IFRS 15 - Inquiry from Projects Business

[Hesham255]

Hello All,
I would like to inquire specifically about IFRS 15:
We have a projects section which is providing materials, make some changes in the site and install the material and testing and commissioning.
Currently we recognize revenue based on Input method (over time) and based on % of completion (actual cost / planned cost)

I believe that output method might be more suitable due to some issues such as:
- Sites are not ready, however we have actual costs charged on other elements. but revenue recognized as per the input method
- Materials issued but customer did not receive. but revenue was recognized as per the input method.
- technical issues related to design and integration. customer did not accept the progress due to that but we recognized revenue as per the input method.
- Customers did not accept officially the milestones because of pending issues. We did not transfer control. Customers could not benefit of the goods or services. but we recognized revenue as per the input method.

Please advise on the following:
1- does output method (based on milestones) are suitable in this case?
2- what would be the accounting treatment if we used the output method. noting that currently and as we have input method: our accounting include: revenue, unbilled revenue (the step before issuing the invoice) and after issuing the invoicing, the unbilled revenue will be turned to Accounts receivables.

Thanks for your time and advises.

[Marek Muc]

Hi, it's not clear to me what industry this is - construction?

I see you have many objections whether input method is suitable. I suggest that you take a step back and answer another question - whether this is a performance obligation satisfied over time?

See here:
https://ifrscommunity.com/knowledge-bas ... -over-time

Which criterion is met and why? How does this assessment reconcile with your doubts re.input method?

The accounting treatment of account receivables is the same under input and output methods, i.e. accounts receivable are recognised when there is an unconditional right to payment, until then a contract asset is recognised.

[Hesham255]

Hello Marek,
Thanks for your prompt reply and offered assistance.
Our business is: purchasing materials and installing it in customer sites but we are not manufacturing. our projects also cover hiring subcontractors to do some preparation in customer sites so they can be ready before installing the materials that we agreed on. our pricing covers: the subcontractor works that are under our supervision + materials + installation and commissioning. All are in customer sites.

Currently we are doing the accounting over time and using % of completion based on (actual cost YTD / total planned cost)
but due to some of the issues that I referred to before in my first post, most of them customers are not approving the materials and they have technical issues I think to change the accounting to output method instead of accounting method.
Actually, I feel that we recognize revenue under the input method for transactions that we shouldn't recognize as the main principle in IFRS 15 we should recognize revenue once control transferred to customers and this will happen when the customer will be able to benefit from it which (as I referred before) customers did not accept the materials due to technical issues. or sites are not ready but we spent expenses on other items.

I think output method(based on milestones) will be much better. please feed me back.

Regarding accounting:
Currently we do the following accounting: for any cost we spent, we recognize revenue against it:
Dr. Unbilled revenue
Cr. Revenue

Dr. COGS
Cr. Inventory

Then uppon issuing the invoice:
Dr. AR
Cr. Unbilled revenue

What I think to be changed after applying the output method:
Dr. WIP or Contract Assets
Cr. Inventory

After realizing a milestone and issuing the invoice:
Dr. AR
Cr. Revenue

Dr. COGS
Cr. WIP or Contract Assets

So I transferred the pending amounts under input method from (unbilled revenue) to (WIP or Contract Assets) under output method.

Please advise on your opinion on the full case.
Much appreciated!
Thanks

[Marek Muc]

You still haven't answered the most crucial question here: is it a performance obligation satisfied over time? If so - why?

You seem to be saying that this should be rather a performance obligation satisfied at a point in time. In such a case, there is no measurement of progress at all - you simply recognise revenue only after the performance obligation is satisfied. A contract can have several performance obligations though.

A side note: debits and credits are the same irrespective of whether you measure progress using input or output methods.

[Hesham255]

Hello again Marek,
The project include several performance obligation and we can measure each performance obligation separately. I believe that each performance obligation (PO) can be realized as a revenue once completed and approved by the customer because the customer has to officially approve and accepts it.

while in some other cases PO can be approved based on the progress and not necessarily for each PO to be completed in order to be approved.

I believe if I linked the revenue recognition with the customer acceptance (whether at completion of each PO or during the progress) will be much better.

Most (99%) of our cases that customers are approving and accepting the PO at completion.

That's why, I believe that recognizing revenue based on separate PO completion will be much appropriate.

To answer the question:
the following is my personal assessment of the conditions to recognize revenue at a point in time:
A present obligation to pay: Yes, once they accepted the milestone (usually at completion of each PO)
Physical possession of the asset(s): Yes, materials are installed in customer sites
Legal title
Risks and rewards of ownership: Yes, once the installation finishes
Accepted the asset(s): Yes


The following is my assessment for conditions over time:

The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs. YES, in some projects. other projects we need to complete the PO so he can benefit.
The entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced. Yes
The entity’s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date. Yes

As you can see it is very fague decision should we go over time or at a point of time. even paragraph IFRS 15.B16 offers a practical expedient and allows to recognize revenue as the customer is billed, provided that this corresponds directly with the value to the customer of the entity’s performance completed to date.

That's why I would like to link: revenue recognition with customer acceptance for each PO. so the contract as a whole will be over time as it include several POs and for each PO it will be at a point of time. so the contract will be accounted as follows: over time based on output method (i.e each PO)


Regarding the accounting treatment,
I believe that my proposed accounting treatment will be applicable for my proposed solution.

Please advise and sorry for the very long explanation.
thanks
Hesham

[Marek Muc]

in my opinion, it's very unlikely that each milestione in a contract is a separate PO. And it's hardly possible that such a fragmented PO meets all the criteria for being satisifed over time - all at the same time it's all explained in more detail in the knowledge base, it's really worth reading

I think that this discussion got too general. Please give an example of a contract, what milestones are in it that you think are separate PO.

And yes, posts of such length don't help

[Hesham255]

I went back reading the explanation on the knowledge base.
Our business met most of the conditions to satisfy over time recognition.
then next step should we go input method or output method. Currently we apply input method.
I think to change it to output method to recognize revenue based on value of the goods or services transferred to date relative to the remaining goods or services promised under the contract. the most clear Measurement method is milestones reached as we are bill our customers based on these milestones. then we can get a benefit of the practical expedient and allows to recognize revenue as the customer is billed.

I believe that this should be applied for each PO.

Can you please explain to me the accounting treatment in this case? is this one true?
Dr. WIP or Contract Assets
Cr. Inventory

After realizing a milestone and issuing the invoice:
Dr. AR
Cr. Revenue

Dr. COGS
Cr. WIP or Contract Assets

thanks

[Marek Muc]

Note that you need to meet only one of the criteria for PO to be treated as satisfied over time. The entries that you provided are OK, except that a contract asset is not the same as WIP, you probably meant contract costs there

[Hesham255]

Thank you for your help. Amazing and prompt response. Appreciated!