Revenue, inventory, property plant and equipment, intangibles and impairment
Revenue from Contracts with Customers (IFRS 15)
The five-step model
- Identify the contract - approval, identifiable rights, payment terms, commercial substance and collection probable.
- Identify performance obligations - a promised good or service is distinct if the customer can benefit from it on its own (or with readily available resources) and it is separately identifiable within the contract.
- Determine the transaction price - variable consideration estimated using expected value (many outcomes) or the most likely amount (binary), constrained so a significant revenue reversal is not highly probable; include a significant financing component where payment timing differs from transfer; measure non-cash consideration at fair value; deduct consideration payable to a customer unless it is for a distinct good or service.
- Allocate on relative standalone selling prices; a discount goes to specific obligations only where observable evidence supports it.
- Recognise over time where the customer receives and consumes benefits as performed, the entity creates or enhances a customer-controlled asset, or the asset has no alternative use and there is an enforceable right to payment; otherwise at the point control transfers.
Traps
Assurance-type warranties create a cost accrual; service-type warranties are a separate performance obligation. Principal versus agent depends on who controls the good before transfer. Licences are rights to access (over time) or rights to use (point in time). Bill-and-hold, consignment and repurchase agreements test whether control has genuinely passed.
Worked example
Equipment for CU100,000 plus installation for CU20,000; standalone prices CU100,000 and CU25,000. Total consideration CU120,000 allocates 96,000 to equipment and 24,000 to installation. Never allocate using the contractual split.
Intangible Assets and Impairment
Intangibles (IAS 38)
An intangible must be identifiable (separable or arising from contractual or legal rights), controlled and expected to generate future economic benefits, with cost reliably measurable. Internally generated goodwill, brands, mastheads, publishing titles and customer lists are never recognised. Research is expensed; development is capitalised only once technical feasibility, intention and ability to complete, probable benefits, available resources and reliable measurement of cost are demonstrated together. Finite-life intangibles are amortised over their useful life (reviewed annually); indefinite-life intangibles are not amortised but tested annually for impairment.
Impairment (IAS 36)
Recoverable amount is the higher of fair value less costs of disposal and value in use. Value in use is the present value of expected future cash flows, discounted using pre-tax cash flows and a pre-tax rate reflecting current market assessments of the time value of money and asset-specific risks. Where an asset does not generate independent cash flows, test the cash-generating unit, allocating goodwill and corporate assets.
Impairment losses are allocated first to goodwill, then pro rata to other CGU assets, without reducing any asset below its own recoverable amount. Losses go to profit or loss unless the asset is carried at a revalued amount, in which case they are a revaluation decrease.
Traps
Goodwill impairment is never reversed. Other reversals are capped at the carrying amount that would have existed without the original impairment. Never discount post-tax cash flows at a pre-tax rate.
Worked example
A CGU carries 5,000,000 including goodwill of 800,000; recoverable amount is 4,400,000. The 600,000 loss is allocated entirely to goodwill, leaving 200,000. Rule of thumb: goodwill is the shock absorber.