Hkfrs 15 Revenue from Contracts with Customers

HKFRS 15 Revenue from Contracts with Customers

Recently, the International Standards Board published IFRS 15 Revenue from Contracts with Customer. In order to maintain international convergence, Hong Kong Institute of Certified Public Accountants issued HKFRS 15. According to HKICPA, there are several reasons for issuing HKFRS 15. For instance, “Significant diversity in revenue recognition practices has arisen in HKFRS/IFRS because extant version of revenue standards contain limited guidance on many topics, such as accounting for arrangements with multiple elements.”(HKICPA)

Moreover, because the limited guidance does not provide any basis for conclusion, it is hard to apply to complex transactions. Therefore companies are selectively applying US GAAP. In addition, even with all of the specific requirements, revenue recognition problem continue to arise as new types of transaction emerged (HKICPA). In response to these challenges, the new standard was developed with more prescriptive and precise requirements comparing with existing IFRS/HKFRS.

The core principle of HKFRS/IFRS is carried out in a five steps model.

Step 1: Identify the contract

Step 2: Identify separate performance obligations

Step 3: Determine transaction price

Step 4: Allocate transaction price to performance obligations

Step 5: Recognize revenue when performance obligation is satisfied

The first step is to create a contract with customers. According to (HKICPA), “ A contract is an agreement between two or more parties that creates enforceable rights and obligations.”

After identifying contract, vendor should identify its performance obligation, which is a promise to transfer goods or service to a customer.

For the third and fourth step, vendor determines the transaction price of the contract and allocate transaction price to its performance obligations.

Finally, revenue can be recognized when vendor satisfies the performance obligation. It may be a point of time, or over time. The principle is based on the control of the goods or service obtained by the customer.

As mention by HKICPA, several standards and interpretation will be superseded when HKFRS 15 comes into effect, including HKAS 11 Construction Contracts and HKAS 18 Revenue. There will be significant changes of revenue and profit recognition by adopting HKFRS 15.

In HKAS 11, the costs and revenue associated with a contract should be recognized in the income statement as the contract activity progresses. The principle is consistent with HKAS 18. In Hkas 18 vendor should recognize revenue when the final outcome can be estimated by reference to the stage of completion.

Regarding revenue recognize over time or at a point of time, HKFRS / IFRS has more specific and precise guidance. There are three criteria result in recognition over time. (BDO)

1. The customer simultaneously receives and consumes the benefits provided by the vendor’s performance as the vendor performs
2. The vendor’s performance creates or enhances an asset (for example, work in progress) that is controlled by the customer as work progresses
3. The vendor’s performance creates an asset, which does not have an alternative use to the vendor, and the vendor has an enforceable right to be paid for work completed to date.

According to (BDO), taking the construction of standard specification apartment block as example, “This construction did not fall in the scope of IAS 11 Construction Contract because each apartment is a relatively standard design and therefore not being subject to a contract which was specifically negotiated for a customer.”