obligations • Written Oral 5-StepModel : Step 1 Attributes • Parties have approved the contract and are committed toperform • Each party’s rights to goods/services can beidentified • The payment terms for goods/services can beidentified • The contract has commercialsubstance • It is probable that an entity will collect the consideration (evaluate customer’s ability and intention topay).

6. Allocatethe transaction Price (TP) to the separate performance obligations(PO) Recognize revenue when (oras) an entity atisfesPO Identify the separate performance obligations (PO) Determine the Transaction Price(TP) Contract Modification ` Identify the contract with the customer Contractmodifications 5-StepModel II. CM = PART OF EXISTING CONTRACT (“catch-upadjustment”) Are additional goods/services in CMdistinct? NO YES Does consideration for added goods/services reflect their stand-aloneprices? III. CM ≠ SEPARATE CONTRACT; (termination of old contract + creation of newcontract) NO YES I. CM = SEPARATE CONTRACT Consideration allocated to the remainingPO: = consideration from old contract not yetrecognized + consideration in the contractmodification

7. Allocatethe transaction Price (TP) to the separate performance obligations(PO) Recognize revenue when (oras) an entity satisfies aPO Determine the Transaction Price(TP) Identify the contract with the customer STEP2 : Identify the separate performance obligations (PO) Identify the separate performance obligations(PO)) Performanceobligations =promisein acontractwithacustomertotransfertothecustomereither: 5-StepModel Good / service (or bundle) that isdistinct Series of distinct goods/services that are substantially the same and have the same pattern oftransfer = single performanceobligation PO can be both explicit (in the contract) and implicit (based on practices or policies) If no transfer to customer => No PO! (e.g. admin orsetup)

8. Allocatethe transaction Price (TP) to the separate performance obligations(PO) Recognize revenue when (oras) an entity satisfies aPO Idetify the separate performance obligations (PO) Determine the Transaction Price(TP) Identify the contract with the customer Step 2 :Identify the separate performance obligations (PO) Identify the separate performance obligations(PO) Performanceobligations => What is“DISTINCT”? Examples: 5-StepModel • Sale of goods produced byentity • Resale of goods purchased byentity • Resale of rights purchased by anentity • Performing contractually agreed-upontasks • Grantinglicenses • Constructing, manufacturing, developing an asset on behalf of acustomer

9. Identify the contract with the customer Identify the separate performance obligations(PO) Performanceobligations => What is“DISTINCT”? 2.Criteria 5-StepModel Good/service is capable of beingdistinct On itsown => Customer can benefit fromgood/service In conjunction with other readily availableresources Separately identifiable from other goods/services in thecontract => Entity is NOT using good/service as an input to produce or deliver combinedoutput => The good/ service does NOT significantly modify or customize anothergood/service => The good/ service is not highly dependent with other goods/services in thecontract Workshop : IFRS 15 Revenuefrom Contracts withCustomers

10. STEP1 STEP2 STEP3 STEP4 STEP5 Allocatethe transaction Price (TP) to the separate performance obligations(PO) Recognize revenue when (oras) an entity satisfies aPO Identify the separate performance obligations (PO) Determine the Transaction Price(TP) Identify the contract with the customer Identify the separate performance obligations (PO) Performanceobligations => Otherconsiderations Goods/services that are NOTdistinct: => Combine until you get a bundle that isdistinct PC = Not distinct, must becombined 5-StepModel PC only sold with ITservices IT services sold either separately, or with PC asa package IT services =distinct Workshop : IFRS 15 Revenuefrom Contracts withCustomers

11. STEP1 STEP2 STEP3 STEP4 STEP5 Allocatethe transaction Price (TP) to the separate performance obligations(PO)` Recognize revenue when (oras) an entity satisfies aPO Identify the separate performance obligations (PO) Determine the Transaction Price(TP) Identify the contract with the customer Determine the Transaction Price(TP) = amount of consideration to which the entity expects to be entitled in exchange for transferring promised goods/services to a customer excluding the amounts collected on behalf of thirdparties. Transactionprice 5-StepModel How to determine transactionprice? • Variableconsideration • Constraining estimates in variableconsideration • Existence of significant financingcomponent • Non-cashconsideration At fairvalue • Consideration payable to acustomer likelihood + magnitude ofreversal (over 1year) For distinct good/service =>aspurchases Not for distinct good/service =>reduction inTP Workshop : IFRS 15 Revenuefrom Contracts withCustomers

12. STEP1 STEP2 STEP3 STEP4 STEP5 Allocatethe transaction Price (TP) to the separate performance obligations(PO) Recognize revenue when (oras) an entity satisfies aPO Identify the separate performance obligations (PO) Determine the Transaction Price(TP) Identify the contract with the customer Allocate the transaction Price (TP) to the separate performance obligations(PO) =to allocate the transaction price to each performance obligation in an amount that depicts the amount of consideration for transferring promisedgoods/services. Allocation objective 5-StepModel How to allocate the transactionprice? => Based on relative stand-alonesellingprices Criteria to apply theexception: except for: Entity regularly sells each distinct good/service on a stand-alonebasis Bundles are also sold regularly on a stand-alone basis at a discount to stand-alone selling prices ofgoods/services Discount attributable to each bundle is substantially the sameas discount in the contract + analysis providesevidence Allocatingdiscounts + (exception) Workshop(g:eIFnReSra1l5) Revenue from Contracts withCustomers 24

13. STEP1 STEP2 STEP3 STEP4 STEP5 Allocatethe transaction Price (TP) to the separate performance obligations(PO) Recognize revenue when (oras) an entity satisfies aPO Identify the separate performance obligations (PO) Determine the Transaction Price(TP) Identify the contract with the customer Allocate the transaction Price (TP) to the separate performance obligations(PO) =to allocate the transaction price to each performance obligation in an amount that depicts the amount of consideration for transferring promisedgoods/services. Allocation objective 5-StepModel How to allocate the transactionprice? => Based on relative stand-alone selling prices except for: Criteria to apply theexception: Terms of variable payment relate specificallyto entity’s efforts to satisfy thePO Allocating consideration with variableamounts Allocating variable amount entirely to the POis consistent with the allocationobjective Workshop : IFRS 15 Revenuefrom Contracts withCustomers

14. STEP1 STEP2 STEP3 STEP4 STEP5 Allocatethe transaction Price (TP) to the separate performance obligations(PO) Recognize revenue when (oras) an entity satisfies aPO Identify the separate performance obligations (PO) Determine the Transaction Price(TP) Identify the contract with the customer Allocate the transaction Price (TP) to the separate performance obligations(PO) = the price at which the entity would sell promisedgood or service separately to the customer (at contractinception) Stand-alone sellingprice 5-StepModel How to estimate the stand-alone sellingprice? I. Take observable sellingprices II. If observable selling prices notavailable => make estimate • Consider all informationavailable Adjusted market assessmentapproach Expected cost plus margin approach • Consider all informationavailable Residualapproach Combination Workshop : IFRS 15 Revenuefrom Contracts withCustomers

15. STEP1 STEP2 STEP3 STEP4 STEP5 Allocatethe transaction Price (TP) to the separate performance obligations(PO) Recognize revenue when (oras) an entity satisfies aPO Identify the separate performance obligations (PO) Determine the Transaction Price(TP) Identify the contract with the customer Recognize revenue when (or as) an entity satisfies aPO Performance obligation is satisfied when a promised good or service is transferred to acustomer. 5-StepModel Control How can a performance obligation besatisfied? Overtime At the point oftime Workshop : IFRS 15 Revenuefrom Contracts withCustomers

16. STEP1 STEP2 STEP3 STEP4 STEP5 Allocatethe transaction Price (TP) to the separate performance obligations(PO) Recognize revenue when (oras) an entity satisfies aPO Identify the separate performance obligations (PO) Determine the Transaction Price(TP) Identify the contract with the customer Recognize revenue when (or as) an entity satisfies aPO Overtime Performance obligation issatisfied if 1 of the following ismet: 5-StepModel • Customer simultaneously receives and consumes as the entityperforms • Customer controls the asset enhanced or created by theentity • Entity does not create an asset with analternativeuse + enforceable right topayment How to measure progress towardscompletion? => Select single revenuerecognition method + apply consistently (no change ispermitted) Overtime Overtime Workshop : IFRS 15 Revenuefrom Contracts withCustomers

17. STEP1 STEP2 STEP3 STEP4 STEP5 Allocatethe transaction Price (TP) to the separate performance obligations(PO) Recognize revenue when (oras) an entity satisfies aPO Identify the separate performance obligations (PO) Determine the Transaction Price(TP) Identify the contract with the customer Recognize revenue when (or as) an entity satisfies aPO At the point oftime Performance obligation issatisfied if control not transferred overtime. 5-StepModel Indicators: • The entity has a present right to payment for theasset. • The customer has legal title to theasset. • The entity has transferred physical possession to theasset. • Thecustomerhasthesignificantrisksandrewardsofownershipoftheasset. • The customer has accepted theasset. Workshop : IFRS 15 Revenuefrom Contracts withCustomers

18. Contractliability Did the entity receive consideration in advance? Yes No Contract asset, receivable and contractliability Does the entity has the right to bill itscustomer? No Did the entity transfer goods/services in advanceof consideration No Nonecessary accounting Yes Is the consideration conditional other than the passage oftime? Recognizerevenue No Yes Recognize contractasset Workshop : IFRS 15 Revenuefrom Contracts withCustomers

19. Incremental Costs to obtain a contract Costs to fulfill acontract If not within IAS 2/IAS 16/IAS38 Salescommissions Legalfees Bonuses toemployees IFRS 15: ContractCosts • Capitalizeif: • Costs relate directly tocontract • Costs generate/enhance resources used in satisfying performance obligations in the future • Costs are expected to berecovered  Direct labor Directmaterials  General + admincosts Wastedcosts Capitalize +Amortize Allocated costs Chargeablecosts Costs of pastperformance Indistinguishablecosts Workshop : IFRS 15 Revenuefrom 37 Contracts withCustomers

20. Non- refundable up-frontfee Extended time for revenue recognition With renewaloption Yes No IFRS15Specificguidance? Revenue recognized immediately Related to transfer of performance obligation No Yes Revenue is recognized on satisfaction of performance obligation Workshop : IFRS 15 Revenuefrom Contracts withCustomers

21. Licenses Revenue recognized with other goods orservices Distinct? No Yes IFRS15Specificguidance? Ontransfer! As it exists at the point oftime As it exists through out itslife Revenue is recognized at the point oftime Revenue is recognized over the time Workshop : IFRS 15 Revenuefrom Contracts withCustomers

22. 1 January 2018 = mandatory effectivedate How to Apply ? TwoMethods How to make atransition? Transition Full retrospectiveadoption Modified retrospectiveadoption = retrospectively to each prior reportingperiod = retrospectively with cumulative effect at the date of initialapplication Expedients: • No need to restate completedcontracts within the same annualperiod • No need to estimate variable considerations in the comparativeperiods • Some relief fromdisclosures • Comparatives presented under priorIFRS • IFRS 15 applied to existing and newcontracts onwards • Adjustment to opening retainedearnings Workshop : IFRS 15 Revenue from Contracts withCustomers 51

23. Presentation andDisclosure Disclosures May Be Challenging toImplement Workshop : IFRS 15 Revenuefrom Contracts withCustomers

24. First Time Adoption of IFRS impact more thanCompany (1) People (2) Process Informationsystem & (3) and impact It may the strategy entire and Impacts, Challenges andIssues Organization, its businessmodel and Each industry has different dynamics and will have different implications of IFRS15 and Early Preparation is the key for successfulimplementation and A well planned implementation approach could bring the desired results. Workshop : IFRS 15 Revenue from Contracts with Customers 56

25. Challenges • Potentially very challenging for accountingsystems • Need to identify all existing contracts if criteria of the standard ismet • Need to identify / maintain large number of up-to-date standalone sellingprices? • Need to perform high volume of different allocationcalculations? Impacts, Challenges andIssues Workshop : IFRS 15 Revenuefrom Contracts withCustomers

26. Other areas where current areas may have tochange • Not just an accountingissue: • Need to prepare market for impacts and educate analysts and other stakeholders • Changes to KPIs and other key metrics (also, Off-Balance SheetKPIs) • Reconsideration of the nature of futurecontracts • Changes to profile of tax cashpayments • Availability of profits fordistribution • Compensation and bonus plans – affects ability to meettargets? • Potential non-compliance with loancovenants Impacts, Challenges andIssues Workshop : IFRS 15 Revenuefrom Contracts withCustomers

27. Scope Landscaping , Review of old and new accounting policy, impact assessment and preparation of GAAP analysis, review of entire organisation and identification of functions affected, Review of financial statement, management reports, business processes, governance structure, together with discussions with management to outline the affected areas,. Evaluation of first time adoption exemptions and accounting policy choices, Ensure functions/departments effected have due involvement in the convergence approach ( I.e. Accounting, Controlling, sales, Business development, contract, Project management, ITetc) Plan, resources required and detail plan to be outline, including key deliverable and timeline to be agreed withmanagement, Design, New processes, GL, new KPIs and management and operational trainings plans to be designed and agreed with management, Trainings will be delivered, designing internal and external financialreports. Test , In test phase technology to be tested., reports are generated ,reviewed and validated. Run system parallel for threemonth. Implement, Process and technology changes will be go live. IFRS compliance reports to be generated, revised KPIs willbe monitored. Presentation and disclosure modification andreviewed. Review , Post implementation review andvalidation. The profile of revenue and profit recognition will change for some entities, In particular, companies will need to consider : whether revenue should be recognized over time or at a point in time; How shipping term will impact the timing of recognition. the extent to which distinct goods or services are supplied, which should be accounted for separately; whether particular costs relating to obtaining a contract must be capitalized; whether revenue must be adjusted for the effects of the time value of money; how to account for contract modifications; and the impact of new guidance where pricing mechanisms include variable amounts. The new Standard requires significantly more disclosures relating to revenue and entities will need to ensure that appropriate processes are in place to gather all the information. ImpactLandscaping review IFRS 15 ImplementationMethodology Implement Strategy ( Pricing, Payment terms ) Key Challenges for differentIndustries

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