Contract liabilities disclosure

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Leo
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Joined: 05 Apr 2020, 22:31

Contract liabilities disclosure

Post by Leo »

Hi Guys,

I do have a question on the disclosure of contract liabilities.

Here below the extract of the standard :

Commentary

IFRS 15.116 also requires disclosure of ‘revenue recognised in the reporting period that was included in the contract
liability balance at the beginning of the period’ and ‘revenue recognised in the reporting period from performance
obligations satisfied (or partially satisfied) in previous periods’. Entities can also present this in a tabular or narrative
format.

The Group provided qualitative and quantitative disclosures of its contact balances and changes on those balances during
the period. Entities are permitted to disclose information about contract balances, and changes therein, as they deem to
be most appropriate, which would include a combination of tabular and narrative information.


Questions :

So, whats the difference between "Revenue recognized in the reporting period that was included in the contract liability balance at the beginning of the period" and "Revenue recognized in the reporting period from performance obligations satisfied in previous period"?

I understand that Contract liability = Deferred revenue, and any deduction from this account goes to revenue.

For example, at 31/12/2019 my Deferred revenue was 100, and at 31/12/2020, my deferred revenue is 0, I'll disclose that 100 is the revenue recognized in the reporting period that was included in the contract liability balance at the beginning of the period.

In which case, do I have the other one? ("Revenue recognized in the reporting period form performance obligations satisfied in previous period"?

Thank you all

All the best
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Marek Muc
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Re: Contract liabilities disclosure

Post by Marek Muc »

say you've got contract liability at $100 at 31 Dec 2019 and $120 at 31 Dec 2020, are you able to say how much revenue recognised in 2020 was included in the contract
liability balance at 31 Dec 2019?

Revenue recognized in the reporting period form performance obligations satisfied in previous period - this concerns for example variable consideration recognised in 2020 for performance obligations satisfied in 2019 because uncertainty was resolved in 2020:
https://ifrscommunity.com/knowledge-bas ... sideration
Leo
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Joined: 05 Apr 2020, 22:31

Re: Contract liabilities disclosure

Post by Leo »

Thank you very much Marek for your help.

Now I understand better.

However, I think that it's difficult to be applied in practice because companies should distinguish in their deferred revenue, the part of revenue from estimates (constraining estimates of variable considerations). the amount of 13K€ in your example.

Am I right?

Thank you.
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Marek Muc
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Re: Contract liabilities disclosure

Post by Marek Muc »

yes, this disclosure requirement can be onerous,
you need to approach it with materiality in mind, and the approach will depend on the profile of your operations
for example, if you generally satisfy performance obligations within 1 year, you can say that vast majority of contract liability as per opening balance was transferred to revenue during current year, without the need to actually track it
the same with variable consideration, if you don't have contracts with material variable consideration, then you don't have to disclose anything
Leo
Posts: 909
Joined: 05 Apr 2020, 22:31

Re: Contract liabilities disclosure

Post by Leo »

We are so lucky that we don't have it :)

Best regards !
Leo
Posts: 909
Joined: 05 Apr 2020, 22:31

Re: Contract liabilities disclosure

Post by Leo »

Hi,

Please let me ask a quick question about the backlog disclosure.

We provide connectivity services to our clients. Sometimes, the client buy our servers with 36 monthly commitments, and sometimes, the client just subscribe to our monthly services without other commitments.

In the first case, all the performance obligations that haven't been fulfilled are recognized as contract liabilities (Deferred revenue), and in the second case, all unbilled invoices are recorded in our backlog by the sales team.

From my understanding, for our disclosure, in terms of the Backlog defined by IFRS15, we have to report all the amount that we have in our backlog by the sales team, plus, the full amount of the account Deferred revenue (contract liabilities).

Is my understanding correct?

Thanks again for your help.
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Marek Muc
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Re: Contract liabilities disclosure

Post by Marek Muc »

are you talking about disclosure requirement in IFRS 15.120?

I don't fully understand your accounting treatment, can you provide short examples with debits and credits for both scenarios. Show day 1, i.e. signing of the contract, and what happens after 1 month passes
Leo
Posts: 909
Joined: 05 Apr 2020, 22:31

Re: Contract liabilities disclosure

Post by Leo »

Hi Marek,

Yea, I was talking about IFRS15.120.

So for services with 36 months commitments, at the billing date, we record the following entries:

Dt Client 360 € (BS)
Cr Differed revenue 360€ (BS)

At the end of the first month, we'll record the following entries :

Dt Differed revenue 10€ (BS)
Cr Revenue 10€ (P&L)

So, if my year end is at this moment, my differed revenue would be 350€.

At meanwhile, one client subscribed a one month service with us, which we haven't billed yet, let's say 50€. This is not recorded in our books but kept track by our sales team as a backlog.

So, if I have to provide information regarding to IFRS15.120 usually referred to as "IFRS 15 backlog", I should, from my opinion, disclose 350€ + 50€ = 400€. Am I correct?

Thanks a lot
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Marek Muc
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Re: Contract liabilities disclosure

Post by Marek Muc »

to be honest, I think your approach is incorrect for 36-month service commitment. You should not recognise a receivable/contract asset from a client for the remaining 35 months, you haven't fulfilled your performance obligation yet. The full amount (EUR 350 in your example) should be disclosed under IFRS 15.120, but not recognised in your balance sheet

as for the second scenario, at the end of the month, you should recognise a receivable and revenue for EUR 50 (even if unbilled yet), so nothing to be disclosed under IFRS 15.120
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